Not much fun

While the toy makers are enjoying a pretty good run these days the same cannot be said for insulin companies. On a year to date basis shares of Lilly (NYSE: LLY) are up just under 2%, Sanofi (NYSE: SNY) down almost 10% and Novo Nordisk (NYSE: NVO) down almost 17%. Novo shares were hit hard at the end of last week when a report in Danish newspaper stated the company was going to lay off 3000 employees and will be withdrawing their long term financial guidance.

To pour salt in the wound the companies are also facing a public relations nightmare being blamed for the “high” out of pocket cost of insulin.

We’d like to say there is a ray of sunshine among the dark clouds but looking at the long term forecast it’s difficult to find reason for optimism. The long-acting segment of the market has fully commoditized while the short-acting market will soon follow. The GLP-1 market, which all three play in seems in better shape until one considers this market too is on its way to commoditization.

It should also come as no surprise that all three insulin makers are making the deep dive into the device pool. Lilly is developing an insulin pump while Novo and Sanofi are both developing their version of a Tyler. A move we suspect Lilly will make if for no other reason Novo and Sanofi are doing it.

Of the three Novo has the most reason for hope as their oral version of semaglutide continues to look very promising. Of course, this is Novo a company who has never meet a study they didn’t like so the question is will they get this damn thing to the FDA quick enough.

This dismal state of affairs makes us wonder which of three will be bold enough, or perhaps we should say desperate enough, to leave the reservation and try something different. That instead of fighting a losing battle with payors who hold the keys to the kingdom, offer something that hasn’t been done before. For years we’ve been stating that it’s just a matter of time before patients are prescribed a diabetes management system (DMS). A system which includes everything the patient needs to manage their diabetes.

As it stands today Lilly is in the best position to make such a move as they have the most comprehensive portfolio of diabetes therapies. Throw in insulin delivery, not just a pump but a Tyler too, and the company could realistically offer payors a different option. They could walk in the door and basically say to the payor, “Hey we’ll handle all your diabetes patients for X no matter what therapy regimen they use.”

Let’s say Lilly gets bold, something we doubt, and gets a payor to bit. This would set off a chain reaction that could change diabetes management forever. All of sudden AstraZeneca (NYSE: AZN), yes, they are still in diabetes, becomes a hot commodity as next to Lilly they have a comprehensive portfolio of diabetes therapies. Bolted onto either Sanofi or Novo and all of a sudden Lilly has a serious competitor on their hands. This move which makes so much sense on so many levels that it will likely never happen if for no other reason that deals that make sense just don’t happen in our wacky world.

However, if nothing changes, if one of these companies does not think outside of the box, they are all doomed. They will forever be at mercy of payors who control formulary access forcing all three into the endless cycle of price cuts and/or higher rebates. A cycle which has created their PR nightmare as all three companies have continually raised the list price of insulin so that after discounts and rebates the net effective selling price remained in an acceptable range.

The fact is these companies can not cut their way to growth. While cost cutting has short-term benefits companies do reach the point where there is nothing left to cut. This is what happened in the BGM market and if they reports about Novo are accurate looks to be happening in the drug sector too. While it would have seemed unthinkable years ago the possibility now exists that one of these companies could become so frustrated with market dynamics that they decide its time to get out of the market entirely.

Sanofi is the best candidate for a complete diabetes divestiture yet the company seems intent on throwing good money into a bad situation.

Novo for their part is strategically in the worst position as unlike Lilly or Sanofi they do not have other franchises which could pick up the slack. Yes, Novo has other drugs but for all practical purposes Novo’s fortunes rise and fall in the diabetes market. Simply put Novo has the most to lose here.

One would think at some point that one of these companies would get tired of having their heads bashed in by payors. That they would look at the landscape and realize that if they don’t try something different these franchises which at one time generated huge profits will become second class citizens. That the cycle will force them into deeper cuts just so they can make a profit.

Nope it’s not too much fun being an insulin company these days and the days ahead without any major changes will be even less fun.