Insulin giant's chief is in for a marathon.
The morality of business is a front page subject these days. From the paltry tax contributions of some multinationals to the ethics of high pay, doing the right thing has rarely been under such scrutiny. Lars Sorensen knows that more than most.
But while many businesses struggle with how to appear to be doing the right thing, Sorensen's challenges are altogether more serious. As chief executive of the world's largest insulin maker, the 58-year old Dane's decisions shape the margins between life and death for the world's 370m diabetes sufferers.
Being chief executive of Novo Nordisk (Other OTC: NONOF - news) , Scandinavia's biggest company with 35,000 people, is something of a moral minefield. What, for example, to do if customers cannot pay for medicines simply stop supplying? Or how to react if austerity cuts force health authorities to downgrade to cheaper medicines, leaving existing customers with inferior medical care? And the biggest tester of all, how hard to push to find a cure for an illness that keeps you in a job and rewards your shareholders?
It's quite a challenge. But then again, Sorensen good company, with a typical dry Danish sense of humour doesn't have any problems with those. He is very much the poster boy for good living. In March he will take part in the Vasaloppet, a 90km cross-country ski race in northern Sweden.
It's not one for the faint hearted, but if he makes as much of a success of it as he has his 12 years in charge at Novo, the kilometres will fly by. The company, based just outside Copenhagen, is the envy of many of its global pharma peers its record of consecutive quarters of double-digit revenue growth currently stands at 42. As competition hots up and pricing pressure rises in a time of austerity, the difficulty of keeping that run going is growing, but Sorensen remains confident.
"We're a bit of an outlier when it comes to growth and our share price," he says. "So when I look back at 12pc-13pc growth over the last 10 years and see a mix of us becoming more competitive but the pricing environment getting more challenging, I'm projecting top line growth of about 10pc. Though I'm starting to realise that 10pc growth on something big is getting more and more difficult."
The pricing pressure is in part a symptom of those morality challenges. Sorensen has structured Novo's pricing model to play to the morality-profit conundrum but the economic downturn has made things a little more complicated than they once were.
At one end of the scale, Novo provides insulin at cost price to the 50 poorest countries in the world. "At the lowest part of the pyramid, it's philanthropy," he explains. "So we help these countries build healthcare capacity and know-how and allow them to buy our products at cost. And we don't discontinue production of the cheapest drugs."
Slightly higher up the scale in countries such as Brazil Novo offers its full range of products, from cheap generic drugs at 10 US cents a pop, to top-end patented medicines at $5 for the wealthy. And finally, "at the top of the pyramid which is supposed to be the US, Europe and Japan the idea is they should only buy the new, innovative products."
It's a clever model designed to allow Novo to escape much of the criticism that was heaped on pharmaceutical companies 10 years ago for protecting patents in the provision of HIV Aids drugs in South Africa. But while it's working at the bottom end and Novo has helped set up 1,000 diabetes clinics by donating $300m via its foundation it's the top end, where the real money is made, that is creating issues.
"The problem is that Europe is starting to back-pedal and health authorities for financial reasons increasingly want to stay with old generic products. Ministers say they want countries to be leaders in science or industry, but when you try to sell them new products, they say 'old is good enough'. They're talking out of both sides of the mouth."
The problem got so acute in parts of Europe that Novo was forced to demand cash up front for delivery. "It's disturbing to us these patients are our patients and if they don't get our product they die. [Health authorities] know we want to be seen as socially responsible so they play the guilt card. We'd like them to have the best possible product. If you don't want it in the first place, that's fine, buy the generic. But once you buy it then you have an obligation of continuing to supply.
"We look like idiots because we don't want to give them the latest products at the old products' price. We can't do that this is a business. If we do that we start to erode the whole innovation model which generated the products in the first place. Then I deprive the remaining 370m diabetics in the world of the possibility of finding a cure for their disease."
When Sorensen took the top job at Novo in 2000, he suggested such a cure might be found within 15 years. That view hasn't changed, though the starting point has. "I still think it's 15 years. And that cure may not apply to everybody it might only be applicable with particular types of diabetes. So, even if we find a cure, diabetes will still be around. The branch is growing faster than I can cut it."
With so much progress being made on some of the big killers, it seems a pretty pessimistic outlook? "Diabetes treatment has improved, but it's [a] dreadful [illness]. In the last 20 years it will have killed more than 500m people," he says, before adding, perhaps unnecessarily: "It's very sad, but of course it's fantastic business."
Novo's dominance of the insulin market and the growth of an under-treated illness in diabetes some 550m are projected to have the condition by 2030, with fewer than 10pc of diabetics thought to be either diagnosed or successfully treated leaves it in striking contrast to some of its international peers. While UK giants such as Astrazeneca (NYSE: AZN - news) and GlaxoSmithKline (Other OTC: GLAXF - news) have struggled with patent issues and have seen their share prices hit accordingly Novo is sitting pretty.
"We're working on something we understand we know the insulin molecule. That's why our success rates are perhaps slightly higher than the rest of the industry," he says. "We do have patent issues we're just growing enough to compensate. We're able to replace the old generation of insulins before they run off patent."
Sorensen believes the problems facing many of his peers is down to a lack of specialisation, as well as structural problems with the market.
"One of the reasons we chose proteins is that's where our understanding is. But many of the big pharmaceutical companies are competing in the same field they get a patent protected product but that doesn't preclude people from making a slightly different product. Then, eventually you have eight companies making the same product."
But patents, argues the Dane, are not the problem. Innovation is.
"A patent is just an opportunity to have exclusivity for a period of time that's the whole engine of innovation. It's the lack of productivity in R&D that has eroded valuations for the pharma industry."
One driver for that, he claims, is "the big successes we've had in the past. Liver drugs, heart drugs, asthma drugs. It's not that they were easy, but the easiest things to invent have probably been invented."
If that all sounds like a recipe for further industry consolidation, it's not a future Sorensen would recommend. "The examples have hardly been stellar," he says. "It's very hard to retain employee engagement and motivation when you start to consolidate and consider employees as a variable cost. Consolidation is usually benefitting the selling shareholder. The model is not necessarily bigger."
It's an easy claim to make sat where Sorensen is. Like many Danish companies, Novo has an ownership model with a controlling foundation that precludes a takeover of the company.
"It's part of our DNA to take a long-term perspective we're not required to maximise earnings quarter by quarter," he says. "That fits well in an industry where it takes 20 years to create a new product."
On the subject of longevity - he's been in the seat for 12 years the corporate governance experts would suggest it's time to let someone else have a go. "We believe in continuity. If the company was doing poorly, I would say then throw me out," he says. "I have 30 years here and with that comes a thorough understanding of our field. If we were to diversify into something we knew nothing about, perhaps we would not be the right leadership team. And anyway, we're coming from the third division I want us to be Barcelona. Coming from Denmark and beating the big guys, it's great!"
As Novo's global peers continue to struggle on, they can't say they haven't been warned.