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Drug pricing challenges diabetes king Novo Nordisk

By Ben Hirschler and Mette Fraende

COPENHAGEN (Reuters) - Drug pricing is emerging as a key challenge for Novo Nordisk, the world's biggest insulin producer, whose previously unstoppable growth has started to flag, according to the Danish firm's chief executive.

Lars Sorensen is certain of one thing: the number of potential customers for his products is going to keep on rising as a global obesity epidemic tips more people into type 2 diabetes in the West and many developing nations.

But he has a mounting fight on his hands when it comes to securing a good price for insulin and other diabetes treatments from cost-conscious reimbursement authorities around the world.

"Pricing is going to be challenging," Sorensen said in an interview at the drugmaker's headquarters in Bagsvaerd on the outskirts of Copenhagen, where a new spiral office complex inspired by the insulin molecule is under construction.

"In Europe, it is already a challenge and pricing in the United States is likely to be challenging in the future as well, with healthcare reform and concentration in the distribution chain."

It has been a torrid year for the 59-year-old, who has been in the job since 2000 and acknowledges that the group is starting to think about succession planning for when he steps down, sometime before his 65th birthday.

Last week he reported the group's 46th quarter of double-digit percentage sales growth in local currency terms, a record most rival drugmakers can only dream of.

But the results fell short of market expectations - and a warning that sales and operating profits might only grow by high single digits in 2014 unnerved investors who have bought into the Novo story because of its long-term growth visibility.

Sorensen insists the aspiration of double-digit sales growth is "still there, alive and kicking" and Novo has not given up on its long-term financial target of 15 percent operating profit growth, adding that forecasts for the following year given at this stage are "always conservative".

But he admits that growing the Nordic region's biggest company by value is getting tougher, especially after a decision by the U.S. Food and Drug Administration earlier this year to delay approval of its new long-acting insulin Tresiba.

That setback opens the door to competition from Sanofi's new insulin U300, just as Eli Lilly threatens Novo's popular non-insulin diabetes drug Victoza with a potential rival called dulaglutide that may be superior.

On top of all this, Novo is now encountering growing pushback on prices from healthcare insurers and governments, challenging its strategy of increasing prices and charging a premium for innovative medicines.

PRICING BALANCE

Getting the pricing mix right is a balancing act for Novo, whose giant factory at Kalundborg, 100 km west of Copenhagen, supplies half the world's insulin, making both modern products for rich markets and cheap generics for the developing world.

Up until now, the West - particularly the United States - has accepted higher prices for more convenient and effective treatments. But the climate is changing, with Novo losing a major U.S. managed care contract with Express Scripts in the face of cheaper competition to Victoza, while austerity-hit Europe is reluctant to pay up for Novo's new drugs.

It is a battle in which Sorensen believes he cannot afford to give ground.

"We need to price innovation at a premium, otherwise we will not be able to fund innovation going forward," he said.

"We could have priced ourselves into the (Express Scripts) contract had we wanted to, but we believe Victoza is a better product and therefore demands a premium."

In Europe, Novo is facing resistance to the 60-70 percent price premium it is asking for Tresiba but Sorensen said he had no plans to reduce the price, even though this may mean the new medicine is never launched in Germany.

For Sorensen, fighting for a fair reward for innovation is a matter of principle and he believes Europe will have to find extra funding beyond taxation - via insurance or patient co-payments - to deal with its rising healthcare burden.

The stand-off, however, is unnerving for investors anxious about Novo's long-term growth story.

Even after this year's setbacks, its B shares, the class of stock open to outside investors, still trade on 18 times expected earnings, against a sector average of about 14.

The stock is underpinned by the knowledge that more than half a billion people are expected to be living with diabetes by 2030, up from 370 million today, according to the International Diabetes Federation.

Sorensen hopes to stay around long enough to see the company well on the way to the next stage of technological breakthrough - oral pills, rather than injections, for delivering insulin and so-called GLP-1 medicines like Victoza.

He thinks a GLP-1 pill could hit the market in five years, with a 50/50 chance of an insulin tablet in 6-8 years time.

Novo is trailing Israel's Oramed Pharmaceuticals in clinical testing of an insulin pill, sparking speculation of a possible deal. But Sorensen said this was not on the cards since Novo doubted Oramed's approach.

At a personal level, the Danish company's boss shows no signs of flagging, having recently extended his mandatory retirement age from 62 to 65. He cycles to work most days and is a keen cross-country skier, preparing to take part again in the 90-km Vasa race in Sweden this winter.

Whoever takes over will have a hard act to follow but Sorensen sees good internal candidates for the job.

"We've bought a little time to work on diligent succession planning and we are doing that at the moment," he said.

(Editing by Giles Elgood)

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