This should have surprised no one

This should have surprised no one

Shares of Sanofi (NYSE:SNY) are getting hammered this morning as the company finally acknowledged what readers of Diabetic Investor have known for some time, things aren’t going so well with the company’s diabetes franchise. Yet based on several headlines from the various financial media sites, investors are stunned by this news. An article posted on the Wall Street Journal’s web site states;

“Sanofi SASAN.FR -8.85% became the second European drug maker to be hit by cold winds from across the Atlantic Tuesday, as pharmaceutical companies reel from price squeezes in the U.S., their most profitable market.

Shares in Sanofi fell 8% as its forecast of flat diabetes drug sales next year stunned investors. Analysts had penciled in double-digit growth in the French company’s most important business line.

Sales of its best-selling drug, the insulin Lantus, disappointed analysts in the third quarter, while its new forecast could spark low to mid-single digit earnings downgrades for 2015, estimates Deutsche Bank.

U.S. pricing pressures have forced Sanofi to cut the price of Lantus in order to compete with rivals, and the company noted that “the increased rebates in the U.S. and the impact of the Affordable Care Act will continue in 2015.”

Perhaps more stunning here is how clueless the analysts have been, how they believed the horse manure the company was shoveling about how diabetes would be just fine.  We hate to say this but all Sanofi really did today was publicly acknowledge what Diabetic Investor has been saying for months. The diabetes drug market is becoming a commodity style market where price favors performance. The insulin market is ultra-competitive with Novo Nordisk (NYSE:NVO) and Lilly (NYSE:LLY) using price as a weapon to gain and hold share. After years of increasing the price of Lantus, payors are pushing back demanding price concessions, larger rebates or both. The fact is other than Lantus, it’s been a series of failure for diabetes – Apidra, iBGStar and Lyxumia. That the partnership with MannKind (NASDAQ:MNKD) isn’t the answer, that Toujeo® isn’t the answer, that the company has failed to execute on what was once a very promising strategy.

What’s almost laughable here is that this public acknowledgment of the company’s failures in diabetes comes just when rumors have been spreading in French media that the Sanofi Board of Directors is looking to replace CEO Chris Viehbacher.; rumors which prompted Mr. Viehbacher to write a letter to the Board which outlined the reasons why he shouldn’t be replaced. A letter which was ultimately leaked to French media and which Diabetic Investor believes was leaked by Mr. Viehbacher or a member of his team.

As we noted just yesterday the gist of the letter was that Mr. Viehbacher believed he should be retained because of past performance. To which we countered that past performance does not guarantee future results and that it might just be better if Sanofi and Mr. Viehbacher part company. Today’s acknowledgment of just how badly the company has managed their diabetes franchise, how unprepared they were for the coming patent expiration for Lantus and the many notable failures in diabetes gives the Board the ammunition they need to move forward.

Just as we noted yesterday the stakeholders who’ve been rewarded by Mr. Viehbacher’s past performance don’t want to see those gains erased because the Board didn’t act.  The situation at Sanofi reminds Diabetic Investor of how quickly fans of American football can turn on once beloved head coaches, coaches who at one time were hailed as geniuses only to be vilified when their team failed to make the playoffs. The simple fact is for American football head coaches and corporate CEO’s it’s all about winning and past victories doesn’t matter when current loses keep mounting.

Perhaps the best news for Sanofi is that they have finally acknowledged they have a problem in diabetes. That it just might be time to do something about it, that the current strategy just isn’t working and it’s time to start fresh.  Diabetic Investor believes this process has already begun and that ultimately the Board will replace Mr. Viehbacher and find someone “French” enough to get the company back on track. Maybe someone who will do something big and bold by acquiring the diabetes franchise from AstraZeneca (NYSE:AZN) or even bigger and even bolder do the reverse and sell the Sanofi diabetes franchise to Astra.

It’s difficult to be optimistic for Sanofi looking into the future, that crystal ball grows cloudier when one looks at the past missteps made by management. Yes they had a very long and very profitable run with Lantus but other than Lantus it would be a major stretch to call anything else in diabetes a success. The diabetes drug market is changing before their eyes and they are ill-equipped to deal with these changes. The partnership with MannKind should have sent a clear signal to analysts, stakeholders and Board members that the party was over, that there was no diabetes strategy and desperation had turned into full blown panic.

The good news here is that the readers of Diabetic Investor, even the ones in France, knew this was coming. That for months we’ve been outlining that the Sanofi diabetes franchise was like a house of cards getting ready to tumble. That the company’s diabetes pipeline had nothing of substance and that the partnership with MannKind was a very bad and very costly deal that had little chance of success.

The fact that analysts bought into the company’s line really doesn’t surprise Diabetic Investor as these are the same people who ignored our repeated notes that Exubera would fail. These are the same people who were stunned when Pfizer ultimately lost $4 billion because of Exubera.  The truth is most of these analysts are clueless when it comes to the complexities and nuances of the diabetes market, a market which we have been noting is undergoing a major transformation.

Quite honestly no one should have been stunned or surprised by today’s news as the handwriting has been on the wall for some time.  This is like Chicago Bears fans who are stunned that the Jay Cutler is an inconsistent quarterback or that the defense couldn’t stop a high school football team. To Diabetic Investor anyone who was stunned by this news is like many delusional Bears fan who see hope because as the Patriots were embarrassing the former Monsters of the Midway the game well out of reach the offense finally scored and the defense played well against the Patriots second teamers. The fact is the Bears and Sanofi have something in common as neither can execute news which should stun neither Bears fans nor analysts who follow Sanofi.