A Battle Between Heavyweights

A Battle Between Heavyweights

This morning both Lilly (NYSE:LLY) and Novo Nordisk (NYSE:NVO) reported 2014 fourth quarter and full year results. Here is what we learned.  Pricing in the insulin market has become very complex yet the net take away is this- payors are putting the screws to companies demanding and receiving better overall terms and ultimately lower overall prices. This is something that isn’t going to change and likely will only get worse.

The companies themselves are caught between a rock and hard place and however unwillingly are contributing to the problem. Perhaps the perfect example of this is the many questions Novo faced on how aggressive Lilly was being with their new long-acting GLP-1 Trulicity™.  Analysts are worried that Trulicity will cut into one of Novo’s few bright spots sales of their once-daily GLP-1 Victoza®. Given that Novo has no long-acting GLP-1 even close to coming to market they should be very worried. By being aggressive Lilly has created almost the perfect storm for Trulicity, preferred formulary position combined with superior performance. Now Novo could fight back and be even more aggressive with Victoza pricing/rebates but this in essence is the problem as it creates what every drug company wants to avoid, an all-out no holds barred price war.

At least Novo was smart saw this was coming and is repositioning Victoza as treatment for obesity.

One area where the battle will be no-holds barred is the insulin market and it doesn’t matter whether it’s short or long acting insulin. Here just based on depth of portfolios we’re giving Lilly a slight edge. This small advantage really has more to do with Novo’s FDA issues with Tresiba® and Lilly having a biosimilar insulin glargine waiting in the wings. Yet the company impacted most here is our wine drinking friends in France, Sanofi (NYSE:SNY) and their soon to be launched inhaled insulin Afrezza. Given the intensity of the price/rebate game we just aren’t sure how Sanofi can compete with either Novo or Lilly without using price as a weapon. As we noted before all the pieces are in place for an all-out price war, a war where there will be no winners but payors.

This coming price/rebate war in insulin and Afrezza’s very poor formulary position almost guarantees that the drug won’t come close to Sanofi’s already lowered expectations for the drug. The harsh reality is the insulin market is about money and while inhaling may be preferable to injecting, most patients will be faced with the decision; do they pay more out of pocket for Afrezza or do they (excuse the play on words here) stick with their current short-acting insulin that comes with either no out of pocket or a very low co-payment.

Another company impacted by all this isn’t yet in the insulin market and that’s AstraZeneca (NYSE:AZN). Without insulin Astra is actually in a more difficult position than Sanofi as at least Sanofi knows which battlefield they are fighting on. Astra cannot compete head on with Lilly as they lack insulin in their diabetes portfolio, so they are forced to fight on multiple fronts at the same time.

This in short shows the brilliance of Lilly’s diabetes strategy as it forces the competition to make some very difficult decisions. Novo, Sanofi and Astra must choose where and when to fight, they must choose just how much margin they can sacrifice to maintain share. Basically they are constantly playing defense and while there are times when the defense scores the goal of a defensive unit is to prevent the other team from scoring.  Looked at in the diabetes drug market it’s difficult to gain share when a company’s defensive unit is always on the field.

Still as we have noted many times as brilliant as Lilly’s strategy looks on paper we have no idea if it will work in the long run. The fact is everyone and we do mean everyone is fighting for share and whether it’s through higher rebates or just plain price concessions or both, the much dreaded price war that no one wants but everyone is anticipating seems almost a self-fulfilling prophecy. The simple fact is these companies don’t have many options as payors hold the keys to the kingdom and they aren’t opening the doors unless a company is willing to play ball. And when it comes to playing ball it boils down to one thing, money.

Given their respective histories in diabetes, depth of portfolios, market presence and brand name awareness Lilly and Novo Nordisk are two heavyweights contenders while everyone else are mere pretenders. Novo would be well to consider buying their way into the oral medication space as that would set up on the greatest fights in diabetes history. Still even without orals Novo is well positioned product wise for where diabetes treatment is headed in the future. Being realistic we just don’t have faith that Astra is committed to this space for the long term. Sanofi has so many problems to overcome its difficult seeing how they will compete over the long term.

Lilly is back in a very familiar position leading the way in the diabetes market, although this time around the circumstances are vastly different than the last time they were in this position. In an ironic twist they are taking a page out of the Novo playbook, when Novo decided to become aggressive in the US years ago. Lilly is taking the game to the competition and has a take no prisoner’s attitude.   They are also well aware that Novo in particular won’t go quietly into the night and they must press their advantage whenever they can.

A word of advice to everyone watching this play out, the diabetes drug market is not for the faint of heart this is going to be a series of very bloody battles.  So fasten your seat belts this is going to be a very bumpy ride.