Earnings Roundup and an award for MannKind
To say this has been an interesting week in the diabetes world is like saying there’s a football of some importance being played this Sunday in Indianapolis, Indiana – which besides hosting the Superbowl is also home to Lilly (NYSE:LLY) and Roche, two companies who reported results this week. The third company to report, Novo Nordisk (NYSE:NVO) is based in Denmark and thinks football is game played with small round ball and where people go crazy when the score is nil-nil, here in America we call this game soccer and believe it to be one of the more boring sports ever invented.
Looking at the two insulin companies Lilly and Novo, an interesting story line is developing and it will be interesting to see who will come out ahead. After watching Novo beat the pants off them, Lilly has finally grown a set and decided that they had enough. Realizing that they did not have any competitive advantage over Novo, Lilly did what every company does when they don’t have a real strategy- they cut prices. This strategy has paid off for Lilly who witnessed an healthy sales increase for both Humalog®, where sales increased 21% worldwide for the year and Humulin® with sales up 20% worldwide and 41% here in the US thanks in large part to their deal with Wal Mart.
Now before everyone starts jumping for joy, it should be noted that revenue increases do not necessarily translate into more profits or any profit at all for that matter. The fact is Lilly paid a steep price to steal share away from Novo and may be unable to sustain these prices over the long term without drastic cuts to their bloated diabetes sales and marketing team. Even with major job cuts, Diabetic Investor is not convinced that Lilly can play in the insulin market for much longer, a market which not only faces the threat of generics but is becoming a commodity market where price rules over performance.
Novo on the other hand is having a difficult time deciding just what to do as they are facing threats on multiple fronts. As we have already noted the market for short-acting insulin is becoming a commodity market, the market for long-acting insulin with the patent expiration for Lantus, the world’s number one selling insulin, coming in 2014, is about to become a commodity market. While the GLP-1 market is showing signs of life they are also behind the eight ball with the recent approval of Bydureon and no matter how Novo wants to spin it the fact is patients and their physicians will prefer a once-weekly injection over Victoza which is a once-daily injection.
While Novo is not facing any immediate patent expiration issues, the company must come to grips with how they move forward in this changing healthcare environment. As we have stated in the past, Novo is used to living in world where premium products came with premium prices. Today the world has changed and premium products no longer come with premium prices plus there is a greater emphasis in cost containment which will breathe life into generic insulin, a threat Diabetic Investor believes is very real and vastly underestimated by the major insulin companies. They can tap dance all they want but the fact is generic insulin, both short and long acting, are coming and there is nothing they will be able to do to stop the impact these cheaper insulin’s will have on the market.
Making matters worse for both Novo and Lilly, is neither company has a compelling pipeline of new products. After years of steady progress Diabetic Investor believes we are entering a new phase in diabetes drug development, a very boring phase. Lilly and Novo are not the only diabetes drug company’s void of exciting ideas. The fact is when taken as whole most pipelines are full of drugs that are line extensions with incremental improvements over the original product, i.e. once-weekly dosing versus once-daily. While there is some work being done on improving the performance of short-acting insulin’s which looks intriguing, Diabetic Investor is not convinced with the increased focus on controlling costs that insurers will pay for better performance. Although we have not yet moved to the British system which measures cost effectiveness of new drugs, we are moving closer to this system by the way insurers are paying for drugs.
The harsh reality is going forward new drugs will need to offer compelling advantages of existing ones and their generic counterparts. The short-acting insulin market will is the perfect example of what lies ahead. While the three insulin companies will disagree, the three current short-acting insulin’s are basically the same and are inter-changeable. Once a generic gets here it will have the same impact that generic Lipitor is having on the statin market. Yes there will be a minority of patients who will request NovoLog®, but a far greater number will be forced to convert to the generic of HumaLog by their insurer. Therefore going forward insurers will no longer pay for a new branded drug which offers no compelling benefit over the existing drug, in order to gain broad coverage new drugs will need to be superior not just better.
For the moment it seems that Lilly has accepted what the future will look like, while Novo seems resigned to living in the past. The problem for Lilly is can they take the next step and make the drastic cuts needed to remain profitable, the problem for Novo is can they transform themselves into a leaner organization without crippling their legacy franchise, while diabetes is important to Lilly, it is the heart and soul of Novo Nordisk. This is like asking Mercedes Benz to build a high quality car, sell it for the price of a Kia and still be profitable too boot. While it may be possible, it sure won’t be easy.
While Lilly and Novo struggle to deal with the changing dynamics of the diabetes drug world, Roche continues to live in their own fantasyland for diabetes devices. Unlike their neighbor in Indianapolis, Roche cannot come to grips with how the device market has changed and fully transformed itself into a commodity market where price rules and everything else is secondary to price. They continue to believe they can fight this raging forest fire with a common garden hose and that by some miracle this market will once again return to its high growth, high margin past.
To their credit Roche has at least realized that while they run this franchise into the ground it’s better to do so with less overhead and as Diabetic Investor reported has eliminated almost half of their diabetes device sales force. Even a company as dense as Roche understands simple math. However beyond that we’re not quite sure if they understand anything else as it’s obvious they remain clueless about the diabetes device market.
Yes once again while announcing that the sales for their diabetes devices had fallen yet again, this time down 10% year over year, the company insisted that the recently approved Nano glucose monitor would jump start sales. And to show just how far out of touch with reality they are, the company believes they can re-enter the insulin pump market with two systems which although net yet in the market are already over-matched. Keep in mind that Roche has not been a serious player in the insulin pump market for at least five years and short of buying the insulin pump business from Medtronic (NYSE:MDT) they stand about as much chance of becoming a player again as Diabetic Investor going on a dinner date with Paula Deen, simply put this isn’t going to happen, no way, no how.
Believe it not there is a bright for Roche as even with their many blunders the diabetes franchise still generates sales of almost $3 billion so the company has plenty of money they can blow while making this futile attempt. Listen we know it seems ridiculous that any company can turn a $3 billion franchise into a worthless pile of junk but if anyone can do it Roche can.
Finally Diabetic Investor would like to issue a special award to Al Mann, the CEO and founder of MannKind (NASDAQ:MNKD). As everyone in diabetes knows Al is one of the all-time greats and deserves a place in the diabetes hall of fame. Al made a fortune selling MiniMed to Medtronic and is now taking that fortune and dumping it into his new company in a desperate attempt to prove that there is a market for inhaled insulin. Just when it seemed that MannKind was on death’s door Al once again has steeped in to save the day.
According to a press release issued by the company late yesterday; “MannKind Corporation (Nasdaq: MNKD) today announced that it has entered into a purchase agreement with The Mann Group LLC, an entity controlled by MannKind’s chief executive officer and principal stockholder, Alfred E. Mann, for the sale of shares of its common stock to The Mann Group. The Mann Group has committed to purchase 31,250,000 restricted shares of MannKind’s common stock, the same number of shares as the number of units that are expected to be purchased in the concurrent public offering of MannKind’s common stock and warrants, which was initially announced on January 31, 2012. The shares to be purchased by The Mann Group will be priced at $2.47 per share, the consolidated closing bid price for MannKind’s common stock as reported by The NASDAQ Global Market on February 2, 2012, resulting in an aggregate purchase price of approximately $77.2 million.
This aggregate purchase price will be paid by cancellation of principal indebtedness under MannKind’s existing revolving loan arrangement with The Mann Group. At December 31, 2011, the principal amount outstanding under the loan arrangement was $277.2 million, and MannKind had $45.0 million remaining of available borrowings under the arrangement.” (Bold and Underlining added by Diabetic Investor)
This comes just days after the company announced they were looking for more suckers to buy even stock in this disaster of a company. Yep back on January 31, 2012 the company announced that they would be going to the well once again, a well that should have run dry long ago, to raise more money. Now if there is a bright light among this darkness the underwriters realizing that there aren’t that many idiots left who would be willing to buy this dog of a stock they invented this scheme for the Mann Group to purchase an amount equal to the offering without shelling out any real money. The basic theory being that no one will really look too closely at these smoke and mirror tactics and actually buy the stock because Al is buying the stock.
While Al may have had the Midas touch years ago, that touch has turned to stone with MannKind where investors have lost millions and are getting ready to lose millions more. Yet undaunted Al Mann continues to tout his company and therefore wins the Diabetic Investor award for unmitigated gall and chutzpah. It will take a big set of brass ones to pull this off and if there is one thing Al has in abundance is stones.