Key company-specific risks
In addition to industry-specific risks, Novo Nordisk (NVO) faces company-specific risks due to its unique business model.
R&D failure risk
Novo Nordisk (NVO) is involved in several research and development (or R&D) programs. If clinical trials fail or a regulatory body refuses to approve a drug, it can lead to substantial losses for the company. In addition to monetary losses, these failures also result in opportunity costs, as a competitor’s drug gets an advantage in the market.
Novo Nordisk experienced this in 2013 when the FDA (U.S. Food and Drug Administration) requested additional cardiovascular safety data for Tresiba. At that time, Tresiba, a next-generation insulin diabetes therapy, was in the FDA’s regulatory review process. In response, Novo Nordisk had to conduct a cardiovascular outcomes trial called DEVOTE.
Based on positive results in the DEVOTE trial, the drug was finally approved in the United States on September 25, 2015. Tresiba was already approved in other markets in the world in 2013 and 2014 and has consistently received a positive response. The delay in the launch of the drug in the United States led to a substantial market loss for Tresiba, as competitor drugs such as Merck’s (MRK) Januvia, Sanofi’s (SNY) Lantus, and Eli Lilly’s (LLY) Humalog capitalized on the opportunity.
Business concentration risks
Novo Nordisk earns about 78% of its total revenues from its diabetes franchise. This over-reliance on a certain disease segment increases the level of uncertainty associated with the company’s business. If there’s a safety incident with Novo Nordisk’s diabetes drugs, it can severely affect the company’s overall business on account of excess business concentration.
Based on sales, Europe is Novo Nordisk’s second largest market. However, due to financial crises and a subsequent sluggish economy, there has been an increase in cost-containment pressures in Europe. In response, governments are slashing public health expenditures. This has resulted in price cuts for medicines as well as restrictions on access to medicines.
Novo Nordisk experienced this when the company had to cease distribution of Tresiba in Germany due to failed price negotiations with GKV-Spitzenverband, the German national association of statutory health insurance funds. If these pressures continue for a number of years, it may lead to substantial losses for the company in Europe.
You can reduce exposure to Novo Nordisk’s company-specific risks by investing in the VanEck Vectors Pharmaceutical ETF (PPH). Novo Nordisk accounts for 5.05% of PPH’s total holdings.