Required Listening

Required Listening

Yesterday during AstraZeneca (NYSE:AZN) Investor Day presentation there was an interesting exchange during the first question and answer session. The company was asked about the co-payment equalization program they have been offering for their recently launched SGLT2 Farxiga® and how long this program will continue. Astra is following a well-traveled path when a drug has inferior formulary placement to a competitor and uses co-pay equalization to level the playing field. The general feeling is that physicians won’t be reluctant to prescribe Farxiga as with these programs the patient will not be paying more out of pocket.

The issue here is one of margin as basically Astra is subsidizing the cost of Farxiga and this subsidy comes out of margin. Now as Astra acknowledged the competition also uses such programs which brings up the bigger point and reinforces what Diabetic Investor has been predicting.  The diabetes drug market has now transformed into a commodity market where price trumps performance with payors in full control over what they will pay and what rebates they except. Payors know full well favorable formulary placement equates to market share gains and that drug companies will do whatever it takes to gain favorable formulary placement.

The fact is the use of co-pay equalization is one of the few weapons Astra has to fight back when they don’t have favorable formulary position. About the only option is what we like to call the nuclear option and give away the drug for free. The problem with either option is obvious these programs crimp margins and cannot be maintained over the long term. Which points to the bigger point and the problem faced by every diabetes drug company, just how can they make money when the market is commoditizing.

Diabetic Investor suspects drug companies will use some of the same tactics used by blood glucose monitoring companies as that market transformed into a full blown commodity market.  We all know the drill by now first comes cost cutting, followed by more cost cutting and then finally even more cost cutting.

This is another reason we believe that Astra must somehow add insulin’s to their diabetes portfolio if they are ever to stand a chance of competing with Lilly (NYSE:LLY) head on. Besides commodization of the market so too is single source contracting the order of the day and right now only Lilly has a full portfolio of diabetes treatment options.

Which points to another strategy used by BGM companies when the market commoditizes scale, massive scale is critical for survival. This is one reason we believe that a company like Sanofi (NYSE:SNY) who holds their investor day tomorrow must go big or go home. That buying Astra is about the only option they have for remaining relevant in diabetes.

The bottom line here is when it comes to diabetes drugs it’s no longer about who has the best in class compound. It’s no longer about how deep the pipeline is. This market is about right-sizing operating units so that these units can make money. For some companies this will mean getting bigger while for others this will mean getting leaner.  The harsh reality here is there isn’t much wiggle room for any company in the middle.  This is just one more reason Diabetic Investor sees the already active M&A activity heating up in the diabetes drug arena. Some tough choices will need to be made and the clock is ticking.