A Second Look

A Second Look

Yesterday besides Lilly (NYSE: LLY), Merck (NYSE: MRK) also reported third quarter results which for their Januvia franchise came in as expected, basically treading water. After reading through the transcript of the Merck call we decided to read the transcript for the Lilly call as well even though we listened to that call. As they say in football based on further review …..

Lilly and Merck besides being in diabetes each has a blockbuster diabetes franchise. Januvia for Merck and Humalog for Lilly. While in different categories Januvia is a DPP4  Humalog short-acting insulin, both share another dynamic – maintaining share and reasonable margins isn’t easy. Look at both transcripts and count the number of times each company mentioned pricing pressure, discounts and rebates.

Back in the day we knew of one company that did shots every time their CEO used the phrase back in the day. Well if we updated this drinking game to include the rebates and discounts let’s just say it would be one heck of a hangover. This is the conundrum facing every diabetes drug company – do they go for volume hoping to make up for lower margins with increased share – or do they try to maintain margins and risk losing share?

The facts, yes those pesky facts again, indicate that as hard these companies try to establish a performance difference between their offering and the competition, the competition fights back using a powerful weapon; price. Look at Invokana, Johnson and Johnson’s (NYSE: JNJ) SGLT2 vs. Jardiance Lilly’s SGLT2. Given the EMPA-REG data, hard data that JNJ does not yet have, one would think Jardiance would have an edge and be gaining on Invokana. That the SGLT2 class would be growing because of this data, as most experts believe all SGLT2’s will produce cardiovascular benefits.

Well it hasn’t gone as planned. Yes, the SGLT2 class is growing but not as fast and by as much as Lilly expected. Nor is the company gaining as much share as anticipated either. Why? As JNJ noted when they reported revenues for Invokana DECLINED due to .. get ready to drink.. discounts and rebates. Simply put Jardiance apparent performance advantage was negated by JNJ’s willingness to sacrifice margin to maintain share. This scenario is being played out in every diabetes drug category.

The price war that no one wanted is here and the culprits are the companies themselves. Listen we can’t blame them either as price, rebates and discounts are all the only weapons they have to fight with. Even when it looks like a drug has a performance advantage that advantage is negated when the competition fights back with higher rebates and/or bigger discounts. Why is Sanofi (NYSE: SNY) losing nearly every 2017 formulary battle for Lantus. Lantus is an outstanding drug with a proven track record. Why are they losing? Do we really need to say it?

Now we hate to be caption obvious here but the longer the market stays this way, and we see no end in sight, the greater the pressure and the more likely it is we’ll see some serious collateral damage. Sanofi is top on the list closely followed by AstraZeneca (NYSE: AZN). Sanofi just doesn’t have the portfolio or talent to compete while AstraZeneca lacks a coherent strategy and has frankly squandered their opportunity. Just as frank both companies should seriously consider getting out of diabetes entirely but neither will as it just makes too much sense and we can’t have any of that.

More than likely each company will waste valuable resources trying to put Humpty Dumpty back to together again. They will try to convince everyone they can have a Lilly like turnaround. The big difference here is that Lilly has deep roots in diabetes and had an epiphany.  All Sanofi and AstraZeneca have is hubris combined with willful blindness.

Novo Nordisk (NYSE: NVO) will survive but is in a very tough spot as they are fighting the war on multiple fronts. Victoza their once-daily GLP-1 has done well but now with three once-weekly’s available growth is slowing. Novolog is in a cage match against Humalog. Levemir and Tresiba faceoff against Lantus, Toujeo and now Basaglar.  They have no oral diabetes drugs yet and have only just begun to right size their organization. Other than that Mrs. Lincoln did you enjoy the play?

The reality here is no matter how many times we look at this it doesn’t look any better, kind of like last night’s Cubs game. Yet unlike the Cubs who have another game tonight which can level the series, diabetes drug companies cannot level the playing field. Payors have a stranglehold on who wins the share war and they aren’t shy about pressing this advantage. The drug companies only add fuel to this already out of control fire by willingly caving to the demands of payors. So round and round we go.

As Momma Kliff used to say; “This is the problem with ugly, it can only be masked or hidden for so long, eventually someone will turn on the lights.” First look, second look it doesn’t matter that light switch is being moved to the on position.