Novo Nordisk: Back To Business School

How a visionary CEO transformed the fortunes of the Danish drugmaker

In the Man Markets Meeting this week, the great Rory Powe – soon to celebrate a decade at Man Group – spoke eloquently about Novo Nordisk, a firm whose GLP-1 semaglutide treatments for diabetes (Ozempic) and obesity (Wegovy) are only the most high-profile of its increasingly diverse range of drugs. The firm has more than 80% of the global weight management industry, notwithstanding competition from the likes of Eli Lilly and Company. Its rocketing share price has reflected the fact that it has not only attained this dominant market position, but also appears to have a strong pipeline of next generation drugs: Amycretin, currently undergoing trials, is being touted as significantly more effective than Wegovy, allowing patients to lose more weight, more swiftly.

Rory pointed to a key turning point for Novo: the reorganization of its research division in 2018. Prior to this, Novo Nordisk had been the story of a company over-reliant on a single, increasingly commoditized product – insulin. Indeed, it was often used an example of the broken nature of the US healthcare market, with Novo coming under regulatory scrutiny for its pricing policies and relationships with Pharmacy Benefit Managers (PBMs). Insulin was becoming commoditized and there seemed little prospect of Novo, a Danish firm founded in 1923, becoming one of the stock market success stories of the 2020s.

Then Lars Fruergaard Jørgensen – previously head of Novo’s Quality and Corporate Development divisions – succeeded Lars Rebien Sørensen as CEO. It was a controversial moment for the firm. As Sørensen announced his retirement, it was largely expected both within the company and by investors that he would be succeeded by Jacob Riis, who ran the American business. When Jørgensen got the job instead, Riis quit and the new CEO ruffled feathers as he set about reenergizing Novo’s operations, focusing specifically on R&D.

The reorganization was dramatic: 400 research jobs were eliminated in Denmark, while four satellite centers or “Transformational Research Units” (TRUs) were established: two in Copenhagen, one in Oxford, one in Indianapolis. The TRUs were set up by Jørgensen to be “biotech-like” in their thinking and operation: more nimble, innovative and risk-tolerant than the previously slow-moving corporate hub. It was from these TRUs that Wegovy and Ozempic (and, indeed, Amycretin) emerged and these centers are now at the heart of research into a number of other chronic illnesses for which Novo believes it can use the lessons learned from the transformation of its diabetes treatments. Novo is a pioneer in AI and is working with NVIDIA to build a supercomputer in Copenhagen to identify new medicines, while also establishing an AI research center in London’s King’s Cross Knowledge Quarter.

All this is interesting for a number of reasons. Firstly, it’s an example of how important good management is. It’s easy to fall into the trap of believing that a firm’s performance is largely defined by outside factors, and that management can only make a difference at the margin. Jørgensen’s visionary reorganization of Novo’s R&D division is a clear example of a decisive move that had far-reaching ramifications. It changed the culture of the organization, driving innovation and collaboration, doing away with a Not Invented Here mindset and promoting partnerships with startups and university science departments.

Secondly, Rory makes a good case for us being about to enter a period of increasing stock dispersion. We’ve seen valuations driven by thematic or sectoral narratives in recent years. With the shift in regimes behind us and a likely stabilization of interest rates, and with companies facing persistent high costs and having largely eroded pricing power, it’s going to be a case of sink or swim in the years ahead. Only those firms with strong management, significant moats and high and expanding market shares across a global footprint will prosper in this less forgiving economic climate. We need to learn how to read management decisions and corporate profiles and Novo provides a good blueprint for what works.

Finally, Rory’s explanation of the Novo Nordisk story – a powerful intervention by a visionary CEO driving real change not only in the firm but in the broader world – sent me back to my own MBA days. I’ve been posting academic papers on LinkedIn recently exploring the gulf between the theory and practice of finance. It feels like the MBA can sometimes fall into this same trap, relying on out-of-date case studies or theories that have been superimposed on events after the fact (a kind of management theory overfitting). Jørgensen’s business school background – he studied at Aarhus University – clearly provided the blueprint for the steps he took on becoming CEO. Two methodologies that come to mind when you look at the Novo story are the Lean Startup Model championed by Eric Reis, which emphasizes agility and rapid innovation, and W. Chan Kim and Renée Mauborgne’s Blue Ocean Strategy, which encourages companies to create new market spaces and value innovation rather than competing in existing markets. This alignment with management theory appears to have been instrumental in transforming Novo, a striking demonstration of the real-world application of the lessons taught in business school.