More evidence

More evidence

One of the biggest questions facing the diabetes drug market is how companies would respond to Lilly’s (NYSE:LLY) strategy, how would a one hit wonders such as Januvia would compete against a comprehensive portfolio of diabetes drugs. A sidebar question was is there any way to prevent this market from fully transforming into a commodity market where price trumps performance.

In the past Diabetic Investor has speculated that Lilly with their comprehensive portfolio of diabetes treatments combined with payors preference for single source contracting would create an interesting competitive dynamic. As we have accurately noted when it comes to diabetes drugs while there are slight differences between drugs in the same class the reality is these differences are slight. Put more simply it’s unlikely that a patient would notice any difference taking Januvia, Onglyza or Tradjenta.

As innovative as Lilly’s strategy is the one kink in the armor was how they would respond when the competition fights back. Was there any way to avoid an all-out price war as price was about the only weapon a competitor could use to maintain formulary presence which translates into market share? Again put simply was there any way to prevent the diabetes drug market from becoming a commodity style market?

Well given the results released by Merck (NYSE:MRK) this morning all signs point towards a price war. Go back a few quarters and Merck acknowledged that Januvia sales were being adversely impacted by a more difficult competitive environment, i.e. the competition was using price as a weapon. While Januvia wasn’t exactly struggling it was beginning to appear as if this juggernaut of a franchise was losing momentum.  Seeing this the company did exactly what we thought they would, they fought back and fought back hard.

Looking at Januvia sales which were up 9% this quarter excluding the impact of exchange rates it’s fair to state that this franchise has regained whatever momentum may have been lost just a few quarters ago. A fact which brings up another interesting dynamic which could complicate this market further and provide a lesson to other companies with one hit wonders like Januvia. Namely when all your eggs are in one basket better to protect that basket using any means possible rather than risk seeing these valuable eggs crack. Even if that means accepting a lower overall margin on those valuable eggs. Bottom line better to make some money rather no money at all.

The question is will other companies such as Johnson and Johnson (NYSE:JNJ) who has a one hit wonder with Invokana or Sanofi (NYSE:SNY) whose golden goose is still Lantus will replicate Merck’s strategy. Will they do whatever is necessary to protect their one hit wonders even if that means lower overall margins or risk seeing these golden geese become dead ducks. As we noted before the choice may not be as obvious as it appears and involve a multitude of factors.

Like Merck neither JNJ nor Sanofi is 100% dependent on their diabetes franchises for revenue growth or profits. These franchise are important but not the lone franchises which drive earnings. Take for example what’s going on at Sanofi who just received FDA approval for their cholesterol drug, Praluent®.  Depending on which sales estimates you look at many see Praluent as the next mega-blockbuster in the cholesterol category. Should Praluent achieve this status it would provide Sanofi with some added flexibility for how they price/rebate Lantus.

Think of it this way. Do investors really care which franchise drives earnings growth? The simple fact is investors could care less which franchise drives earnings. For years diabetes was driving earnings for Sanofi, now that Praluent is here a transition may be taking place. This doesn’t mean that Sanofi would abandon Lantus but it does take the pressure off somewhat as they can achieve overall company targets and still accept lower margins for Lantus. Simply put for these large pharmaceutical companies like Merck and Sanofi it’s the big picture that matters not the individual pieces of the puzzle that make up the big picture.

Should Sanofi take a page from the Merck playbook and decide to fight back aggressively and protect Lantus formulary position and corresponding market share watch out. Such a move would place Lilly and Novo Nordisk (NYSE:NVO) in a defensive position forcing them to make some very tough choices. Using history as guide we believe that Lilly and Novo would have little choice but to fight back. Bottom line the price war no one wants becomes a self-fulfilling prophecy.

With each earnings report it’s becoming clearer and clearer that the diabetes drug market is following the diabetes device market and becoming a commodity market.  It’s not like we need more evidence to prove this but that’s what we’re getting with each earnings release.