Novo Nordisk A/S (ADR) (NYSE: NVO)
Novo Nordisk A/S shares tumbled on Friday as the worlds largest manufacturer of insulin products slashed short- and long-term revenue and profitability guidance. Shares of NVO finished the day 12.9% lower, recovering from an even steeper decline earlier in the trading session.
Has NVO Jumped The Shark?
The question that shareholders appear to be asking is whether or not they have seen the best out of NVO for the foreseeable future. Being that NVO themselves cut the guidance, investors would be naive to not take NVO management at their word. After all, NVO is not one of those companies that historically under-promises and over-delivers.
The problems facing NVO are not necessarily company specific. U.S. based insurers are getting more aggressive in the way they reimburse drug makers for their products. Rather than play the spoiler out in the open, insurers have found a more effective means – simply pit drug manufacturers against each other. While forcing a price war is generally good for the consumer, investors might not fare as well. And, in the long term, the insurers’ strategy may not be good for the patients, either. The pricing pressures will more than likely lead to less incremental change in drug formulations despite the additional efficacy that the newly-developed drug can provide.
For NVO, specifically, the reimbursement policies of the insurers have caused an overhaul to the insulin makers overall strategy.
Novo Nordisk May Shift The Industry
While investors can certainly punish the stock, they should not blame NVO entirely for the guidance provided. Just this week, insurance providers announced premium increases of well over 100% in some U.S. markets and an average increase of well over 35% in most markets. Although most of the premium increases are Obamacare specific, they undermine the overall trend in the industry, whereby insurers are being forced to get stingy due to less overall participation in insurance plans. Despite the promises of better care and lower prices, the Obamacare experiment appears to be doing more harm than good for the industry. NVO might be the first to be showing accelerating symptoms.
In a presentation for the nine months ending in 2016, NVO reported significant changes to its overall company strategy. Inclusive of the shift in focus, NVO specifically announced the following changes:
- R&D strategy and priorities have been updated to reflect the increasingly challenging payer environment, particularly in the US Market, by applying an even higher innovation threshold for starting and progressing R&D projects within diabetes.
- Intensified focus on exploring current projects into adjacent disease areas of high unmet need including NASH, CVD and CKD.
- Build research portfolios via strengthened activities related to in-licensing of early stage projects and enhanced academic collaborations.
- Discontinuation of oral-based insulin and combinations involving oral insulin, as well as a number of changes to the portfolio of early-stage projects will also be eliminated, reflecting the required higher innovation threshold.
While these changes are a significant step away from prior developmental focus, they did ensure investors that the stable of products in later stages of development will not be affected. The shift at NVO is likely to cause other drug developers to take a look at their overall strategies as well.
Insurers Not Paying For Incremental Change
As the markets get tight, the playing field for everyone will get smaller. NVO won’t be the only company affected, and investors should expect the downdraft to continue for smaller companies that specialize in developing drugs that offer an important but incremental change in the drugs efficacy.
For diabetes medications, which are far more specific to NVO, it will take a new generation of diabetes medication to spur company interest. In past years, insurers were willing to pay for even modest developments of diabetes medications, however, the shift in repayment policy will eventually cause an industry-wide pause for incremental advances unless they meet an unmet medical need.
For NVO, this can lead them to take advantage of their current developmental initiatives and find the synergies to treat adjacent disease areas.
New Opportunity for NVO
While investors sell first and are willing to ask questions later, the door for a more focused and innovative NVO has been opened, and investors and NVO would be wise to consider walking through it.
I specifically like the shift in focus to study NASH, an area that the market is embracing in full force. Allergan’s purchase of Tobira, which paid shareholders an estimated 765% premium to where the stock traded the day prior to the announcement, is a prime example.
Back in April, Gilead purchased Nimbus, also in a deal that was consummated in a large part of Nimbus’s advances in the NASH space. Quickly stated, NASH is a syndrome that develops in patients who are not alcoholic, but suffer from liver damage that is generally associated with a patients suffering from alcoholic hepatitis. The liver damage is histologically indistinguishable, and the syndrome appears to be related to the resistance of insulin in the body.
Following in the footsteps of Allergan and Gilead, NVO should consider being in the market to locate an acquisition target to expand quickly into the space. Investors should look at Galmed (GLMD) as a potential target by NVO. NASH is attractive to investors because of the large market potential, it is a significant unmet medical need and there is a lack of clinical data by the large pharma’s. To get a running start, large pharma will need to purchase the advancements already made in the space by these smaller companies if they wish to remain competitive in the race for treatment. The market is estimated to be a $5 billion dollar per year opportunity in the US alone, but that number can skyrocket due to patients that have fatty liver complications similar to NASH.
With NASH being in focus, a move at this early stage could be immediately accretive to shareholders in a PPS sense, and investors may be willing to once again look to the near term for NVO. Even with NVO alluding to interest in cardiovascular study (CVD) and Chronic kidney disease (CKD), those trials are expensive and risky. I believe NASH to be in everyone’s best interest.
Is This A Buying Opportunity for NVO Stock?
Novo Nordisk has been crushed since August, with shares down over 23% after Friday’s close. As with most of these biotech companies, once they get caught in the downdraft, it is hard to escape. With the speed of trading and the fickle changes in sentiment, stocks like NVO often get beaten up for far too long at too deep a level.
NVO can change sentiment quickly and, just as investors fled, they will come flocking back. NVO management is clearly aware of the need to do something quickly and investors should begin to look forward for NVO once the capitulation of selling occurs, which should be close.
Investors do not need to rush in and buy their entire position at these levels, they should take a cost average approach and buy incrementally to fill a position. If NVO acts quickly to advance themselves as a potential player in the NASH space, chances are that the stock price will recover quickly, bidding adieu to those that lost confidence.
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