Novo Nordisk is the most valuable company in Europe, and unique in that it’s a pharma giant of its size focusing almost solely on metabolic diseases (diabetes and obesity)— and that it’s owned & controlled by a non-profit!
How does the striking efficacy in treating diabetes of the company’s recent media star, the GLP-1 agonist Ozempic/Wegovy, affect the big insulin companies? Especially when Novo Nordisk is itself a big insulin company?!
Back at the time when insulin was discovered (early 1900s), huge demand and very little supply; but culture was very anti-commercialization of medicine (“people shouldn’t make money off of this!”) → initially licensed for 1 year to Eli Lilly (IN-based, utilized pancreases from cattle slaughterhouses)
Eli Lilly used the opportunity to build a brand associated with quality insulin, and it worked! Still bigger than NN by market cap (although much more diverse)
Previous Nobel prize winner who nominated insulin “discoverers” for their prize was Danish guy… and founder of NN! His wife (who happened to be one of the first woman doctors) was diagnosed with diabetes, motivating his interest in producing insulin in Europe
At this time, isolating insulin = getting cow and pig pancreases, grinding them up, dumbing hydrochloric acid, and extracting insulin… extremely inefficient (1 million animals to support 30,000 diabetes patients) and super impure and unstable (short shelf-life, lots of infections and allergic reactions)
Corporate structure…
The doc/scientist team leading operations weren’t that corporate-minded, but needed to set up company to have employees, etc. → founded a company and a foundation which controlled 100% of the company, and made themselves the board of the foundation
Foundation has two principles: 1) manufacture and sell insulin in Scandinavia at cost, 2) manufacture and sell insulin more broadly for profit, with all profits returning to foundation to improve production, research
“Foundation owning company” is common structure in Denmark for tax reasons (Lego!), but in this case the foundation is pretty legit. And even to this day, they control vast majority of shares of the publicly traded company
Initial company + foundation named Nordisk Insulin (literally, “Nordic Insulin”)— but power struggle between head scientist guy and the engineer brothers heading the production side of things lead to the engineers being fired, and since drugs couldn’t be patented, they set up Novo Insulin (“New Insulin”) down the road and began their own operations → bitter competition for years, and only merged into Novo Nordisk in 1989!
Why diabetes?
(Type II) Lifelong disease, and insulin enables people to live “normal” lived when they otherwise would have died— patients also dependent on usually daily use, so have a stable market
Lots of room for improvement in production of insulin to make it more efficient, more pure, more stable, easier to use (versus selling tablets that patients have to dissolve and inject with a glass syringe)
Competition between Novo and Nordisk → various innovations and improvements to insulin stability and production; Novo focused on scaling production while Nordisk supplied locally but made money by licensing production globally
WWII → Nazi occupation of Denmark → complicated ethics! Nordisk no longer making money from (Allied) countries they licensed to, while Novo became supplier of all of German-occupied Europe
After war, both companies had to pay Danish state back for profits mostly
Novo emerged as scaled pharma company and largest European insulin producer → more investment in research
1970s: Novo wants to expand into enzyme space (eventually spun out into Novozymes), but enzyme market crashes and they need lots of capital → approach a struggling but cash-rich (new CEO with background in lumber industry) to merge…
Nordisk instead uses cash to vamp up production of new insulin (much more pure) and enters US market → successful at this and start catching back up to Novo in share of insulin market
BUT overall, pharma in general is a tiny industry at this point— drugs not good enough! How do these companies scale to where they are today?
1980s: people start getting “metabolic diseases” like Type II diabetes more, and Genentech + Eli Lily announce recombinant DNA → produce actual human insulin
Tons of hype for biotech, both N & N go public (one in Denmark, one in US)
Late 1980s, with genetic engineering, scale becomes much more important for research, production, everything in healthcare → merger talks begin again
US pharma structure is super weird
Pharma manufacturer(e.g. NN) makes drug → sells to distributer (Cardinal Health) → sells to pharmacy (CVS)
Patient buys drug at pharmacy, but pays with insurance money → insurance doesn’t want to pay actual price from pharma company and they have scale to throw around → negotiate with pharma company, outsourced to pharma benefits manager (PBM) who negotiates with manufacturer for discount (like a rebate)
Manufacturer pays PBM rebate → PBM pays some of this back to insurance, who can share with employer
Manufacturer responsible for production, research, clinical trials
Some pharmacies + PBMs have merged
PBMs manage pharmacy benefits for almost all of America, and at this point <30 so very large — biggest = CVS Caremark (pharmacy + PBM), Express something, and OptumRX (part of UHC, so merged with insurance); these three are sorta “gatekeepers” of drugs because impractical to prescribe something they don’t all have a deal on; rebates these days are very high (75% of list price?) and money doesn’t come close to the patient
Anyway! 1989 Novo (62%) and Nordisk (32%) merge — both companies and foundations
Combine for 50% of insulin market
“Dwarfs” in the context of other huge pharma mergers happening at this time (Astra + Zeneca, etc.)
Later, themselves were poised to be acquired by another company, but fatefully the foundation blocked the merger ad not being necessary to their charter
Early 2000s? Some “pre-diabetic” drugs on the market like metaformin, but NN wasn’t a part of them…
A woman in their enzyme department started thinking about GLP-1, (glucagon-like peptide-1) which is known to cause glucose-dependent decrease in blood sugar by enhancing insulin secretion (and preserved in T2D patients)
Able to produce with recombinant DNA, but extremely low half-life (degrades on order of minutes) → NN posed ultimatum that she needs to figure out a way to make this viable or else stop
Solved the problem by attaching GLP-1 with lipid that somehow couples the peptide to albumin, protecting the molecule from filtering in the liver
But! Simultaneously, some government employees at the VA in the US discovered that a hormone in Gila monster venom (!!) was also a GLP-1 mimetic that is stable in the human body! (Working with researcher back at University of Toronto) → developed by Eli Lilly, brought to market in 2005! But not that much more effective than other drugs, requires two injections a day (not as stable as engineered version)
2007, NN’s drug enters Phase III clinical trials (1/3 of spend of R&D pipeline for a drug!) → noticed that, as in rats, the drug also caused patients to eat less (opposite of most pre-diabetics) → researchers pushed for getting second indication by FDA as weight management drug
Huge stigma for weight-loss drugs— problem usually addressed by recommending lifestyle changes, despite strong evidence of biological underpinnings; many past examples of very unsafe weight-loss drugs (fen-phen)
2010: NN’s diabetes GLP-1 agonist (approved for diabetes, but known to help obesity too) is a huge success — prescribed a lot off-label for weight loss
Super effective comparatively, but still not the best!
Next gen versions (semaglutide— Ozempic and Wegovy) = even longer half-life (only need once weekly injections) → almost double as effective for weight loss; insanely profitable
Extremely supply-constrained and will be for a long time
Manage to be both very high revenue and have high gross margins (80%) by “specializing” in metabolic diseases that are also so widely prevalent
Recent breakdown of revenue = about 40% GLP-1 agonists for diabetes, 20% for obesity, and the rest insulin
Interesting misalignment of incentives for most private health insurance providers in US — average time an American stays with one employer (therefore one insurer) = 3.7 years, so subsidizing drugs like Ozempic/Wegovy that will reduce long-term extremely expensive costs from acute effects of obesity won’t actually be realized by them
Only Medicare actually is incentivized (financially) to do this, but there are specific provisions saying Medicare cannot cover weight loss drugs
Cost per month when covered by insurance (in the US) is ~$200-500 (not insane for a potential life-changer, but also not actually affordable by a lot of people)
GLP-1 agonists in trials for treating many other diseases— cardiovascular, Alzheimer’s, etc. (actual potential miracle drug?)
NNF (foundation controlling NN and Novozymes) has endowment of $120 BILLION → largest charity in the world (with the caveat that a lot of that value is NN itself)
Still, seems relatively true that the company is motivated to cure diabetes even if it would put them out of business (mission-driven)
Reflected by compensation scheme: executives and board members don’t get shares as part of their compensation, so they are not incentivized by the short term 3-5 year returns; employees aren’t given shares but actually required to buy them (similar to Berkshire Hathaway), and make less money than counterparts at other pharma companies
Also maybe a cultural thing of Denmark versus US— employees more mission-driven than “mercenaries,” exemplified by woman who led the GLP-1 efforts when asked if she’s gotten rich: “No, I’ve never asked for a raise in my life— but look what we’ve done for the world.”
Together, the long-term focus unique to NN made it possible for them to create something great: spent 100 years iterating on better, longer lasting forms of insulin, and this translated to their success with GLP-1s (general business principle, perhaps)
Commenting on healthcare overall:
Again, drug development is SUPER EXPENSIVE and inefficient — vast majority don’t repay their R&D costs even if successful, and most profits for pharma companies come from top decile of products
Shift away from efforts to treat widespread conditions (last breakthroughs maybe statins, HIV/HepC treatment?) → very difficult to prove something works better than current treatment (not a requirement for any other market); while they have a big market, not as profitable
Instead focusing on rare diseases, specific cancers— extremely small market but super expensive ($1M per treatment)
Shows why market drove scale and consolidation in pharma (need a lot of resources to do research)
Pharma industry
Overall, sector has decreasing ROIC (return on invested capital), but variance between companies has increased (from purely market perspective, shouldn’t index pharma sector)
NN far outperforms peers
Health “insurance” in US isn’t actual insurance— it’s access (make money in the “good times” but don’t see the risk in the bad times… the government/taxpayers do)