UPDATED: Who's the diabetes price-cutting culprit: Lilly, Sanofi or Novo?

Lantus--Courtesy of Sanofi

What about that diabetes price war? When Sanofi ($SNY) announced that its franchise would suffer next year because of U.S. payer contracts, that was the natural follow-up question. If Sanofi had to boost its rebates to win coverage--which the company admits it did--then that means its rivals, including Eli Lilly ($LLY) and Novo Nordisk ($NVO) have, too.

And with that payer pressure unlikely to ease anytime soon, more and bigger rebates may be on their way. Or more exclusions--and those formulary decisions on high make life difficult for sales reps in the field.

Sanofi said Tuesday that its diabetes sales would be flat for 2015, thanks to those payer contracts. Lantus, the company's top-selling drug with more than $7 billion in 2013 sales, was able to win reimbursement in 90% of the U.S. market, CEO Chris Viehbacher--departed as of today--said during the third-quarter earnings call. "However, this did cost more in rebates," he said.

Viehbacher wouldn't name names, despite analysts' repeated questions about the competition. But in Lantus' segment of the U.S. diabetes market, the head-to-head rival is Novo Nordisk's Levemir. Novo executives have traditionally been less aggressive about discounting. But the Danish company's sales suffered after Express Scripts booted two key products--the GLP-1 drug Victoza and the 'modern insulin' NovoLog--off its formulary for 2014. They're still barred from that formulary--which is used by many, but not all, of the PBM's customers--for 2015. The two meds remained on the CVS Caremark formulary for 2014, however, and kept their places for 2015.

Still, Novo says it's not much interested in discounts, according to Leerink Swann analyst Seamus Fernandez. The company has increased discounts on Levemir in "a small number of accounts" to keep reimbursement. But executives "stated emphatically that they aren't offering significant incremental discounts," Fernandez said in a Wednesday investor note, adding that execs repeatedly said Novo has "little interest in pursuing exclusive contracts with payers in the U.S."

Novo reports earnings Thursday, which will offer some hint about price competition's effect on its sales--and about its pricing strategy going forward. Lilly's report last week, meanwhile, gives a hint at that company's approach. It's out to win payers over. The company's Humalog pushed NovoLog off the Express Scripts formulary, which, despite the lower prices involved, has helped with sales. The drug pulled in more than $2 billion for the first nine months of the year, up 10%--and Lilly expects the benefits to continue in 2015.

"[K]eep in mind that going forward, we'll likely see the impact both in terms of volume and price from the Express Scripts decision to put NovoLog off their formulary and put Humalog into preferred position," Philip Johnson, Lilly's investor relations VP, said during last week's earnings call. "[W]e continue to see very robust volume growth in this category and are very pleased to have very stable share and good robust volume growth as the market continues to grow. We project that trend to continue in the future."

Complicating matters is this, however: The market for basal insulins--which are long-acting products often supplemented with fast-acting insulins at meals--is about to change significantly. Sanofi is hoping to launch its Lantus follow-up Toujeo in the U.S. next year. Novo has its own follow-up, Tresiba, which is delayed till 2016, thanks to the FDA's demand for more safety data. And Lilly and its partner Boehringer have tentative FDA approval in hand for their Lantus biosimilar, though they can't launch till a patent fight with Sanofi resolves.

Sanofi's global chief of commercial operations, Peter Guenter, figures that an all-out pricing war won't happen. With Lilly, Novo and Sanofi all launching--or hoping to launch--new basal insulin products in the U.S., it's not in the companies' best interest to pump up rebates too much. "Lilly and Novo and ourselves are entering into the innovation phase in basal insulin," Guenter said during the third-quarter earnings call with analysts. "So I think it is not in the interest of the existing players to go for a race to the bottom."

Analysts aren't so sanguine. In an investor note Tuesday, Leerink's Fernandez cited "concerns over an emerging undisciplined price war." To Fernandez, impending biosimilars, together with "increased buying power of payers" has "clear near-term negative implications for the injectable diabetes market."

The competition isn't limited to insulins, either, with Eli Lilly's new Trulicity (dulaglutide) now in head-to-head competition with Novo Nordisk's Victoza. Fernandez figures that Lilly could end up as a market share winner, with Sanofi having the most to lose in a price war. Lilly's share is likely to be less profitable, however, the analyst says.

- see Morningstar's transcript of Lilly's Q3 call
- get the Sanofi transcript from Seeking Alpha

Special Reports: Top 10 best-selling diabetes drugs of 2013

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