Novo Nordisk to Slash 2% of its Workforce to Pare Costs

Most job cuts will be in R&D units and staff functions at its headquarters in Denmark

n1Danish company Novo Nordisk A/S (NYSE: NVO), the world’s largest insulin producer, plans to trim about 1,000 jobs, or 2% of its workforce, as it tightens its belt in the face of growing competition and resistance to high prices for diabetes drugs in the US, as reported by Bloomberg on September 29th, 2016. Novo, which has a global workforce of 42,300, said about 500 of the lay-offs would be in Denmark. Most cuts will be in R&D units and staff functions at its headquarters in Bagsvaerd as well as in its global commercial organizations. The headcount reduction and associated costs would not change its financial outlook for FY16.

n2The job cuts would save Novo 700 million to 1 billion Danish crowns ($105-150 million, $1 = 6.6417 Danish crowns), equivalent to 2-3% of FY17’s earnings before interest and tax. The job reductions come at a time when Novo’s long-serving CEO Lars Rebien Sorensen would step down in January 2017. He will be succeeded by Lars Fruergaard Jorgensen, who is now executive vice president and head of corporate development.

The move underscores the difficult operating environment in the US, Novo’s largest market, as payers become more selective about the drugs included in coverage plans for their clients and cheaper generic drugs force the company to cut prices or lose ground to rivals. n3Novo generates about half of its revenue from the U.S., which has a diabetic population of over 30 million. The pricing uncertainty is likely to extend into 2018, according to Chief Executive Officer Lars Rebien Sorensen. Novo acknowledged in August 2016 that it lost a major contract for its top-selling insulin NovoLog, and is rethinking whether or not to proceed with the development of certain drugs in its pipeline. Concern about the increasing competition has caused Novo to lose more than a quarter of its value so far in 2016.

Novo is now reviewing whether oral insulin can be commercially viable, and how much investment would be needed. The drugmaker has shifted its focus to a pill version of an experimental diabetes drug, semaglutide, which stimulates insulin production in the pancreas.

Intense competition from generics and biosimilars

Generic competition for Novo Nordisk’s diabetes treatments has swollen in recent months, a major cause for worry since diabetes drugs account for nearly 80% of Novo’s sales. After reaching a peak of $271 per prescription in 2014, prices for traditional treatments like basal insulin drugs have fallen by more than 20% in the U.S. to $215 per prescription in 2016.

n4Eli Lilly and Co. (NYSE: LLY) and Boehringer Ingelheim GmbH are expected to launch a biosimilar version of Sanofi SA‘s (NYSE: SNY) blockbuster insulin drug, Lantus, called Basaglar, in December 2016. Basaglar will also compete with Novo’s next-gen diabetes treatment, Tresiba, one of the products that the company is banking on for future growth. Novo launched Tresiba, whose sales surged 161% in H1 FY16, in the U.S. in January 2016.

For all these reasons, Novo cut its forecast for FY16 in August 2016. The Company now expects sales growth of 5% to 7% and profit growth of 5% to 8%. It earlier expected its profit could grow by as much as 9%. Novo Nordisk achieved 12% revenue growth in FY15, down from the annual growth of about 20% it had achieved over the previous five years.

Headwinds in coverage and drug pricing regime

Formulary exclusions and mandatory discounts have pulled in the reins on Novo’s industry-beating growth in recent months. Major insurers such as UnitedHealth Group Inc. (NYSE: UNH), the largest health insurer in the U.S., CVS Health Corp. (NYSE: CVS), and Express Scripts Holding Company (NASDAQ: ESRX) are increasingly changing reimbursement terms for long-acting insulin drugs to include lower-priced options in their 2017 formulary, in order to reduce costs for their members. n5For example, UnitedHealth said that it will no longer cover Sanofi’s blockbuster insulin drug Lantus, instead choosing Basaglar, a cheaper biosimilar insulin sold by Eli Lilly, under Tier 1. Express Scripts has barred Novo Nordisk’s blockbuster GLP-1 diabetes drug Victoza and two of its top-selling insulins from its coverage, instead favoring Eli Lilly’s new weekly GLP-1 drug Trulicity.

Major drug companies are preparing for a tougher drug pricing environment in the U.S. in 2017, since government organizations are looking to clamp down on elevated drug prices, even while the rapidly increasing older population is intensifying pressures on the U.S. health system. Meanwhile, drug pricing has become a political issue, with leading Presidential candidate Hillary Clinton pledging to clamp down on pharmaceuticals companies. While the new drug pricing would likely lead to a restructuring of the global pharmaceutical industry, drug makers will have to introduce new pricing models for their top-selling drugs.

Adding to the pricing pressure for drug companies is the advent of biosimilars, which are cheaper copies of protein-based biotech drugs. The advent of biosimilars is expected to benefit insurers, patients, and the medical community. Pharmacy Benefit Managers (PBMs) are expecting the launch of several biosimilars since the patient pool is set to rapidly expand owing to lower prices. PBMs are looking to work on securing pricing deals and benefits with companies that manufacture biosimilars, since it would lead to huge savings for patients covered within the Medicare and Medicaid programs. These savings will lower the cost of insurance, and PBMs will be able to provide competitive medicare premiums to patients.

It now remains to be seen whether the job cut announced by Novo could help it achieve a sustainable balance between incomes and costs in the future months.

Stock performance

n6Novo’s stock stood at $41.12, slipping 1.13%, at the close on Monday, October 3rd, 2016, having vacillated between an intraday high of $41.15 and a low of $40.83 during the session. The stock’s trading volume was at 3,571,861 for the day. The Company’s market cap was at $83.85 billion as of Monday’s close.

Be the first to comment

Leave a Reply

Your email address will not be published.


*