An Earnings Trifecta – Novo, Bayer and Sanofi Report
With Bayer, Novo Nordisk (NYSE:NVO) and Sanofi-Aventis (NYSE:SNY) all reporting earnings this morning all the major diabetes players have now reported 2011 first quarter results. Although not necessarily in the order of prominence it’s appropriate we take a look at what Bayer had to say, as they were the last of the big four glucose monitoring companies to report. Not surprisingly Bayer, joins LifeScan and Abbott (NYSE:ABT) as the beneficiary of Roche’s continued slide in the US market. Given how badly Roche has done, being the only major player to report a sales decrease in the US for the quarter, Diabetic Investor believes out of the spirit of kindness Bayer, LifeScan and Abbott should send Roche one huge thank you note and some flowers, it’s the least they can do.
According to the Bayer press release; “The Medical Care Division benefited especially from increased volumes of the ContourTM line of blood glucose meters (Fx adj. +14.3 percent).” Now before everyone jumps for joy and begins to believe that somehow the glucose monitoring market has improved, it’s important to consider a few points. First, while Roche may be the gift that keeps on giving, their share in the US will not go to zero no matter how hard management tries. Second, it’s equally important to note that results for the first quarter of 2011 look better when compared to a very bad first quarter of 2010. Third, market conditions continue to be problematic and will likely continue to deteriorate. Fourth and finally, the market will become even more competitive as Sanofi-Aventis is set to enter the US market late in 2011.
Listening to the Sanofi call a few key points came across. Their entry into the BGM market continues to experience unexpected delays mainly due to the FDA. While the BGStar® and iBGStar® was launched in Germany this month and will be launched in France next month, the key to their success in BGM rest here in the US. Unfortunately the company is learning that as competitive as this market is, the FDA and their overly conservative nature isn’t helping matters any. Simply put it’s hard to compete when the main regulatory agency won’t let you enter the market. This problem will eventually be solved but Sanofi management must be sitting around wondering why the FDA is taking so long.
Looking at their diabetes pipeline management gave a glimpse of their marketing strategy for Lixisenatide, their once-daily GLP-1 which they plan to submit to the FDA in the second half of 2012. Understanding that Lixisenatide will be the fourth entry into the GLP-1 market, behind Byetta®, Victoza® and soon Bydureon®, the company is already positioning the drug as an easier to use and less expensive version of Victoza. This also falls into the company’s started position that they want to overtake Novo as the dominate global diabetes company.
As far as their main diabetes product, Lantus®, results were somewhat mixed, while sales increased slightly more than 13%, this increase was not necessarily due to increased share as the company did raise prices late last year. The company has also increased their SG&A spend for Lantus, after seeing Novo become more aggressive.
At some point Diabetic Investor believes Sanofi management needs to become less focused on beating Novo and more focused on their overall diabetes strategy. The central fact is everyone knows the company is gunning for Novo; the company has been very public about this. However, it’s about time they stared executing on their overall and very ambitious diabetes strategy and stop worrying about what Novo is doing. Sanofi management should realize that Novo isn’t going anywhere and is formidable competitor. Given the depth of the Sanofi strategy in diabetes, basically a cradle to grave strategy which goes beyond diabetes drugs and devices and into disease management, the company would be better served focusing on what components to this strategy are missing and how best to integrate all these moving parts. As we have noted previously the company’s strategy while ambitious can be attained IF they remain focused on the strategy and not what Novo is doing.
Looking at Novo, the company continues to chug along. While sales of modern insulin’s remain strong, it was sales of Victoza that impressed Diabetic Investor. According to their press release issued this morning; “Victoza® sales reached DKK 1,098 million during the first quarter of 2011 reflecting solid market performance in both Europe and the US. Victoza® has now reached a global value market share of 39% in the GLP-1 segment (source: IMS, February MAT value data).” There is no question that Novo is taking full advantage of Bydureon being delayed as the FDA. The company, like Diabetic Investor, also understands the growing importance and acceptance of GLP-1 therapy. Simply put they are putting on a full court press for Victoza and hoping to retain these inroads when Bydureon gets to market.
The company also has changed their tune somewhat on Degludec and DegludecPlus, as they are beginning to position the products as Lantus alternatives. With Lantus set to hit the patent cliff in 2015, and these drugs in Phase 3 trials the company senses and opportunity to grow their presence in the long-acting insulin market. While this seems like a sound strategy, Diabetic Investor believes both Novo’s and Sanofi’s insulin franchises face a greater threat from increasing GLP-1 usage. Hence the reason both companies are aggressively pursuing this category. With Victoza already on the market Novo currently has the edge here but they like Sanofi know that Bydureon is coming and as we had said all long just as once-daily administration trumps twice-daily administration, once-weekly administration will trump once-daily.
It’s worth noting now that all the major insulin companies have reported some negative longer term trends in the overall insulin market. Besides facing the threat posed by increasing usage of GLP-1 therapy there are some structural issues with the insulin market. Not surprisingly the market is facing increasing price pressure especially here in the US. As Novo noted during today’s call the company lost two key managed care contracts as Lilly (NYSE:LLY) has become very aggressive with their pricing as they try to buy share. Novo also noted that Sanofi has become more aggressive on the sales front which places greater pressure on the company. Novo management is now facing some critical questions. Do they risk lowering margins and begin discounting their insulin’s to compete price wise? Secondarily, do they increase SG&A costs and put more reps in the field? Neither option is all that pleasant and speaks volumes as to just how competitive the insulin market has become.
When looking at the US insulin market the facts are fairly obvious, pricing pressure is intensifying, SG&A costs are increasing and insulin usage is flat to declining; not exactly positive factors for the longer term. The reality is increasing GLP-1 usage will slowly eat away at the number of patients using insulin and the Type 1 market by itself is not large enough nor is it growing fast enough to offset this trend. The central fact is growth in insulin usage these past few years can be directly linked to a greater share of Type 2 patients beginning insulin therapy. Take away this critical market segment and all the insulin companies will have some very tough choices in the years ahead and will become even more reliant on international insulin markets.
In many respects the future of the US insulin market will follow the path of the US BGM market, where it becomes a battle for share and not market expansion. Although Diabetic Investor does not expect the insulin market to become a complete commodity market like the BGM market it will come close. Understanding this all the insulin companies will begin promoting non-therapeutic aspects of their insulin franchise, i.e. insulin delivery systems. Just as BGM companies became fascinated with technology, insulin makers are following suit developing what they believe are whiz bang insulin delivery systems that will make it easier for the patient to remain on insulin therapy.
While these newer systems will make insulin therapy easier for the patient they cannot stop the negative insulin market trends. Just as BGM companies never understood that greater usage had nothing to do with technology and more to do with lack of patient education; insulin companies will experience similar results. The reality is how insulin is administered is not the reason more physicians don’t prescribe insulin, the enemy isn’t the needle as many believe its insulin itself. Primary care physicians, who treat almost 80% of the diabetes population, understand that the majority of their type 2 patients will not follow all the necessary steps to use insulin safely and effectively. They know these patients do not monitor their glucose levels on a regular basis; they don’t count carbs and therefore are at greater risk of experiencing a serve hypoglycemic event. They also know that the patients who do practice effective insulin therapy will likely experience weight gain, which increases other health risks.
This is what makes GLP-1 therapy so compelling and so promising. The fact is GLP-1 therapy is very patient friendly. No need to monitor glucose levels, no carb counting, no complex dosing decisions or calculations plus the additional benefit of being at worst weight neutral and at best patients will experience weight loss. Perhaps best of all it’s NOT insulin and the reality is many patients will not use insulin as they view this as personal failure. As we said before patients are not averse to using injectable therapy options, they are averse to insulin.
These facts won’t stop Novo, Sanofi and Lilly from aggressively promoting all these new fancy insulin delivery systems and in the near term they will have a positive impact on the market. Longer term, however, these new systems will do little to change the forces that are now in motion. Bottom line here is Sanofi has more to worry about than what Novo is doing and Novo has more to worry about than Lilly buying share. The true threat to all the insulin franchises is already here and it’s called GLP-1 therapy.