A step closer

A step closer

Yesterday according to the Wall Street Journal the European Commission approved a lower-priced “biosimilar” version of Johnson & Johnson (JNJ) and Merck’s (MRK) Remicade treatment for rheumatoid arthritis.  Writing on the event in today’s Journal Jonathan Rockoff made a statement that should be read and reread by every insulin company; “By allowing so-called biosimilar versions, cost-conscious governments aim to replicate the success that generics have had slowing spending on traditional medicines.”

The fact is nearly everyone except the insulin companies realize that biosimilar insulin’s are coming and there is nothing these companies can do to stop that. Yet it amazes Diabetic Investor the extent these companies have gone to and the explanations they have come up with in attempt to convince stakeholders and analysts that biosimilar insulin isn’t a threat.  Now it’s understandable that Sanofi (NYSE:SNY), Novo Nordisk (NYSE:NVO) and Lilly (NYSE:LLY) would follow this path it is pretty much standard operating procedure. The bigger question is not what they saying publicly but how or if they are planning ahead for this event.

Yes this seems like a very stupid question until you consider this is the wacky world of diabetes where anything can and usually does happen. History and gray hair tells Diabetic Investor that companies in this space are very short term oriented and this focus on the short term blinds them from planning for future events. Just look at the glucose monitoring companies who for years ignored the fact that their market was transforming from a medical device market to a commodity market.  Or look at a company like Lilly who ignored what Novo was doing and all of sudden found themselves at the bottom of the insulin food chain.

Over the next two to three years Lantus, the world’s number one selling insulin, will see its patent expire as well as the patents for Humalog and Novolog. The products in develop to replace them are more than three years away which basically means Novo, Sanofi and Lilly better be planning ahead or there in for a very rude awakening. As Diabetic Investor has pointed out on more than one occasion the mere threat of generic insulin will give payors even more control over the future profits of the insulin companies. As we noted yesterday the balance of power no longer resides with the makers of insulin.

Now here’s a shocker Diabetic Investor actually believes that of all the insulin companies Lilly, that’s right Lilly, is best positioned for the coming of generic insulin. With a biosimilar of Lantus on its way the company seems to have taken the path better to go with flow rather than fight the reality of the future.  Based on everything the company has said and done the strategy seems to be get profits where they can until their pipeline of new products is ready to hit the market. That it’s ok to accept the lower margin a generic offers until higher margin products come along.  Now it remains to be seen whether this pipeline is as good as everyone else seems to think it is, still the company seems to have a strategy while Sanofi and Novo seem ill-prepared.

In a strange way the competition between Sanofi and Novo has opened the door for Lilly. Sanofi for years made it crystal clear they wanted to dethrone Novo as the most dominate global diabetes company. This obsession with overtaking Novo hasn’t exactly gone as planned as the company other than Lantus can’t seem to get anything right. Their attempt to enter the device space was a disaster, Apidra is another failure and their GLP-1 is basically a Victoza copycat.  Yes the pipeline looks intriguing but they have nothing in their late stage pipeline that will come anywhere close to replacing the damage that will be inflicted when a generic version of Lantus hits the market.

As we noted just yesterday Novo too is fighting a war on multiple fronts and even had the FDA not thrown a major monkey wrench into their strategy the company still has several structural issues. Not the least of which being can they adapt to the new world of reimbursement, where price trumps performance.

It’s true that Diabetic Investor has been tough on Lilly’s CEO and many times with good reason but perhaps he was more visionary than we originally thought. Why spend huge amounts of capital developing new and innovative therapy options when the reward is dubious at best. Why  put up with an ultra-conservative FDA an agency that is only adding to the risk and basically turning America into a third world country when it comes to diabetes devices and therapy options. Better to spend precious capital on developed markets even if that means the margins are lower than what the company is used to in the past.

Long ago Diabetic Investor warned BGM companies that the light at the end of tunnel was a freight train at full stream which was headed straight at their cash cow. Naturally they ignored this warning and look where they are at today. This same freight train has changed tracks and is now headed straight at Sanofi, Novo and to some extent Lilly.  Sanofi and Novo better wake up before it’s too late as just as there was no stopping the impact this train had on BGM, there is no stopping the impact it will have on insulin companies.