Earnings Roundup – Has the Januvia Juggernaut stalled, What will Novo do now and Dexcom continues to roll

Earnings Roundup – Has the Januvia Juggernaut stalled, What will Novo do now and Dexcom continues to roll

This past Monday Diabetic Investor speculated that Merck (NYSE:MRK) who reported earnings yesterday might just be getting a little desperate, more like worried, that the Januvia juggernaut is showing signs of slowing down. Well as turns out we were correct in our speculation but not for the reasons we originally speculated on. The simple fact is Merck like everyone else in the diabetes drug space is not immune from pricing pressure. According to Adam Schechter, EVP & President, Global Human Health; “Regarding price, the market is very competitive. We are seeing rebate and pricing pressure as newer competitors seek to improve their formulary positions by lowering price.”

This increased competition also appears to be driving factor in Merck’s decision to partner with Pfizer (NYSE:PFE) on a SGLT2, a market which is getting more crowded by the minute. During the Q&A portion of yesterday’s call there were several questions about this deal as many of the analysts had the same question we raised on Monday, why partner with Pfizer on me-too, copycat, and late to market drug from a class of drugs which doesn’t exactly have a clean adverse event profile. The companies response was; “We think that there is room to commercialize an SGLT2 inhibitor. And we are excited about the potential combination because after utilizing JANUVIA a nice combination with a high-quality SGLT2 we think would be a very attractive option for physicians when they want to continue to use oral therapies prior to insulins.”

Now Diabetic Investor does not want to say we didn’t warn everyone but this is what happens when companies concentrate their R&D spend on developing me-too, copycat drugs. Given that there are only miniscule differences between Januvia and its many competitors the only way the competition can recoup their investment is to start a price war. This is exactly what happened in the short-acting insulin market and is now happening in the DPP4 market. Given the growing list of companies entering the SGLT2 market don’t be surprised if this class follows the exact same path.

Basically what the companies are doing is by their own actions they are turning the market for type 2 drugs into a commodity market where price trumps performance. Just as insurers have gained the upper hand in the glucose monitoring market they are gaining the upper hand in the short-acting insulin and now DPP4 market. Just as BGM companies capitulated to their demands for lower pricing, drug companies have no choice but to lower prices or risk losing preferred formulary status. Frankly Diabetic Investor has no sympathy for these companies as we noted earlier they are largely responsible for this scenario.

Just as side note here, this news must have been received as both a blessing and a curse for the folks at Johnson and Johnson (NYSE:JNJ), who at the moment have the only FDA approved SGLT2. In one respect Merck’s deal with Pfizer validates the potential of this class, yet on the other as the Januvia results indicate the company must be take full advantage of being first to market and understand that their window to maximize their SGLT2 will be a short one. Lilly (NYSE:LLY) along with their partner BI have already submitted their SGLT2 to the FDA and as we have seen in the short-acting insulin market Lilly is not afraid to use price as weapon to gain market share, even when this weapon eventually ends up coming back to haunt them later.

Looking at Novo Nordisk (NYSE:NVO) who also reported results yesterday the question isn’t where they have been rather where do they go from here. Now that the FDA has thrown a major curveball into their plans by issuing a complete response letter for Tresiba, the company is facing a lengthy and expensive process should they decide to continue working with the FDA to get Tresiba approved. At the moment the company, at least publicly, is saying all the right things and seems committed to Tresiba. Yet take a look at this comment from Mads Krogsgaard Thomsen, Chief Science Officer, Executive Vice President and Member of the Senior Management Board; “We are currently in a dialog with the FDA regarding the detailed design of the cardiovascular outcomes trial to generate the requested data needed for resubmission. The trial is expected to be double-blind, event driven, based on the needed number of cardiovascular events with insulin glargine as comparator on top of standard of care.

It is expected that the basis for submission will be an interim analysis demonstrating that the upper bound of the 2-sided 95% confidence interval for the estimated cardiovascular risk ratio is lower than 1.8. With the reassuring point estimate for the hazard ratio.

In addition, it is expected that we will be required to continue the trial to completion after approval in order to rule out the relative risk of 1.3 based on the 95% confidence interval. We expect to initiate the trial within the next year and that data for the interim analysis will be available 2 to 3 years after trial initiation based on the underlying assumptions in the trial protocol.”

So if the basis for submission will be an interim analysis and that analysis will be ready in two to three years after the trail starts which is likely next year that pushes the possible approval all the way out to 2016 and possibly longer. That date just so happens to coincide nicely to about the time we should be seeing the generic version of the world’s number one selling insulin Lantus. Now we know Novo along with other insulin companies keep trying to convince everyone that there are issues with a biosimilar, all this talk is just that talk. The fact is generic insulin, both short and long-acting are coming and there is nothing any of the insulin companies can do about it.

Let’s assume for a moment that Novo does prove that there are no cardiovascular issues with Tresiba and further assume that generics are late getting to market, just what will the insulin market look like in 2016; frankly not much different than today and actually the market could be much worse. Sanofi (NYSE:SNY) the makers of Lantus isn’t going to sit around and let Tresiba steal share. Just as Lilly used price to battle Novo in the short-acting market, Sanofi will use price to battle Novo in the long-acting market and let’s not forget that Sanofi is also working on a new version of Lantus. This battle could get very interesting as Sanofi has another advantage as no matter what happens at the FDA, Tresiba even with an FDA is already a somewhat tainted product and when it comes to prescribing insulin physicians prefer using drugs which they have experience with.

As Diabetic Investor has noted previously the problems at Novo aren’t necessarily over the drugs they have or their pipeline; no the real problem is the changing dynamics of the markets they play in. The company is used to developing premium products which in turn receive premium reimbursement. However, those days are coming to an end, as we are seeing the market for diabetes drugs is transitioning to a commodity market. Tresiba could well be the greatest thing since sliced bread and soft soap, which it isn’t, but that won’t help when insurers aren’t willing to provide preferred formulary placement, ask for a lower price or both. The harsh reality is the market for diabetes drugs always a competitive market, will only get tougher as the big boys battle for their very survival. Throw in the threat of lower priced generics and this battle will turn into an all-out war.

One company that for moment is not facing the threat of generics or a price war is Dexcom (NASDAQ:DXCM) who reported their earnings late yesterday. Dexcom is in the enviable position of having the best product for a market that is actually expanding, albeit not as fast as they might like. Yet even with the market for continuous monitoring expanding and no apparent pricing pressure Dexcom must be a little concerned about the future. Like Novo, the problem for Dexcom isn’t with the products they make or the ones they have under development; the problem has more to do with what the CGM market will look like in the not so distant future.

As we are seeing now in the conventional BGM market, competitive bidding is wreaking havoc. Bayer, Abbott (NYSE:ABT), Roche and JNJ are all struggling to deal with the impact and all are in the process of cutting costs even more than they already have. Based on what Diabetic Investor is hearing the government in their zeal to lower Medicare costs will expand competitive bidding beyond glucose monitors and make insulin pumps their next target. Although CGM systems are not now a major Medicare cost it would be foolish to believe that CGM will be exempt from competitive bidding.

Although Medicare is a tiny portion of CGM sales, as we have noted in the past private payors use Medicare reimbursement rates as the model for their reimbursement rates. The possibility exists that in the not so distant future these private payors could well turn the screws on companies like Dexcom and Medtronic (NYSE:MDT) demanding lower prices. It is also quite possible that Medtronic, whose CGM system is inferior when compared to the Dexcom system would try and blunt Dexcom by lowering their prices and thus start a price war in the CGM market.

For the moment Diabetic Investor isn’t overly concerned but investors must be aware this possibility does exist. Thankfully Dexcom has one of the best management teams in diabetes devices, a seasoned group that has been there, done that and will likely handle any threat thrown their way.

It’s time everyone starts to wrap their hands around the fact that the diabetes market, devices and drugs, is no longer for the weak or timid. Pricing pressure, healthcare reform, generics and failure to innovate are all factors that will impact how these companies perform. The wacky world of diabetes is about to get even wackier and that’s saying something considering how wacky it already is.