Caught in the deal vortex

Caught in the deal vortex

Yesterday Sanofi (NYSE:SNY) reported first quarter results and reading through the transcript it’s hard not to come away believing that the Lantus gravy train is coming to end and that Sanofi’s days as a true player in diabetes are also coming to an end.  Take a look at some of the comments made by Sanofi CEO Chris Viehbacher;

“Couple of points on diabetes. There has been a trade shift with some of the wholesalers in the U.S. this is not just affecting us. There have been a couple of others. These are largely as a result of new distribution agreements that we have already signed last year. This has led to lower inventory levels in a couple of big wholesalers that effect on Lantus in the U.S. was about €70 million.”

“I think it’s fair to say that the diabetes market is becoming increasingly competitive. And I think some are pushing harder than others for market share. So far we haven’t seen anything on the horizon that would cause us to change our business outlook for the year. But there is definitely an increased competitiveness in this field.”

Obviously given Pfizer’s (NYSE:PFE) pursuit of AstraZeneca (NYSE:AZN) the subject of whether Sanofi would do a deal came up during the Q&A portion of the call and just as obviously the answers to the questions were pure corporate speak. The fact is all the analysts are beginning to wake up to something Diabetic Investor has been stating for some time, that when it comes to diabetes Sanofi is a one hit wonder and that one hit wonder is going off patent in 2015. That the diabetes pipeline, no matter how the company wants to spin it, has nothing that will come remotely close to replacing even a fraction of the revenue and profits generated by Lantus. That if the company do something and do it fast the very possibility exists that they will become irrelevant in diabetes.

Think about that last statement for a moment for Sanofi back in the day was very vocal about how they would challenge Novo Nordisk (NYSE:NVO) for supremacy in the diabetes space. Even more ironic back then Lilly (NYSE:LLY) was struggling in diabetes as they were at the time also on the brink of becoming irrelevant in diabetes. Fast forward to today and Lilly has righted their ship, Novo – even with a few issues- remains the dominate global diabetes player and it is Sanofi who is on the brink of becoming a non-issue in the space.

The main question now becomes can Sanofi perform a Lilly like turnaround or perhaps a better question do they want to? Using history as guide Diabetic Investor can’t say we’re overly confident the company without an acquisition can turn things around. As we have outlined many times outside of Lantus everything the company has touched in diabetes has failed. Making matters even worse is that other than Astra there really isn’t another diabetes company around who they could acquire that would meet their needs. Basically this means either they get into a nasty and costly bidding war with Pfizer or go to plan B, unfortunately there does not seem to be a plan B.

It will be interesting to see where the new head of the diabetes division takes the franchise. Will he do the corporate let’s cut cost two-step and attempt to maximize Lantus profits while he still can or will he be bold and pursue some sort of deal? Yet even if he wants to be bold can Sanofi a company who’s known for their inability to close deals get out of their own way.

Given the changing dynamics of the diabetes drug space this is one time Diabetic Investor wouldn’t blame the company at all if they took the easy way out, slashed internal costs and maximized Lantus profits while they still can. They know that a generic Lantus is coming, they know that prices in the space will continue to come under pressure, they know that try as they might they really can’t do anything else but Lantus, they know that the diabetes pipeline is weak and that the competition is in much better shape to meet the changing demands of the marketplace. As much as going after Astra makes strategic sense at over $100 Billion it doesn’t make financial sense.

One day it’s likely some will look back and talk about how Sanofi had the chance to change diabetes and failed. How they had what looked like a great strategy and just couldn’t execute, couldn’t get out of their own. That day isn’t far off, sad but very true.