A sign of things to come

A sign of things to come

Yesterday Novo Nordisk (NYSE: NVO) announced they would not raise prices on individual drugs by more than 10% within a year. Additionally, the company indicated they would tie price to performance, moving more towards value-based pricing. Novo becomes the first of the major insulin companies to make such a pledge. Insulin companies which have come under increasing criticism for the rising out of pocket cost of insulin.

Now some will say this is just a public relation move by Novo, the company’s attempt at changing the narrative. While there may be some truth to this we don’t see it that way, we see it as an act of survival.  The fact is Novo understands that they have lost control over pricing or to be more accurate lost control of the net effective selling price. (The list price minus discounts and rebates) That in the future outcomes will matter and the only way they can truly differentiate their products is to prove they work better than the competitions.

Lilly (NYSE: LLY) has ventured down this path with their once-weekly GLP-1 Trulicity and now that Novo is moving in this direction could be forced to follow their lead. This also puts additional pressure on Sanofi (NYSE: SNY). It should also be noted that these value-based pricing models are not limited just to drugs but include devices too.

We have contended that in the future outcomes will matter, that reimbursement will be tied to outcomes. Although we have not yet reached that point, this move towards value-based pricing is a significant step in that direction. It also puts some additional burdens on companies like Novo.

As we have noted when it comes to diabetes drugs it’s become a space filled with me-too copycat drugs. There are now 5 long-acting insulin’s, 4 once-weekly GLP-1’s (now that Novo has filed semaglutide for regulatory approval) and 3 SGLT2’s. Not to mention multiple DPP4’s and 3 short-acting insulin’s 4 if Afrezza remains alive. Yes, there are some minor differences between drugs but most do the same thing the same way. In other words, they have become commodities and in a commodity market price trumps performance.

With Novo moving towards a value-based pricing model performance will matter. The burden is now on Novo to prove that Tresiba produces better outcomes than Basaglar. That semaglutide outperforms Trulicity. That if these drugs do not produce better outcomes it will hit them where it really hurts, the bottom line.

Value-based pricing also presents somewhat of a dilemma for Novo, no drug works well when it’s not used properly. Again, as we have noted regularly therapy adherence, the patient taking their medications as prescribed is a huge obstacle. It will be interesting to see how these value-based pricing plans account for therapy adherence or lack thereof.

This leads to another interesting aspect of value-based pricing as it could well be the catalyst that makes diabetes management systems a reality. Long ago Diabetic Investor predicted that in the future patients will be prescribed a diabetes management system. A system which not only includes the drugs and the devices they use but also the apps they use. This is the promise of interconnected diabetes management (IDM), transforming data into patient relevant, patient actionable information.

Now that nearly device a patient uses are cloud enabled it’s possible that a company like Novo would not only be able to better assist the patient but know whether the patient is being adherent with their therapy. There are now a host of companies that are developing cloud enabled insulin pens, pens which transmit not just how much insulin a patient doses but when they do so. Throw in cloud enabled CGM and Novo using advanced data analytics can assist the patient with better insulin dosing algorithms.

Even better this move towards value-based pricing could make patient education a real priority for a company like Novo. Novo like everyone knows that the most effective tool at improving patient outcomes is patient education. That for all the way cool whiz bang devices and drugs we have patient education is the most effective tool at getting patients to do things they are supposed to do. That for any recommendations made by a diabetes management system to be effective the patient must understand why they are doing what they are being asked to do.

It’s been said many times give someone a fish and they are feed for a day, teach them to fish and they are feed for a lifetime.

Think for a moment how transformative this move towards value-based pricing could be. Think of the additional burdens this places on drug and devices companies. It will no longer good enough to develop way cool whiz bang devices. It will do no good to develop me-too copycat drugs. All these apps which like everything else in diabetes have become commodities must be something other than be way cool whiz bang.

This move towards value-based pricing could well force companies like Lilly and Sanofi to move well beyond their core competencies. It could also be the catalyst towards some interesting hook ups. Sanofi has already aligned themselves with Google, who in turn is aligned with Dexcom (NASDAQ: DXCM). Sanofi also has an investment in one of the many smart insulin pen companies while Lilly is aligned with Companion Medical another smart pen company.

All along we have been saying that for IDM to become the standard of care, for diabetes management systems to become a reality legacy diabetes companies would need to align with our many friends in the Valley. This is the reason Medtronic (NYSE: MDT) has aligned themselves with Watson Health and why Johnson and Johnson (NYSE: JNJ) keeps talking about their diabetes eco-system. The fact is an interdependence is developing between old-school diabetes and high tech companies.

The key as we see it is who can shed their beliefs about the other and bridge the gap between the realities of today against the promise of the future. Each brings something positive to the relationship provided they don’t become provincial, believing they have all the answers and the other is just providing product.

This announcement by Novo may not at first glance seem that transformative, that it’s just a ploy, an attempt at changing the narrative. We see it as sign of things to come, an event which when looked back upon a few years from today will be seen as the start of a new day in how diabetes is managed.