A look down the road

A look down the road

This morning CVS Health reported earnings and noted that like Express Scripts they are making changes to which drugs they cover and which are excluded. Although the company did not reveal which drugs they planned on excluding from their formulary it’s a safe bet that some diabetes medications made the list. As we’ve been noting this is what happens when there are multiple drugs in each category, drugs which basically do the same thing the same way. Just as in the glucose monitoring area the balance of power belongs to payors and PBM’s as they control formulary position which translates into market share.

This is the reason Diabetic Investor remains convinced that the winners and losers in the diabetes drug market won’t be determined by which company has the “best” drugs rather by which company can right size their diabetes franchises to match the current pricing dynamic.

As much as we hate to dump on our wine drinking friends in France Sanofi (NYSE:SNY) is the poster child for what’s going on in the diabetes drug market. For years the company enjoyed the luxury of being the only game in town with Lantus. Today the company is facing a series of very difficult choices as Lantus extraordinary run is coming to an end. Besides having a biosimilar version coming to market, Sanofi faces a formidable competitor in Novo Nordisk (NYSE:NVO).

Before Olivier Brandicourt took over as CEO the company had hoped that Toujeo, Afrezza and LixiLan would offset the revenue lost by declining Lantus sales. Yet early sales results for Toujeo and Afrezza have disappointed while LixiLan has yet to be approved. Adding to their woes is the capital they are investing promoting Toujeo and Afrezza. Not to be redundant but this is the reason Diabetic Investor believes that Olivier will have little choice but to reduce head count outside of Europe.

At one point we believed that of all the diabetes drug companies Lilly (NYSE:LLY) was in the best position. The company has a complete portfolio of treatments, orals and injectables. They have a well-respected brand name plus a distinguished history in diabetes. The only issue facing the company was how the competition would respond, how vigorously they would fight to maintain share. Well as turns out very vigorously and again not to be redundant the price war that no one wanted has arrived.

Novo for their part should be commended for seeing the handwriting on the wall. In a brilliant move the company has repositioned Victoza as a treatment for obesity another, excuse the play on words, huge market. What makes this move truly brilliant is it really didn’t add any significant cost. This move has bought the company some time to see their pipeline progress.

AstraZeneca (NYSE:AZN) who we once thought had a chance to compete head on with Lilly has been on a roller coaster ride. On the plus side it looks as if sales of Bydureon are finally accelerating however at the same time sales of Onglyza are falling. Fraxiga sales look promising yet the company faces fierce competition with Invokana from Johnson and Johnson (NYSE:JNJ) Further complicating the situation for Fraxiga is the recent concerns raised regarding the entire SGLT2 category.

Looking into the future we see little in the way of relief as the rising cost of medications continues to be a major issue. The reality is payors won’t be shy using the power they have to demand and likely receive even greater price concessions from diabetes drug companies, who in turn will have to find ways to maintain reasonable margins. The simple truth is success or failure will come down to what it always comes down to, a well thought out strategy and solid leadership. Let’s see who will bring their A game.