One sentence says it all

One sentence says it all

“U.S. sales of Humalog have also been negatively impacted by the product’s removal from a large formulary in 2012.” This one sentence from the Lilly (NYSE:LLY) earnings announcement, released this morning; perfectly explains what’s happening in the insulin market.  In fact the section which covers Humalog® in the earnings announcement is very telling:

“For the fourth quarter of 2012, worldwide Humalog sales decreased 7 percent, to $616.0 million. Sales in the U.S. decreased 19 percent to $331.6 million, driven by lower net effective selling prices due to increased government and commercial rebates and changes in estimates for sales rebate reserves based upon updated information. U.S. sales of Humalog have also been negatively impacted by the product’s removal from a large formulary in 2012. Sales outside the U.S. increased 12 percent to $284.4 million, due primarily to increased demand.

For the full year of 2012, worldwide Humalog sales increased 1 percent to $2.395 billion. U.S. Humalog sales for 2012 were $1.371 billion, a 2 percent decline due to increased government and commercial rebates. U.S. sales of Humalog have also been negatively impacted by the product’s removal from a large formulary in 2012. Humalog sales outside the U.S. were $1.025 billion, a 6 percent increase driven by higher demand, partially offset by the unfavorable impact of foreign exchange rates.”

The harsh reality for not just Lilly but Sanofi (NYSE:SNY) and Novo Nordisk (NYSE:NVO), the two leading insulin players, is both the short and long-acting insulin markets are quickly becoming commodity markets where price favors performance. This is not just happening because Humalog ® ,Novolog® and Lantus ® are all facing patent expirations although this fact will just accelerate a process which the insulin companies themselves started.

What’s really amazing is the management teams at these companies seem to believe they are the only ones who can use price as a weapon to gain market share. They also seem to believe that their competition will sit there and take it rather than fight back. Just in case there is anyone who does not believe this Diabetic Investor suggests listening to the past two years of Lilly conference calls. Granted this would not be all that exciting but it would provide an excellent glimpse into the mindset of Lilly’s diabetes management who is on the fast track to receive a Diabetic Investor Wacky Wabbit. These geniuses actually believed that Novo would not respond back when Lilly basically bought the insulin business from three major plans. Not only did Novo fight back but they fought back with guns blazing and guess what, surprise, surprise the next thing you know there is a full blown price war going on.

Diabetic Investor is beginning to believe there must be something in the Indianapolis water supply which causes once dominate companies, with what were great products and leading market positions to all of a sudden turn into complete idiots. Listen Diabetic Investor has nothing against this beautiful Midwestern city but seriously how else can you explain a scenario where not just one but two companies go from the penthouse to the outhouse in such a short period of time. We used to believe that Roche had the monopoly on idiocy as it takes real talent to take a billion dollar franchise and turn it into a million dollar one. Yet, Lilly is giving Roche a serious run for their money as they are turning a multi-billion dollar legacy franchise into also-ran million dollar business unit.

And is it really necessary to mention that Lilly continues to believe that a series of me-too, copycat, late to market drugs will somehow reinvigorate their diabetes franchise. Does it do any good to remind everyone that at one time the company was partnered with Amylin who just so happened had the most promising diabetes drug to come to market in some time, a drug which had a true competitive advantage, would not face patent expiration for years and would likely command a nice price.

The honest truth is that Lilly can no longer be considered a leader in diabetes; frankly that position was surrendered years ago.  Novo and Merck (NYSE:MRK) have more promising pipelines, better overall approved products and the will to fight. The way things are going at Lilly the diabetes franchise, once the heart and soul of Lilly, will be a mere shell of its former self. The unit, once known for developing innovative solutions, will become a provider of cheap knock offs. All because management felt it more important to protect their precious dividend rather than make a clear case to their stakeholders why change was needed. Stakeholders who really have no one but themselves to blame for this lame management team as long as they allow them to remain at the company.

At Lilly there is plenty of blame to go around, sad but true.