The price of failure

The price of failure

It appears our wine drinking friends in France have gone on a deal binge. After spending $11. 6 billion to acquire Bioverativ Inc. the company doubled down and spent another $4.8 billion to acquire Ablynx NV, outbidding Novo Nordisk (NYSE: NVO) who had offered $3.1 billion for the company. Whether these deals work out for Sanofi (NYSE: SNY) remains to be seen. However, this deal binge does have serious implications for all the insulin makers including our friends at Lilly (NYSE: LLY) who reports results tomorrow.

As is customary whenever a company spends $16 billion everyone looks to the future. However, to us what these deals show is the high price when a company fails to execute. Believe it or not there was a time when it looked like Sanofi had the bull by the horns and would become the dominate diabetes company. Their lead product, Lantus, had no competition and money was falling from the sky. Back then the company embarked on an aggressive diabetes strategy, moving into BGM, adding a short-acting insulin plus a GLP-1. They also appeared to be on their way to being the first company to have a comprehensive diabetes management system.

Yet as promising as the future looked threats loomed on the horizon, most notably a biosimilar Lantus was on its way. To fend off this threat the company came up with Toujeo which was supposed to be superior to Lantus but, was only marginally better. They also over-hyped what they thought was Toujeo’ s biggest selling point, fewer hypoglycemic events. After years of forcing price increases down the throats of payors, it was time for payback and payors weren’t buying what Sanofi was selling. They knew Basaglar was coming and its arrival would allow them to exact their revenge.

Their push into BGM with the way cool now way dead iBGStar was a disaster. Apidra their short-acting insulin failed as well and as did their push into the expanding GLP-1 market. It was becoming obvious to everyone, everyone that is other than Sanofi management, that Lantus was a one hit wonder while everything else they touched in diabetes failed miserably. Today this franchise is a shell of its former self as the company just laid off another 400 employees.

Yet Sanofi isn’t the only diabetes company who made serious mistakes. Novo also seriously miscalculated where the diabetes drug market was going. They too overestimated what payors would pay for their long-acting insulin’s. This company which had a history of producing premium products which in turn received premium reimbursement could not adjust to the fact that diabetes drugs were now a commodity and in commodity market price trumps performance.

When everyone else was cutting costs, Novo did the opposite adding more sales people. When everyone was reexamining their pipelines, Novo made no changes. When everyone else was capitulating to payors Novo didn’t play the game. It was not until it became obvious that major change was needed did the company act. Like Sanofi Novo just could not accept the fact that the diabetes drug market had become a commodity market. This new way of doing business went against the company’s DNA.

The company finally woke up, began making major changes but the question became was this too little too late.

The fact is Sanofi and Novo are paying a heavy price for their failure in diabetes. Something that should not get lost on our friends at Lilly.

There is no question that today Lilly is the premier diabetes company. They have the most comprehensive portfolio of drugs and seem to understand that this is a commodity market. However, like Sanofi did years ago, they seem to be ignoring threats that loom on the horizon. Humalog, their short-acting insulin is about to face a biosimilar threat from Amedlog and as we said back when Lantus was about to face its biosimilar threat payback will be a bitch.

The company is also embarking down another Sanofi path adding devices to the mix. This push into the insulin pump market is especially problematic. Not only are they going it alone, they are trying to do it on the cheap. As we noted during JPM we cannot believe that CEO Dave Ricks could be so blind to the many threats Lilly faces. Not only did he pick the most difficult device market to enter he doubled down on the level of difficulty by building rather than buying his way in.

Listen we have seen the French version of this movie and the ending isn’t pleasant. Like Sanofi and Novo, Lilly could end up paying a heavy price if their diabetes franchise falls short of expectations. Based on his public comments Mr. Ricks is as clueless as the now beheaded Chris Viehbacher was when Basaglar was about to hit the market. We also question this move into diabetes devices, history tells us pharmaceutical companies and devices are like oil and water, they just don’t mix.

The real question is will Lilly realize this or has the train left the station already. Can they make the necessary changes and avoid the mistakes made by Sanofi and Novo or will they suffer from the same institutional hubris? Yes, things are going well today as they were with Sanofi and Novo, but this can change in a hurry. Sanofi and Novo failed to recognize what was happening, then doubled down before finally accepting reality. We hate to say this, but Lilly seems to be on the same path, they show all the signs of ignorance combined arrogance.