Novo Nordisk (NVO) is joining the generic insulin party that Eli Lilly started and Sanofi (SNY) joined back in April. Introduced last week, Novo’s in-house generic equivalents (what Novo calls “follow-on brands”) of Novolog and Novolog Mix will be available starting January 2020 at about a 50% discount. This is similar to what Eli Lilly (LLY) announced back in March and which I covered in May when it started to sell a generic version of its own Humalog, or insulin lispro, at the same 50% discount for the uninsured. Sanofi for its part has introduced a $99 a month program for the uninsured that covers 10 boxes of insulin pens and 10 10mL vials per month.
Now that all three major insulin manufacturers are offering discounted generics, are insulin prices about to come way down? The short answer is no. Insulin revenues will probably not go down because of this move for any of these companies. Here’s the long answer.
The move makes for some good press for Novo, and it may actually help some patients who have to pay out of pocket because they are uninsured or have high deductibles, but it won’t help structural pricing issues for insulin in the United States.
Novo was also very explicit in saying that its own generic offerings would not affect systemic pricing issues. It begins its press release saying that its $99 Cash Card program will allow the uninsured an adequate supply to cover monthly insulin needs for most people with diabetes. Plus, its follow-on brands will be offered at a 50% discount.
This all sounds great, and indeed it is for those with copays above these amounts and those who are entirely uninsured who pay out of pocket, but for the vast majority of people in the US who are insured, there isn’t much of a benefit here. The structural problems in insulin pricing reach back to health insurance companies at the root, not manufacturers or pharmacy benefit manager middlemen. Here is what Novo says on the matter in its unambiguous warning that this is only a short term fix:
While we will continue to do what we can to help address affordability challenges in the short-term, changes within the system are required to make sustainable and meaningful affordability a reality. What a patient pays for medicine is influenced by insurance benefit design and pricing. While Novo Nordisk has acknowledged the role of list price, more needs to be done to improve how insurance benefits cover vital medicines, especially through high deductible health plans. Those plans push list prices to patients to fulfill a deductible, which sometimes means paying thousands of dollars.
The key sentence here is the second one. “What a patient pays for medicine is influenced by insurance benefit design and pricing.” What Novo is saying is that how insurance companies price medications is out of its control. That is because whether a certain drug is included in the insurance formulary is not up to drug manufacturers. It’s up to the whims of insurance companies and their pharmacy benefit managers who are not required to include all medication that are FDA approved for a specific indication.
In many cases, insurance companies have outright acquired pharmacy benefit managers as is the case with Cigna (CI), which acquired Express Scripts for $54 billion at the end of 2018. By doing so, Cigna now has complete control over what drugs to include in the Express Scripts insurance formulary. How do insurance companies like Cigna decide which drugs are included in the formulary? By whichever company or companies offer the highest rebates from their list prices. This is why manufacturers keep insisting that while list prices keep rising for insulin, the realized price for these drugs keep falling as insurance companies keep squeezing manufacturers from the rebate side.
Since the last time I covered this issue back in May, not much has changed. On the Caremark CVS (CVS) formulary for example (page 3) as of August 1, Novolog is included, but Humalog is not. This is simply because Novo gives CVS a higher rebate than Eli Lilly offered for Humalog. It’s really not that complicated. This pushes up the price for Novolog obviously, but since patients with coverage don’t suffer out of pocket expenses, they don’t feel the higher prices directly other than in higher insurance premiums. Putting two and two together though is a different matter. Next quarter’s formulary is not up yet, but the link is here for those who want to check when it becomes available.
On the Express Scripts formulary it’s arguably worse. There is an explicit list of excluded medications, not because they don’t work as well, but simply because the manufacturers offered less of a rebate. Notice that on the express scripts formulary, insulin lispro, the generic form of Humalog that is manufactured by Eli Lilly and sold at a 50% discount, is explicitly excluded.
While one could theoretically argue that a generic manufactured by a different company could have subtle differences with the same branded drug, generic insulin lispro and Humalog are not only molecularly identical drugs, but they are manufactured by the very same company with the same exact facilities and processes. Any diabetes patient who prefers Humalog over other insulin analogues would do equally well with insulin lispro, which unfortunately is excluded.
This also helps explain why Humalog sales kept climbing since its patent expired in 2013. True, competition has not arisen until 2017, but that’s not the whole story. 2013 sales of Humalog were $2.6B (page 42) versus 2018 of nearly $3B at the end of 2018, a strong 15% rise in the face of generic competition that took a long time to materialize and still hasn’t impacted sales much. As we see with the formularies, generics can be excluded so as to pocket more money for the PBMs and insurance companies.
If we look into Eli Lilly’s previous quarterly report, we also find that sales statistics for insulin lispro, its in-house generic Humalog offered at a 50% discount, are buried (page 44) within sales of Humalog itself. Granted the latest report only incorporates May and June for insulin lispro, but investors may want to watch to see if Lilly publishes lispro sales figures separately. Perhaps the company is subsuming it under Humalog sales because they are low, which would mean tha the discounted insulin isn’t making it to market much.
Total sales of Humalog + lispro however, have been finally falling, down 15% year over year last quarter in the United States. Lilly is blaming the decline on higher rebates, Medicare Part D coverage mandates, and patient affordability programs. In-house insulin lispro is part of the affordability program initiative, so the company does admit it’s having some sort of impact. It’s just not clear enough for investors to assess it yet at this point.
While Novo’s joining the in-house generic insulin bandwagon is certainly not a bad thing and it will help some, especially the uninsured or those with a high deductable, it will not solve the structural problem of spiraling insulin costs. That has to do with insurance companies having near absolute power to including or exclude whatever they want on their formularies. In this way they can extract higher rebates from manufacturers, who in turn are seeing lower realized prices for insulin regardless of how high list prices go. Since formularies don’t matter for the uninsured, Novo, Sanofi, and Eli Lilly can offer in-house generic alternatives without sacrificing much revenue or market share. It gives them good press and makes it look like they are combating the pricing problem, which in a small way they are, but in order for the main problem to really be dealt with, insurance formularies need to be streamlined.
In a word, if insurance companies or PBMs all must include all drugs on their formularies that are FDA approved for whatever indication, then we’d start to see prices really go down. Insurance companies would not have any leverage to press for higher rebates, which raise list prices. All medications would compete for market share based on how good they are and not on how much money drug producers can front just to keep competition out of a particular coverage plan. So is Novo’s move bearish for the stock? Certainly not.
A mandate to formularies to include all drugs that are approved would do the trick, and at that point insulin revenues would start to fall. In a world where you have a system where people are required to purchase insurance anyway by law, limiting these companies’ bargaining power with manufacturers by mandating them to include all FDA-approved drugs on formularies would make a bit of sense. At that point, investors may want to sell health insurance of PBM stocks, because they would be the ones to get hit in such a scenario.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.