The beat goes on

The beat goes on

This morning Novo Nordisk (NYSE: NVO) reported results which further confirmed that when it comes to the diabetes drug market the march towards commodization continues. As Novo noted during the call when it comes to pricing and/or rebates payors are in firm control and continue to exert their power. The question is can Novo or anyone else in this space do anything other than adjust operating costs to deal with this situation.

The standard answer would be to develop truly innovative therapies which would command a true price premium. However, given the therapy options currently available this isn’t as easy as it sounds. In some respects, all the diabetes drug companies are victims of their own success. While improvements can still be made the reality is this current crop of therapy options do the job quite nicely. This is one reason we have entered this phase of launching new drugs which are just incrementally better than the drugs they are designed to replace.

As we noted yesterday Novo is facing an uphill battle with payors to show that Tresiba® is better than Levemir, Lantus and Toujeo. The same problem Sanofi (NYSE: SNY) had showing that Toujeo is better than Lantus, a strategy which didn’t work. This strategy is made more difficult given that payors know that Lilly has Basaglar, their biosimilar version of Lantus, coming to market later this year. (Basaglar is already available overseas.) Based on comments made by Lilly they will not be shy when it comes to using price and/or rebates to gain share for Basaglar.

The harsh reality is Lantus, the world’s number one selling insulin, works very well. The lower incidence of severe hypoglycemic events seen with Toujeo and now Tresiba are nice but in the major scope of things this incremental improvement just aren’t enough to justify a price premium or preferred formulary placement. Simply put payors are telling Sanofi and Novo thanks but no thanks.

Although it hasn’t been talked about much in the calls so far, insulin delivery systems are one area that all the major insulin players are reexamining. Now when it comes to insulin delivery systems Novo has always had a tremendous edge. However, this edge is slowly eroding as Sanofi and Lilly have vastly improved their delivery systems over the years. It would be somewhat of an overstatement to say that all insulin pens are equal but they are more equal today than in years past when Novo had a distinct competitive advantage.

One area all the players continue to look at is insulin pumps, or more specifically how to gain an advantage in this market. Years ago Novo and Lilly looked into the possibility of developing pre-filled pump reservoirs, that instead of the patient filing the reservoirs manually these reservoirs would come prefilled. This technology isn’t all that whiz bang and is not that much different than the prefilled cartridges used with insulin pens. For a multitude of reasons these well-conceived ideas never resulted in a real product. However, now that the insulin companies have seen the handwriting on the wall they are once again looking at this idea and some are going a step further.

As we reported during CES/JPM Diabetic Investor learned that Sanofi had been sniffing around Tandem Diabetes (NASDAQ: TNDM) about the possibility of acquiring the company. Although the company decided against going this road this does not mean we won’t see Lilly and Novo become more aggressive in this area. One reason for this is the coming of biosimilar versions of Humalog and Novolog. Insulin pump patients use a ton of short-acting insulin which means that Lilly and Novo would lose valuable share should say Medtronic (NYSE: MDT) the insulin pump market leader or Animas, a unit of Johnson and Johnson and the second largest player in the pump market decide to contract with a biosimilar manufacturer directly. A manufacturer who would sell them a biosimilar version of Humalog or Novolog in a prefilled reservoir. The mere threat of this very real possibility will likely push Lilly and Novo into strategic partnerships with the major insulin pump companies. The simple truth is they cannot afford to lose the sales.

Even so this will not prevent what’s already in the works which is major price contraction in the insulin market. Since Lilly already has a biosimilar long-acting insulin and no branded long-acting product they do not have to decide whether to split their insulin’s into a value option or a premium option. As this is the decision facing Sanofi and Novo. The problem here is what would be the premium options, Toujeo and Tresiba aren’t getting premium reimbursement. Basically what Novo and Sanofi have to decide is do they price their premium offerings at the same level as the value offerings as this way they could at least theoretically maintain volume.

This same scenario will also play out in the expanding long-acting GLP-1 market. A market Novo will soon enter bringing the total number of once-weekly GLP-1’s up to 4. Although there isn’t a threat from a biosimilar, these products all do basically the same thing the same way. Or put more bluntly the minor differences between these products keep payors in control over pricing and/or rebates. Being the last to market in this growing category Diabetic Investor suspects Novo will have little choice but to use price as a weapon to gain formulary access which then would lead to share.

This makes Diabetic Investor wonder when Novo will become more aggressive on the cost cutting side. While the company has downsized slightly these cuts haven’t gone far enough. Sanofi is in the midst of a major restructuring, i.e. downsizing while Lilly seems to have right-sized their unit for existing market dynamics.

Looking towards the future there is little reason to believe the dynamics in the insulin and GLP-1 markets will improve. The reality is conditions are likely to get worse, much worse. Novo must accept this outlook and initiate further cost reductions if they are to have any hope at maintain reasonable margins. Should by some miracle market dynamics improve they can always reverse course and build again. Yet, for the foreseeable future the order of the day is lean and mean.