The Biggest Problem Facing Pharma
Recently we have cited some prime examples of why pharma has some serious issues when it comes to diabetes medications. Simply put how can they overcome the fact that payors are unwilling to pay for better performance. Back in the day, way back in the day, payors seemed willing to provide more favorable formulary placement when a new drug was clearly superior to what was already available. Yet this has changed dramatically and now it’s crystal clear that payors are unwilling to play even when a drug is clearly inferior to the competition.
The most recent example came when CVS chose Invokana over Jardiance even though Jardiance is clearly superior in terms of performance. This was not like favoring Basaglar which by all measures is on par with Lantus. No this was a blatant money grab by CVS. Yet this is the sandbox that pharma now plays in and we don’t see this changing anytime soon. This is the reason we do not think that the recent label change for Victoza will have a material impact on future revenues.
Just to fully appreciate the negative consequences of this attitude by payors think of it this way; why would any company invest millions developing new and better drugs when there is little or no return on investment. These are publicly held entities who have a responsibility to their stakeholders to maximize return on investment. Allow us just for a moment play this out using the oral version of semaglutide from Novo Nordisk (NYSE: NVO) as an example.
We see this drug having blockbuster potential as it would be the first orally administered GLP-1. The GLP-1 category has been steadily growing and by our way of think an oral GLP-1 would just accelerate this growth. Yes, it is true that GLP-1 administration has become less frequent going from twice-daily to once daily and now once-weekly. With each step along this path the GLP-1 market grew. Still until the oral semaglutide comes along a GLP-1 must be injected. And the fact is physicians and patients feel more comfortable with oral meds than injectables.
The burden for Novo is not just to demonstrate that this version is as good or better than injectable GLP-1’s, that’s just gets them into the sandbox. No, the real burden is to come up with a pricing formula that gets them favorable formulary position without overtly cannibalizing their Victoza franchise. This pricing formula is made even more difficult by the fact that Lilly (NYSE: LLY) and AstraZeneca (NYSE: AZN) will do what they must to protect their respective GLP-1’s. Want even more complexity let’s not forget about the exenatide micro-pump from Intarcia which will likely be on the market when the oral version of semaglutide is approved.
Now if payors truly value therapy compliance then the Intarcia micro-pumps wins by a landslide. While pills are better than injections when it comes to compliance there is nothing better for compliance than no pills or no injections.
Using the past as guide we aren’t sure that payors value compliance, or should we say better patient outcomes, which is directly tied to compliance. Payors do not normally value drugs or drug delivery platforms that make taking drugs easier, for if they did we’d see no one using a syringe to inject insulin. Yes, insulin pens are more popular but they are also more expensive and given the option payors prefer syringes for the simple fact they are cheaper.
The harsh reality is that the pharma companies themselves have contributed to this problem when they started bringing new drugs to market that were only incrementally better than the drug they were designed to replace. This was Sanofi (NYSE: SNY) biggest problem with Toujeo as it was just incrementally better than Lantus. They doubled down on this mistake by claiming that fewer hypoglycemic events justified premium reimbursement when this one very slight advantage did not matter to payors. Sanofi frankly should have known better especially since back then Basaglar was coming which would further disrupt the long-acting insulin market.
All along we have stated the diabetes drug market has been commoditizing, that price trumped performance. Something that has become only clearer with CVS’s decision to favor Invokana a drug that carries a black box warning and when looked at next to Jardiance is clearly not the better option.
This dynamic has forced all the drug companies to reevaluate how they do business. To their credit Lilly seems for the moment to have navigated this mine field the best given the depth of their diabetes portfolio. Yet this strategy will be put to the test when a biosimilar short-acting insulin gets here. Just as Basaglar doomed Sanofi they will get a chance for payback when their biosimilar short-acting insulin hits the market. Just as Sanofi discovered payback is a bitch so too will Lilly.
The dynamic has also forced all the companies to institute dramatic cuts to sales teams and R&D expenses. Novo being the last company to realize they can no longer afford a huge sales team or projects which don’t yield true improvements over existing options.
The way we see this playing out over the near term is consolidation. The question is who will buy whom. Except for Lilly everyone is in play. Novo is strong with injectables but lacks orals. The same can be said with Sanofi. This makes AstraZeneca the wild card as they lack insulin.
Again, using history as a guide Sanofi and AstraZeneca would be the most likely buyers, the problem being is Novo isn’t for sale. Before Sanofi imploded we thought they could compete by buying AstraZeneca’s diabetes franchise, yet given the current situation we aren’t sure the Sanofi board has the stomach for another major acquisition. Nor do we see Novo becoming an active buyer as this just isn’t in their DNA. Which basically means the price war that no one wanted but has arrived will continue and likely get worse.
Looking further down the road we just don’t believe that any company can compete effectively without a full compliment of diabetes options. Which basically means something must give otherwise the status quo will remain.
We further believe that all the companies must get out of their core competencies and begin considering areas they have previously ignored. Developing good drugs is no longer good enough which forces these companies to expand into systems that increase therapy compliance. The most obvious option is something we have been writing about for years but has yet to fully develop. That is who will be the first company to start selling a complete diabetes management system, a system which includes everything the patient needs to manage their diabetes. A system which will include the drugs, devices, apps and coaching used by the patient.
Want even more wackiness to think about this just for a moment since Apple, Google and Amazon are all making the deep dive into diabetes. Each of those companies could if they decided to do so dip into their huge cash accounts and buy their way into the drug business. As we are witnessing with Amazon’s acquisition of Whole Foods these companies are not afraid to spend money to enhance their position in a market. Then using their scale as Amazon is doing change the dynamics of the market they just entered.
All along we have stated these cash rich tech companies do not need to be in diabetes they have chosen to be in diabetes. They could if they decided to do so take the long-term view, buy their way in, slash prices and change forever the market they just entered.
The reality is diabetes has all the elements to make this a worthy and very profitable endeavor. Diabetes continues to grow at epidemic rates on a global basis. A cure is still years away and while drugs and devices have improved dramatically over the years the fact remains we are not seeing equally dramatic improvements in patient outcomes. Think of what it would mean to the entire health care eco-system if instead of two-thirds of patients being out of control that number was flip flopped. Think of how much money would be saved.
Which brings us to what this is and has always been about; money. Who makes it, who saves it and who spends it. There is no question dramatic change is coming when we cannot say with any certainty but it is coming. The dominos are getting lined up and by our way of thinking it’s no longer a question of if that first domino gets knocked over but when and by whom. And once that happens watch out because as Momma Kliff used to say; “You ain’t seen nothing yet.”