Changing the Market for Orals: the Exubera Challenge

Investors are betting that the new inhaled insulin, Exubera, will simply take share from existing insulins. But managed care groups might prefer, given Exubera's likely cost and medical benefits, that it take share from the most expensive orals, the glitazones Avandia and Actos.

A pivotal Exubera trial proved superiority vs. the oral antidiabetic Avandia in certain users. If Exubera pricing is competitive, managed care would like to convert users to the new insulin. Wall Street isn’t buying the logic.

By Roger Longman

For managed care groups, the faster-than-expected FDA approval of inhaled insulin (Exubera) from Pfizer Inc. and Nektar Therapeutics Inc. hardly seems like good news: one more expensive large-molecule therapy adding to the growth of diabetes-related drug costs. Most marketed insulins are a relative bargain, at about 90¢ a day. But Sanofi Aventis’ sustained-release basal insulin Lantus runs managed care $3.75 a day (and is on track for $2 billion in global sales). The injectable peptide exenatide (Byetta) from Amylin Pharmaceuticals Inc. and Eli Lilly & Co. [See Deal] costs MCOs an average of $7.46 a day. And now comes Exubera—still unlaunched and unpriced, but which will undoubtedly go for a premium to injectable Lantus if probably a discount to Byetta. Cowen analyst Ian Sanderson projects a price of $4.00 a day; Friedman Billings Ramsey’s Jim Reddoch puts it at $4.55. Analysts and investors project the drug’s worldwide sales by 2008 anywhere from $650 million to nearly $2 billion—with most of the money coming from the US (See Exhibit 1). With the number of newly diagnosed diabetics increasing steadily, managed care’s cost concerns seem legitimate.

That’s why an intriguing editorial in the Journal of Managed Care Pharmacy, by Frederic Curtiss, PhD, implying that managed care should position Exubera not solely against insulins but the most expensive kind of oral therapy, the glitazaones pioglitazone (Actos) and rosiglitazone (Avandia), should raise eyebrows. Diabetics poorly controlled on their inexpensive generic oral drugs, sulfonylureas and metformin, generally move to the glitazones Actos from Takeda Pharmaceutical Co. Ltd. , co-promoted by Lilly [See Deal], and Avandia (in combination with metformin, Avandamet), from GlaxoSmithKline PLC . But if, thanks to Exubera’s painless delivery system, they are willing to move to insulin directly from the generics, or at least not stay on the glitazones as long as most patients otherwise do, maybe managed care could in part substitute Exubera’s costs for the glitazones.

And the glitazones cost managed care plenty. Actos was the tenth biggest drug expense for private payers; Avandia, number 14. Actos costs the average MCO $5.13 per day; Avandia $4.55. Both are generally Tier 2 or "preferred brands," which means that—relatively speaking—MCOs aren’t setting up high barriers to getting these drugs, despite their cost.

Theoretically, insulin could compete with the glitazones, if patients would move to insulin. But in the US they don’t—and not merely because needles scare them. Most GPs don’t really know how to handle diabetics, given the somewhat complicated daily self-testing regimens. And they certainly don’t like to lose patients to more expert diabetologists and endocrinologists.

But Exubera simplifies matters: it doesn’t hurt to take it and while glucose monitoring is recommended on the label, it probably isn’t necessary for those patients simply taking low doses of mealtime insulin, not a full basal-and-mealtime insulin regimen.

Curtiss notes that one of Pfizer’s pivotal studies did pit Exubera against Avandia in uncontrolled Type 2 diabetics—and found that Exubera did better at getting patients to the requisite levels of hemoglobin A1c. And since many Type 2 patients are not well controlled, Pfizer can position the drug as a safer, more effective alternative to orals—a vastly larger market. Moreover, Pfizer will have fewer competitive glitazone reps to worry about: Lilly will stop selling Actos in September according to its contract with Takeda (on the other hand, the same reps will probably be selling Byetta, which is also competitive to Exubera).

Certainly there’s some support on Wall Street for the idea that Exubera’s gain could be the glitazone’s loss—though not a lot of support, and the support there is isn’t direct. For example, the big news from Cowen & Co.’s survey of 600 diabetics wasn’t the new drug’s threat to the glitazones, but that Exubera would take a bigger than expected chunk of the current insulin market. Despite the fact that they’d still have to take daily injections of basal insulin, Type 1 diabetics said they would probably switch to Exubera for mealtime uses.

But the survey also found that Type 2 diabetics not currently on insulin—the patients directly representative of the glitazaone market—would be willing to take Exubera: 94% of the 200 surveyed said they’d "probably" or "definitely" begin taking insulin earlier than they would if they only had injectable insulin available (See Exhibit 2). The open questions: how much of that glitazone market do those "probablys" and "definitelys" represent? And how aggressively would managed care try to switch uncontrolled diabetics from the glitazones to Exubera?

Right now the smart money is betting "not much" to the first and "not aggressively" to the second. Notes one major fund manager: very few analysts are "estimating this drug will do more than $1-2 billion. And with Exubera’s expected pricing, you can get to that level of sales simply by converting insulin users." He continues: "Maybe a few oral users will convert—but it will be those on the margin." Agrees James Flynn at Deerfield Partners: While "most people with Type 2 diabetes are not well controlled…there is no evidence that our health care system can effectively manage the treatment of diabetes. The US is just about the worst [country] in the world with an average time to insulin therapy, which is indeed much cheaper and much more effective than glitazones….No one can get diabetics in the US to do anything they don’t feel like doing and there are no system incentives that are likely to change that." Indeed, he goes on, "there are no good examples of where managed care has swung a big enough axe in a market like this to really move share in a meaningful way."

Not that managed care disagrees. For Pfizer to really "clobber" the glitazones, says Curtiss, it would need to do two things: a second clinical study against either glitazone, but preferably Actos since it already has done one against Avandia, and charge less than $5.25 per day.

But it would also have to do one other thing, managed care executives note: it would have to match the rebates GSK and Takeda provide to MCOs and PBMs, rebates which can cut 10% or more off the effective pricing of Avandia and Actos. "Managed care is addicted to them," notes Curtiss. And since Pfizer’s gross margins on Exubera are nowhere near those of GSK or Takeda on their glitazones (analysts figure Exubera’s gross margins at about 65% in part because of royalty and manufacturing payments to Nektar), rebates will be costly to profits.

On the other hand, if Pfizer can begin to position Exubera as at least a credible—if not preferred—next step for diabetics uncontrolled with sulfonylureas and metformin, it will be the first large-molecule drug to compete directly in a primary care market with oral medicines. For managed care, the economics just might work well enough for them to help this revolution along.