Roche and Lilly Report

Roche and Lilly Report

This morning both Lilly (NYSE:LLY) and Roche reported second quarter results which confirmed just how difficult market dynamics are in drugs and devices. Another significant development which will add even more pricing pressure to both markets was the news that Anthem is about to acquire Cigna for $48 billion.  There is no question the competitive landscape in healthcare is undergoing major change as payor consolidation continues. Now that the big five payors is becoming the big three look for these larger players to exert even more influence over pricing.

Taking a look at Roche, results clearly confirm that like Abbott (NYSE:ABT) who reported yesterday when it comes to glucose monitoring the company has surrendered the US market to LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), and is content to rely on international markets. This really isn’t surprising given the competitive dynamics of the US market and Roche’s stronger presence internationally. The reality is neither Roche nor Abbott can afford to compete with LifeScan in the US.

The company shed no light as to whether they plan to spin off the diabetes unit into a private company as has been widely speculated. Diabetic Investor suspects that Roche like Abbott is basically in a holding pattern. Both companies have stabilized their respective units which when combined with aggressive cost cutting has bought them some time. The strategy at the moment is to do what they can to hold onto a presence in the US while placing a greater emphasis on international markets.

Looking into the future both companies are hoping that Panasonic/KKR buying the Bayer diabetes unit will spur more interest from the private equity sector. Until that time however they are content to accept the reality of the situation.

Turning our attention to Lilly for diabetes it was a mixed bag of results. Sales of their short-acting insulin Humalog decreased by 7% for the quarter which the company attributed to lower net effective selling prices. Which is a polite way of saying they are getting squeezed by payors.

Although the company did not break out results for Trulicity their once-weekly GLP-1, it was obvious from their comments that is a very important product. Like AstraZeneca (NYSE:AZN) and GlaxoSmithKline (NYSE:GSK) who also have once-weekly GLP-1’s on the market they see this category growing. They also know it’s just a matter of time before Novo Nordisk (NYSE:NVO) gets their once-weekly GLP-1 onto to the market. Simply put what this means is the GLP-1 market will follow the same path as the insulin market where price rather performance will dictate formulary presence and market share.

In essence this is the story for the diabetes drug market, a market which as we predicted is becoming a commodity market. Diabetic Investor still sees Lilly as having a major advantage given the depth of their diabetes portfolio. However as we suspected this advantage is being somewhat offset by competitors who are fighting hard to maintain their market share. We’ve said it before and we’ll say it again the diabetes drug market is not for the faint of heart and has become an all-out no holds barred battle.

The key for everyone in this market is no longer how their respective products perform. The key now is the ability to run an efficient operation. As we noted yesterday this is one reason we cannot imagine a scenario where Sanofi (NYSE:SNY) does not join others in the space and reduce costs. Looking over the pipelines of the respective companies there is nothing on the immediate horizon which is a game changer. In other words there is no wonder drug coming that will save the day.

It’s about time that everyone begin to accept a few facts most notably that for the diabetes market both drugs and devices innovation while important is taking a back seat to running a leaner operation. These companies can no longer afford huge and very expensive sales teams. They must be very strategic and thoughtful about how they spend capital. When it comes to product development they must be cognizant that for the moment innovation isn’t being rewarded with higher reimbursement levels. Finally they must begin to prove the products they offer have a direct and positive impact on patient outcomes.

We know this sounds like a recording but outcomes based reimbursement will forever transform this market. Any company that ignores this fact is at risk of becoming a dinosaur.