Earnings Avalanche

Earnings Avalanche

Today was a big day as Lilly (NYSE: LLY), Roche and Abbott (NYSE: ABT) all reported fourth quarter and full year results. Looking over the results it’s clear that the diabetes market both drugs and devices is facing a series of challenges. In the device world companies are coming to grips with the fact that this market will NEVER return to days past. That they must right size their franchises, run them efficiently and accept lower overall margins.

The diabetes drug market is slowing coming to grips with the fact that this market is transitioning to a commodity market. Not to be redundant but there are just too many products in each category which basically do the same thing the same way. Add in the fact the insulin segment, long-acting in particular, is about to face the entrant of biosimilar’ s which will put even more pressure on margins. Like the device segment diabetes drug companies must right size their franchise, run them efficiently and decide when to fight and when to walk away. Diabetic Investor still believes that the price war that no one wants will become a self-fulfilling prophecy.

Turning our attention to Lilly the story is tale of two cities. As noted in the past Lilly is the only diabetes drug company with complete portfolio of products. Looking over the results this strategy looks to be paying off with Humalog®, Tradjenta® and Trulicity® all showing solid growth. Surprisingly the company did not provide any detailed sales numbers for Jardiance. Given the cardiovascular data for this was somewhat surprising or was it?

The Jardiance story is really the story of the diabetes drug market overall. As everyone knows the cardiovascular data for Jardiance was historic. However, based on comments made by Lilly this data has not yet translated into increased sales.  We see several reasons for this. First as we noted yesterday when Johnson and Johnson (NYSE: JNJ) reported their results yesterday, the data seen with Jardiance will likely be replicated by Invokana and Fraxiga from AstraZeneca (NYSE: AZN). So what at first glance looked like a major win for Lilly has been mitigated by the growing belief that ALL SGLT2’s will see cardiovascular benefits.

The fact is payors, who control access, don’t see a compelling reason to give Jardiance favorable formulary position. Even if they did this is not as easy as it may sound as JNJ has done a solid job of locking up formulary access for Invokana. Payors like everyone else believe all the SGLT2’s are equal, that they do the same thing the same way.  So what looked like a major win for Lilly may actually end up being a win for all SGLT2’s and force companies to once again use price as weapon to gain share.

This in essence is the story of the diabetes drug market.

We continue to believe that Lilly is on the right path and is looking at this market realistically. They may not hit the ball out of the park with each of their diabetes products yet overall they are hitting lots of singles and doubles. We see Basaglar, their biosimilar version of Lantus, being a winner and depending on how aggressive they are pricing it could forever alter the dynamics of the insulin market.  The depth of their portfolio also gives the company leeway and some cushion as their core insulin franchises transitions from a branded market to a biosimilar market. If the company has an Achilles heel, it’s the pipeline which isn’t as robust as in the past. This is not a major issue given the commodization of the market and the patent protection they have with their current portfolio.

Switching gears to Roche and Abbott there is little reason for optimism in the device world. Looking at Roche specifically Diabetic Investor just can’t figure out where they are going and why they are doing what they are doing. Sales in their core glucose monitoring franchise continue to decline and continue to face pricing pressure. Yet for the first time in recent memory the company is once again mentioning the franchise and introducing several new products including a continuous glucose monitoring system (CGMS). Just why they want to play in the CGM sandbox, a market dominated by Dexcom (NASDAQ: DXCM) and Medtronic (NYSE: MDT) is anyone’s guess.

Our guess is they have abandoned the idea of spinning off the diabetes franchise into a privately held company. The new strategy seems to be to position the franchise for sale. The fact is the company even with all the mistakes they have made does have a solid brand name and a complete portfolio. While their presence in the US continues to erode, outside of the US the franchise is holding its own. Given that there are only a few companies with a comprehensive device portfolio and many of the cash rich high tech companies want to be in the space the Roche franchise is a value when compared to the alternative, JNJ in particular.

The fact is companies like Apple, Google, Samsung, etc. see devices as part of a diabetes management ecosystem not as standalone products. They also know that is cheaper and faster to acquire the pieces of the ecosystem then to start from scratch. Finally, these high tech companies understand that in the future when outcomes based reimbursement becomes the norm money will be made not from the individual tools used by the patient but which ecosystem produces the best outcomes.

Abbott is almost in the exact same position as like Roche as they too are experiencing sales declines and pricing pressure. The difference seems to be that Roche, and no we can’t believe we’re writing this, actually has a more realistic outlook and a better overall strategy. The fact is Abbott and Roche aren’t just competing against each other they are also competing for the attention of possible buyers.

This is the reason we believe that Abbott continues to tout the FreeStyle Libre, even though this product doesn’t have a prayer at getting approved here in the US. Although management may not be the best and brightest, even these dim blubs understand that they cannot compete effectively in the US. Although they have not abandoned the US market, like Roche they are focusing their efforts outside the US. Also like Roche they do have a complete device portfolio. Although it was never launched Abbott does have an FDA approved insulin pump.

The simple fact is Abbott and Roche are like Cinderella and her sisters competing for the attention of the handsome prince. They see the clock moving closer to midnight and desperately want that glass slipper. They also understand there is only one prince and one glass slipper which basically means there is no constellation prize for coming in second place. The fact is whoever loses here will end up as the ugly duckling destine to kissing more frogs in the hope that a prince will emerge.