Back in a big way

Back in a big way

This morning Lilly (NYSE:LLY) is holding their annual meeting for the investment community outlining their strategic business goals. Looking at their diabetes franchise it’s becoming increasingly clear that the company is taking a much different approach to the market than the competition; an approach that’s based on the new economic and scientific realities of the diabetes marketplace.

As everyone knows Diabetic Investor has been critical of the company for their lack of innovation.  Rather than develop innovative therapy options that were clearly differentiated from therapy options already on the market, the company has a pipeline of copycat, me-too and late to market drugs. A perfect example of this was their entry into the very crowded DPP4 market with Trajenta®.   Besides coming to market well behind Januvia and Onglyza the drug is starting to gain some traction in the market not due to anything special scientifically rather largely due to Lilly’s aggressive pricing of the drug.

This in a nutshell is the essence of the company’s entire diabetes strategy. Lilly understands what payors understand, namely that there really isn’t much difference between all the DPP4’s in terms of performance. Basically all of these drugs do the same thing the same way. Yes there are subtle differences between the DPP4’s but in reality a patient wouldn’t notice much difference whether they are taking Januvia, Onglyza or Trajenta. Put even more bluntly the DPP4 market is transforming into a commodity market where price is more important than performance.

Perhaps the most telling slide shown today by the company was one entitled competitive landscape in the United States which basically compared Lilly’s portfolio of diabetes drugs to the competition. Unlike the competition Lilly is the only company that has a compound in every category – DPP4, SGLT-2, GLP-1, short and long acting insulin. This smorgasbord approach gives the company something the competition doesn’t have, leverage with payors.  It’s not unrealistic to believe that once the drugs under development actually reach the market and we see no reason why they shouldn’t, that the company could offer payors a package deal on the entire portfolio.

Since all the drugs are competitive from a performance perspective the company can offer payors better pricing by taking the portfolio of drugs as a whole rather than competing in each individual drug category. This strategy besides fitting nicely into the new economic realities of the marketplace also places the competition on the defensive as they cannot match Lilly’s comprehensive portfolio of diabetes treatments.

This strategy also has another benefit as it mitigates regulatory risk. By developing basically copycat drugs that have already blazed the regulatory pathway Lilly knows what the agency is looking for and can eliminate compounds that fail to meet establish standards. While developing innovative therapy options are exciting it is also a very risky and costly proposition especially with an ultra-conservative FDA.  Again given this environment Lilly understands that it’s just not cost effective to go out on a limb. Simply put the risk even if successful does not justify the possible reward.

As Diabetic Investor has been stating for some time the diabetes marketplace like all of healthcare is changing.  Companies are no longer being rewarded for developing innovative therapy options and to be frank the drugs available to treat diabetes work just fine. It’s also true that over the past few years we have seen only incremental improvements in the options available. The GLP-1 market is a perfect example of this, when Byetta first came to market it was innovative. Today besides Byetta there is Victoza and Bydureon, the main differences not being performance but dosing options. While a once-weekly dosing option is more patient friendly from a performance and outcomes perspective the patient wouldn’t see much difference whether they are on Victoza or Bydureon.

The bottom line here is that Diabetic Investor is going to do something we rarely do, admit we were wrong about Lilly. The fact is they are one of the few, perhaps the only company in diabetes, who sees not just where the market is but where it is going. They understand that outstanding science is no longer the key and that the market is transforming.  They understand that as long as performance is comparable, price is now the driving force between who wins and who loses.  Frankly it’s hard to argue with this strategy and from our perspective it looks like Lilly is back and back in a big way.