The real battlefield

Back in the day when it came to determine the winners and losers in the diabetes drug sector it was science that normally won the day. These companies spent millions to prove their drug outperformed what was being offered by their competition. The balance of power rested in the hands of the drug companies not in the hands of payors.

This began to change when diabetes drugs became commodities in combination with the changing nature of how these drugs were purchased. As PBM’s grew the balance of power began to shift away from the drug companies to payors. Today it is no longer a battle over who has the best data, it’s a battle over who has the best combination of discounts and rebates. The balance of power has completely shifted to payors.

The first glimpse of this power shift came not with diabetes drugs but conventional BGM. Well before CGM was even on the horizon BGM commoditized. Payors quickly realized that all meters did basically the same thing the same way so why pay more for one brand over another. Helping push prices down even further where studies that concluded there was no correlation between testing frequency and better patient outcomes. Although there were flaws in these studies they did provide cover to payors who demanded even bigger discounts.

Everyone tries to blame competitive bidding for the collapse of BGM pricing, but the fact is this process was well underway before competitive bidding. Competitive bidding was just the last domino to fall.

Now all the drug companies are making their annual pilgrimage to payors and PBM’s for this is when folks like Express Scripts and CVS Caremark determine which drugs get covered, which don’t, who gets preferred status and who doesn’t. Yes, the drug companies put on their Sunday best and pray that their combination of discounts and rebates is enough to impress the people who ultimately determine their future.

Every major diabetes drug company, Lilly, Novo Nordisk and Sanofi, have noted in their earnings statements the dramatic impact payors have on their franchises. The same goes for device companies for what does everyone in the insulin pump space complain about but Medtronic’s ownership of the most valuable piece of real estate; formulary position. While many see the battle between Dexcom and Abbott for dominance in CGM being fought with technology, the real battlefield is being fought over patient access and that is determined by payors.

To illustrate the major impact payors have consider this possible albeit unlikely scenario. It’s well known that when it comes to the stand-alone CGM market Medtronic has a major problem on their hands. Besides being very late to the game the product they have is inferior to the competition. Yes, the product works but when put side by side against the competition it just doesn’t stand up.

Medtronic gets this but also knows they really don’t have much to lose as they have no share, so anything is better than nothing. The company also has something that Dexcom does not, substantial resources. So rather than compete on product features and benefits something they cannot do, why not compete on price, something they can and have done with insulin pumps. Medtronic does not have to give the product away but could go 100% at risk with type of value based/outcomes pricing.

Abbott, who also has resources, has already fired the first shot in the coming CGM price war, further forcing Medtronic to consider this option. Abbott is positioning Libre as a low-cost alternative to the G6. Dexcom as we have noted is prepared for this and is fighting back. However, should Medtronic go nuclear all bets are off.

A similar scenario is developing in the long-acting GLP-1 segment. As we noted when Novo reported earnings their GLP-1 franchise was the lone ray of sunshine among the dark clouds over their insulin franchise. Yet like Medtronic in CGM, their long-acting GLP-1 is late to market and fighting against some entrenched competitors most notably Lilly. This could force Novo to offer their own version of value/outcomes-based pricing to secure formulary access. Something Lilly is aware of and prepared for.

Both scenarios illustrate the power held in the payors. Decisions are not being made based on who has the best product. Decisions are being made based on who has the most attractive pricing model.

Want even more evidence of this just look at the SGLT2 market where the data clearly indicates that Jardiance from Lilly is the best in class. Yet Invokana from JNJ and Farxiga from AstraZeneca are giving Jardiance one hell of a fight. Even crazier both Invokana and Farxiga have known issues yet still they are commanding the attention of payors. This only has happened for one reason and one reason only, JNJ and AstraZeneca are offering very attractive deals to secure formulary access.

Even in the DPP4 class where Januvia rules, Merck has been forced to play the discount/rebate game to maintain their dominance.

We hate to be redundant, but this is why we keep stressing the importance of having a talented management team. How having the best toy in the toy chest is nice but irrelevant if the management team cannot successfully work with payors. Things would be much different if it was a level playing field and all drugs and devices were equal in terms of formulary position. But this is not the world we live in, yep it would be nice but its also a pipedream.

No, the real battlefield in diabetes is played out in the conference rooms at Express Scripts, CVS Caremark and all the other payors. A battle that is being fought right now and will largely determine who wins and loses in 2019.