Defending the indefensible

Defending the indefensible

This morning Lilly (NYSE:LLY) issued a press release in an attempt to provide their perspective on the Amylin (NASDAQ:AMLN) lawsuit. As was widely reported yesterday Amylin is suing Lilly claiming that Lille breached their strategic partnership agreement. According to the Lilly release; “The lawsuit alleges that Lilly is not using commercially reasonable efforts to support the success of BYETTA® (exenatide injection) and ultimately, BYDUREON™ (exenatide extended-release for injectable suspension).”

The release also contain the following passage; “Regarding BYETTA and Tradjenta™ (linagliptin) tablets, our broad market experience teaches us that injectables like BYETTA generally compete with other injectable treatments in the class rather than with oral anti-diabetic agents.

No breach of contract – The Lilly and Amylin alliance contract specifically provides for Lilly’s ability to develop and market a full range of diabetes treatment options for patients.” (Text enhanced with bold by Diabetic Investor.)

How Lilly can claim that Tradjenta which is a DPP-4 inhibitor, basically the same drug as Januvia from Merck (NYSE:MRK), does not compete with Byetta or Bydureon just does not make sense and frankly is an out an out misstatement of the facts. The fact is DPP-4’s and GLP-1’s are competing for exactly the same patient population, namely Type 2 diabetics. While it is true GLP-1’s are also competing against insulin, they are competing for Type 2 patients who currently follow some type of insulin therapy. It should be noted that neither DPP-4’s nor GLP-1’s are approved for use with Type 1 patients.

In yet another ironic twist which could only happen in the diabetes world, Amylin could get some help here form their main competitor in the GLP-1 space, Novo Nordisk (NYSE:NVO). During Novo’s Capital Markets day the company noted that among the competition for Victoza®, their once-daily GLP-1 was Januvia and Onglyza®, both DPP-4’s. The fact is Lilly knows this, which makes their statement even more ludicrous.

The stark reality here is that Lilly desperately needs Amylin; more specifically they need Bydureon, as their existing diabetes franchise is in serious danger of becoming irrelevant. The recent gains made by their insulin franchise have not come from developing newer and better insulin’s, rather Lilly has resorted to the age old tactic of when all else fails cut your price and buy share. As Novo noted during their first quarter earnings call and again during their capital markets day, Lilly has been very aggressive with their pricing, offering huge rebates which has resulted in Novo losing several large managed care contracts.

It is also true that Lilly’s diabetes pipeline isn’t particularly exciting and contains no product that has mega-blockbuster potential.

The reality is Lilly, desperate to generate revenue, any revenue and preserve their precious dividend, got tired of waiting for the FDA to approve Bydureon and made a deal with Boehringer Ingelheim. What’s so strange here, especially for a company with “broad market experience”, is Tradjenta doesn’t stand a chance in the market. Perhaps Lilly should learn something from their friends at Bristol Myers (NYSE:BMY) and Astra Zeneca (NYSE:AZN), and ask them how Onglyza® sales are doing. We would then suggest they take a glance at Merck’s earnings announcements and pay particular attention to how the Januvia franchise is doing. Perhaps they just might learn the obvious, that gaining market share against an established blockbuster drug is tough enough when you’re second in the category and next to impossible when you’re third in the category. About the only chance Lilly has with Tradjenta is do the same thing did with their insulin franchise; namely undercut the competition and price it aggressively. Not that this would change anything all that much but it’s the only strategy that stands a chance as Tradjenta, is just another me-too drug that frankly isn’t that good.

If Lilly ever decides to exit La-La Land and get back to the real world they would acknowledge that no other drug in their pipeline has the market potential of Bydureon. As Diabetic Investor has said over and over Bydureon has the potential to be a game changer and with solid execution could become a mega-blockbuster. Something that seems impossible now given that the two companies responsible for the drug have decided they would rather spend resources fighting in court rather than developing a cohesive marketing strategy for Bydureon.

Surly the folks at Novo have a huge grin on their faces watching all this. As Diabetic Investor has noted before, Novo is taking full advantage of Bydureon’s delay at the FDA, by aggressively promoting Victoza. Victoza is gaining valuable market share just as Januvia was able to gain market share when Amylin and Lilly screwed up the initial launch of Byetta. One just might think that Amylin and Lilly would have learned from their past mistakes and set aside their differences given Bydureon’s potential.

This whole situation is not unlike what’s going on between the NFL owners and players, where you have billionaires arguing with millionaires on how to divide up billions. Just as Lilly and Amylin have decided to fight in the courtroom, the owners and players are also fighting in court. Where the two disputes differ is who ultimately gets hurt. While many would argue that football fans will be the biggest losers as they will deprived of their Sunday ritual, the real losers here are the millions of patients who would benefit from Bydureon.

Whereas Diabetic Investor believes the owners and players will finally come to their senses, we see little chance of that happening with Amylin and Lilly.  Even if the two parties could get past their stated differences and somehow work out a solution, Diabetic Investor sees the relationship as seriously crippled.  Crippled to such an extent that we doubt they could effectively market Bydureon.

The one possible bright light among all the darkness, is that Lilly takes their heads out of the sand, take a serious look at the diabetes market and wake up to the fact that without Bydureon their diabetes franchise is in serious danger of not just becoming irrelevant, but nonexistent. The reality is Novo and Sanofi-Aventis (NYSE:SNY) are in a better position in the diabetes market, have deeper and more promising pipelines plus overall more promising strategies to deal with the changing diabetes landscape.

Should Amylin end up in the hands of someone else, what is Lilly left with; basically a below average pipeline and no comprehensive strategy to deal with how the diabetes market is changing. Looking at their recent history Lilly hasn’t exactly proven they know how to use their “broad market experience” in diabetes to their advantage. The company was late to acknowledge what everyone else knew in that their insulin market share was shrinking and that Novo and Sanofi were kicking their collective backsides. Although the company revamped their insulin pen portfolio, this effort came too late in the game to change trends embraced much earlier by their main competitors. And in what is perhaps their biggest blunder of all, they flat out blew the launch of Byetta and allowed Januvia to become the blockbuster drug it is today.

Is it possible Lilly with all that is at stake here screw the pooch twice with Amylin? Is it possible they would allow their pride to stand in the way of having ownership of the most promising diabetes drug to come along since metformin? Is it possible they actually believe the nonsense in their very own press release? Or will the company swallow deep and hard and just buy Amylin and once again become a serious player in the diabetes market? Is it possible that Lilly could be that stupid?

The way things stand today the answer appears to be; yes it is possible.