The Price Dynamics of the US Pharmaceutical Market: A Case Study of Novo Nordisk

Kristin Ims Hagen

Student thesis: Master thesis


This paper examines the evolving price dynamics of the US pharmaceutical market and its impact on Novo Nordisk’s profitability. The study analyses the complex US pharmaceutical market and the market dynamics between the pharmaceutical manufacturers and the Pharmacy Benefit Managers (PBMs), who act as middlemen buyers. In addition, the paper reviews two statistical studies of various variables’ impact on the pharmaceutical drug prices. In the second part of this paper, a financial ROIC-analysis of Novo Nordisk is conducted. This study suggests that the consolidation of PBMs and pharmacies, has been one of the forces behind the changing market dynamics of the US pharmaceutical industry. This paper uses microeconomic theory to imply that this market change has led to a shift in bargaining power from the pharmaceutical manufacturers to the PBMs, which results in increased price pressure on the drug manufacturers. This is reflected by dropping growth rates in prescription drug net prices, while the list prices of the drugs have continued to increase at two-digit growth rates, which shows that the PBMs have negotiated increasingly larger rebates. However, the US patients’ insurance premiums are still rising, which indicates that a share of the drug price rebates are not distributed down the value chain to the end consumers. To assess the impact on profitability of Novo Nordisk, the company’s quarterly financial statements were reformulated into analytical income statements and analytical balance sheets. From these analytical statements, the ROIC of Novo Nordisk was calculated to have increased from 99% in 2014, to 135% in 2015 and 145% in 2016. This is extensively above the industry average and the pharmaceutical peers. Novo Nordisk financial performance is partly explained by microeconomics theory, as the company is the market leader of the highly oligopolistic antidiabetics market, which has a CR4-ratio of 74%. Furthermore, Novo Nordisk faces inelastic (- 0.25) consumers and has several active patents that gives monopoly power and increased profitability. While Novo Nordisk has maintained high ROIC rates in 2016, the price pressure has impacted the company through large share price drops and reduced the growth targets of sales and operating profit.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2017
Number of pages115
SupervisorsTorben Juul Andersen