How will this play out?

How will this play out?

The reverberations from Lilly’s (NYSE:LLY) news on the cardiovascular benefits of Jardiance continues to ripple through the diabetes drug world. Based on this news Bank of America Merrill Lynch reiterated their buy rating for Lilly while raising their price target from $101 to $108. Additionally other analysts that cover Lilly have been aggressively raising their peak sales estimates for Jardiance, many expecting the drug to hit $3.5 to $4 billion in peak sales.

Watching this situation very closely are the folks at Johnson and Johnson (NYSE:JNJ) whose Invokana is the current market leader in the SGLT2 class. On track to achieve blockbuster status this year many are wondering whether Invokana sales will be adversely impacted by this news. As we noted just yesterday the FDA recently added a warning to the Invokana label over bone fracture risk. Yet as we also noted the FDA indicated this may be a class effect and may require a label change for Jardiance.

One interesting note coming out of yesterday’s presentation is that Lilly indicated that Jardiance did not appear to have the same bone fracture risk as Invokana. A subject that will likely come up when Lilly holds an investor call next Thursday to review yesterday’s data.

Now before we go on here we want to make very clear that we are not scientists nor do we claim to have an intricate understanding of how these drugs work. Our thoughts are based on detailed discussions with respected researchers, the companies who make these drugs and our general knowledge of the diabetes drug market.  Simply put when it comes to science these people are much smarter than we are and thankfully can explain things so even we can understand it.

That being said we suspect the big loser here won’t be Invokana rather the DPP4 category. Many of the researchers we’ve spoken with believe that the cardiovascular benefits shown by Jardiance will also be seen with Invokana, that all SGLT2’s will have similar results. Something we won’t know for sure until JNJ reveals data from their ongoing studies sometime in the first half of 2017. As we noted yesterday if the JNJ is anywhere close to the Lilly data nothing much will change in the SGLT2 category. Although already each company in this category is picking apart the Lilly data.

We’re pretty much sure that no matter what the JNJ data is, Lilly will pick apart how their studies were designed. This as we like to say is the nature of the beast as study data is not absolute and open to different interpretations. We witnessed this during the Avandia controversy when after looking at the exact same data set different researchers offered widely divergent conclusions. Go figure.

Looking strictly at the business impact of this news we believe the following;

  1. In the near term Lilly does a have leg up in this space. They have set a high bar for JNJ to hit and has the luxury of owning the data high ground until 2017.
  2. On a whole this is good news for all SGLT2’s as we noted many see all having similar cardiovascular benefits. Simply put a rising tide lifts all boats.
  3. Invokana may suffer slightly in the near term but given its favorable formulary access and board coverage we see any impact being slight and not material.
  4. It is unlikely this data will change how payors view these drugs basically meaning competition in this category will remain intense. That formulary access and coverage will be impacted more by price/rebates than data.
  5. DPP4’s could see a more material reduction in sales in terms of new patient starts. We view it as unlikely that physicians would switch a patient from a DPP4 to a SGLT2, although based on this data we could see them adding an SGLT2 to patient already taking a DPP4.

One last thing and while this should be obvious it needs to be stated – this story is far from over. Next Thursday’s call from Lilly will be just the first of many. Given how this category is growing and the game changing nature of the data released by Lilly this debate will go back and forth. Stay tuned as this is going to be a major story that will have a wide ranging impact on all diabetes drugs.