Novo Nordisk Drug Price Pledge Won't Be The Last
(Bloomberg Gadfly) -- One $80 billion-plus company is a pioneer. Two make a trend that can't be ignored.
Novo Nordisk A/S announced on Monday it will no longer raise individual drug prices by more than 10 percent within a year. It joins another pharma giant, Allergan plc, which made a similar pledge in September. The Danish diabetes drugmaker also plans to link the costs of its drugs to the results they deliver for patients.
Novo Nordisk is facing particularly rough circumstances -- it is the world's largest maker of insulins as pricing pressure mounts in the diabetes market -- which likely prodded to take this action. But others who still deny the new pricing reality will be pressured to follow.
Novo Nordisk shares are down 40 percent year-to-date, to a level last seen in 2013. In October, severe diabetes-drug pricing pressure in the U.S. forced the company to cut its long-term operating profit growth target in half, from 10 percent to 5 percent.
Diabetes is an enormous consumer market, and many patients use these medications daily to manage the disease. They feel shifts in drug prices acutely, which makes diabetes drugmakers a prime target for critical politicians such as Vermont Senator Bernie Sanders.
The size of the market and the number of competing medicines available give pharmacy benefit managers (PBMs) and insurers a big incentive to drive down prices and ample levers with which to do so.
PBMs have managed to prod 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 percent 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. 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 tying prices to outcomes, Novo will ideally reduce downside for payers and realize upside if its drugs work. It's a way for Novo to essentially bet on its own medicines. If these moves help Novo stabilize its relationships with payers and stave off negative headlines, then they will likely prompt imitation.
Not every company has it quite as bad as Novo. Those with medicines in less-mature or less-competitive areas aren't feeling the pricing pinch as acutely -- yet.
But diabetes is just the most acute example of a new era of diminished pricing power across pharma. Pressure is ramping up in the blockbuster inflammation-drug market, and even cancer drugs are unlikely to be immune 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 mean any double-digit price hikes pharma companies do try will come under even greater scrutiny. Until recently, such annual price hikes were par for the course in the industry. Public disavowals like Novo's -- and the fact companies are betting they can survive without such price hikes -- will only stigmatize them further.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story: Max Nisen in New York at email@example.com.