Lilly and Roche Report

Lilly and Roche Report

It’s ironic that the two earnings calls today come from two companies who are both seeing problems with their diabetes franchises.  It’s also ironic that both Roche and Lilly (NYSE:LLY) were once dominating in diabetes but are now seeing their diabetes franchises struggle mightily.

Roche continues to astonish Diabetic Investor, as once again their diabetes care unit grew a meager 1% globally and sales declined 5% in North America.  While every other company in glucose monitoring is managing their units to maximize profit, Roche seems to be managing this unit to minimize profit and increase share lose.  To understand just how bad things have become here in the US, sales for the first six months of the year in North America totaled $286 million; while sales for the Rest of the World (this excludes Europe) totaled $231 million. (European sales came in at $812 million, up an anemic 1%).

Diabetic Investor really does not want to waste much time commenting on the Roche results as frankly what else can be said about how badly they have managed this unit particularly here in the US. As today’s results indicate this mismanagement is now spreading to Europe and the only area where they appear to be doing well are less established markets, markets that may be growing in terms of market penetration but offer much lower profit margins. Even with the lousy reimbursement situation here in the US, margins have not yet eroded to the point where it makes sense to abandon the market.

About the only people happy with these results is the delusional management team at Roche and their competitors.  Competitors who are thanking their lucky stars that Roche remains clueless and continues to be the gift that keeps on giving. Competitors who realize that their growth is due in large part to Roche’s continued share erosion.  Heaven help these competitors if Roche ever recognizes how bad this unit is being run and decides it’s time for some serious changes. Based on history Diabetic Investor sees little chance of that happening as it would mean the company would have to acknowledge they have a problem in the first place. Besides Diabetic Investor is privately rooting for the company and hopes they don’t make any changes; after all they still have sales here in the US and we really want to see if they can manage this unit until sales reach $0, now that would be really something and if anyone can do it Roche can.

Although Lilly’s diabetes franchise is not in as bad shape as Roche’s unit, that’s hardly a ringing endorsement, the company has their own set of issues. Like Roche, Lilly also seems to be somewhat delusional about what’s happening in the real world and instead prefers to believe that things really aren’t as bad as they seem. Given the time devoted to the subject it’s obvious that their diabetes partnership with Boehringer Ingelheim (BI) is costing the company a pretty penny.

As everyone knows the company has been spending a fortune to promote Tradjenta™ yet with little to show for all this marketing spend. Also as expected the company received several questions on their SGLT-2 inhibitor which is now facing a much more difficult path given the FDA’s negative panel vote for Dapagliflozin. Once again analysts are wondering if the cancer risks identified with Dapagliflozin is a class effect or is it unique to Dapagliflozin. (Seems we have heard these questions about class effect and diabetes drugs before.) The last piece of the Lilly diabetes pipeline, excluding Bydureon, is another me-too, late to market product and this time it’s a long acting insulin that will likely come to market just about the time the patent on Lantus is expiring, talk about great timing.

Maybe we’re just crazy, and there are probably several companies in the diabetes community who would agree with that last statement, but it seems to Diabetic Investor that the company is continually selling themselves on the BI deal; a deal which is looking like a very bad one with each passing day.  A deal that Diabetic Investor believes was made in haste and was really driven not by science but more to protect the sacred Lilly dividend. A deal which includes a pipeline filled with me-too products which even if they make it to market will come to market late in the game.

The real question that needs to be asked here is why the company continues to fight with Amylin (NASDAQ:AMLN), when Bydureon is their best hope at reinvigorating their diabetes franchise. Why would they hang their hat on a bunch of suspect compounds when they could own the growing GLP-1 market with a truly innovative product? Has the company become so protective of their beloved insulin franchise that they are unwilling to acknowledge the future of diabetes therapy?

The way Diabetic Investor sees it the insulin market is fraught with future pitfalls. Besides the looming threat of generic insulin, Novo Nordisk (NYSE:NVO) and Sanofi-Aventis (NYSE:SNY) are fierce competitors who will not go quality into the night. Common sense, something often missing in the diabetes market, would tell the company it’s better to compete owning a first in class drug in a growing market rather than owning a me-too drug like Humalog which competes in a much more difficult market with less than favorable future prospects.

For the past several years Diabetic Investor has watched the Lilly diabetes franchise slowly fade away. We watched as Novo came into the US and basically ate Lilly’s lunch and went back for seconds. We watched as the company did nothing when Lantus hit the market. We watched them bungle the launch of Byetta. And now we are watching them screw up the launch of Bydureon while embracing a failed partnership with BI.

Frankly there are no reasonable explanations for management’s ill-advised actions with their diabetes franchise. Without some serious changes to their diabetes strategy the company will only accelerate a decline which began years ago; a truly sad state of affairs for a company that was once a diabetes juggernaut.  The simple fact is the ship is taking on water and if they don’t start plugging the holes nothing can be done to prevent this once proud ship from sinking to the bottom of the ocean.