- State of California building its own insulin manufacturing capacity
- Pharma margins under the microscope
The soaring cost of insulin has become a national scandal in the United States. In the past decade, the average price of a vial of the medicine has more than doubled – diabetics falling into medical debt or rationing their prescriptions are well documented. Now, amid a broader cost of living crisis, US lawmakers are working to introduce legislation that could cap insulin prices for some Americans while the state of California is even opening up its own manufacturing plant.
Given the sensitivity of pharmaceutical company earnings to price levels – especially for high-volume products like insulin – this could mean a change in tack is needed from the majors. Novo Nordisk (US:NVO) already flagged insulin price and volume challenges last year, but this could become more important for the bottom line as other areas struggle as well in current conditions.
The three main insulin manufacturers are Eli Lilly (US:LLY), Novo Nordisk and Sanofi (US:SNY). Diabetes is Eli Lilly’s single most profitable therapeutic area, and three of its five top selling therapies for the disease are insulin injections.
Financial burden
Last week, California governor Gavin Newsom announced the state would begin making its own insulin and selling it at close to cost so diabetic residents can access affordable treatment. Under the scheme, $50mn (£42mn) will be allocated towards the development of cheaper insulin products and $50mn will be used to build a manufacturing facility for the medicine. “Nothing epitomises market failures more than the cost of insulin," Newsom said.
This plan is not being universally welcomed.
“[Insulin manufacturing] is a scale business and I think that politicians who think they can come at this industry through alternative ways of manufacturing are a little bit short sighted,” said Michael Leuchten, head of European pharmaceutical research at UBS. “Now, whether that means a company like Novo Nordisk needs to have a 40 to 50 per cent Ebit margin is debatable.”
This is a significant income stream for major pharmaceutical companies: more than 30mn people in the US have diabetes and around 7mn need daily insulin injections to manage the condition.
The average cost of a single unit of insulin in the US is nearly $100 – compared with $7.52 in the UK. Many diabetics require three vials of the medicine per month. According to a recent study from Yale University, the cost of treatment is a “catastrophic” financial burden for around 14 per cent of insulin users. This means they spend 40 per cent or more of their income after food and housing on the medicine.
Several federal lawmakers have taken up the issue of insulin pricing in recent years, and there is momentum building behind the idea of limiting insulin costs for patients nationwide.
On 31 March, the Affordable Insulin Now Act was passed in the House of Representatives and is now awaiting approval by the Senate. If it ultimately passes, the bill would cap insulin copays – the out-of-pocket expense paid by insured patients – at $35 a month. People without private insurance or government-administered Medicare coverage would not receive subsidised medicine.
Critics have noted that the bill does not propose a cap on the list price of insulin, which is the price set by the pharmaceutical company.
However, there are signs that drugmakers are becoming more concerned about the impact of political scrutiny on their businesses. Early this year, it was reported that Eli Lilly spent more than $7mn lobbying politicians in the US capitol in 2021 – almost 30 per cent more than the year before. Meanwhile, Novo Nordisk spent $3.2mn in Washington DC, almost a quarter more than in 2020.
For their part, analysts say the financial fallout from US copay caps and other government-led price interventions would be limited for the big three insulin makers. This is because copay caps could force insurers to pick up a greater share of the tab, leaving drugmakers’ profits unchanged. Although California’s plan could theoretically take market share from pharma firms, it is unclear a localised manufacturing operation could achieve the economies of scale necessary to rival a multinational drugmaker.
At what price?
The question of how much a drug is worth, and how much a company should make from its sale, are as much about ethics as they are economics. When pharmaceutical firms are questioned over drug pricing, Leuchten at UBS said they would often cite the risky and costly process of research and development in the sector. In order to invest in their future pipeline, logic indicates they need current products to offer a healthy profit margin.
“But why have a 40-something per cent margin and not a 30 per cent margin? That’s a very difficult philosophical debate,” he said.
These questions are especially pertinent in the age of socially-responsible investing. Drug pricing can potentially restrict patients’ access to life-saving drugs, creating an ESG risk for pharma companies.
Companies seen to be price gouging or profiteering could face very real pressure on their shares, especially as markets await clarity on regulators’ next moves. This is why Karen Andersen, a healthcare strategist at Morningstar, said conversations about list prices are changing.
“I think the drug companies…are starting to think more about their pricing, and what message they’re trying to convey to doctors, to patients and to investors,” she explained. “Do they want to be perceived as a company that is pricing their drugs fairly? Or do they want to be thought of as a company that is trying to get the highest possible price that insurers would be willing to pay?”
There’s no easy formula for determining a 'fair' drug price – which is why some analysts have begun focusing on the issue of cost effectiveness. This type of analysis tries to determine what a drug is truly worth based on its clinical efficacy. Under this model, expensive (albeit highly effective) gene therapies could be seen to justify their prices because they have the potential to drastically improve the length and quality of a patient’s life.
Earlier this year, US biotech firm Biogen (US:BIIB) halved the price of its newly approved Alzheimer’s treatment Aduhelm following an outcry from patients, clinicians and pharma watchdogs. The Institute for Clinical and Economic Review (ICER) said in a report that the clinical benefits of the drug were not in line with its $56,000 price tag. "Too many patients are not being offered the choice of Aduhelm due to financial considerations and are thus progressing beyond the point of benefiting from the first treatment to address an underlying pathology of Alzheimer’s disease," said Biogen chief executive Michel Vounatsos.
So where do decisions like this leave diabetes drugs like Novo Nordisk's semaglutide which is seen as hugely effective but also too expensive?
“Sometimes there are drugs that are cost effective, but there are so many people afflicted with an illness that the world would be unable to pay to treat all of these people,” said Andersen. She uses the theoretical example of a miracle treatment for heart failure, which could justify a high per-unit price based on its lifesaving abilities. “But if you’re treating millions of people, that drug could end up selling $100bn a year, which would not be a feasible cost [for patients],” she said.
As rates of diabetes rise in the US and around the world, societies must decide how to fund treatment. Regulators could, in theory, force pharma companies to cut their insulin prices and take the hit to their margins, but this would be a highly controversial move. If the Affordable Insulin Now act is any indication, it’s more likely that policymakers will look to spread the cost of insulin more equitably across different stakeholder groups.
Investors with shares in the big three insulin makers therefore don’t have to lose sleep over the imminent introduction of punitive US price caps. But they should focus on the ability of these companies to bring effective new diabetes drugs to market.
Firms are often singled out for price gouging when they’re seen to be taking advantage of a lack of competition in the market. Investors can dodge the associated ESG risks by picking companies that aren’t depending too heavily on growing revenues of legacy products.
UBS recently downgraded Novo Nordisk’s shares to a sell in part because the company is too reliant on sales of a single diabetes product. “Novo management is guiding for flat medium term margin trajectory. We believe that is because the company needs to reinvent itself given the dependence on semaglutide (around 60 per cent of 2025 sales),” wrote analysts in a June note.
Pharma companies with the capacity for reinvention are best placed to weather regulatory storms.
