Such A Pleasant Stay

by DrKSSMDPhD | November 2, 2016 8:18 pm

Time to Ramble On, Novo

[Ed. Note: Dr. KSS writes about medicine and biotech stocks for the Irregulars. He has agreed to our trading restrictions, chooses his own topics, and his words and opinions are his own. All of his past articles and most recent comments are on his Stock Gumshoe page[1].]

“Thanks to you I’m much obliged

Such a pleasant stay.

But now it’s time for me to go

The autumn moon lights my way

Now I smell the rain, and with it pain

And it’s headed my way.”

—- Led Zeppelin[2]

On a summer day, in a month when farmers were making hay, I as a burly bum did come a-hiking through the pages of my E-Trade account. It’s a place that helps me envision lands of milk and honey sometimes, as well as big rock candy mountains. But even when it seems a chore, you have to sniff and poke continually through all your holdings, ever intending to hurl things at the wall where they once stuck to see if they still do. The only dead certainty in investing is change, and today’s fab investment thesis has a way of eventually looking like it belongs on the rack of salted, sun-drying, stench-exuding cod I stopped to ponder on a fjord switchback on a rare warm summer day in Norway. (Just as cat-dragged-in loser investing ideas can reanimate into compellingness when the seasons change. The seasons always change.)

And so I came to notice an odd entry: Novo Nordisk ($NVO) had posted plans to pay a dividend in August. Surely this was an error (E-Trade makes many, be warned). Everyone knows, natch, that Novo’s annual dividend of about 1.5 percent is paid out once yearly in late winter. But other sources corroborated: Novo was doing a pay-out in August. And no comments were being made about this being a “special dividend” and the good times those imply.

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I spoke to Travis Johnson, who told me he’d read in Financial Times that Novo was merely dividing its dividend into two fiscal-year payments. Continuing in a vein of revering the horse’s mouth, I got on the horn with Kasper Veje of Novo IR in Copenhagen. Mr. Veje said that while the final total dividend would not be set until the board met at an AGM in early 2017, the plan called for the August dividend payout to represent about 40 percent of the annual total. One can see, I hope, why I was confused by the publication producing this chart[3], which left me fleetingly with a sense that August’s stipend might be all we’d see. It’s not that a 1.5 percent annual dividend is so big a deal, but my position in $NVO has more than tripled in value during my somewhat extended holding period, and the annual fat check had become a sweet cookie that escorted in warmer and longer days.

The residue of my thinking? Well, why was Novo doing this? I’ve praised Novo Nordisk in these pages many times because I regard them as the best protein chemists in the world, in or out of academia. Colleagues have worked for them, and Novo bestows posh on its employees. But what I’ve never openly discussed is how Novo management style has often reminded me of my brother-in-law’s twin, whose Tourette syndrome makes him a jack-in-the-box of silent kinetic outbursts and hemi-ballistic tics (fortunately he doesn’t have coprolelia, the tendency to swear like a stevedore that badgers many sufferers). It’s not that Novo management skittles on foal legs….it’s that they make some very odd moves indeed, ones that are often inversely proportionate to the importance of what they are acting on. On many minor things, they spazz out and leave shareholders and consultants and insiders wondering (we’ll discuss more below). Analysts were grousing about falling profits at Novo, and the surprise dividend seemed a kind of squid ink to cover that, implying, look, we are so cash-flush that we’re going to hand you a fistful of dollars now just to prove it. Falling profit? What falling profit? Yet if Mr. Veje was correct in his formulation, if you did the arithmetic he proposed, the August payout quantitatively divulged that the overall dividend was falling apace with the profit it tracks.

$NVO Five Year Chart

$NVO Five Year Chart

I’m here neither to bury nor to excoriate Novo Nordisk. I’m here to report. Part of my social contract with readers here is that I go to great lengths to invest within a fishbowl for your viewing pleasure. With few exceptions, I tell you what I am buying and selling within biotech, and do so in a proximal way, such as within 72 hours of the action. The exceptions? Well, one quirk of my biotech investing style is that if I come upon an unfamiliar biotech, ingest it and find that it has survived first-pass metabolism, I grab a few shares. It’s as if I have a couple of loam-filled whiskey-barrel planters out on the patio that are my speccy biotech garden. Owning a few shares, a starter position, doesn’t exactly put my feet in the fire, but it informs my toes and gets me to follow the company far far more closely than I would as a non-owner. If those companies ripen—and many don’t—into ones that need to play in Peoria for you, I write a column. If they don’t take root, I take the hit and move on, never having cost you any money. But except for these dalliances, you know everything I do and why. Which is why I come before you today: I’m leaving Novo Nordisk. I haven’t vacated shares yet, but I plan to, and soon.

Why am I leaving Novo? In one of his better fiction discourses, British novelist Martin Amis writes, “You go when you can no longer stay.” But why can I no longer stay? That merits some explanation. You see, when I picked long enough at the zit of that quirked-out dividend payment, I began to notice others too, corporate blackheads and comedones.

My best-performing biotech long ideas all have one thing in common. I study them, get boluses of information and facts about them, almost as if I’ve gotten digital instructions for 3-D printing downloaded into my head. I muse that information, sleep on it, and in some cases, 4 dimensions begin to emerge. I begin to see possibilities, trends, bigger outcomes not seemingly there in the original data download….things that others don’t seem to be seeing. I do not say this to self-preen….you can develop this capacity for yourself (many of you obviously already have it and display as much in your postings). You get there by learning about medicine, learning about science, learning about trials, learning about how the clinical system works—the stuff we cover here. You shake and bake that formulation and see if dough rises within you.

As the oughties drew to a close, I began to see things about Novo Nordisk that I felt others were missing. The company was on a big mission to deliver on three major clinical initiatives that I felt would irreversibly change the practice of medicine and enrich the company. Please…let me summarize. It’s good stuff. First, Novo planned to get to market a recombinant human factor VIIa product (NovoSeven). Wanna go over the clotting cascades again? Didn’t think so. But factor VIIa is a profound major gateway to the direct activation of thrombin, the big-mover molecule that makes clot from fibrinogen. For a hepatologist, this was a dream come true. Factor VII is the shortest-lived of any of the pro-coagulant factors, and so all cirrhotic patients are deficient in it. When these patients come in bleeding “like stink,” blood coming from every orifice, the clinician would now have an Excalibur to wield. One slug of Novo’s factor VIIa, and all bleeding would stop, were the promises. And the promises were true. Mind you, it did not save you the endoscopic work of identifying GI bleeding sources and fixing them, but it made that work far more efficacious and safer for the patient, who was now less likely literally to drown in barfed blood. The same was true for major catastrophic trauma, such as from severe motor vehicle accidents. In those settings, faced with overwhelming demands for clotting, the normal clotting system dysfunctions. It begins to churn, entering so-called DIC, for disseminated intravascular coagulation (waggishly also meaning, “death is coming”)…..the clotting reactions are going on, but meaningful clots are not stopping real bleeding because factors are being consumed like mad. Novo’s drug has a way of pounding the gavel, demanding order (Al Haig: “I’m in charge here!”), and making bleeding STOP. The cost to patients? Depending upon situation that tended to begin at US$20,000 per dose, and it’s reasonable to assume 95 percent mark-up on the product.

The next part of Novo’s plan for world domination was a clever molecule called liraglutide. The understudy molecule for liraglutide had been a drug called Byetta, generically named exenatide, from Astra Zeneca ($AZN). Exenatide had been devised from a molecule found in the saliva of the Gila monster, a toxic lizard-like critter tenanting deserts of the US Southwest. When the actions of exenatide on mammals was evaluated, it proved to have interesting abilities to lower blood glucose by causing the pancreas to pump out insulin. Exenatide was acting by what was at the time a little known pathway in diabetes and metabolism, the so-called incretin pathway. Exenatide is an incretin mimetic, and had the ability to cause the pancreas to elaborate insulin not blindly and diffusely, but specifically in response to calorie ingestion. This made it an unusually ideal agent to try to harness for use in type II (never type I) diabetic patients.

As a physician, I am what pharma companies dub “an early adopter” because I track drug development and tend to be among the first to prescribe a new agent after FDA approval if I feel the drug is sound. I don’t wait for others to try it first. I had a large population of type II diabetics in my clinic, and had begun to see the power of Byetta. Not only did it bring glucoses seriously into line, but it was having an unexpected benefit: weight loss….REAL weight loss. Which made people “less” diabetic. But Byetta had problems and has nearly disappeared from clinical use. First, many patients were bedeviled by nausea while they took it (causing some to allege that nausea-driven food avoidance was why people lost weight), Next, on more than a few occasions, I saw it trigger pancreatitis. But Novo was barreling down the pike with liraglutide, a V2.0 incretin mimetic that had all of the pleasure (weight loss and much better glucose control) and none of the pain (minimal or no nausea, though patients experience early satiety; only very rare pancreatitis) of Byetta.

After an FDA hiccough, liraglutide was approved, initially as Victoza. Its weight loss effects were so marked (6-10 pounds per month in most cases, and without efforts at dieting) that, in the context of valid reasoning that highly obese patients who are not diabetic are merely not YET diabetic, Novo sought and got a positive PDUFA for Saxenda, which is merely liraglutide under a different name, at significantly higher doses than Victoza, and label indicated for morbid obesity rather than diabetes management. This was a coup…..Novo in meteoric form. Shareholders were delirious.

Liraglutide in both forms had a golden era, though soon competing pharma were biting at Novo’s heels with competing incretin mimetics (this class of molecule is also called glucagon-like peptide 1 receptor agonists (GLP-1 RA’s) such as Bydureon from Alkermes ($ALKS), a sometimes Gumshoe Biotech fave). Liraglutide in either form is injected daily beneath the skin, while the industry goalpost has been to devise a once-weekly GLP-1 RA. Many people with expertise in endocrinology have a bias toward a daily form, however, because rare patients do still vomit or get pancreatitis. When a once-weekly drug is on board, you can’t withdraw it, and so the patient is conscripted to suffering in the face of a complication.

Like an earthquake’s premonitory sentinel tremor, in June 2016, a large clinical trial demonstrated that liraglutide reduces by about 60 percent the risk of MI or CVA in patients with DM-II. And yet this did not affect share price….Sherlock Holmes’s dog not barking in the night. Savvy investors were seeing the pentagram in the palm of Novo.

While the present zeitgeist in biotech markets has moved my investing style somewhat away from very long-term to being more inclined to be a trader who grabs profits when they’re there, at heart I am still a long-term investor. My ideal biotech is something like Arch Therapeutics ($ARTH) or ChemoCentryx ($CCXI), identified at a nascent stage, entered, and ridden all the way to maturity or buyout. I actually love scouring for what I call maturing mid-cap biotechs, ones that have made it to perhaps a minimum of $3B in market capitalization, that can either continue to grow and go it alone or else be bought at a hefty premium. This was the nature of Novo Nordisk when I entered shares: it was a solid mid-cap company, and I felt I saw a clear progression to being a major in its future. That formulation was correct. At one point my shares had nearly quadrupled in value, all in stealth mode, by slow consistent gains without ever having the fervent buying that causes share price to soar.

But being a long-term investor never means putting your critical utensils in a box and storing them away. It does not mean you cease paying attention. The companies you’ve selected for long-term holding need to be quality ones that you are willing to forgive when they have a bum quarter or two or make a casual misstep. The long-term thesis for the company needs to be trenchant, something not easily dislodged. Are you happy with management? Is uptake by clinicians good? Is topline revenue growing? Is the company continuing to perform high-quality trials that produce high-quality publications? Is it stably retrenching profits back into R&D? Does its R&D interest you? Are you pleased with what share-owning is doing for your portfolio?

The third prong of Novo’s plan to have the entire planet speaking Danish (a quaint language that has the larynx in perpetual sea-lion flipflop over endless vowel sounds, of which Danish has 27, flailing and desperate for a toehold on a consonant) was devising and marketing a state-of-the-art basal insulin. In the fairly recent past the upshot of that work, Tresiba, has hit the US market after a stinging FDA-culpable long delay, though not without its remaindered haters at the FDA, many of whom wish to subject the drug to unusually harsh post-marketing surveillance as regards cardiac issues. Various pharma houses have had stabs at once daily basal insulin injections, but for reasons beyond the scope of this column, Tresiba is the highest incarnation of these and the one that performs best clinically. Novo have made a global industry out of reinventing insulin again and again, devising insulins that never occur in nature so as to modify potency, rapidity of onset and duration of action. And Novo were far too smart to fall for the inherent stupidity, the fool’s errand, of inhaled insulin, though it’s a problem that it could have tackled much more handily than Alfred Mann’s company (MannKind$MNKD), now trading for less than a dollar a share and unlikely to remain a going concern. Novo is in a mighty position, in that most of the top ten selling drugs for diabetes management globally are Novo drugs. Put another way, for a planet tenanted by growingly flabby people, betting that diabetes has a future is like betting on the sun coming up.

With the company having accomplished all this, I’d be willing to see it cruise for an interval, even if cruise is a euphemism for “coast.” But over the last three years, we’ve gone on at length about buying opportunities. We’ve outlined when to get in, why to get in, and presented ample long ideas from which readers can profit, elucidating the reasons comprehensively in each case. But to be a Compleat Biotech Investor, you have to know when to exit, and Novo presents itself as a fine case study in that. For volatile biotechs, consider exiting when X% profit is on the table. But for your long-term holdings, there may be other sorts of things that prompt rethinking. In some ways, the cues for a long-termer exit might even be a kind of playing in reverse of the coalescence of boons that led you to enter.

You really owe it to yourself to read some of Stephen Hawking’s popular writings. The academic world is full of supposedly great intellectuals who premise their careers on having one, maybe two, good ideas early in the course….and spending decades parlaying the upshot of those one or two good ideas. Not so with Hawking, however, whose ALS-diseased brain has every excuse for profound cognitive impairment and yet reasons, integrates and formulates in meteoric arcs, and goes on having profound ideas.

Hawking has always backed a lucid, simple view of the origin of the universe that sticks with me. Although the universe appears to be expanding at an accelerating rate (presuming that’s not an illusion caused by it folding on itself), and presuming that the vagaries of dark energy permit it, at some point in the future entropy will cause that expansion to cease and contraction to begin. Gravitation sources will compete, and coalesce into fewer superpowered gravitation sources that cause the universe to collapse region by region. Given world and time enough, all matter will supercondense torrentially into a single black hole and space-time as we know it will end.

But Hawking posits a symmetry of forward and reverse time and argues that much can be learned about the behavior of matter by mathematically ordering time to run in reverse. We think of time as running only forward because we equate its passage with the accumulation of entropy. But real physics has no such constraint. Thence the Big Bang, which is nothing if not the events of the final collapse of the universe put into reverse motion. And so the universe cycles. If you want to understand the beginning of the universe (a Big Bang), all you have to do is roll the tape of the universe’s end backwards: the universe in its agonal end will collapse into pinpoint-sized black hole. By analogy, if you want to know when to get out of a company, reflect carefully on what makes you go in, and then flip it. A rising profit forecast is good reason to buy, and a falling forecast good reason to sell. And other suchlike considerations we’ll go into as they apply to Novo Nordisk. Science teaches us to revere Ockham’s razor, the idea that thrifty single causes drive things, but in practice Ockham’s razor isn’t very sharp. In my view, it should be a multiplicity, a confluence, of events that goads you to enter a stock. Likewise it should be an entire pie of considerations, not a single slice, that causes you to exit one of your betrothed long-term holdings.

The obverse often applies too. Recognizing what has gone wrong, or what can no longer pertain, why the giant roars no more, may have lessons for the mirror image work of identifying when the attainment of greatness is underway at a baby biotech. Engineers studying the Challenger space shuttle disaster examined footage in reverse, frame by frame, to discern what hurtling parts appeared to return to the hull last. I was once so frustrated by a Charles Dickens novel that I read the chapters in reverse order and found the narrative made more sense that way. Two great writers, Martin Amis and F. Scott Fitzgerald, have treated us to novels about lives lived in reverse (Time’s Arrow; The Curious Case of Benjamin Button). These succeed because they reveal how rationalization of cause and effect can conceal real symmetry. They succeed because they find great order and sense.

May I diffract my thinking through one more set of optics?

The benefits of buy-and-hold investing are extolled by many, including Warren Buffett. For Peter Lynch, long-duration buy-and-hold investing was a way of achieving extreme tax efficiency, a strong factor in Magellan Fund’s praised quantitative returns while helmed by him. But this strategy has its limits: companies complete arcs that led you into them, and in other cases lose luster when the cardinal reason for being in them no longer pertains. In fiction writing as in investing, sometimes you have to murder your darlings. Buy-and-hold investing can become a vice of evasion, an activity undertaken to avoid the heartburn of grappling whether you should sell: too often for me, it’s been easy to invoke Buffett and Lynch, declare I’ll continue to hold and have false assurance, when being that way was an excuse for not deciding, for running from the issue of selling. My investment portfolio must, for me, be like a refrigerator: everything in it needs a planned destiny, an outcome, needs to be going somewhere. When food develops a mold colony, we eject it, yet we leave stale deteriorating stocks in our portfolios when the financial equivalents of mold are on them, thinking that in so venerating them we have infused our investing habits with wisdom. In so doing, we sanction messes that we’ll have to clean up later.

We concern ourselves much at Gumshoe Biotech about entry, about when to start positions. But isn’t the exit equally important? Oughtn’t we study that too? If you have an acute understanding of when to exit, maybe that burnishes your sense of when to enter. Buying and selling are Janus faces of the same impulse, which is maximizing the alpha you evoke from your investment. So, when DO you sell? When do you leave?

Which brings me to why I’m puddling on your doorstep with this concise update: as I see things, it was a Novo day yesterday…..but it’s an old day now. I am planning to send my good friend Novo Nordisk ($NVO) packing. I’ve not sold yet, and am still formulating exactly how I’ll unload what for me is a large position (possibly I’ll do it piecemeal). But none of the reasons I entered the stock still pertain, and the decision is only logical. Philosophers and Buddhist monks may quibble about the varied goodnesses and essences of being versus becoming but let’s be very clear about biotech investing: it rewards that which is becoming, not that which is being.

Let’s ramble through what good due diligence now finds going on at Novo.

Lars Rebien Sorensen

Lars Rebien Sorensen

$NVO shares have, for me, now officially jumped the shark. Evidently Novo Nordisk CEO Lars Rebien Sorensen, singled out for greatness as 2015 World’s Best CEO by Harvard Business Review[4], feels the same way: he’s resigning[5] after being the man in charge since 2000, a departure three years ahead of contract stipulations. His decision follows eerily on the heels of a flap with the FDA over Novo’s plan to combine liraglutide and Tresiba into a blockbuster single product for patients with DM-II. Although a committee met in May and resolved this in the $NVO’s favor, Novo has repeatedly faced major unforeseen approval setbacks despite its usual abundance of caution and goodwill in dealing with regulators, and Sorensen may have had enough of these. Despite having a pallet of extraordinary drugs for metabolism, indeed the best in the world, recent weeks have seen the company guiding analysts lower in terms of revenue expectations, something Sorensen hasn’t had to do before during his tenure. Jack Welch ran General Electric from 1981-2001, twenty years that left him seemingly none the worse for wear, but folks that’s different from helming biotech. Biotech executives grossly overwork because commonly their skill set does not include gritty expertise in science and medicine, and they struggle to keep up with what they have to know to communicate with experts within the company. I don’t fault Rebien Sorensen for leaving and may even admire him for going out at the top of his game. But if you’ve ever flown across the equator, you know the big bump a jet sometimes experiences. Changing CEO’s is a change of clime. $NVO shares took a hit over the summer, but I don’t want to be holding if a new bump strikes. Rebien Sorensen will likely wind down his tenure as a lame duck, and a new CEO will likely need two years to get up to speed. Meanwhile, I smell smoke at Novo.

Can we talk about size, about market cap? Size may not matter in some of life’s dimensions, but it certainly does matter when you contemplate biotech. I recall that in certain ago days of aviation, pilots began trying to break the sound barrier. But pilot lore began spinning yarns about there “being a demon out there at Mach I” such that when you tried to surpass that speed, your jet became unstable and crashed. I am proposing a similar consideration for biotech stocks, which is to say: They are not goldfish. They will not continue to take on size as allowed by their container (or lack thereof). Watching biotech in order to propound guidelines for investing in it for readers leads me to think that for biopharma firms, there may be a toxic, asymptotic limit to how big market capitalization gets before brakes of one form or another set in.

Company………… Ticker……. Peak Market Cap*………. Time of Peak…………….. Market Cap as of Nov 2016……
Allergan $AGN $135B summer 2016 $82.7B
Amgen $AMGN $132B recent (same)
Bristol-Myers $BMY $131B summer 2016 $84.9B
Celgene $CELG $109B summer 2015 $80.7B
Gilead $GILD $160B summer 2015 $97.7B
Roche $RHHBY $264B early 2014 $199B
J&J $JNJ $340B summer 2016 $316B
Lilly $LLY $99.2B summer 2015 $81.5B
Merck $MRK $179B recent (same)
Novartis $NVS $276B summer 2015 $187B
Novo Nordisk $NVO $121B summer 2016 $71.5B
Pfizer $PFE $237B summer 2016 $192B

This data may reveal some less than obvious truths about MC size as it pertains to this sector. First of all, the data seriously challenges the entrenched idea of safety in large cap biopharma when one considers the significant retreats from peak market cap all over the chart. True, much of the retreat was macroeconomic or driven by the sector being spooked. But clearly one cannot count on pharma giants to attain bulky size and gratuitously hold on to that. I excluded from the analysis some good but cardinally smaller companies like Shire ($SHPG), Sanofi ($SNY), Regeneron ($REGN) and Biogen ($BIIB). I’ve not considered Abbott Labs because of its break into two companies.

The data bring into relief that Johnson and Johnson is the largest biotechnology company, with a supra-$300B market cap; this is not a manner in which we commonly regard it, and may also underlie calls throughout the industry for it to split into three companies to unlock shareholder value. Many perceive large cap biopharma as sluggish and underperforming compared with fleet-of-foot catapulting small cap biotechs. But we see that large caps can escalate considerably in value with, for example, Novartis, which climbed from MC $130B in 2012 to be Olympian.

While the data aren’t definitive, they do hint at a demon out there—possibly around $100B in MC—some critical size that biotechs will reach in their growth that they have to bounce off of before, years later, resuming a journey upward. This has clearly been the case with Novo Nordisk, but also with Celgene, Lilly, Gilead, Bristol-Myers and Allergan. Were I living my life over, I might have begun to consider selling $NVO when it reached $100B in size, that possibly being where the falcon begins to stop hearing the falconer, where the wax in Icarus’s wings begins to melt.

Let’s look at some examples that make the case for selling Novo.

During my holding period, Novo has grown from being a competitive “hot” mid-cap biotech to a mature large one. With a market cap now closing in on $100B, I question whether its ladder has many rungs left. $100 billion in market cap seems to be a biotech asymptote, and while being in bio companies this size may confer price stability and dividends, one rarely sees real growth. Novartis ($NVS) in recent years was a notable exception. Our hopes that Allergan ($AGN) and Amgen ($AMGN) will behave like large-cap growers has been sorely challenged this week. But I don’t see Novo Nordisk enlarging from here, and a degree of consolidation wouldn’t surprise.

I was irked by the CEO’s hamfisted handling of Novo’s fairly recent spin-out of its information technology unit, called and tickered NNIT ($NNIT.CO). The company baited shareholders with sweet talk that it might bestow shares in the new company in part to them, which in fact seems fair. But good leaders know you never tantalize with cookies like this unless you plan to deliver. I spoke with investor relations in the run-up to the event, and was told that present shareholders “had a pretty good chance” of being given shares in $NNIT in the manner of a special dividend. But then the spinout passed with barely a blip, I called investor relations again. And was treated as if they felt I was “confused” about the spinout. NNIT now trades on the Copenhagen exchange with a market cap of 4.93B Danish kroner (that’s US$730M!).

Among my most important criteria for entering a stock in extent of institutional ownership. The reasons for this should be clear. Institutional holding of biotech shares tends to be stable, with hedge funds and investing entities seldom doing “flippy” trades. Such holding thus functionally reduces the pool of floating shares, making those shares more valuable, and more prone to price spikes on good news. All entities that invest in biotech either consult with a “tech guy” or consult someone who can vouch authoritatively for whether the science is legitimate, though these assessments are staggeringly variable in quality. But when an institution has gotten there before you, it provides assurance that your assessment of company prospects is correct. The ideal case, of course, would be stock ownership before institutions get in so that their acquisition of shares can drive up your equity, but in practice that’s tougher to do. The institutions have earlier swings at the shares in most cases, and some may have provided funding to the company pre-IPO in exchange for later equity.

I’m willing to enter certain companies in the absence of institutional ownership: these would be the small-cap non-exchange-listed companies with diminutive stock prices that institutions cannot buy stock in on the basis of their charters. Arch Therapeutics ($ARTH) is a fine example. So is Enumeral ($ENUM).

When I entered $NVO shares, institutional ownership was around 40 percent, not insignificant, but frankly less than I like to see. I invested because other aspects of the thesis were intact. Now that participation has fallen to 9.4 percent, probably its nadir in the modern history of the company. Again, the sign seems to read: “Vacate the premises.” No insider has bought a share of $NVO in over five years.

Surely among the most critical of considerations for deciding when to enter or exit a stock has to do with its research and development plans. R&D should never be examined in isolation, but in context. For example, as of 1 November 2016, Incyte ($INCY) is a profitable company owing to frothy sales of lead drug Jakafi; for many this might sound a flat knell, as biotech is so much about future earnings—-with earnings in hand, is the future dimming? With Incyte, hardly: it plans to churn those profits back into what I regard as an appealing and timely pipeline, one that suggests Incyte is highly au courant.

With Novo’s R&D, however, a seasoned reader now sees immediate problems, however. First, in the spring of 2016, the company decided to shutter a perfectly good inflammatory diseases program, one that I felt drug designers of Novo’s caliber could do well with. And they provided no satisfactory answer for doing so. It was as if they were declaring, “We are a Kentucky Fried Chicken biotech,” by which I mean doing only one thing, if well (diabetes treatment….the current Novo war room chart is a Kafkaesque declension of new forms of tinkered insulin, as if they intend to drive so many nails into that board that only splinters remain).

In the summer, Novo reiterated a plan to move forward with oral insulin. Long term readers know that for me, this is an utter bust, and I will present it from two equally dismal angles. First, there is the perceived patient aversion to subcutaneous injection. Let me digress a little: during a tenure as an academic physician, I began to feel guilty about the fact that patients who were very sick had to come very far to get appropriate medical care. It’s not necessarily a sin for complex sickness to baffle the skill of local physicians, but something is wrong with how such illness baffles, say, seven phalanges of physician referrals before it finally gets to the right physician in a tertiary care center, who manages it correctly from the outset.

Let me tell you a story: one night I was on GI and liver call at one of this nation’s household name institutions. I was called to see a retired Baptist minister with features that could be features of advanced liver disease BUT could also be features of an evolving leukemia. For the preceding five years, he’d been a supplicant at physician offices all over the state and no one could figure out what was wrong. I reviewed his chart. Then I spent five minutes examining him. I asked him one, and only one, question. “Have you ever been outside the United States?”

“No,” was his loving wife’s immediate answer. But the patient was silent for a moment. “Now wait a minute hon. There was that time, back in World War II, when they sent me to…..aw, what was the name of that place hon? You know, I had to help build a bridge over that river.” But she was stymied….this was a distant chapter in their sixty years together.

“Asia?,” I asked.

“Yeah.”

“Was it Burma?,” I asked. Shot in the dark, or maybe not.

Burma! THANK YOU, SON!” A torrent of memories began sloshing in his cranium.

“I thought so,” I said. “Sir, you have schistosomiasis. It’s a parasite. We never see it in this country. But as of World War II, Burmese waterways had perhaps the heaviest infestation of it in the world. You were probably building a bridge over a tributary of the Irriwaddy…”

“Irri….hon, he’s right again!”

“And this is precisely how schistosomiasis presents, decades later.”

I confirmed that we could definitely help him medically, and a colonoscopy the next day confirmed the diagnosis. Total time I spent between entering the room and making the diagnosis: 15 minutes. I tell this story not to self-preen and not to impress you with me as a diagnostician. What I know in medicine I know well, as should all physicians, charged as they are with presiding over life and death.

But on the way home at midnight, I began to cry. There IT was again, this same weird guilty feeling about being in an academic medical center. It seemed wrong to me that that guy had suffered that long for lack of a diagnosis. Which is why a couple of years later I found myself practicing in a rural part of a southern state where people were populous but underserved, because I wanted badly to bring the academic model of top quality care to them. I am an expert in hepatitis C, and identified a hyperendemic region of the United States. I presented myself as a refugee from academia and had a ridiculously successful practice.

I have gone into this story because in that practice I dealt with the poorest, most backward people I have ever seen. Patients who had completed high school were rare. Many families needed a shrine for the family tooth. But in nearly a decade of practicing 15 hours a day there did I ever, even once, come upon a patient that I could not persuade to receive medicines by subcutaneous injection. It is easy, painless and trivial. Teaching backward people to give themselves interferon, and do it safely and effectively, was not always easy. But my point is that giving insulin orally is a total non-starter. Everyone can learn to give meds subcutaneously, and I deemed Novo foolhardly, even pretentious, for trying to do otherwise.

But I have a second contention. Giving insulin orally is about protecting the intact molecule from the soup of proteolytic enzymes that GI secretions is. Occasionally people at home come upon situations in which they are splashed on their hands from enteric secretions because of an apparatus in an ill family member. If this has happened to you, you know the powerful tissue-degrading effects of such material (perhaps not quite as bad as the goo squirting out of the Alien when its carapace is sliced and which dissolved several layers of the good ship Nostromo). But you get the idea. Insulin would have to be packaged in an utterly failsafe nest of concentrated inhibitors of proteolytic enzymes, and even this wouldn’t suffice. Why? Because the GI tract is a stupid, irreproducible, ungoverned organ….it would never absorb insulin in precisely the same way at the same time. There’s also the awful fact that insulin acts like a growth factor, and that the gut is NOT accustomed to seeing it. Mice given oral insulin formulations in experimental models developed thickened fatty small intestines that absorb poorly and are prone to spontaneous obstruction!

On 31 October (this article has needed many revisions), Novo, ever the flip-flopper, announced it had decided to abort its oral insulin program, but this is not enough to right the ship. Its next major objective is to come up with an oral form of an incretin mimetic (GLP-1 receptor agonist) in the form of a drug called semaglutide. All other GLP-1 agents are injected subcutaneously. And this is a fool’s errand because of my preachments above about the ease of SQ injections. Novo is creating a straw man, and a very expensive one.

Finally, Novo Nordisk now finds itself in the crosshairs of the medical price controllers. This year, for example, ExpressScripts ($EXSM), an iniquitous company whose corporate motto should be “We’ll give no effective drug to a patient unless the patient has failed two others in the same class,” announced it would not cover Victoza or Tresiba. It will not cover them in 2017 either. Other pharmacy benefits managers are following suit. Others still are fighting Novo on insulin prices because while Novo’s insulins are best of breed, those of competitors are pretty darn good and significantly cheaper. Novo’s urge thus to devise specialty insulins with unusual pharmacokinetics that truly represent insulin being the best it can be is unwittingly driving sales back into the hands of competitors like Lilly ($LLY) and Sanofi ($SNY).

This is not a short column, but I wanted to lay out the case in a clear and accessible manner, and had some concerns that if these remarks were placed in the threads, they’d be missed by many readers. Parting with Novo Nordisk is painful for me because I respect the company’s abilities and have had fine friends employed by it. It’s been a portfolio friend for many years, and fortunes change: in better times, we may strike up the dance again. But even holding shares, dawdling in them, makes no sense to me at this juncture, and with the biotech space likely to rekindle post-election, too many fine opportunities offer better rewards.

Farvel, Novo. Onward and upward.

Acknowledgements: I will be divesting my long position in $NVO as described above. I have no short interest in $NVO. As usual, I will otherwise not trade in these shares for 72 hours, reckoned in business days, after publication. This column is not a solicitation or recommendation for you to sell $NVO shares, but is offered to educate you on the company and to notify you, per my pact with readers, of major trading decisions. I have neither sought not gotten anything of pecuniary value from any biotech company or person for any coverage of any biotech stock at Stock Gumshoe, and am not being remunerated to express my intention to sell shares. Follow me on Twitter @KSSMDPhD. I have long positions in $ARTH, $CELG, $CCXI, $INCY, $LLY, $MRK,$PFE and will not trade in those equities for at least 7 days after this column appears.

This post has been closed to discussion. The conversation has moved over to Dr. KSS’s latest article, which can be found at the top of his Stock Gumshoe page[6].


Endnotes:
  1. his Stock Gumshoe page: http://www.stockgumshoe.com/author/dr-kss-md-phd/
  2. Led Zeppelin: https://www.youtube.com/watch?v=yfDPKdecZzY
  3. this chart: https://www.dividendchannel.com/symbol/nvo/
  4. 2015 World’s Best CEO by Harvard Business Review: https://hbr.org/2015/11/novo-nordisk-ceo-on-what-propelled-him-to-the-top
  5. he’s resigning: http://www.reuters.com/article/us-novo-nordisk-ceo-idUSKCN1173S8
  6. Stock Gumshoe page: http://www.stockgumshoe.com/author/dr-kss-md-phd/

Source URL: https://www.stockgumshoe.com/2016/11/such-a-pleasant-stay/


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