You knew it was going to hurt

You knew it was going to hurt

Given the recent announcements from CVS and Express Scripts regarding the changes they have made to their formularies it should come as no shock these changes are having a major impact on diabetes drug companies. An impact that is being felt at Novo Nordisk (NYSE: NVO) who reported earnings this morning. Earnings which were highlighted by the company LOWERING full year guidance. As we noted earlier in the week it has become all-out war in the insulin market with payors firmly in control over pricing.

This war has spilled over into the growing GLP-1 market which also hurts Novo. While Victoza, the company’s once-daily GLP-1 continues to hold its own and has some solid new data the product now has serious competition. As noted during the call the GLP-1 market is becoming a battle between once-daily Victoza and once-weekly Trulicity from Lilly (NYSE: LLY). Given how aggressive has been with Trulicity using price plus outcomes based contracting there is no question Novo has a serious fight on their hands.

Novo is also being impacted by another Lilly product, their biosimilar version of Lantus, Basaglar. A product which will decimate the dynamics of the long-acting insulin market. Not only will Basaglar put the final nail in the Lantus coffin, it has lowered the price bar for products like Tresiba® from Novo. Novo could try and compete by pitting Levemir, their older long-acting insulin, against Basaglar but this would basically be a game of low price limbo, just how low can they go.

The reality for this segment of the insulin market is the newer products just aren’t that much better than the older products. As we have been stating Lantus works pretty damn well and physicians are loathe to change products that work, unless they are forced to do so. Basaglar works as well Lantus, it’s made by a company that physicians trust so when forced to change patients to Basaglar there won’t be much complaining. Bottom line Basaglar works as well as Lantus and it’s cheaper – game set match.

The news in the short-acting insulin segment isn’t much better as the company noted they expect Sanofi to become super aggressive with their short-acting insulin Apidra. Although Novo and Lilly dominate this market and Apidra is barely on the radar, the thinking is Sanofi has nothing to lose and everything to gain by going balls to the wall. Yep exactly what this market segment needs an all-out price war which will only create multiple losers and no winners. And if anyone is looking for a preview of what will happen when biosimilar short-acting insulins get here, reread the previous two paragraphs.

Payors have made it crystal clear that they are not concerned about the quality or performance of biosimilar products. They have made it crystal clear that they will do whatever they can to lower costs. They know they have the upper hand during negotiations and will not will not remove their foot off the throats of drug companies. Basically drugs companies either capitulate to the demands of payors or suffocate.

Perhaps this can best be summed up by a question asked towards the end of the call which we will paraphrase as it was a very long question. Basically the company was asked what the long term outlook is now that Basaglar is here and biosimilar short-acting insulin looms on the horizon. He could have added how this outlook is impacted by the changing nature of the GLP-1 market. Not surprisingly when a company really doesn’t have an answer they do the old Texas two step and dance. Which is what Novo did, although we’re not sure what they call shoveling horse manure in Denmark.

A couple of observation to wrap up. First, as the company noted when it comes to the markets they play in, it’s a battle between them and Lilly. Second, lower trier players like Sanofi and AstraZeneca (NYSE: AZN) can upset the applecart as with nothing to lose and everything to gain they could throw reason out the window. Third, say goodbye to the long-acting insulin market as a major profit center. Fourth, prepare to repeat that statement for the short-acting insulin market in the near term future. Fifth, that glimmer hope being generated by the growing GLP-1 market won’t last and just as the insulin market has become all-out war this is exactly where this market is headed.

Since it’s Friday and we don’t want to ruin anyone’s weekend we should try to end on a positive note. We don’t want to say we told you so, that we warned everyone that the diabetes drug market was following the same path as the device market and becoming a full blown commodity market where price is about the only thing that matters. Nor do we want say that all the insulin companies should have been better prepared for the impact of products like Basaglar. That they should have known that payors, people who make Mafia bosses blush when it comes to negotiating tactics, would only become more aggressive given all the me-too copycat drugs in diabetes.

We really would like to end on a positive and we tried to think of what Momma Kliff would say when times were tough and the future didn’t all that promising. Words of wisdom, empathy or understanding and all we could think of was something she said many times before; “You can’t change the past or the future so either quit or deal with it.”  Momma Kliff was one tough lady.