Major drug companies are bracing for a tougher drug pricing environment in the U.S. in 2017, especially since U.S. President-elect Donald Trump has pledged to clamp down on elevated drug prices, even while the rapidly increasing older population is intensifying pressures on the U.S. health system. While a new drug pricing regime would likely lead to a shake-up of the global pharmaceutical industry, drug majors will have to introduce new pricing models for their top-selling drugs given the intense competition from biosimilars. Biosimilars are copies of biologic drugs that have a shorter development cycle as compared to the typical 10-year development cycle of a pharmaceutical drug. Biosimilars are expected to generate revenue of $25 billion to $35 billion by 2020 according to industry experts. Globally, around 700 biosimilar molecules are undergoing various phases of development, targeting different therapeutic areas.
Within the pharmaceutical industry, the market for diabetes treatment drugs is worth more than $70 billion globally, with multiple drugs competing for market share for just about every approach to managing the disease. While the advent of biosimilars is expected to benefit insurers, patients, and the medical community, drug companies are the worst hit as Pharmacy Benefit Managers (PBMs) are looking to secure pricing deals and benefits for the benefit of patients.
Headwinds in coverage and drug pricing regime
While being already boxed in by both government agencies and PBMs, drug companies are now faced with formulary exclusions and mandatory discounts for long-acting insulin drugs in recent months. Major insurers such as UnitedHealth Group Inc. (NYSE: UNH), the largest health insurer in the U.S., CVS Health Corp. (NYSE: CVS), and Express Scripts Holding Company (NASDAQ: ESRX) are changing reimbursement terms for long-acting insulin drugs to include lower-priced options in their 2017 formulary, in order to reduce costs for their members.
UnitedHealth said that it will no longer cover Lantus, the blockbuster insulin drug sold by French drugmaker Sanofi SA (NYSE: SNY) and will instead cover Basaglar, a cheaper biosimilar insulin sold by Eli Lilly and Co. (NYSE: LLY), under its Tier 1 coverage. These savings will lower the cost of insurance, and PBMs will be able to provide competitive medicare premiums to patients. UnitedHealth’s move comes after CVS made a similar change to drop Lantus in favor of Eli Lilly’s new biosimilar. Express Scripts has barred Novo Nordisk A/S’s (NYSE: NVO) blockbuster GLP-1 diabetes drug Victoza and two of its top-selling insulins from its coverage, instead favoring Eli Lilly’s new weekly GLP-1 drug Trulicity.
Competition from cheaper biosimilars
Sanofi’s Lantus, whose Q2 FY16 sales fell 11.2% to €1.46 billion, is facing intense competition from many biosimilars launched in the market in recent months. While Sanofi has reaffirmed its sales expectations despite the exclusion of Lantus from the 2017 drug coverage, it is still predicting a 4% to 8% annual decline in diabetes drug sales over the next two years. Faced with a slump in demand for Lantus, Sanofi is relying on new treatments including its Toujeo insulin to help make up for the Lantus revenue shortfall.
In a similar vein, Novo Nordisk, the world’s largest insulin producer, plans to trim about 1,000 jobs or 2% of its workforce, as it tightens its belt in the face of growing competition and resistance to high prices for diabetes drugs in the U.S. The move underscores the difficult operating environment in the U.S., Novo’s largest market, as payers become more selective about the drugs included in coverage plans for their clients and cheaper generic drugs force the company to cut prices or lose ground to rivals. Novo generates about half of its revenue from the U.S., which has a diabetic population of over 30 million. In August 2016, Novo lost a major contract for its top-selling insulin NovoLog, and is rethinking whether or not to proceed with the development of certain drugs in its pipeline.
Novo is now reviewing whether oral insulin can be commercially viable, and has instead shifted its focus to a pill version of an experimental diabetes drug, semaglutide, which stimulates insulin production in the pancreas. Generic competition for Novo Nordisk’s diabetes treatments has swollen in recent months, a major cause for worry since diabetes drugs account for nearly 80% of Novo’s sales. Another cause for worry for Novo is that its next-gen diabetes treatment, Tresiba, which was launched in the U.S. in January 2016 and whose sales surged 161% in H1 FY16, is facing intense competition with the cheaper biosimilar Basaglar.
Diabetes population expected to surge in next two years
Nearly 400 million people worldwide have diabetes, with type 2 accounting for more than 90% of the cases. Without proper treatment, it can lead to a wide variety of serious health complications, which include heart attacks and cancer. Diabetes, which will affect an estimated 600 million people by 2035, costs about $245 billion a year in the U.S. alone in health-care resources and lost productivity, according to the American Diabetes Association.
Is making diabetes drugs commercially viable?
The prices for traditional treatments like basal insulin drugs have fallen by more than 20% to $215 per prescription in 2016 in the U.S., after reaching a peak of $271 per prescription in 2014. While the fall in insulin drug prices is a boon for patients and PBMs, the growing costs ploughed into R&D, commercialization, and marketing of these drugs is expected to hurt the bottom-line of pharmaceutical companies making these drugs in the future years. It is also getting increasingly tougher than ever for pharma firms to successfully launch new drugs in competitive areas, even with good trial results, as PBMs throw up roadblocks to prescribing drugs.