JPM Day Two – Revelation

JPM Day Two – Revelation

There comes a time when companies can no longer ignore the obvious and must deal with the unpleasant realities of the markets they operate in. This was the theme for our friends in Indianapolis, Roche and Lilly (NYSE:LLY) both of whom presented today.

Looking at Roche first after years of watching their diabetes device unit shrink from a multi-billion dollar unit into a multi-million unit the company is now publicly acknowledging what we’ve all known, the glucose monitoring market basically sucks. Margins have shrunk, competition continues to intensify, there is little left to cut in the way of costs and while diabetes continues to grow at epidemic rates there is no chance this market will ever return to its former glory.

Although the company shed little light as to the future plans for this unit, the good news is they are no longer oblivious to what’s happening.

Looking at their crosstown neighbors Lilly it’s a much different situation. The company continues to be the only diabetes drug company that has a full complement of therapy options. A portfolio which seems to be aligned with the needs of payors who are increasingly moving towards single source contracting. However, the company acknowledges that as innovative as this strategy is they are not immune to the intensifying pricing pressure from payors.

As we have noted in the past the company is well aware that while they may be the only company with a complete range of therapy options the competition is not sitting ideally by and doing nothing. Novo Nordisk (NYSE:NVO), Sanofi (NYSE:SNY), AstraZeneca (NYSE:AZN) and Merck (NYSE:MRK) all have territories they want to protect and price is becoming the primary weapon to protect their various franchises.

Diabetic Investor believes this battle for formulary presence will become even more intense once the 30 month hold is lifted for Lilly’s Lantus knock-off. Although Sanofi is trying to convince everyone that physicians will be loath to prescribe a Lantus knock-off and that not just anyone can compete in the highly competitive insulin market, Lilly is not just anyone. The company has a well -earned, well established reputation in the diabetes market, understands not just how to manufacture but also market insulin. They are also well aware that physicians may be reluctant to prescribe a Lantus knock=-off from some unknown company but as we noted Lilly is not such a company. Finally when all is said and done these advantages will extend to payors who will use the entrance of Lilly’s Lantus to extract even greater price concessions from Sanofi and Novo. This is the brilliance of Lilly’s strategy as they are forcing the competition to play defense and make some very difficult decisions.

One final note on the Lantus knock-off as it will not just impact the overall market but Lilly’s own diabetes pipeline, notably Peglispro their novel long-acting insulin. As promising as the data looks for this product study data revealed two possible areas of concern. The drugs impact on lipids and liver enzymes. With Abasaglar, their insulin glargine product, already approved the company is not completely dependent on Peglispro should the FDA have concerns over these issues. Simply put Lilly knows that even if Peglispro is delayed or not approved they still have Abasaglar to fall back on.

Although the company has yet to present today earlier in the in the day Dexcom (NASDAQ:DXCM) earned the gold star of day two when they announced that revenue for the 4th quarter will come in near $84 million well above consensus estimates of $74.8 million. The company’s patient base has grew by more than 50% during fiscal 2014 and 2015 revenue estimates came in at $340 to $360 million, again above consensus estimates of $346 million.

The fact is no one should really be surprised how well the company is doing given their strong management team, which is a tribute to the now retired Terry Gregg. There is no question Mr. Gregg left Dexcom is good hands. About the only worry may be how they top this already outstanding performance. Again Diabetic Investor isn’t worried given their strong product pipeline and devotion to putting the patient first. While we won’t care to speculate as to how high shares may go, all we will say is Dexcom is an example of how a diabetes device should be run.