Novo under siege

Novo under siege

The diabetes drug world is abuzz with Express Script’s recent decision to dump Victoza and Novolog in favor of Byetta and Humalog. While no one is talking publicly about what Bristol Myers (NYSE:BMY) or Lilly (NYSE:LLY) had to offer to take this business away from Novo Nordisk (NYSE:NVO) the fact remains that Novo will suffer as a result.  Some analysts have speculated that Novo will take a serious hit to earnings perhaps as much as 3% in 2014. To Diabetic Investor this decision speaks volumes as to what’s going in the wacky world of diabetes drugs and is an ominous signal of things to come.

To fully gauge the impact of this event it’s important to understand not just what happened but why it happened. As Diabetic Investor has been reporting the short-acting insulin market is following the same path the conventional blood glucose monitoring did years, or put more bluntly it’s becoming a commodity market where price trumps performance. Express Scripts knows that it really makes no difference which short-acting insulin a patient uses which gives the leverage they need to extort ever lower prices from Lilly, Novo and Sanofi (NYSE:SNY). (Yes Sanofi does have a short-acting insulin, Apidra which may surprise many as it has virtually no presence in the marketplace.) Express Scripts also knows that through formulary status they can determine market share for these copycat drugs.

Simply put Express Scripts can play Novo, Lilly and Sanofi off each other as none of these companies can afford to lose access the company’s huge base of patients. This is exactly what Liberty Medical used to do back in the day with glucose monitors. Express Scripts is also looking down the road a little as they see generic insulin coming which is another piece of leverage they can use to extort lower prices.

Diabetic Investor also believe this decision confirms what we’ve been saying about Lilly all along, as they have basically given up on developing anything innovative in the diabetes arena and have become a value player. Yes their pipeline has some interesting compounds but nothing that jumps out as being a diabetes game changer.

Now some are looking at the Victoza decision differently as many believe that the drug has a strategic advantage over Byetta, as Victoza is taken once a day and Byetta twice a day. Yet Express Scripts can easily argue that while there is a patient convenience difference between the two drugs there isn’t an outcomes difference between the two. Put another way patient outcomes should not be any different whether patients are taking Byetta instead of Victoza.

Diabetic Investor also believes that Novo seriously miscalculated how badly Bristol wanted this contract. Unlike Novo, Bristol has an ace in the hole with Bydureon. Diabetic Investor is guessing that Bristol was willing to sacrifice margin on Byetta as they believe that once Bydureon is available with a pen delivery system they can convert the Byetta patients they stole from Novo to the higher margin Bydureon. Bristol knows that Novo will not have a once-weekly GLP-1 for some time and that Bydureon is the reason they paid billions to acquire Amylin.  As Diabetic Investor accurately predicted the GLP-1 market is growing and Bristol is actually taking a page from the Novo playbook as they are willing to do whatever it takes to own that market.

The fact is in many respects the diabetes drug companies have been their own worst enemy, rather than develop innovative medicines they have developed me-too copycat drugs. Just take a look at the DPP4 market dominated by Januvia, a multi-billion franchise for Merck (NYSE:MRK). As dominate as Januvia has become, Onglyza from Bristol is gaining share. This isn’t because Onglyza is a better option than Januvia; the two drugs are virtually identical. The share gains are because Bristol is willing to play ball and Merck isn’t.  Just as Express Scripts played the insulin makers off each other, they can do the same thing in the DPP4 market.

Simply put the balance of power in the diabetes drug market has shifted from the companies who develop the drugs to the companies like Express Scripts who negotiate prices and control formulary placement. This is exactly what happened with glucose monitoring and is repeating itself now with diabetes drugs. But wait just when everyone thinks it can’t worse for the drug companies it can and will, as wait for it …. generic insulin is coming giving even more leverage to payors.

Think of how Novo must feel as not only are they fighting with the FDA over Tresiba®, a drug which they see as blockbuster but now majorly delayed, they are fighting Bristol and soon Sanofi in the GLP-1 market and Lilly in the insulin market.  Keep in mind that these types of fights are just not in Novo’s DNA, as they are used to a world where they could develop premium products which in turn received premium reimbursement. Unfortunately for Novo the world just doesn’t work that way anymore and likely won’t ever return to that model.

The company is trying to fight, as we predicted they would when Lilly started stealing contracts with overly aggressive pricing, but we don’t believe the company anticipated just how fierce this fight would be. This is not unlike what happened to the major BGM companies who believed that when competitive bidding was finally instituted the price cut would come in around 30% to 35%, not the 72% that devastating the business today. Unlike Lilly, Novo has yet to downsize their insulin sales force and unlike Bristol they don’t have a long-term clear strategy in the GLP-1 space.

Simply put the company is fighting a war on multiple fronts and right now they are losing more battles than they are winning. The company has some serious decisions to make and better make them in a hurry as it is clear they are not prepared for how this market is changing. Will they follow Lilly and downsize their insulin franchise to reflect current pricing dynamics and the coming threat of a generic? Can they develop a response to the changes that are taking place in the GLP-1 market? Is it possible after being the most dominate diabetes company on the planet they can shift gears and realize that that premium reimbursement is a thing of the past?

Diabetic Investors sees Novo as champion fighter who after years of facing cupcake opponents now has some serious competitors who want the title as bad they do.  The company has taken some serious hits but we don’t see this fight as over by any means. As the great Jack Dempsey said; “A champion is one who gets up when he can’t.”