#2 Novo Nordisk - Business breakdown

On the previous newsletter - #1 Novo Nordisk - Changing Diabetes - I introduced the diabetes and obesity problem the world is facing and how Novo Nordisk, through its product portfolio, is well positioned to capture it as a tailwind. If you have no previous background on diabetes problem then I recommend you to spend 10 minutes and understand the context Novo Nordisk is operating at before continuing. Check it out here.

Having introduced the diabetes problem, in today’s newsletter I will break down Novo Nordisk business to understand how they operate to meet patients’ needs.

DISCLAIMER: This article is not a recommendation to buy or sell any financial instrument, the content is educational and my personal opinion. Each person has to make his own analysis. Any action or decision you take as a result of viewing this article is your sole responsibility.

Note: All visual material in this article is from Novo Nordisk, unless otherwise stated.

A Brief History of Innovation in Diabetes Care

The company was founded in 1989 through the merger of two Danish companies, Nordisk Insulin and Novo Insulin. Both companies had a long history of developing and manufacturing insulin products.

Insulin extraction and purification techniques was discovered in 1921 in Toronto by Sir Frederick G. Banting (pictured), Charles H. Best and J.J.R. Macleod. In 1923, August Krogh and his wife Marie Krogh brought the technique to Denmark and started Nordisk Insulinlaboratorium with Hans Christian Hagedorn and August Kongsted. With insulin, diabetes was no longer a death sentence and life expectancy improved dramatically.

Novo Terapeutisk Laboratorium was founded by brothers Harald and Thorvald Pedersen, who after working as engineers in Novo Terapeutisk Laboratorium founded their own company for insulin manufacturing in 1925 after Thorvals Pedersen was fired by H.C. Hagedorn.

Both companies became competitors on the insulin market, Nordisk Insulin A/S developed new long lasting insulins while Novo Industri innovated on insulin pens. In 1989, Nordisk Insulin and Novo Insulin merged to form Novo Nordisk. The new company was a global leader in diabetes care, and it quickly expanded into other areas of healthcare, such as hemophilia and growth disorders.

Today, Novo Nordisk is one of the world's leading pharmaceutical companies. The company is headquartered in Bagværd (Denmark), and it has employees in more than 80 countries

The business model

Novo Nordisk business model is to target unmet needs and develop solutions which meet specific patients requirements, supporting innovation on precision medicine with data-driven decision-making and digitalization.

Another strategic part of Novo Nordisk business is manufacturing and distribution of the drugs of its pipeline to final customers.

Novo Nordisk has a global network. R&D activities (drug and manufacturing process development) take place in Denmark, USA, UK, Switzerland and China. Then drugs API is manufactured in Denmark and North Carolina (USA). This API is filled into pens, vials and/or packaged in sites strategically placed on different locations worldwide. This network is supported by four local production sites for countries with specific demands/requirements: Japan, Russia, Iran and Algeria. Finally, distribution warehouses, sales offices and other facilities in 80 countries.

The company is vertically integrated as they carry all the productive activities from new drugs development to market access activities, being the last ones integrated across the whole value chain.

R&D approach and pipeline

The value creation process starts on the research and development segment of the company.

Novo Nordisk adresses unmet needs improving patients’ quality of life. They search for the biological cause of a disease to target it through its treatment. Focus is placed in addressing chronic diseases and providing precise treatment targeting particular patients segments needs.

Novo Nordisk has strong collaboration ties with academia and other biotech companies around the world. A good example are the Novo Nordisk Foundation Centers across top Danish Universities such as DTU Biosustain and Novo Nordisk Center for Protein Research (both institutions controlled by Novo Foundation, I will dig into into on the 3rd newsletter about the company), expanding talent and ideas acquisition, increasing companies’ technological advancement pace.

Regarding the actual R&D pipeline of Novo Nordisk, the company is exploring broadening GLP-1 applications to other chronic illnesses such as Alzheimer and NASH (Nonalcoholic steatohepatitis). Another innovation on their pipeline is glucose sensitive insulin. development.

From the R&D pipeline picture below it can be observed that drugs for GLP-1 application to diseases mentioned are in Phase III (70% probability to get final approval) while glucose sensitive insulin is still in Phase I (30% approval rate).

The approach towards 2030 R&D pipeline is the reinvestment of cash flows generated by diabetes care segment to develop the obesity products portfolio to subsequently strengthen rare diseases segment and then expand new treatment areas proven to be viable.

The business units

Novo Nordisk business is divided in four segments: diabetes, obesity, rare diseases and other serious chronic diseases. Figure 5 shows the mentioned segments and their total addressable markets (TAM).

Diabetes care

Novo Nordisk diabetes portfolio is splitted in two groups insulin and GLP-1 (glucagon-like peptide 1) as follows:

With a market share in diabetes care of 32.7%, Novo Nordisk is the leader in the insulin segment (44.3%) and GLP-1 analogues (54.1%). As explained in the previous newsletter, these two product lines are the ones capturing most of the diabetes market value.

Overall diabetes care sales grew at 9.5% CAGR during the last five years. However, that growth is unevenly distributed between insulin and GLP-1 segments. While the insulin segment slightly decreased from around 60 DKK billion in 2018 to 53 DKK billion last year, GLP-1 segment sales expanded to from 26 DKK billion to 83.4 DKK billion reported in 2022.

The described trends are a consequence of the shift in diabetes care approach due to GLP-1 medication being a better available option for diabetes control, expiring patents and price competitiveness (later explained).

Hence, GLP-1 treatments are the growing segment of the diabetes care market due to the advantages they have versus traditional insulin based treatments. Novo Nordisk estimates they are capturing most of the GLP-1 market growth as shown on figure below:

According to 2022 annual report Novo Nordisk diabetes sales have increased 14% at constant exchange rate (CER) driven by GLP-1 drugs growth:

“Sales of GLP-1 products for type 2 diabetes (Rybelsus®, Ozempic® and Victoza®) increased by 56% measured in Danish kroner and by 42% at CER to DKK 83,371 million. The GLP-1 segment’s value share of the total diabetes market has increased to 33.5% compared with 26.5% 12 months ago. Novo Nordisk continues to be the global market leader in the GLP-1 segment with a 54.9% value market share, an increase of 2.2 percentage points compared to 12 months ago.“

Moreover, Rybelsus (oral GLP-1 drug) is close to achieving the blockbuster status despite being launched only three years ago. In 2022 its sales were more than doubled to 11.3 DKK million (vs 59.8 DKK million of Ozempic, the injectable version of the same drug). Nowadays Rybelsus is available in 45 countries (vs 73 of Ozempic) representing a very little amount of prescriptions outside the USA and Canada.

On the other hand, Victoza sales are declining, continuing a past trend. This can be explained by Victoza adverse side-effects - higher risk of thyroid and pancreatic cancer among others which were investigated by FDA back in 2013 - and the availability of other more effective and safer GLP-1 treatments. Moreover, Victoza patents are expiring in 2023.

Obesity care

This segment was created from splitting “Diabetes and obesity care” segment back in 2021. Obesity care portfolio is much more limited than the Diabetes care one. Only two obesity products are currently commercialized, Saxenda and Wegovy. Its sales in 2022 were 16.7 billion (9% of the company’s total sales) and Novo Nordisk’s objective is to surpass the 25 DKK billion sales by 2025.

Current obesity care market is Novo Nordisk’s monopoly, with 92% market share. This situation might be challenged from 2024 onwards as Saxenda patent expires in 2023. However, know-how and economies of scale will be the moat protecting the moat from 2024 onwards

Note: It is for me hard to think of a company able to build/assemble the needed facility and efficiently operated on a similar scale as Novo Nordisk does in a short period of time, especially considering GMP regulations.

The segment shows strong growth, especially in recent years with the approval of Wegovy in 2020. Wegovy marketed name for the oral GLP-1 analogue used for weight loss. Its sales in 2022 were 6.2 DKK billion (vs 1.4 DKK billion in 2021) split 99% from the USA and 1% from Denmark. In 2023, Wegovy got approval in other countries such as Japan, Germany, Australia, Norway so a surge in revenue is expected in the coming years as it becomes available in more countries.

Future focus on this segment is placed on building a portfolio of products for different patient needs, similar to the one currently available for diabetes. As shown on figure 7, Novo Nordisk already offers medication options for moderate weight loss targets but the plan is to roll-out new drugs (CangriSema and others) for drastic weight loss in the coming years.

Rare diseases

Previously known as “Biopharms”. Segment was renamed in 2021 but it still comprises the same activities. It is splitted in three areas: rare blood disorders, rare endocrine disorders and other rare diseases.

The segment as a whole reported sales of 20.5 billion in 2022 (11% of company’s total sales). Its sales increased 1% at CER from 2021. The segment is currently experiencing some issues in connection with a reduced manufacturing output according to the 2023 H1 presentation. However, segment margins are best out of Novo Nordisk’s ones.

Rare blood disorders area is focused on haemophilia. 600k people are estimated to suffer from haemophilia (very modest patient base compared to diabetes and obesity). As it occurs with diabetes, there are two types of haemphilia, type A and type B, both of them being caused by genetic mutations. This means patients will need medication recurrently as they cannot be cured with the available treatments nowadays.

Novo Nordisk product portfolio also provides varied medication options to better fit patients needs. However, the company’s haemophilia products are losing market share against competitors since 2018 as shown in the figure below.

Endocrine rare disorders is focused on growth hormone disorders and generated 7.1 DKK billion (largest player with 30% market share as per 2023 H1 presentation).

Other rare diseases area covers all other chronic diseases whose treatments are under investigation on Novo Nordisk development platforms and acquired clinical companies. Cardiovascular disorders, Alzheimer, NASH and cell gene therapy are included in this area.

Geographies and distribution

Geographically, Novo Nordisk reports splitting the world in 2 groups: North America Operations (USA and Canada) and International Operations (which compiles the rest of the world).

From figure 10 three things can be noticed:

1. Strong growth in all geographical markets, specially in North America due to being the more mature market for obesity products.

2. High USA dependency. 50% of revenue comes from there.

3. Low penetration of treatments in China, considered a strategic opportunity considering its TAM and projected growth. Rybelsus is currently pending regulatory approval in China.

A large portion of the revenue is related to USA diabetes and obesity care medications so it’s important to understand how the product is commercialized in the US.

Long story short, in the USA large institutions in charge of paying healthcare assistance negotiate drug prices with pharma companies through intermediate companies called PBM’s, Pharmacy Benefit Manager. These intermediaries are responsible for negotiating lower drug prices in exchange for including that drug among the list of approved medications by the private healthcare plans. This explains the difference between the price the pharmaceutical company asks (list price) and the price the patient or insurer pays (net price).

In the USA, most patients are insured by the government or a private institution. This explains why despite the rise in insulin prices, Novo Nordisk revenues are not impacted to the same extent.

Final wrap-up

Novo Nordisk is a global company with a clear strategy on addressing unattended chronic disorders with tailwinds.

The company is a first mover on development of GLP-1 treatments for diabetes and its current focus is to extend geographical availability of obesity treatments and find new GLP-1 application for other disorders. At the same time, investment on strenghthening the rare diseases segment - a growing segment where Novo Nordisk is losing traction - is being made.

Revenue is highly dependent on the US market (50% revenue share). However, the marketing approval of GLP-1 Rybelsus and, especially, WeGovy in more countries should reduce US revenue share.

This is the end of Novo Nordisk’s 2nd newsletter. It has been more challenging than expected (taking holidays in the middle of the write-up did not help) and as a result also a longer newsletter than usual.

In the 3rd newsletter I will talk about the company management and structure and also about its competitor and competitive advantages.