Does Lilly really want to win?

Does Lilly really want to win?

It almost sounds like one the dumbest questions there can be; bit one has to wonder if Lilly (NYSE:LLY) who’s being sued by Sanofi (NYSE:SNY) really wants to win the case. Just as a quick refresher Lilly submitted a biosimilar version of Lantus, which is the world’s number one selling insulin with nearly $8 billion in sales last year, to the FDA back in January.  Sanofi responded by suing Lilly for patent infringement, claiming that Lilly has violated 4 of Sanofi’s patent. The lawsuit also covers the SoloStar® insulin pen which accounts for nearly 60% of Lantus sales.

Now it almost sounds ridiculous that Lilly would actually want to lose this case that they would do everything in their power to seek an injunction which would lift the 30 month stay which went into effect when the Sanofi lawsuit was filled. Without getting into too much legalize just by filing the lawsuit the FDA cannot review Lilly’s product until either the stay is lifted or the litigation is resolved.

Yet the case has much broader implications than meets the eye, as it should be noted that Lilly’s short-acting insulin Humalog® goes off patent in 2015, as does Novo Nordisk (NYSE:NVO) short-acting insulin Novolog®. Based on the most recent annual reports Humalog had global sales of $2.6 billion in 2013, while Novalog had slightly more than $3 billion in sales. This basically means that three insulin’s – Lantus from Sanofi, Humalog from Lilly and Novolog from Novo had combined 2013 worldwide sales of nearly $14 billion. Revenues which would be severely impacted by the presence of a lower cost biosimilar version.

Before going any further it’s important to note that no one believes that a biosimilar insulin – either long or short acting – will cost 70 to 80% less than the branded offering. Most believe that generic insulin will likely be priced only 20% to 30% less than the branded alternative. Still the mere presence of a generic will provide payors with the leverage they need to demand and likely receive major price concessions from companies like Lilly, Novo and Sanofi. Although insulin usage has grown somewhat this pricing pressure will crimp margins and lead to lower overall insulin revenues. As Sanofi noted on their most recent earnings call 2/3 of the revenue increase for Lantus came from price increases and only 1/3 came from additional volume. A pattern repeated at Lilly and Novo.

The choice for Lilly, Novo and Sanofi comes down to either agree to the price concessions or risk losing valuable formulary presence and thus a corresponding drop in volume. This scenario is already playing out to a certain extent in the short-acting insulin segment. While there are slight differences between Humalog and Novolog, the vast majority of patients wouldn’t see any performance difference using either product. Payors understand this and have pitted Lilly versus Novo with each winning and losing key accounts over the past few years. Although Novo does a long-acting insulin, Detemer the product has never been a serious threat to Lantus which has allowed Sanofi a virtual lock on this segment of the market. A lock which would be broken should Lilly prevail in court.

So the question, as crazy as it is, needs to be asked – does Lilly really want to win? Should they prevail it would set a precedent for future lawsuits which will surly come when a generic of Humalog or Novolog are filled with the FDA. Just as Sanofi will do everything in their power to protect the Lantus franchise, so too will Novo and Lilly do everything they can to protect their insulin franchises. Given that prices are already under pressure and that the mere presence of a generic would provide payors with even greater leverage, one could easily argue that while having a generic insulin available is the last thing these players want to see.

Another intriguing issue is one of time, or put another way Lilly could win in court and still lose. This scenario is possible given the amount of time it would take to see this case proceed through the courts, for as night follows day, Sanofi would surly appeal any Lilly court victory and attempt to drag out the legal fight. This would give Sanofi time to develop their U300 insulin, the Lantus replacement. Basically by the time the legal fight is finally over, win or lose, Sanofi has something new to offer which would be patent protected. Now Diabetic Investor does not see U300 as a major advancement or improvement over Lantus but its presence would provide Sanofi with another weapon should Lily be able to launch their biosimilar version of Lantus.

Although Lilly has publicly stated that they will fight the lawsuit aggressively, a loss in court wouldn’t hurt their long-term diabetes strategy all that much. As noted in previous posts Lilly is building the most comprehensive portfolio of diabetes drugs all under one roof, a virtual smorgasbord of diabetes drugs. In the not so distant future Lilly will have a short-acting insulin, long-acting insulin, a DPP4, a SGLT2 and a long-acting GLP-1. Lilly would then be able to go to a payor, payors who are increasingly moving to one source contracting, and fulfil all their diabetes drug needs. The fact the long-acting insulin offering would be delayed by a loss in court would not ultimately derail this strategy.

While Novo has the insulin and GLP-1 components they lack any oral medications. Sanofi does have a once-daily GLP-1 yet it’s unlikely this product will ever see the light of day as a standalone offering in the US and the chances of it being combined with Lantus in a single pen delivery system are also somewhat suspect given the issues the company has had with the FDA approving Lyxumia®. As we noted far too many times when it comes to diabetes and Sanofi it’s a one-trick pony – Lantus. Like Novo, Sanofi has no DPP4 or SGLT2.

Diabetic Investor believes, win or lose, Sanofi and Novo will be on the acquisition trail as they try and keep up with Lilly. This is the brilliance of the Lilly strategy as it puts their main competitors in a defensive position, forcing them to either add the drugs that are missing from their portfolio’s or spend precious capital acquiring them. Looking over the landscape of possible acquisition targets the landscape is rather barren. GlaxoSmithKline (NYSE:GSK) has a long-acting GLP-1 but nothing else. AstraZeneca (NYSE:AZN) has a GLP-1, DPP4 and SGLT2 and seems like a possible target yet they just spent $4.3 billion to buyout their former diabetes partner Bristol, Myers Squibb (NYSE:BMY).

Looked at from this perspective one could easily argue that the pressure is not on Lilly to win but for Sanofi not to lose. Novo may not be in the best position but they do have a more complete portfolio than Sanofi which will help them whether the storm. The fact is if Sanofi loses and the scenario plays out as Diabetic Investor predicts Sanofi could well be faced with the prospect of deciding whether or not to remain in the diabetes market. Just in case anyone can’t imagine this possibility take a look at the blood glucose monitoring market which has already transformed itself into a full blown commodity market, where all the major players are cutting costs to the bare bones and would exit the market in a heartbeat if the right offer came along.

Another even better example is when Bristol who once owned the oral market with Glucophage (metformin), ultimately exited the diabetes market entirely when Glucophage lost patent protection. It wasn’t until they acquired Amylin and formed their now ended partnership Astra that they decided to re-enter, albeit for a very short time, the diabetes drug market.

This being the wacky world of diabetes, where anything can and usually does happen, Diabetic Investor suspects that Lilly while make an effort to win the lawsuit but won’t be all that upset should they lose. As it’s often said on the battlefield, sometimes it’s better to lose one battle, live to fight on and ultimately win the war. Right now it’s Sanofi who’s fighting a war and Lilly who’s fighting one battle.