Novo Nordisk (NVO-NYSE, $187.57) and Eli Lilly (LLY-NYSE, $517.53) Seek to Potentially Upend Modern Preventative Healthcare. There Will be Winners and Losers.

A key study, detailed today, published by Novo Nordisk, confirm what has been widely assumed by medical researchers in the rather new GLP-1 medication class; that in addition to providing quantifiable and fairly immediate benefits for those with type 2 diabetes and those seeking to manage body weight, at least one major companion condition related to heart health, is alleviated with a prescription for a GLP-1 medication.

The massive 5 year study, covering more than 17,600 obese persons aged 45 or older, featuring a history of heart disease but no underlying condition that would classify them as diabetic, reported a 20% overall reduction in heart attacks, strokes and infarctions vs the placebo group.

The study has profound and far reaching implications on a number of health related sectors, too many perhaps to be covered in a single blog posting. Investment analysts and active investment funds with an emphasis upon medical investment will, more likely than not, need to assess the investment outlook for entire sectors of the healthcare economy in the coming years. Hence the major one-day uptick in the share price of both Novo Nordisk and Eli Lilly, the only two legitimate players in the space with active and approved GLP-1 medications.

Major issues remain front and center for GLP-1 class medications and the two companies that are approved to sell this class of products.

1. GLP-1 medications in the USA are frightfully expensive, far too costly for the average American household to purchase on their own and too expensive for broadly based coverage to be readily available via either private health care insurance or the Medicare/Medicaid options. Yet, this study represents a strong and tacit acknowledgement of the near term benefits in using a GLP-1 medication outside of a diabetic setting, and that will place pressure upon the players to come up with some sort of broadly mandated coverage compromise at a federal level. Significant pricing changes will be required at the producer level to broaden the market, but the duration of a prescription will likely run for years for heart indications, rather than the “on again-off again” cycling that was felt to be the likely choice for weight loss patients.

2. The current #1 name in the space, Novo Nordisk, has a demonstrated and recurring inability to produce enough product for the market, even with their high price point. This has led to the second player in the space, Eli Lilly, capturing essentially free market share based off the relative failure by Novo Nordisk to corner the market and expand the NVO prescription “install” base.

On the heels of the study findings, Novo Nordisk intends to seek an FDA label extension for Wegovy in order to capture overweight patients that have a history of heart disease as well, but this could be little more than a theoretical exercise in the near term, as Novo has acknowledged that they cannot even fill new Wegovy starting prescriptions for those seeking a weight loss medication.

3. Most of the GLP products presently approved are injectables. These products are expensive to produce and while typically more effective than pills, are considered by the consumer to be a less than optimal product.

4. Health insurance companies will continue to fight, tooth and nail, via lobby groups and through a variety of indirect means, to slow the rollout of GLP-1 products. The issue for any HMO is that the expense to cover a prescription is entirely front ended, with the benefits back ended, and that model wreaks havoc with an HMO bottom lines on a year to year basis. The cost of preventions by Novo, and to a lesser extent, Eli Lilly, is an issue that might negatively impact the for-profit business model of American health insurers unless some sort of equitable arrangement is made to offset the front end cost.

In addition to injected GLP products produced by Novo, all essentially featuring the same active ingredient, differing only in API strength and labeling that permits use for one indication (but prohibiting use for another), Novo Nordisk presently sells the only approved GLP-1 oral diabetes medication on the market today, Rybelsus.

An FDA review and approval for a 50 mg oral version of GLP-1 by Novo is being sought this year. For most big pharma firms, an approval for a potential mega-blockbuster product, with no imminent competitor for several years, in a hot market, would be an absurdly easy win. In an optimal scenario, one where health insurance reimbursement is available and pill production can be assured, Novo Nordisk could theoretically generate the sorts of revenue ramp-up that investors observed for the Covid-19 vaccine producers, the sort of “zero to ten billionish in sales within a year or so” that makes analysts jaws drop.

However, Novo Nordisk has acknowledged that they lack the current manufacturing capability to roll out a high strength oral medication, in volume, anytime soon. At best, the company recently floated out a vacuous suggestion that a 50 mg pill could be produced, but only at the likely expense of an equivalent cutback in Rybelsus output. It is clear that an FDA approved pill pressing facility is one thing that is critically important for Novo Nordisk to build or procure; which begs the question: “why didn’t anyone at Novo plan for an oral medication facility, if the intent was to obtain an FDA approval for a blockbuster weight loss pill“? This oversight, which will take time, possibly years to fully resolve, means that the lions share of any benefits that would normally accrue from label extensions, and potentially an entirely open global market based upon a clamor for an oral medication, that requires abundant supply, is not likely to be quickly consolidated under one brand or by one company.

This corporate botch-up by NVO suggests that Eli Lilly, presently the number #2 player in the space, but a company with massive internal pill manufacturing capabilities, may be fast breathing down the neck of Novo Nordisk in the emerging fight for dominance in GLP1 medications, not just for injectables, but potentially also for oral medications.

The Gnostic Portfolio holds equity stakes in both Novo Nordisk and Eli Lilly. As of today, based upon the science, the findings of the study would clearly favor Novo Nordisk. However, based upon the ability to actually get a medication into the veins of a patient, a patient covered by a health care plan that reimburses the scrip, Eli Lilly stands to benefit as much as Novo, perhaps more so with abundant manufacturing capacity, a 35%-40% lower sticker price on the medications and a better working relationship with the US HMO gatekeepers.

Investment focus in the months ahead, in my view, shall increasingly shift towards the likelihood of an oral GLP medication approval targeting weight loss, because as much as we appreciate the benefits of an injection of GLP-1, the only way to truly reach a global market is with a pill. Once again, this would logically favor Novo Nordisk, who as of today, produces the only oral medication in the space and is seeking approval for an extra strength pill with the same API, to be marketed under a different name and for a different indication. However, what is the point of getting approval on a product that, due to a glaring corporate planning lapse, never built a manufacturing infrastructure to scale up pill production and capitalize on a potentially earthshattering demand for the oral meds?

The US government will likely get more directly involved in the discussions regarding broader coverage for the GLP-1 medication class, going into an election year in 2024 and that is a wild-card, because government direction (edicts) don’t always go the way that investors would like and we now have several different competing sectors in health care, seeking to protect their significant skin in the game.

From a purely scientific standpoint and a health care policy overview, Novo Nordisk should represent an easy winner with the data put forth. They have multiple products presently cleared for sale that will all have benefits for heart issues as well as weight loss and diabetes care; the active ingredient in the study is exactly the same for the entire suite of NVO products, differing only in strength and delivery mechanism. However, Eli Lilly holds extensive lobby sway within US government halls and maintains a solid lock on national health insurance and HMO businesses; Lilly is always willing to play ball in order to increase market share. Novo, I believe, has lost some of their inroads within the HMO industry based upon a expensive pricing model for products, anecdotal indications of a persistent European arrogance and a proven willingness of NVO to bypass the health insurers completely, if need be. Such a business model might work well in the short run but creates business challenges over a full product cycle. Attempting to circumvent the health insurance industry can come back to bite a company in the behind, and Novo has added a risk to their outlook as a consequence. This will be every bit as great a fight between lobbyists as it is a battle for dominance in the weight loss/heart health/diabetes space.

In the world as it is, rather than than world we may wish it to be, the market has decided that the GLP-1 class isn’t a binary investment choice of one company vs another.

To cover the bases, it seems clear that institutions have decided both equities are required to be held in one institutional account, so as to overcome certain inherent failings by either of the top 2 players presently in the space.

This is due to the realities on the ground, one of the two firms seems to greatly prefer being a research house to its actual job of producing and delivering medications, perpetually falling down on the production and distribution front, lacking expertise in oral medication manufacturing and afflicted by a corporate culture that blithely squanders its first-to-market advantage; the other firm specializes in marketing triple strength products, all the while willfully glossing over patient tolerance issues with such high dosages, but readily capturing the HMO market via significant pricing discounts.

As to the lobby front, we have Eli Lilly and the HMOs, all US domiciled companies, with a vested interest in protecting and growing their national markets, completely enmeshed in US legislative and bureaucratic back-rooms. Competing against these deeply entrenched interests, is a Danish company.

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