The Grand Experiment

The Grand Experiment

Years ago it seemed after being an industry leader Lilly (NYSE:LLY) was in serious danger of becoming an also-ran in the diabetes space. Boy have times changed as there is no question Lilly is back and back in a big way. As it stands today no other company in the diabetes drug space has a more comprehensive portfolio. What’s truly intriguing is that as extensive as this portfolio is no one, not even Lilly for that matter, is sure this strategy will work. Quite frankly Lilly is embarked on a grand experiment.

The Lilly strategy seems to fit perfectly into the new regulatory and reimbursement paradigm. In essence Lilly has decided that while it would be great to have the best in class in each drug category, a company can still succeed with drugs that match the competition in terms of performance. With payors increasingly moving towards single source contracting in attempt to control costs, Lilly appears to have the upper hand.

What makes this strategy even more intriguing is that Lilly has gone from playing defense to playing offense. The company has basically forced the competition to make some very difficult decisions. Do they try and match Lilly’s portfolio or do they use price as a weapon to gain share? A perfect example of this is how GlaxoSmithKline (NYSE:GSK) is pricing their new GLP-1, Tanzeum. Given how GSK is pricing Tanzeum it appears they have chosen to use price as a weapon. GSK knows that Lilly also has a once-weekly GLP-1 coming to market. They also know that Bydureon from AstraZeneca (NYSE:AZN) continues to underperform in the marketplace. A situation Astra hopes will be rectified when the Bydureon pen delivery system hits the market. In essence GSK has decided that while Astra fumbles about with the Bydureon pen launch and Lilly’s GLP-1 not yet approved there’s no time like the present to grab as much market share as possible even if that means selling the drug at lower price point.

This same situation could play itself out in Europe when Lantus goes off patent and Lilly’s generic version of Lantus, which was recommended for approval in Europe, comes to market in 2015. Sanofi (NYSE:SNY) so far has blunted Lilly here in the US with a legal fight but this isn’t the case in Europe. Like GSK, Sanofi faces a difficult decision over how to respond. How this plays out in Europe could well foreshadow how Sanofi will respond here in the US when the court fight with Lilly is over. In a strange sense of irony it is now Sanofi who is at risk of becoming irrelevant in the diabetes drug space as they have nothing in their pipeline that will come even remotely close to replacing the revenue that will be lost when Lantus goes off patent.

At the moment only Novo Nordisk (NYSE:NVO) and AstraZeneca come close to matching Lilly’s portfolio. However both companies have gaping holes in their portfolios, Astra’s huge hole is insulin while Novo’s equally large hole is orals. Like GSK and Sanofi, Novo and Astra are in the uncomfortable position of playing defense. Do they use price as a weapon to maintain share and accept lower margins? Or do they spend valuable capital to develop or acquire the drugs they need to fill the holes in their respective portfolios?

The brilliance of Lilly’s strategy is that no company in the diabetes drug space is immune from its potential impact. Johnson and Johnson (NYSE:JNJ) is off to great start with Invokana® while Merck (NYSE:MRK) has the Januvia franchise. Yet even as successful as these drugs are they are not safe.

Sitting in the catbirds seat are the payors who can use Lilly’s strategy as tool to force even greater price concessions. Payors know they have the upper hand as they can determine market share with which drug gains preferred formulary placement. This is exactly what they have done in the blood glucose monitoring space and what they are beginning to do in the diabetes drug space. With cost control being the order of the day look for payors to be overly aggressive asking for and getting companies to capitulate to their pricing demands.

This is the one potential monkey wrench in the Lilly strategy as no one knows for certain that the company will win the battle. Yes it’s true that payors are increasingly favoring single source contracting. However payors are also doing everything they can to rein in costs and will be more than happy to watch companies battle over price. The simple fact is there is nothing more that payors want than an all-out price war in the diabetes drug market.

Diabetic Investor suspects with all the deal making that’s been going on the wacky world of diabetes is about to get even wackier. The simple fact is about the only way anyone is going to effectively compete with Lilly is to go out and buy what they need. Things are about to get very interesting, very interesting indeed.