Maybe Lilly has the right plan.

Maybe Lilly has the right plan.

This week the diabetes world will descend upon the historic city of Berlin for the 48th annual meeting of the European Association for the Study of Diabetes (EASD).  As with all such meetings there will be a plethora of data released combined with normal scuttlebutt about who’s buying whom. Surly there will be discussions and debate as to the current state of the diabetes and just where this market is headed. One topic that is unlikely to discussed, at least publicly, is the future of Eli Lilly (NYSE:LLY).

This once proud franchise has fallen on hard times and too many in the industry is no longer a relevant player. Many believe, as Diabetic Investor does, that the company blew their chance to get back in the game when they dumped Amylin and instead chose to partner with Boehringer Ingelheim. Now in the hands of Bristol Myers (NYSE:BMY) and AstraZeneca (NYSE:AZN), Bydureon just might become the mega-blockbuster drug and actually bring about a seismic shift in how Type 2 diabetes is treated. This is by no means a sure thing, however the chances of this happening are far greater now that Amylin is owned by Bristol/Astra and no longer handcuffed by their former partner who never truly believed in the GLP-1 category from the start.

The fact is for a company who once owned the diabetes market, the insulin market in particular, management failed to see where the market was going and falsely believed that their leadership position was never in serious danger. The first signs of managements failure appeared years ago when Novo Nordisk (NYSE:NVO), long a strong player overseas, decided to get serious about the United States and went after Lilly with a vengeance. Next Sanofi (NYSE:SNY) came along with Lantus, now the world’s number one selling insulin, catching Lilly flatfooted and unprepared. Finally there is the Amylin debacle which is not unlike the Americans blowing their huge lead in the Ryder Cup yesterday. The fact is Amylin was Lilly’s last chance to remain a serious player in diabetes and just as the Americans blew a 10-6 lead going into the final round yesterday, Lilly let their one last chance to score a big win get away.

Today the company is a mere shell of its former self. Their existing drugs are quickly becoming commodities soon to face generic competition and their pipeline is full of me-too, late to market drugs that offer nothing substantive over what’s already on the market. With nothing substantial to offer the company has resorted to deep price concessions to keep the factories running. And as sure as night follows day it’s just a matter of time before they announce even deeper cuts in their already depleted sales and marketing teams.  Lilly in an ironic way is following the model used by diabetes device companies who’ve been dealing with a commodity market for years now and has decided to milk their diabetes franchise dry until the well runs dry.

Perhaps this was the plan all along and the company is actually a lot smarter than we thought. Perhaps they looked into the future, as Diabetic Investor has, and have a seen a new world order in diabetes. Perhaps they realize that while generic insulin will not appear the day after patents expire they are coming and coming with a price point which will make their life a living hell. As we noted with Sanofi and coming Lantus patent expiration, payback is a bitch. Just as Sanofi pushed through price increases for Lantus, Lilly pursued a similar strategy for their short-acting insulin’s.  A strategy that was fine with no generic threat to empower payors, but a poor one now that generics are right around the corner.

The same can said about their oral medications. Rather than develop truly innovative new drugs or therapy options, the company instead is developing the same drugs as everyone else and to make matters worse they are well behind everyone else. However, maybe this was the plan all along as the company perhaps believed that cost not performance will determine market share.  Perhaps they believe that healthcare reform with its fixation on costs rather than outcomes will push America further towards the British system where cost is a factor when it comes to drug approval. Perhaps they reasoned that it really doesn’t matter whether they are first to market or not as what a drug costs will be as important, perhaps more so, than whether it’s effective at helping the patient achieve better outcomes than existing therapy options.

Maybe, just maybe, Lilly had it right all along and everyone else had it wrong? Given the current market conditions, regulatory environment and worldwide economic situation one could argue that Lilly is actually well ahead of everyone else who is foolishly trying to develop new and innovative therapy options. Options that will cost billions to develop and likely come with a premium price that no one will want to pay. This is the dilemma now facing Novo Nordisk.

Looked at realistically as much as everyone likes to complain about the FDA, the regulatory environment is not the only factor driving drug development. Truth is we already have some very effective therapy options for treating diabetes and at the moment the vast majority of drugs under development will only offer minor improvements.  In the real world everyone pretty much knows that while improvements in therapy options are always welcome, we would see much better patient outcomes if patients actually took their medications and had a better understanding of how to manage their diabetes. We’ve said it before and we’ll say it again, diabetes drugs are really no different than diabetes technology in that neither helps all that much when they are not used properly.

The fact is payors and healthcare reform are doing more to damage drug development than the FDA could ever do. Frankly it does not make sense to risk billions on developing new and innovative therapies when the financial payoff may not exist.  While no one likes to talk about it in public, diabetes is not just a chronic disease but a huge global business. And companies like Lilly, Sanofi and Novo have stakeholders who want to see the companies they invest in make money. These are not non-profits who don’t have shareholders they must answer too.

So perhaps when it’s all said and done Lilly is actually following the right path after all. At least this is what management must believe as to acknowledge that they have taken a once great franchise and run it into the ground would be akin to the Americans believing they had the Ryder Cup won after Saturday’s rounds were completed. The only problem was they still had to play on Sunday and as we witnessed nothing is over until the final putt has fallen.