Novo Nordisk to cap price increases as drug costs face more scrutiny; do two drugmakers equal a trend?

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With drug companies under fire over prices, the world’s largest insulin maker plans to limit increases and join competitors by introducing a model that ties the cost of medicines to the results they deliver.

@novonordisk to make prices dependent on achieving certain patient outcomes or benefits Click To Tweet

Novo Nordisk A/S (Bagsvaerd DNK), which competes against behemouth Eli Lilly & Co. (Indianapolis IN) in the insulin market, expects to make prices dependent on achieving certain outcomes or promising benefits to patients, CEO Lars Rebien Sorensen said in an interview, according to Bloomberg. That type of pricing should play a bigger role in contract negotiations with purchasers starting early next year, he said.

“It’s starting to arrive,” said Sorensen, who is retiring by the end of the year after 16 years as Novo’s CEO. “More and more companies will try to enter into valued-based pricing.”

The Danish drugmaker also will limit any potential list-price growth in the future to no more than single-digit percentages annually and seek partnerships aimed at reducing the burden of out-of-pocket costs on patients, the company said on its website. That may put pressure on competitors to follow suit.

The cost of medicines has long prompted controversy in the US, where rebates are negotiated in private between the companies and intermediaries in a smoky pricing system. Novo and Lilly were targeted by Sen. Bernie Sanders last month over their insulin treatments, used by millions of diabetics, and the profits that they generate for the drugmakers.

Novo’s moves come after the company in October slashed its long-term profit-growth forecasts by half because of pressure on prices in the US, its largest market. Despite big increases in list prices, the amount Novo takes home has tracked inflation, the company says.

Data will need to be collected to demonstrate the value of drugs to patients and insurance companies, said Sorensen, chosen by Harvard Business Review as the best-performing CEO in the world for the past two years. Novo said it’s exploring continuous glucose monitoring and pen devices as well as apps, using cloud-based technology, to assess results.

“We don’t want society to believe we are not offering value,” Sorensen said in the interview. “We’re going to be in the diabetes business 20 years, 30 years, 40 years from now. We’re coming back to the same customers again and again, so that credibility on the value of our drugs is very important.”

The industry has been shifting in that direction, says Bloomberg. Swiss pharmaceutical giant Novartis AG (Basel CHE) has a “pay-for-performance” plan in place for heart failure treatment Entresto, in which insurers spend more if the drug keeps patients out of the hospital and lowers associated costs.

Amgen Inc. (Thousand Oaks CA) said last month it’s committed to working with payers through value-based contracts that protect payers from unexpected cost increases, or give discounts if patients don’t respond as expected.

For a class of diabetes medicines known as GLP-1s, which stimulate insulin production, prices could be based on blood-sugar control, blood pressure or potential heart benefits, according to Sorensen. Novo has an experimental diabetes medicine in that class, semaglutide (pdf), along with its blockbuster Victoza.

Steve’s Take:

Did you know that Harvard Business Review chose Novo’s Lars Sorensen the best-performing CEO in the world the past two years? I didn’t. (One more thing.)

But his company’s prices (and those of other insulin makers) have been rising so fast in recent years that some people are spending as much on monthly diabetes-related expenses as their mortgage payment, says Business Insider. As a result, the companies that make insulin have been under fire from the public and politicians including US Senator Bernie Sanders.

Novo Nordisk is facing particularly harsh circumstances–it is the world’s largest maker of insulins as pricing pressure mounts in the diabetes market–which likely prompted this action. But others who still deny the new pricing reality will be pressured to follow.

Novo’s operating margin, sales, and operating income growth are all deteriorating due to drug-pricing pressure in the US. Its shares are down 40% year-to-date, to a level last seen in 2013. In October, severe diabetes-drug pricing pressure in the US forced the company to cut its long-term operating profit growth target in half, from 10% to 5%.

The size of the market and the number of competing medicines available are giving pharmacy benefit managers (PBMs) and insurers a big incentive to drive down prices and plentiful tools with which to do so.

PBMs have managed to shove companies such as Novo Nordisk, Sanofi, and Eli Lilly into a diabetes-drug price war, with companies giving up ever-larger discounts just to maintain market share. Novo is particularly exposed because it gets more than 80% of its revenue from diabetes treatments; its biggest competitors are considerably more diversified.

But the changes announced Monday should insulate Novo from public and political criticism and help its position with payers, says Bloomberg’s Max Nisen. Novo isn’t just limiting price increases, it’s making them more predictable for PBMs.

Novo’s embrace of value-based pricing is an attempt to gain market share without resorting to a race to the pricing bottom. Like other firms in the space, Novo has been working to prove its newer drugs, such as its next-generation insulin Tresiba, have extra benefits for patients.

By attaching prices to outcomes, Novo will ideally reduce downside for payers and realize upside if its drugs work. It’s an approach for Novo to essentially bet on its own medicines. If these moves help Novo stabilize its relationships with payers and stave off the bad press, they will likely cause imitation as a result.

Not every company has it quite as bad as Novo. Those with medicines in less-mature or less-competitive areas aren’t yet feeling the pricing pinch as acutely.

But diabetes is just the most apparent example of a new era of diminished pricing power across pharma. Pressure is intensifying up in the blockbuster inflammation-drug market, and even cancer drugs are unlikely to be exempt for much longer. That means it will take ever-larger list-price increases just to counter discounts and maintain headline sales levels, let alone grow them.

These public pledges suggest that any double-digit price hikes pharma companies attempt will come under even greater scrutiny. Until recently, such annual price hikes were routine in the industry. Public pronouncements like Novo’s–and the fact companies are betting they can survive without such price hikes–will only vilify them further.

“While we can debate who pays what in different scenarios, it doesn’t change the fact that many patients simply can’t afford the medicine they need,” Novo president Jacob Riis wrote on the company website.

Riis also pointed to the difference between the list price the company sets and the net price that drugmakers get after rebates and other contact with middle men in the supply chain.

According to data from ZS Associates, a sales and marketing firm that works in the healthcare industry, Novo’s rebate rates were 47% in 2014, and 55% in 2015. Across the industry, ZS data shows that rebates paid out to PBMs and insurers have risen from about $40 billion four years ago to $100-$130 billion by 2016. So while list prices continue to go up, net prices to the drugmakers have remained mostly flat.

Novo Nordisk is now the second company in recent months to commit to single-digit yearly price increases.

In September, $80-billion-plus Allergan PLC (Dublin IRL) also pledged to put limits on the size and frequency of drug price hikes in a social contract, limiting it to only yearly single-digit percentage increases, and it won’t occur on drugs about to lose patent protection.

Steve's Take: @novonordisk joins @allergan in pioneering 'value-based' #pharma pricing Click To Tweet

Allergan is the true pioneer in this new “value-based” movement. But with Novo Nordisk joining up, are we seeing shapes of things to come?

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