The Fun Begins

The Fun Begins

Yesterday while Lilly (NYSE:LLY) and Novo Nordisk (NYSE:NVO) were releasing their fourth quarter and full year results the third member of the insulin Sanofi (NYSE:SNY) also made news as they begun patent litigation against Lilly. According to a company issued press release:

“Sanofi (EURONEXT: SAN and NYSE: SNY) announced today that it filed a patent infringement suit against Eli Lilly and Company ( “Lilly”) on January 30, 2014 in the United States District Court for the District of Delaware. In its suit Sanofi alleges infringement of four patents.

The suit was triggered by notifications received from Lilly beginning in mid-December, in which Lilly stated that it had filed a NDA (505(b)(2) New Drug Application) with FDA for an insulin glargine drug product. Lilly also stated that its NDA included a paragraph IV certification challenging six of the seven Sanofi patents listed in the FDA Orange Book for Sanofi’s Lantus® and Lantus® SoloStar® products.

Lilly has also stated that it will not launch its product before the expiry of Sanofi’s patent on the active ingredient in Lantus®, which is in force through February 12, 2015.”

This action was not unexpected and actually was covered by both Lilly and Novo during their respective calls yesterday. During the Q&A of both calls Lilly and Novo executives fielded questions on the subject. In the morning before the Sanofi announcement Phil Johnson Lilly’s VP of Investor Relations stated; …for your question on Sanofi and whether should they sue us; they would enjoy the full benefit of the 30 months, for the 30 month stay. At this point it’s premature to speculate on how that may play out. We have as its required notified Sanofi of our acceptance of our filing with the FDA, and that’s where things stand as of today. So there maybe more developments in the future, but it will be premature to comment at this time.”

Also yesterday Novo’s CEO Lars Rebien Sørensen stated; “First, on the Sanofi, the Eli Lilly situation, it’s a little bit delicate for us to comment on how these 2 players are going to react. First of all, we don’t know the composition of the Lilly product and whether or not the patents that Sanofi has can be brought to bear about that. But I mean, if all other things being equal and a 30-months stay is enacted, with all the uncertainties that you can predict into that, then of course, it would change the competitive picture in the basal market and defer that generic thread, which would, all other things being equal, be a positive to Novo Nordisk, I would imagine.”

Lilly, Novo and Sanofi aren’t the only parties with a vested interest in how this litigation ultimately plays out as payors will also be watching with a great deal of interest. As Diabetic Investor has noted in the past payors are likely rooting for Lilly to win as they can use this victory to force price concessions from Sanofi, who as we have also noted has forced through price increases for Lantus as they knew they had no serious generic threat.

In an interesting side twist here Lilly and Novo are somewhat conflicted as their short-acting insulin’s are facing patent expirations and they too could soon be facing a generic threat for their bread and butter franchises. The ultimate irony could be that Lilly will sue whoever comes out with a generic version of Humalog while Novo will sue whoever comes out with a generic version of Novolog.

Perhaps most ironic of all is the future of the insulin market won’t be determined by which company develops the latest greatest new insulin but by the courts. The simple fact is all the newer insulin’s under development aren’t all that innovation or ground breaking more like incremental improvements to products that already exist. While all the players are doing their best to convince everyone otherwise they realize that should generic’s become available their impact would do serious damage to their bottom lines as payors will gain the upper hand during contract negotiations. As we have seen recently in the short-acting insulin and GLP-1 markets payors aren’t shy when it comes to pitting one player against the other to extort lower prices in exchange for category exclusivity. Both Novo and Lilly have experienced this already with each company being on the winning and losing side of the playing field.

While it’s an understatement to say that Sanofi has the most to lose here as without Lantus they have nothing substantial and a loss in court would likely force the company to make major changes, Diabetic Investor also sees Novo in a difficult situation. Unlike Lilly which is developing a complete line of diabetes therapies, Novo is highly concentrated in the injectable side of the therapy spectrum. Even though the GLP-1 market continues to grow and Victoza continues to perform well the company now has to deal with how AstraZeneca (NYSE:AZN) will compete now that own 100% of the former Amylin franchise. Should Astra do a better than job than Bristol managing Bydureon, and quite frankly they can’t do any worse, Novo will be facing a serious competitive threat to their most promising franchise.

No matter what the outcome of this litigation the insulin market will continue to face pricing pressure as payors will play these players against each other. This same situation is extending to the GLP-1 market which will soon have a new player when GlaxoSmithKline (NYSE:GSK) enters the market. (Glaxo recently received approval in Europe for their GLP-1 offering.)

Diabetic Investor continues to see the diabetes drug market moving further down the path towards commodization even without generic insulin on the market. All one has to do is look at the pipelines of the major diabetes drug companies and they will see them filled with mostly me-too copycat drugs. These drugs will face a smother regulatory path but will create an abundance of choices for payors who will leverage this array of choices to extort the lowest possible price. In many respects the diabetes drug market is following the well-traveled path that glucose monitors did years ago, unfortunately this path did not lead to riches rather to the destruction of the glucose monitoring market. While we don’t see the diabetes drug market collapsing, we do believe the winner won’t be the company with the most innovative drug rather the most comprehensive portfolio of drugs and right now that company is Lilly.