Novo Nordisk CEO Lars Sørensen to retire at the end of 2016; Successor Lars Jørgensen steps into position effective January 1 – September 1, 2016

In a big surprise announcement early Thursday morning, Novo Nordisk shared that CEO Mr. Lars Rebien Sørensen will retire at the end of 2016, with successor Mr. Lars Fruergaard Jørgensen taking the reins starting January 1, 2017. Mr. Sørensen is truly a company man: his retirement follows 34 years with Novo Nordisk and 16 years as CEO. His tenure oversaw the establishment of several Novo Nordisk products as power players in the diabetes market, including GLP-1 agonist Victoza (liraglutide) and insulin analogs NovoLog (insulin aspart) and Levemir (insulin detemir). Mr. Sørensen also presided over the company’s development and launch of next-generation products Tresiba (insulin degludec) and Xultophy (insulin degludec/liraglutide) in Europe and expansion into the obesity arena with Saxenda (liraglutide 3.0 mg).  Novo Nordisk’s “deep engagement with social and environmental issues” under Mr. Sørensen’s tenure as well as the company’s exclusive focus on diabetes and its corresponding strong financial position won him the #1 spot on Harvard Business Review’s 2015 Top Performing CEOs ranking. Mr. Sørensen will be sorely missed at Novo Nordisk and in the larger diabetes field! In a media call, Mr. Sørensen shared that he’s looking forward to some (well-deserved!) days off in 2017, though he didn’t entirely rule out returning as a member of the company’s board – we certainly hope Mr. Sørensen will remain involved involved in Novo Nordisk and the broader diabetes field in a very meaningful capacity.

Mr. Jørgensen will step up from his current position as executive vice president and head of Corporate Development. We don’t know him but have heard very good things about him. Mr. Jørgensen brings 25 years of experience with Novo Nordisk to his new role; he joined the company as an economist in 1991 and has since held positions based in the US, Japan, and the Netherlands. Given this experience and his economist background, we expect him to be a good partner (and we see them as equals) to Mr. Jacob Riis, who has clearly been given the charge of steering Novo Nordisk through the increasingly choppy waters of the US diabetes pricing market. Indeed, Mr. Riis has the harder job of the two – there is enormous confidence in him and we expect he will navigate the ship very well.

• Novo Nordisk announced that Mr. Jakob Riis has been appointed President of Novo Nordisk in the US as of today, September 1. Mr. Riis formerly served as the company’s Executive VP for China, the Pacific, and marketing. Under his new position, he heads all North American operations, including Canada. Given that the US is the largest and by far the most profitable diabetes market globally, this is the most important and influential leadership position within the company and within the diabetes field as a whole. During investor call on the executive management changes, the company emphasized that Mr. Riis is the “optimal” person to have at the helm during the upcoming launches of Xultophy and faster-acting insulin aspart in the US, due to his extensive experience in marketing and overseeing transitions in Asia, Canada, and Oceania. We see this leadership decision as marking a new era for Novo Nordisk, which we imagine might have a particular focus on smart positioning for the company’s products given Mr. Riis’ marketing background. Mr. Riis and the US team are confronting significant continued pricing pressures in the US, and according to this morning’s investor call will be prioritizing collaboration with PBMs to ensure patient access to Novo Nordisk’s diabetes products. Indeed, the company lowered expected 2016 growth measurements during the first quarter, a very unusual change and one that reflects that bigger-than-anticipated challenges.
• Other leadership changes include expanded responsibility for very highly regarded Mr. Mike Doustdar, Executive VP and head of International Operations, who started in the post office at Novo Nordisk, as well as the announcement that Mr. Jesper Høiland and Mr. Jerzy Gruhn will no longer be part of the executive team. The latter is perhaps not so surprising – the US has taken on outsized importance at Novo Nordisk and it makes sense to consolidate the rest of the geographic areas (we hope they still break them out financially – they did confirm in Q&A that they would). The company will redefine “international operations” to now comprise Europe, Africa, Asia, the Middle East and Oceania, China, Japan, Korea, and Latin America. Mr. Doustdar’s broader role consequently affects Mr. Høiland’s position, formerly head of the US, and Mr. Gruhn’s position, formerly head of Europe. Management remarked that Executive VP of Corporate Development, a position formerly occupied by the “new Lars” Mr. Jørgensen, will remain vacant for now with a successor announced at an undisclosed later date. It was somewhat unusual for this announcement to come today with so many unanswered questions and the “effective immediately” designations – presumably the real story of the last week’s unfoldings will remain unknown forever.
  
  • The decision to redefine international operations will also impact the company’s quarterly sales reports. Management confirmed during Q&A that they will report all sales with full transparency starting in 1Q17, with revenue broken down by new regional divisions for the first quarter of 2017 as well as the past several quarters. (Presumably this means they will continue geographic breakouts as they’ve been doing).
• In terms of the timing of the transition, Mr. Sørensen suggested that it was driven in part by a lull in product launches for Novo Nordisk. Mr. Sørensen had previously indicated that he may stay on until as late as 2019 due in part to the fact that the company was “standing in front of an unprecedented number of product launches.” With the successful launches of Tresiba and Saxenda, Mr. Sørensen suggested that “the immediate challenges in the US market have been dealt with.” Hmmm. While anticipated launches for Xultophy and faster-acting aspart are on the near horizon as well, Mr. Sørensen expressed confidence in the ability of the new management team to rise to the occasion – we certainly have no doubt that management is in place, although whether or not they can navigate the uncertainty is less clear. In terms of the September announcement, this timing allows four months for Mr. Jørgensen to work closely to Mr. Sørensen to get fully up to speed and begin handling 2017 business plans while Mr. Sørensen focuses on wrapping up 2016.
  
  • Chairman of the board Mr. Göran Ando emphasized that the extra time granted by Mr. Sørsensen’s contract extension to 2019 allowed the board to conduct a deep internal and external search for his successor before ultimately unanimously approving Mr. Jørgensen. While certainly it made sense to examine outside candidates, we can’t imagine, ever, that any outsiders were in contention for this role. Mr. Ando pointed out that it’s often difficult to predict exactly when a potential successor will be ready to take on this critical position and the long contract extension was to ensure that Novo Nordisk would have enough time to identify and transition a successor without running into timing pressure. While it technically makes sense, there were a number of unanswered questions at the end of the day, such as future roles for a number of leaders and the timing of a number of US events.
• Management also offered several interesting points of commentary on the US diabetes market that may hint at the directions in which Mr. Jørgensen may take the company.
  
  • Notably, Chairman Mr. Ando suggested that the recently Express Scripts creation of a Diabetes Value Care Program may lead the company to engage in more innovative rebate models, such as values-based contracts. Under these agreements, Novo Nordisk would pay a lower level of rebates if their products are able to produce a range of clinical outcomes in the payer’s patient population. Mr. Ando expressed confidence that these contracts would play out in Novo Nordisk’s favor, given the strong clinical profiles of its key products – we absolutely agree. We’ve seen these value-based contracts begin to gain traction for PCSK9 inhibitors and, more recently, within diabetes with Lilly’s agreement to a value-based model for Trulicity (dulaglutide) with Massachusetts-based insurer Harvard Pilgrim. For his part, Mr. Jørgensen suggested that the move from Express Scripts is based on a more holistic management of diabetes costs and may not severely intensify diabetes drug pricing pressures. Echoing this sentiment, Mr. Sørensen suggested that Express Scripts’ focus on improving adherence to drive down costs will favor Novo Nordisk products, as they are “the most convenient and the more efficacious drugs that should be the easiest for patients to be more compliant with.”
  • Regarding M&A, Mr. Jørgensen suggested that Novo Nordisk will engage in more development and commercialization partnerships moving forward in order to support the rapid growth of its pipeline and the company as a whole. That said, he also emphasized that Novo Nordisk will not become a large-scale M&A company and that its partnerships will be centered on complementing its internally-developed pipeline candidates.

Questions and Answers

Q: I’m sure you also looked outside of Novo Nordisk for a new CEO, so in the end, what led to choosing an internal candidate?

Mr. Ando: We had the opportunity and privilege to have several internal candidates who we’ve evaluated over a significant period of time. We did also benchmark them against external candidates, and clearly found very, very strong internal strength in what we call the “Novo Nordisk way.” Our culture is very strong. We see Lars Fruergaard Jørgensen as fitting our desired profile perfectly. Thus, it was an easy decision. The board was completely unanimous.

Q: Do you foresee any shift from your historically modest activities in the mergers & acquisitions (M&A) area?

Mr. Jørgensen: So, I think there will be a shift in the sense that we will have to rely slightly more on external innovation as we grow in size. But we will not be looking for large-scale M&A. For quite some time actually, we’ve been in a number of deals to complement our in-house research, and that’s what we’ll continue doing. If we can find opportunities to complement our portfolio, we’ll be proactive about that.

Q: What areas is Mr. Riis looking to do differently in the US? Should we expect any wholesale strategic changes there?

Mr. Ando: The overall strategy will be quite the same. It’s clear that the company in general is facing more commercial challenges, so it will be important for Jakob and his team in the US to retain collaboration with the trade and with PBMs to ensure that our drugs are available in the marketplace and that patients with diabetes have access to these drugs.

Q: We saw Express Scripts announce a Diabetes Care Value Program, which should reduce the rate of increase in diabetes spending. With further pressures from PBMs, is the new Lars still confident in the mid-term guidance?

Mr. Ando: Occasionally, we have to look deeper in terms of rebates to achieve what’s been announced for 2017. That’s the kind of activity we’re looking at going forward – also perhaps crafting relationships with PBM/insurance companies and trying to develop a more outcomes-based contract with value-based pricing of our drugs. We believe this would play into the hand of Novo Nordisk because we have the most efficacious and the best quality diabetes care for the US market.

Mr. Jørgensen: I saw the Express Scripts announcement as rather broad. There’s a drug component, and I think that has been negotiated for 2017 – that’s what we’ve based our guidance for 2017 on. Then there are a number of components dealing with how we manage diabetes, how we secure compliance with medication, all with an aim to drive down the cost of treating diabetes. I saw this piece as a more holistic diabetes strategy focused on additional pricing initiatives compared to what we have already negotiated for 2017.

Mr. Sørensen: Just in addition to that, I note in the announcement that Express Scripts is looking to improve adherence to therapy. This is a positive in the sense that it’s also something we’re interested in, the reason being that it’s better for the patient. It’s also better for the payer, because this will reduce hospitalization and long-term complications of diabetes. It’s good for Novo Nordisk, because we have the most convenient and efficacious drugs that should make it easier for the patient to be compliant. So, I think it’s a positive initiative, acknowledging that compliance is very important in diabetes.

Q: You mentioned the slight shift with the company relying more on external innovation, and possibly small complementary deals. How could that affect your shareholder friendliness and buybacks?

Mr. Jesper Brandgaard: I think we’ve all along been working with capital allocation, which has two specific components – a dividend payout, which has this year moved to become twice a year in order to reflect stable ongoing cash flow for our company, and a ~50% payout aligning continuously to where we have the overall pharma industry. I would anticipate that shareholders can counter that also going forward. There’s also been a share repurchase program where we basically have used the cash over and beyond what we returned as formal dividend to our shareholders. All along, we’ve been saying that in any single year, there will be opportunities to complement our current activities. In that case, we would then tone down the share repurchase program in an individual year. But the principle will remain a steady and predictable return of cash flow to our shareholders with the flexible element being the share repurchase program.

Q: Has the board’s deliberation and composition of the executive team led to discussions among board members about competencies required for the future board level?

Mr. Ando: The board has been deliberating on that for quite some time, and has changed significantly in the last four or five years. We now have a board with very deep, varied experience within the pharmaceutical industry, including direct hands-on experience in the US. We obviously have financial and other expertise on the board as well. I am quite comfortable that we currently have a good mix of the competencies that we need to develop strategies for the future. Having said that, it’s an ongoing process all the time.

Mr. Sørensen: I also remind you that we have, in the past, worked with former board membership and advisory committees for a period of time. Some competencies can be filled by other instruments beyond a formal contribution at the board level.

Q: Lars Rebien, I believe when you decided to stay on a bit longer a few years ago, one of the reasons given was uncertainty going particularly into 2017, but also beyond. From a timing perspective, is Novo Nordisk now in a position where such change going forward is good? From a new Lars perspective, obviously 2017 will be an important year, so how involved will you be over the next couple months to plan for 2017?

Mr. Sørensen: When we expanded the executive team, it was to create more visibility at the board level for both commercial activities and also leadership potential, to identify successors to my job. I think what we stated at the time was that we were standing in front of an unprecedented number of product launches. We have successfully launched Tresiba in the US; we’re seeing sound performance of Saxenda for obesity. So, immediate challenges in the US market have been dealt with. There’s a new group of launches taking place as we speak – hopefully we’ll get an approval of Xultophy and a faster-acting insulin analog. That will of course give us a new set of launch challenges, which the new management team is well-equipped to take care of. Since the competitive environment in the US is going to be forever changing, it’s not something that should hold us back from making changes now. We see now as the right time for change. It’s a business decision to do it now because it allows us to change leadership structure in the US, to get fresh leadership at the helm of our US business and to develop a business plan for 2017 under Lars’ leadership. We think the timing is pretty good.

Mr. Jørgensen: I can confirm that a key priority for me is to be heavily involved in the planning for 2017. As such, September 1 is a good time to make this announcement because this is basically when we start planning for the following year. Yes, I’ll be very close to that.

Q: Region Europe is now reporting to Mike Doustdar. Does that mean anything operationally, practically, or is that just a simplification of the executive committee’s structure?

Mr. Jørgensen: There’s no change in the importance or any considerations around Region Europe. We’ve had a number of important decisions made in terms of pricing and market access in Europe, and we’re starting to move past some of the disappointments in the German market. Going forward, we can have a good track record in Europe.

Q: As a follow-up on the US business, can you let us know if there are any problems you’ve seen with performance there over the last year or two? Can you talk more about reasons for the change of leadership? We see Mads and Jesper are staying put – is there a timeframe for their tenure or are they set for the foreseeable future?

Mr. Sørensen: We think that Jesper Høiland and his team successfully launched Tresiba in the US, along with Novoeight (for hemophilia) and Saxenda. They have reshaped our US organization from the payer side, so we have a very strong team dealing with contracting. As a result of all of this, you will see our improved and sustainable access in the US market in 2017. I think you should see this shift from Jesper Høiland to Jakob Riis as a fresh set of eyes and new energy into a very challenging business environment in the US. Because of Jakob’s background having successfully managed transitions in Asia, China, Canada, and Oceania and his background in marketing, he’s extremely well-equipped for the next set of launches that we have to undertake in the US. Xultophy, hopefully, will be imminently approved. You should see this as new energy being put into leadership of the US rather than a deceleration of the performance of our US team up until today.

Mr. Ando: There are no other changes at the executive level being contemplated currently. And we'll try to keep them off being run over by a bus.

Q: Lars, I get that the 2019 extension gave you sufficient space, and that it wasn’t a deadline in itself. But we’re still quite some way from this. So if I can ask again, why now? Why 2016 rather than 2017? Is it possibly related to operational changes?

Mr. Ando: We’ve had a very long process to look at CEO succession. Extending Lars’ contract, as you said, was a way to make sure that we wouldn’t run into any sort of timing pressure. We have a totally unanimous board behind this decision, and once you make sure the selected person is ready, you move forward and make the appointment. We also selected a time here that works from a business angle – it’s important to allow one Lars to take charge of the 2017 planning process while Lars Rebien concentrates on 2016. It was a nice handover, a nice succession. I’m very pleased with this.

Q: With Mike’s expanded role and the redefinition of international operations, will that change the way you report your quarterly sales regionally?

Mr. Brandgaard: I should apologize for changing reporting structure again. Of course, I have distinguished colleagues sitting next to me who make those calls, and then it falls on my shoulders to find ways to ensure that our investors stay with the same level of insight into our business. What you should anticipate is that we’ll continue to report on the current structure for the remaining year. Then we will change the regional structure and provide full transparency on the past two years. Going forward after that, we’ll report on the new structure. From January 1, 2017, you’ll get complete transparency into the new structure with the necessary numbers also provided for prior years.

Q: What are your short-term focuses in the US?

Mr. Jørgensen: The biggest challenge in front of us is the number of launches into the same market. We’ve never had to do that in the fashion and shape that we have to do it now. Getting that right and executing that well is of utmost importance. Here, we believe that Jakob brings the experience from both marketing and the markets he’s been running to be the optimal person to run that.

Q: You’ve been very firm in that you will not expand your US sales force. Is that still your position?

Mr. Sørensen: You’re correct; we have stated that we did not expect to expand sales force in the US. We’ve had exclusive contracts for short-acting insulin, etc. which diminishes the role of the sales force because patients are switched by PBMs and insurance companies and there’s little competition in the marketplace or in doctor’s offices because it’s pre-determined what products the patient should be using. All things being equal, we predict that we’d need less sales force in the market place. But Novo Nordisk is in the position to launch new products in the near-future. We also need to capitalize on the LEADER and SWITCH studies. Therefore, we might end up with the same size of sales force as we’ve always told you. We believe that will be sufficient to maximize the value of this portfolio.

-- by Helen Gao, Payal Marathe, and Kelly Close