A case study comparing Aspen and Novo Nordisk from the March 2017 edition of the FarSight Report
By Rob Worthington-Smith
05 April, 2017
Popular sentiment is in danger of turning against the pharmaceutical industry as drugs are increasingly being perceived as becoming more expensive, while adding less value, normally at end stage of care, rather than offering a preventative cure. Further, R&D and approval have become so costly and risky that drugs will only become yet more expensive and of only marginal increase in efficacy.
Reputational risk is exacerbated when pharmaceutical manufacturers grow large and achieve market dominance in specific regions, or with particular drugs. Companies need mature leadership to build a credible reputation as providers of medicines at reasonable cost, while managing complex supply chain and regulatory issues.
Aspen, which has come under fire for manipulation of drug prices in certain of its European markets, makes no mention of the issue in its 2016 Integrated report. Rather, the company promotes the idea of “sustaining life and health through high quality, affordable medicines”. However, this wording appears only in the title text and is largely missing from actual reporting. For example, there is no reasoning offered for why its product mix/portfolio should be specifically tailored to improve the health and well-being of people. Nor are there any stats given as to penetration or reach of APIs to the broader population that need access to such medicines.
Indeed, it is left to the press to report on CEO Saad’s meeting with African leaders to make ARVs more readily available and such reports are generally also accompanied by comments on APN struggling with supply issues. In an article (November 2016), the Mail & Guardian suggested that APN was withholding supply, clearly alluding to the possibility of price manipulation in a market where the company enjoys dominance.
APN’s own press release, written in response to the article, adopted needless attack (the archetypal form of defence) accusing the reporter of poor standards of journalism in not noticing that the company faced strike action, causing disruption to its supply. This attempt to score points off the journalist involved, rather than address the underlying issue (recovering return on R&D investment through product margin, balanced against the need for critical medicines in Africa), raises red flags of suspicion for the company’s stakeholders.
In summary, APN’s annual report lacks depth and leadership voice, instead floating high ideals without following through with meaningful information to help stakeholders understand how the company’s strategy is linked to its challenges.
FarSight’s comment on Aspen in April, 2017
With an FS score of 2,9, APN is a laggard in the healthcare sector, especially when compared with international benchmark pharmaceutical firm, NVO (36,7). APN’s report assumes confidence and trust in leadership and claims are poorly backed up by substantive discussion, leaving the impression that the leadership is not concerned with business externalities. Only in the area of talent attraction and management did the report impress in terms of appearing to be genuine and goal oriented. The poor effort to establish and embed a value system supporting company behaviour, and the overly defensive response to press criticism of its supply management, are further examples of poor leadership maturity.
Companies often choose to remain either silent on vulnerable issues, or gloss over such issues with window-dressing aimed at misdirecting the reader. How did Novo-Nordisk deal with allegations of price-fixing it received during 2016?
Background to Novo Nordisk’s pricing challenges
Reuters reported on January 31, that “three of the biggest makers of diabetes treatments, Sanofi SA, Novo Nordisk and Eli Lilly and Co, were named in a class action lawsuit about price fixing filed by a group of patients. The suit, filed on Monday in a federal court in Massachusetts, said the companies have simultaneously hiked the price of insulin by over 150 percent during the past five years. Plaintiffs claim that Sanofi, Novo Nordisk and Eli Lilly raised their public benchmark price for insulin products while maintaining a lower “true” price they charged large pharmacy benefit managers (PBMs) like Express Scripts, CVS Health and OptumRX. The PBMs act as intermediaries with health insurers and keep a percentage of the price difference, according to the lawsuit. The lawsuit, which seeks class action status, alleged violations of the federal racketeering statute, which allows for triple damages, as well as consumer protection laws in virtually every state.
MarketWatch reported on January 12, 2017, that “Novo Nordisk shares dropped 5.4% on Thursday after a U.S. law firm filed a class action lawsuit against the Danish pharmaceutical company on behalf of the Lehigh County Employees’ Retirement System in Pennsylvania. The complaint alleges Novo Nordisk was party to “collusive price fixing of insulin drugs.” The complaint also alleges the drug maker “misrepresented and concealed the true extent of the pricing pressures it was experiencing from pharmacy benefit managers (PBMs).” Novo Nordisk is the world’s largest insulin maker for the treatment of diabetes. The lawsuit covers the time between April 30, 2015 to Oct. 27, 2016.
Meanwhile, the Danish press describe a Robin Hood policy favouring poor nations
Danish CPS Post Online reported on September 23, 2016, that “Novo Nordisk will ensure the price of medicine does not exceed 20 percent of the list prices that patients in Western nations pay for human insulin, and the figure will be decided by Novo Nordisk’s Social and Environmental Committee. Novo Nordisk produces nearly half of the world’s insulin supply, and its guarantee applies to nations among the Least Developed Countries as defined by the UN and the World Bank. The biotech giant’s ‘Access to Insulin Commitment’ will come into effect as of 2017.”
How NVO reported on the issue in its IR
About the same time, Jakob Riis, Executive VP, North American Operations, writes in the Integrated Report: “The complexity of the US market is also reflected in the price of medicines – a topic of heated debate. As the graphic (on p 33 of the report) illustrates, numerous entities are involved in the process, and that means that different people pay different prices for medicines, depending on insurance coverage and other factors. So how does it work?
“Manufacturers set the ‘list price’ and have full accountability for those prices. However, after the list price is set, drug manufacturers negotiate with payers in order for medicines to stay on their preferred drug list, or formulary. The revenue that companies receive after rebates, fees and other price concessions given to the payer is the ‘net price’. The net price more closely reflects actual company sales. Across Novo Nordisk insulin products, net price increases year over year have been mid-single digit. This brings the net price development closer to the Consumer Price Index – Urban, a common measure of the average price of goods.”
Yet the access and affordability issue is real. “We’re hearing from more and more people living with diabetes about the challenges they face affording healthcare, including the medicines we make. We take this issue seriously and are working to do more to better support patients. This is a responsibility that needs to be shared among all those involved in healthcare, and we’re going to do our part,” affirms Jakob Riis.
What can we glean from Novo Nordisk’s reporting?
Novo Nordisk clearly understands the threats it is facing as a result of its differential pricing policy. However, it deals with pricing in the US market as a separate issue from its policy in poorer countries. This may have come across as being disingenuous and a more direct discussion setting out the conundrum it faces and the inevitable trade-off resulting in cross-subsidisation between the US and Novo Nordisk’s poorer nation customers might have been more helpful.
If such a discussion were to have been put forward, different strategies may have presented themselves, for example, a campaign in the US to show that every USD spent on insulin by US customers was subsidising insulin for a child in a poor country.
Instead, Novo Nordisk has been inflating prices in the US without explaining why. Indeed, the company has attempted rather to make the case that market pressures have forced it to raise its prices. It now makes the promise that it will limit price increases to single digits, simplify the price system and reduce the burden of out-of-pocket costs.
The issue has received top leadership attention in the report and the response to the threats in the US have been decisive, including the CEO stepping down, a new VP for the US being appointed, and a clear strategy enunciated by the incoming CEO.
FarSight comment on Novo Nordisk in April, 2017
NVO scored best with an FS score of 36,7, well above the SA average for the healthcare sector of 5,9. Considering its size and market dominance in the control of diabetes, especially in the US, NVO faces a broader range of issues, and is exposed to more risk than its peers in this analysis: President Trump is already accusing pharmaceutical firms of exploitation in the US market, NVO faces lawsuits for price fixing, and its main product, insulin, is losing reputation as a treatment for diabetes. NVO has responded decisively in replacing its CEO and leadership in the US and is moving its thought-leadership articles away from insulin, despite this still being its primary product. NVO’s leadership maturity, while high, will have to improve further in order to weather the storm to come.
Relative to SA peers, including Aspen, Novo Nordisk’s leadership has shown a mature response to the accusations it faces relating to price fixing and collusion in the US market. It remains to be seen whether its strategy the likely headwinds it will face in a market where the cost of healthcare is rising far faster than the country can afford.
* Rob Worthington-Smith is the founder of FarSightFirms.com. The FarSight model analyses leadership maturity based on the IIRC’s Integrated Reporting Framework, an international guide designed to standardise the way companies relate their value creation story.