While we can’t say that AstraZeneca (NYSE: AZN) who reported results this morning has done much right when it comes to diabetes their results are almost a perfect picture as to what the diabetes drug market has become. A market that has fully commoditized and become a battle of rebates combined with discounts. Astra also reflects many of the mistakes made in this market and how these mistakes force companies to make critical choices.
It’s ironic that Bydureon, the company’s once-weekly GLP-1 and the product that brought them into the diabetes drug market has become somewhat of an afterthought achieving full year sales of less than $600 million. This is in sharp contrast to sales of Trulicity from Lilly (NYSE: LLY) which came to market well after Bydureon and achieved full year sales of over $2 billion.
The failure of Bydureon lead the company to become very aggressive with their top diabetes product Farxiga which reached full year sales of over $1 billion. Farxiga competes against Invokana from Johnson and Johnson (NYSE: JNJ) and Jardiance from Lilly in the expanding SGLT2 category. Its success has nothing to do with its performance as a strong argument can be made that it isn’t even the best drug in the category. No Farxiga has succeeded because Astra used a combination of rebates and discounts to win formulary position.
As the company stated in their earnings release;
“The first-half performance, with a sales decline of 1% to $206m, was adversely impacted by the Company’s level of participation in affordability programmes. Significant changes to the Company’s approach to these programmes, however, saw a much-improved performance in the second half, illustrated by Q4 2017 sales growth of 15% to $150m.”
Simply put in the first half of year the company didn’t compete hard enough, made changes in the second half which obviously worked.
Onglyza their DPP4 which competes with Januvia from Merck (NYSE: MRK) reached full year sales of $611 million and the following statement from the press release sums up their attitude about this category;
“Given the significant future potential of Farxiga, the Company continues to prioritise its commercial support over Onglyza.
The full-year performance reflected adverse pressures on the dipeptidyl peptidase-4 (DPP-4) class and an acceleration of ongoing Diabetes market dynamics, where patients are moving to medicines and classes of medicines with documented CV benefits.”
Looked at collectively these three drugs and the strategy Astra is implementing for each provides a clear picture of this market operates. The company has basically thrown Bydureon and Onglyza under the bus while throwing additional resources at Farxiga. They blew the advantage that Bydureon had being the first once-weekly GLP-1 to hit the market, they failed to bring its new delivery system to market soon enough which basically opened the door for Lilly who took full advantage of Astra’s mistakes.
Onglyza is another example of failure to execute. The drug should have come to market at the same time as Januvia but delays in approval cost Astra dearly. The reality is Astra never recovered from this mistake and when they did try to fight back using price as weapon Merck hit back hard and forever doomed the slim chance the drug had. On the plus side Astra has admitted this is a lost cause and is no longer throw good money into a bad market.
Farxiga however truly shows how the diabetes drug market works and the power held by payors. The only reason this drug has become a blockbuster is Astra paid dearly to receive favorable formulary placement. Had data alone be used to determine formulary placement Jardiance would win hands down. Neither Invokana nor Fraxiga have a data set that matches what Jardiance has and in many respects these two drugs are inferior to Jardiance. But in a commodity market performance doesn’t matter and price does.
The bottom line here is Astra has bet the ranch on Farxiga, given up on Onglyza and is only somewhat committed to Bydureon. Looking at their pipeline they really have nothing of substance in diabetes meaning either they plan to milk Farxiga until the well runs dry or they will buy new compounds, so they can stay in the space. Listen we couldn’t blame the company if they chose the former over the later. As their own results indicate the diabetes drug market is increasingly competitive and without massive scale there is no room for mistakes.
We have long maintained that the Astra diabetes portfolio which is devoid of insulin would make a nice fit with Sanofi (NYSE: SNY) or even Novo Nordisk (NYSE: NVO). That in the hands of either of these companies they could compete more effectively with Lilly who has the most comprehensive portfolio of diabetes therapies. Of the two Novo is the better choice as they remain committed to diabetes and based on recent actions seem ready to open their checkbook. Sanofi says their committed to diabetes, but their actions indicate otherwise.
The question is will Astra do what they should have done years ago, admit they made mistake getting into diabetes and sell the unit while it still has some value. Or will they make the mistake made by JNJ, hold on too long and destroy value. There really is no third option here.
Since it’s Friday and the big game is Sunday it’s time for our annual Superbowl prediction. Now a word of caution here as our track record predicting these games isn’t all that great. So please don’t take this to the bank or use this prediction when wagering. That being said- Eagles 33 Patriots 28. Have a great weekend everyone and enjoy the game. Dilly Dilly