Listen Up Big Pharma

Listen Up Big Pharma

“We need to add value – life-prolonging or quality of life benefits that are meaningful enough for payers around the world to say; Yes I’m willing to pay a premium over generic opportunities.” This statement comes from a recent interview with Novartis (NYSE:NVS) chairman Joerg Reinhardt and should be read by every company in the diabetes drug business. Comments which echo what Diabetic Investor has been stating for some time now, that without innovation the diabetes drug market will follow the path followed by the conventional blood glucose monitoring market and become a full blown commodity market where price favors performance.

In many respects this transformation is already underway with payers and the ultra-conservative FDA providing a helping hand. Payers just as they did in the BGM market have learned they control the kings to kingdom and through formulary placement can determine market share. They have learned just as they did in BGM that there really isn’t a noticeable difference between drugs in the same category so why not seek the lowest possible price for a DPP4, short-acting insulin or GLP-1. Drug makers for their part have had little choice but to acquiesce to the demands made by payers for lower prices and/or larger rebates. Just as BGM lost control over pricing this same dynamic is now playing out in the diabetes drug market.

Contributing to the drug makers problems is the ultra-conservative FDA, an agency in desperate need of reform. Looking over some of the recent decisions made by the agency in the diabetes space one has to wonder if the mission of the agency is to prevent new treatments from coming to market. Thanks in large part to that crusading cardiologist Dr. Steven Nissen and the Avandia controversy he stared, the agency has become afraid of its own shadow. The FDA is supposed to approve drugs based on scientific research not some mythical data generated by an easily manipulated meta-analysis.

Frankly one cannot blame companies from developing me-too, copycat drugs as at least they know what the FDA is looking for. These companies already know that developing new and innovative therapies is a risky and costly business. In the past they would take this risk as should they be successful the reward made the risk acceptable. However today is far different story and the FDA isn’t helping any with their crazy and often off the wall requests for more studies or data.

What’s even crazier about this situation is the future of the diabetes drug market could well be determined not in a laboratory or research facility but in the courts.  The patent litigation between Sanofi (NYSE:SNY) and Lilly (NYSE:LLY) over Lantus could well determine the future of the diabetes drug market. This case and its outcome has wide ranging implications as soon after Lantus loses patent protection so does Humalog® and Novolog®, the top two selling short-acting insulin’s. As we have noted in the past, the insulin market would be turned upside down when a generic hit the market, a move which would provide payers with even greater leverage.

Looming on the horizon is the very real possibility that the drug approval process, already a complex process, will become even more complex as Diabetic Investor suspects healthcare reform will force the government not just to consider safety and efficacy when approving new medications but the cost of the new medication. Whether this will look like the British system or not is open to debate. Yet recent studies have indicated that some of the newer more expensive diabetes drugs provide little benefit over cheaper generic options. This is an ominous sign for drug makers as this is exactly what happened in the BGM market as studies began questioning the benefits of regular glucose monitoring. Back in the day Diabetic Investor predicted that payers and the government would use these studies as cover to justify major changes to reimbursement policies. Does anyone seriously believe we would have competitive bidding without these studies?

The most damning prospect for the diabetes drug market is the epidemic growth rate of the disease itself. At first glance this would seem like a crazy notion as how could such dramatic growth in the number of patients be bad for drug companies. Does it not make sense that drug companies could make up for lower prices with greater volume. Well this would normally be true in most market but not the diabetes drug market. The sheer size of this market and its projected growth rate are forcing governments around the globe and private payers to limit the financial impact of diabetes. As we have noted on far too many occasions diabetes is not just a major healthcare crisis, it’s also a looming financial crisis.

Looking towards the future there are really two options for drug companies, surrender or invest. Lilly is perhaps the best example of a company who has decided to surrender. Looking over the landscape the company has basically decided they don’t want to risk valuable capital developing innovation new therapies, that it’s better to have a full portfolio of me-too, copycat drugs that when sold as a package yields an acceptable margin. Frankly Diabetic Investor can’t blame Lilly for this strategy.

At the moment however Diabetic Investor doesn’t see too many companies willing to invest in the future. Looking at the various drugs in late and mid-stage development most are improved versions over drugs already on the market. Yes they offer benefits over existing medications but the benefits are incremental and unlikely to justify a reimbursement premium.

Mr. Reinhardt should be commended for his honestly and clarity of his statement, no truer words have spoken. The real question becomes are any of the companies in the diabetes drug arena listening?