How much better does it have to be?

How much better does it have to be?

Although the American Diabetes Association (ADA) annual conference does not officially begin until Friday the news flow had begun. One item that caught the attention of analysts was an abstract released by Lilly (NYSE:LLY) for their once-weekly GLP-1 drug dulaglutide. According to the abstract which compared dulaglutide to Novo Nordisk (NYSE:NVO) once-daily GLP-1 Victoza, Victoza outperformed dulaglutide in terms of one key category; weight loss. Patients taking Victoza lost an average of 3.61 kg versus 2.9 kg in the dulaglutide arm. And the difference cleared the bar for statistical significance.

Lilly is touting the fact that while dulaglutide may have underperformed in this one area, in all other areas the drug was on par or noninferior to Victoza. Basically what Lilly is counting on that dulaglutide’s once-weekly dosing regimen will trump Victoza’s once-daily dosing regimen. Simply put patients and physicians will favor fewer injections. This is exactly what AstraZeneca (NYSE:AZN) has been counting on with their once-weekly GLP-1 Bydureon.

Now some analysts seem to believe that Victoza will remain tough to beat just because of the weight loss difference. Diabetic Investor disagrees. As we have been noting the diabetes drug space is quickly transforming into a commodity style market where price trumps performance. The simple fact is with so many me-too copycat drugs in each category – both oral and injectable – new drugs don’t necessarily have to outperform drugs which are already on the market.

In fact Lilly’s entire diabetes drug strategy is based in this. Looking over Lilly’s existing drug portfolio and the drugs under development they will be the only diabetes drug company with a drug in every category. This strategy fits very well with payors who are increasingly favoring single source contracting.  Now Lilly isn’t stupid as they know Novo, Sanofi (NYSE:SNY) and AstraZeneca will fight back but they also know they are putting their competitors on the defensive.

The one possible flaw in Lilly’s strategy is that this fight will result in an all-out price war. This is exactly what happened in the conventional blood glucose monitoring market. This is why Lilly is also paying close attention to costs. They realize as Diabetic Investor does, that when it comes to the diabetes drug market controlling costs is just as, possible more important than how a drug performs.

Here too Diabetic Investor sees Lilly making their competition play defense instead of offense. They see that Novo, Sanofi and AstraZeneca have been slow to adapt to the new market realities. That these companies have yet to hunker down on costs. To Diabetic Investor Sanofi is the most vulnerable as when it comes to diabetes they are one trick pony and that pony is running out of gas. The company must either get very aggressive very fast or risk becoming a non-factor in diabetes.

AstraZeneca has the potential to give Lilly a run for their money. However, the company has yet to prove they can actually compete effectively. The company spent a considerable amount of money to become a player in the space. Yet from what we’ve seen so far we’re just not sure they can play the game.

Novo for their part seems to be a company that sees the handwriting on the wall but is unwilling or perhaps unable to accept what they see. They have the weapons to compete but they seem to lack the fortitude to get costs under control.

This is why Diabetic Investor believes so many industry analysts are so wrong when it comes to how this market should be analyzed. They continue to live in the past focusing on clinical results rather than what’s going on in the real world. They look at minor statistical differences between drugs believing these small performance differences really mean something in the real world.

Yes it would be great if the pipelines of these companies were full of truly innovative products. Products which made people stand up and take notice. But the truth is this just isn’t the case. Looking over the various pipelines they are filled with offerings which are nice but really not that innovative. They are incremental improvements of existing drugs or just plan copycats of drugs already on the market. Now Diabetic Investor understands the reasons for this given the cost and risk of developing truly innovative drugs.

This is why Diabetic Investor is so intrigued with what Lilly is doing. As we have outlined previously this strategy looks great on paper but has never been even attempted. It seems to be in line with the new market realities. Still it could backfire on the company depending on vigorously the competition fights back. Should the competition follow a take no prisoner attitude protecting volume at all costs a very ugly price war will ensue. A price war which will push the market over the edge and complete the transformation to a full blown commodity market.

This is the point that is being missed by some many analysts. Performance remains important but is no longer the factor in which drugs physicians prescribe. A fact reinforced by the fact that the vast majority of these drugs do the same thing, the same way with very similar results.

Way back in the day, way before the BGM market collapsed Diabetic Investor performed a very simple experiment to illustrate why this market was headed for trouble. We visited several pharmacies and asked each pharmacist which meter they preferred. We then asked were there any major differences between what they preferred and another meter. In almost every case the pharmacist noted that while there were minor differences between meters they all did basically the same thing, the same way. Diabetic Investor reasoned that given this fact cost would be the deciding factor as to which system a patient used. If all the systems were equal it didn’t make any sense to pay more for brand A when brand B did the same thing and was cheaper to boot.

Well looking over the diabetes drug market history is getting set to repeat itself. Why would a payor reimburse for drug A at higher rate than drug B when they both do the same thing, the same way and produce similar results. Just as payors gained the upper hand in the BGM market they now have the upper hand in the drug market as well. Just as BGM companies capitulated to their demands for lower prices so too will diabetes drug companies. The simple fact is drug companies cannot afford to lose share.

The real question is which company will cry uncle first. Again going back to the collapse of the BGM market it was Roche who became the first company to cry uncle. The company basically decided not to capitulate to payors demands, a decision which proved extraordinarily costly as the company went from number one in the market to a very distant number two. Today Roche is mere shell of who they were.

The fat lady is not yet singing as she is doing for the BGM market. Taking a very real look at the diabetes drug space it’s just a matter of time before she changes her tune. And believe us she won’t be singing Happy Days are here again.