This is not good news
Yesterday UnitedHealth announced they would be acquiring Catamaran Corp for almost $13 billion. This deal will place UnitedHealth in third place behind Express Scripts and CVS Health in terms of number of prescriptions filed plus provide the combined entity with greater leverage when negotiating with drug companies. Suffice it to say the news of this deal was not well received by any drug company but this is particularly bad news for diabetes drug companies.
As we have been reporting the diabetes drug market was already moving towards becoming a commodity market and we see this move as just one more step down this dangerous path. This is what happens when companies fail to develop innovative new therapy options and instead develop a series of me-too copycat drugs. This is what happens when companies develop new versions of older drugs which really offer no compelling benefit over the drug they are supposed to replace. This is what happens when the overly conservative nature of the FDA hampers innovation, adds not just more risk to the process but more cost to an already risky and costly process.
Add in the fact that it’s just a matter of time before we have biosimilar insulin’s available and it’s easy to see why the balance of pricing power is shifting completely to payors. That just as payors had the upper hand when the glucose monitoring market transformed to a commodity market so too will have the upper hand in the diabetes drug market. Payors know that scale is critical and that formulary position translates into market share. They know that diabetes drug companies will do whatever it takes to protect their investments. As we noted just last week this is going to be all out knock down take no prisoners battle and this was before the UnitedHealth deal was done.
Given this set of dynamics one has to wonder how Lilly (NYSE:LLY), Novo Nordisk (NYSE:NVO), AstraZeneca (NYSE:AZN) and Sanofi (NYSE:SNY) will adjust. This is not to say that a company like Merck (NYSE:MRK) won’t be impacted rather Diabetic Investor believes companies with a broader portfolio of drugs will have tougher choices to make. Do they themselves go for scale filing the holes in their existing portfolio or do they retrench and scale back sales and marketing costs?
This dilemma is particularly acute at Novo, Sanofi and Astra as unlike Lilly they each have gaping holes in their diabetes portfolio. Holes which given how quickly this market is transforming would be filed via acquisition. The harsh reality Sanofi, Astra and Novo don’t have the luxury of time to build a portfolio that would match Lilly’s. Diabetic Investor also sees another benefit here as Novo, Sanofi and Astra would not have to add more sales people as they each could use their existing sales forces to sell the drugs that would be added to their portfolios.
Considering what Serge Weinberg said about acquisitions it doesn’t seem likely that Sanofi will be making any deals. However one has to wonder whether Serge would consider divestitures. As we have stated many times Astra is the company closet to Lilly in terms of depth of their diabetes portfolio. The gaping hole in the Astra product line is insulin something that would be quickly solved by acquiring Sanofi’s diabetes portfolio.
Finding a suitable target for Novo is more problematic as the gaping hole in their portfolio are oral therapies targeted at Type 2 patients. Novo has one of the strongest portfolio of injectable medications but has little experience with orals. The big problem here is finding someone other than Astra who has the oral meds Novo needs to file the holes in their portfolio. Another issue for Novo is their culture as unlike Astra or Sanofi they like to build from within and aren’t generally comfortable doing deals.
Yet Novo, Astra and Sanofi aren’t the only companies impacted here. One hit wonders such as Merck with their Januvia franchise and Johnson and Johnson with Invokana will also have some decisions to make as each is facing new competition. Given that GlaxoSmithKline (NYSE:GSK) only has Tanzeum it more than likely they would be sellers not buyers.
The real question is does a drug company have to have scale or can they survive with a limited product portfolio? The honest answer is Diabetic Investor has no idea. What we do know is that many of the things we predicted long ago are beginning to come true and the dominos aren’t lining up well for the drug companies as we move forward. The shift to a commodity market has begun and once started the genie cannot be put back in the bottle. What’s required now is some very tough choices and experienced, talented leadership. Something that’s been in short supply in the diabetes drug market.
Diabetic Investor continues to believe that Lilly and Novo have the best chance at dealing with this new world order. Astra has a chance but only if they can stay focused and add insulin. Sanofi is in the worst possible position and their change in leadership, assuming Brandicourt is allowed to lead, couldn’t come at a worst time.
The market is transforming and doing so quickly. Let’s see who’s up to the challenge.
