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Novo Nordisk Paid Kickbacks, Denied Pricing Pressure, Says Securities Class Action

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Pharmacy benefit managers (PBMs) stand between drug makers and health insurers and can choose what goes into a formulary, or list of drugs covered by the insurer. The complaint for this securities class action alleges that Novo Nordisk paid kickbacks to PBMs to include its insulin drugs in formularies and then kept its prices high to compensate for the kickbacks. Failing to disclose this, the complaint says, was a violation of the Securities Exchange Act of 1934.

The class for this action is all persons and entities who acquired Novo American Depositary Receipts (ADRs) between February 3, 2015 and February 2, 2017.

Novo is a global Danish healthcare company that produces diabetes medicines, one of a handful of companies that dominate the insulin market. The company gets about 80% of its revenues from insulin-based medications and about 54% from the US insulin market.

According to the complaint, Novo’s insulin drugs were widely used because it paid kickbacks to PBMs to include them in their formularies. To keep its profits high, the complaint says, it raised prices along with competitors, Sanofi SA and Eli Lilly and Company. The complaint says Novo claimed its revenues and growth were due to its innovation and the quality of its products.

However, the complaint says, the drugs’ high prices were not sustainable because of public outcry over increasing drug prices and regulatory scrutiny. Both Sanofi and Eli Lilly announced that pricing pressures in the US market would cause a decrease in their earnings, the complaint says.

Novo made no such disclosure, claiming that the quality of its products justified premium pricing and that it would maintain stable sales growth. In reality, the complaint claims, this was not true because insulin drugs are commodities, with one easily exchanged for another. PBMs were asking for higher kickbacks, and the inability to raise prices any further meant that the company could not maintain the same sales and profit growth.

Yet, according to the complaint, Novo insisted in its filings and other public statements that the company would not be affected by pricing pressures, claiming that the company had “a very strong position with a gold standard product” that was better than its competitors’ products. During the class period, the company was able to show flat or moderately growing earnings.

In August 2016, the company at last reported disappointing earnings and lowered its guidance, and the public began to learn that it was not exempt from pricing pressures. As this was gradually revealed, its ADR price declined. Prior to the first disclosure, its ADRs were trading at $55.20; by the end of the class period, the price was only $33.48.

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