Welcome to the new world

Welcome to the new world

Yesterday Diabetic Investor had two interesting discussions with fellow members of the media regarding the future pricing models for diabetes therapies. One conversation centered on the DPP4 market which is currently dominated by Januvia, the other on the insulin market. While these markets are different in terms of which patients are targeted  when it comes to pricing they aren’t as different as one may believe. In fact what’s going on with both markets is a perfect example of the dramatic change that’s underway.

After years of dramatic growth based on the latest results from Merck (NYSE:MRK) the Januvia juggernaut has lost some momentum.  According to their latest earnings release; “Combined sales of JANUVIA and JANUMET, medicines that help lower blood sugar levels in adults with type 2 diabetes, grew 2 percent to $1.6 billion in the second quarter. The growth reflects higher sales in Europe and the emerging markets, which were partially offset by declines in Japan. Sales in the United States decreased 1 percent.”

Now let’s be honest about this as sales of $1.6 billion for the quarter is nothing to be ashamed of. As the company noted during the Q&A portion of their earnings call they still maintain “about a 65% share globally and about a 75% share of the class in the US.”  Still the fact remains that Onglyza and Tradjenta, competing DPP4’s, are taking share away from Januvia. It’s equally true that AstraZeneca (NYSE:AZN), the makers of Onglyza and Lilly (NYSE:LLY) the makers of Tradjenta, have decided to use price as a weapon to gain share.

Yes Merck, Astra and Lilly would disagree but all three DPP4’s do pretty much the same thing, the same way. While there are some minor differences between the three nothing so major that a patient would notice much of a difference no matter which DPP4 they used. The fact is that payors know this as well and understand they can extract better pricing as they can essentially influence market share based on formulary position.  The DPP4 market has not evolved into a complete price war, as of yet, however Merck, Astra and Lilly have decisions to make as to where and when to fight.

This same situation has been playing itself out in the short-acting insulin market between Lilly and Novo Nordisk (NYSE:NVO). Just as with the DPP4 class of drugs there really isn’t that much performance difference between Humalog and Novolog. Over the past few years Lilly and Novo have been battling each other for preferred formulary placement with each winning and losing different key accounts.

The real fun will begin sometime in late 2015 or 2016 when a generic hits the market. The first company impacted by the presence of a biosimilar insulin will be Sanofi (NYSE:SNY) as Lilly’s generic version will eventually land on US shores. This will be followed shortly thereafter with biosimilar short-acting insulin’s.  As we have noted consistently we don’t expect biosimilar insulin’s to be priced dramatically lower than the branded option. Still they will carry a lower price but more importantly their mere presence will put payors in an even stronger position to demand and likely receive further price concessions.

Diabetic Investor anticipates this same scenario is about to begin with the new class of diabetes drugs, SGLT2. First to market was Invokana® from Johnson and Johnson (NYSE:JNJ), now comes Farxiga™ from Astra, which like Invokana is off to a strong start.  It won’t be long before Jardiance® from Lilly, which was just approved by the FDA, begins to impact this market.

This is why Diabetic Investor is so intrigued by what Lilly and Astra are doing. At the moment these two companies have the most comprehensive portfolio of diabetes therapies. Given the trend towards single source contracting both companies are banking on the fact that payors will buy their entire basket of products.  Lilly for example could offer lower overall pricing on the entire basket and still come out just fine financially as they understand in the new world order market share is everything. This strategy is also brilliant as it forces the competition to play defense.

The one possible downside to this strategy is the risk of an all-out price war in the diabetes drug market. Something that payors would relish but would create havoc within the pharma world. Diabetic Investor was keenly aware of this possibility as we watched it play out in the conventional glucose monitoring market, followed by the short-acting insulin market and now extended to the entire diabetes drug market. The fact is a company like Sanofi, for example, won’t sit ideally by and let Lilly just come in with their generic and take share away. Sanofi will fight and fight hard to maintain share.  The only problem is about the only option they have is the nuclear option, use price to maintain share.

Should Sanofi decide the nuclear option just isn’t worth it, it will likely mark the end of the Lantus cash machine. This is exactly what happened to Roche back in the day when they decided not to fight to maintain their share in the BGM market. At the time LifeScan, a unit of JNJ, was using price to gain preferred formulary access. Back then Roche was beating the pants off LifeScan and held the top market share. Yet their decision not to fight back when LifeScan became aggressive was costly as the company paid a heavy price. Not only did they fall into second place in terms of market share, sales never recovered. Keep in mind this decision was made well before competitive bidding became a factor and is why we have long maintained that competitive bidding has contributed to the demise of the BGM market but did not cause the demise.

Now Diabetic Investor has no way of knowing if this same scenario will play out in the diabetes drug market.  On the surface it appears that all the dominos are aligning for the diabetes drug market to follow this exact same path. However there key differences between the device and drug market.  Our gut tells us that somebody will fire the first shot and this will escalate into a full blown all-out no holds barred price war. A war with few winners, an abundance of casualties and its fair share of collateral damage.

The first shot hasn’t been fired yet, but honestly it’s just a matter of time.