Analysis: Diabetes drug price war likely to claim more casualties

Through no fault of their own, 1,000 people just became victims of a drug-price war mostly taking place on another continent. Danish pharma giant Novo Nordisk announced Thursday that it is cutting 1,000 jobs (about half of them in Denmark), after last month slashing growth forecasts for 2016, citing lower U.S. prices for diabetes drugs.

These will likely not be the last victims, either—Novo and competitors such as Sanofi and Indianapolis-based Eli Lilly will likely have to keep tightening their belts as prices and profit margins fall.

Diabetes is fertile ground for a drug-price fight. It's a $40 billion-plus market in the United States, with many big firms looking to protect billion-dollar franchises. Each of the many medicines treating diabetes has multiple strong competitors. And all the customers want to pay less.

Diabetes is a chronic illness affecting millions of people—a recipe for a lot of drug spending. Naturally, those who pay the drug bills—insurers, pharmacy benefit managers, or PBMs, and the U.S. government—have an interest in keeping prices under control.

And those payers have extra leverage against the pharma companies because of the sheer number of drugs on the market. In August, pharmacy benefit manager Express Scripts said it would decline next year to pay for several Novo Nordisk drugs—which accounted for more than $7 billion in sales last year—in favor of medicines from Eli Lilly and others. Novo Nordisk's competitors probably offered substantial discounts to get on the PBM's favored-drug list.

CVS Health, meanwhile, said it will exclude Sanofi's long-acting insulin drugs Lantus and Toujeo (expected to combine for $6.8 billion in sales this year) next year in favor of Eli Lilly's similar drug, Basaglar, which rolls out in mid-December. UnitedHealth, a large health insurer that also has a large PBM segment, revealed it was doing the same.

As new drugs and drug combinations hit the market and PBMs aggressively curate their favored drug lists, drugmakers are forced to continually raise the rebates, or discounts, they make to payers to stay competitive.

For example, the implied rebate—the percentage of gross drug sales given away in rebates and other discounts—Sanofi gives for its drug Lantus has grown from around 10 percent in 2009 to nearly 60 percent last quarter, according to Bloomberg Intelligence. The discounting could get even more severe when Eli Lilly's rival drug Basaglar hits the U.S. market.

This is happening to many diabetes drugs. Eli Lilly and Novo Nordisk's short-acting insulins have implied rebates of about 70 percent, according to BI. Newer diabetes drugs in different classes, such as Eli Lilly's Trulicity, Merck's Januvia, and Novo's Victoza, also have large and rising rebates.

Such price competition does not tend to suddenly reverse. It's actually more likely to increase—agreements between payers and drugmakers get renegotiated every year, and PBMs have gotten more savvy and aggressive about playing companies against each other to get the biggest possible discounts, especially in large drug classes.

For an example of the kind of impact this has on revenue, consider Sanofi's Lantus, the biggest-selling diabetes drug. Since 2014, Wall Street's consensus forecast for the drug's 2017 sales has fallen from $7.1 billion to $5.1 billion. Lantus is expected to fall below $4 billion in sales by 2019.  

Those 1,000 job cuts will likely not be the last.