WHEB Commentary

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Going beyond the sugar rush – Novo Nordisk and sustainable value


It is not often that one’s first meeting of the day starts with an exquisite rendering of a 19th Century Danish hymn by a quartet of professional musicians. The singing along with a crisp, cloudless but decidedly chilly Copenhagen morning served to kick-start a day-long discussion of how Novo Nordisk, the Danish pharmaceutical company1, should go about creating ‘sustainable value’.

Along with a small group of external experts, I had been invited to help define the next iteration in Novo Nordisk’s approach to sustainability. The company has long been seen as a leader in this field – a reputation that has been cemented in recent years by its ‘Blueprint for Change’ programme. An example has been the work that the company has done in China. Starting in the mid 1990s, the programme focused on diabetes prevention, physician training, patient education and general public awareness to build capacity within the Chinese healthcare system to cope with the burgeoning population of diabetics. Today this initiative has translated into a 63% share of the Chinese market with sales of DKK4.5billion.

Another example has been the company’s approach to tackling climate change. Initially conceived as a ‘corporate responsibility’ initiative to reduce the company’s emissions of CO2 by 10% from 2004 to 2014, the programme ended-up realising cost savings of more than US$24 million with an average pay-back on projects of 1.9 years. The 10% CO2 reduction target was achieved five years ahead of schedule in spite of the company delivering 30 consecutive quarters of double digit revenue growth.

A fair amount of the discussion during the day focused on the complex relationship between a company’s purpose and its profitability. A key question was whether these case studies are just sophisticated market-entry and cost management strategies? The answer is probably ‘yes’, but the company’s commitment to social impact was what initially drove the initiatives and enabled the company to pursue the programme earlier and for longer than most companies (and, truth be told, several Novo employees) could stomach.

Novo Nordisk is unusual in that a foundation controls 73% of the votes allowing the company to define its mission in broad terms around social impact. In Novo’s case this is ‘to defeat diabetes by working toward better prevention, detection, and treatment’. Red-in-tooth-and-claw corporations would no doubt scoff at this mealy-mouthed nonsense, but with compound annual growth in sales of 14.8% since 2007 and a leading market share of 26% of the global diabetes market, perhaps these short-term profit maximisers should pay a bit more attention. ICI famously recast its mission in 1994 from being a company focused on ‘the innovative and responsible application of chemistry and related science’ to one where the objective was to ‘maximise value for our shareholders’. Within two years the company’s share price had started a long decent before the company was finally taken over by AkzoNobel in 2007.

Novo Nordisk is not perfect. A recent warning letter from the US Food and Drug Administration can attest to that. But its leading position in the insulin market is because of, not in spite of, its ability to take a long-term view on the development of its business. This approach – seeing the competitiveness of the company and the health of the communities around it as mutually dependent – is what Professor Michael Porter has called ‘creating shared value’. But during our day in Copenhagen several participants argued the company should go further. For Novo Nordisk this means pushing upstream beyond the lucrative diabetes treatment market and developing interventions that prevent the development of the disease in the first place.

This strategy is not without risk, and for some it would certainly seem to be counter-productive; effectively undermining the market for insulin. But our view was that the greater positive social impact in prevention is already a key focus for clinicians and funders of healthcare. Novo has demonstrated that it has the culture and the capacity to invest in and develop markets many years before they become profitable. The market for diabetes prevention will not be any different. Creating sustainable value for Novo Nordisk means pushing hard into this new market. If they don’t, someone else certainly will.

 

1 – In the interests of full disclosure I should state that the IM WHEB Sustainability Fund has an existing holding in Novo Nordisk.

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