Earnings Roundup – The inter-relation between AMLN, LLY and MRK

Earnings Roundup – The inter-relation between AMLN, LLY and MRK

Monday was a banner day for earnings reports in the diabetes sector, Amylin (NASDAQ:AMLN), Lilly (NYSE:LLY) and Merck (NYSE:MRK) all reported results yesterday. Although only Amylin and Lilly have a strategic relationship the reports from all three companies are interrelated and speak volumes to what’s happening in the diabetes therapy market. As per usual while everyone else is concentrating just on the numbers there’s much more to the news then meets the eye.

There’s no arguing the numbers for Amylin were disappointing as sales for their lead product Byetta failed to meet expectations. More problematic for the company are the reasons behind the disappointing sales numbers. In particular the difficulty the company is having in penetrating the primary care market. This market is critical to Amylin not just for Byetta but their long-acting once-a-week version of Byetta which is set to go to the FDA either late 2008 or mid-2009. Primary care physicians treat nearly 80% of the diabetes population and as such control which therapies millions of patients use each day.

According to the company there are two main problems when it comes primary care providers, reimbursement and perceived issues with Byetta. To combat what the company sees as misconceptions on both fronts they plan on increasing their sales force by 15% while at same time increasing the frequency of sales calls. The hope is during these calls sales rep will educate physicians that reimbursement is available at the same time reeducating them that Byetta is safe and effective.

Here is where the interplay with Lilly, Merck and Sanofi-Aventis (NYSE:SNY) comes in.

1. Lilly – While Lilly has a strategic relationship with Amylin their own diabetes franchise, most notably their insulin franchise, is facing a tough battle with Novo Nordisk (NYSE:NVO) and Sanofi. It should be noted that Lilly reported Humalog® sales increased 13% domestically at the same time Byetta sales were slowing. Granted part of this growth was attributed to a price increase yet the increase is real. Which makes one wonder what’s going on with the Lilly reps who are supposed to be supporting both Humalog and Byetta. Although Diabetic Investor has not seen the compensation package for Lilly reps it’s unlikely the company would favor Byetta sales over Humalog sales even if they have vested interest in seeing Byetta succeed. Diabetic Investor has long wondered how Lilly would react to a product that could eat into sales of one of their key franchises. Perhaps we’re beginning to get some insight into this with these results.
2. Merck- Merck reps continue to aggressively market their diabetes products, Januvia and Janumet. Although Diabetic Investor sees Januvia as a less than impressive drug there is no denying that primary care providers prefer oral medications over injectables. A belief further reinforced as Merck reps market Januvia as an oral form of Byetta without any adverse side effects. While there is no credible evidence that comes anywhere close that would support the claims made by Merck reps, primary care physicians are buying into this pitch.
3. Sanofi-Aventis- Sales of Lantus continue to accelerate as physicians have adopted the drug as part of therapy regimen for type 2 patients poorly controlled by oral medications alone. Many believed that Byetta would replace Lantus in this large group of patients. The theory was that since Byetta produced better A1c results combined weight loss, physicians would adopt a Byetta plus oral regimen over Lantus plus orals. Diabetic Investor never believed in this theory as it ignores an important market dynamic, namely primary care physicians have a tough enough time as it is to get a type 2 patient to use insulin, and once they do it’s even tougher to get them to change. It would be one thing if the combination of Lantus and orals failed to work but this therapy regimen has proven to be very effective. In the physicians eyes why change something when the current therapy regimen is working. Replacing Lantus with Byetta may work even better but primary care providers aren’t known to favor this type of approach. They would rather wait and see if the Lantus oral combination fails before making any changes. The old treat to failure mentality is still alive and well.

To their credit Amylin is learning from Byetta sales and determined not to let anything get in the way when LAR becomes available. While there is no question that Byetta LAR is one of the most widely anticipated drugs in the primary care community, this does not guarantee that LAR will achieve the sales expectations Diabetic Investor and others expect for the drug.

To insure that physicians understand just how much better LAR is than existing therapy options Amylin has initiated a series of clinical trials to demonstrate LAR’s superiority. Called the Duration trials, the company will pit LAR against TZD’s, DPP-4’s and Lantus. Based on the available data on LAR Diabetic Investor has little doubt that LAR will come out on top. Add in the fact that drug is delivered just once a week Diabetic Investor remains firm in our belief that LAR is game changing technology and should easily reach mega-blockbuster status.

Still Amylin has some work to do while LAR makes its way through the regulatory process. The key now becomes demonstrating they can execute their new sales strategy while convincing Lilly to support Byetta as aggressively as they are Humalog. For all the public comments made by both companies in support of each other, behind the scenes it’s a much different story. For their part Lilly has seems to have Dr. Jekyll and Mr. Hyde personality when it comes to Amylin. One day their extolling the virtues of Amylin, the next their making deals with companies who have products similar to what Amylin has.

Diabetic Investor has long believed that Lilly would acquire Amylin to protect their presence in the diabetes market. We further believe that Lilly does not want to overpay for Amylin and has it in their power to play havoc with Amylin’s share price. Frankly this is not the first time the Lilly’s actions have influenced Amylin’s results.

In the end, even Lilly’s sometimes strange actions with Amylin, will not prevent LAR from achieving success. Until LAR is here expect Amylin shares to take a roller-coaster ride. Just as a good roller-coaster ride is a thrill a minute, the ride for Amylin shareholders will be equally thrilling and quite profitable.

David Kliff
Diabetic Investor
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224-715-3761 mobile