Uneasy is the King who wears the crown

Several items stood out today when Lilly (NYSE: LLY) released fourth quarter and full year results so let’s get right to it;

1. Diabetes is the king of the castle but uneasy is the man who wears the crown.

There is no question that the strategy the company embarked on years ago is paying big dividends today. One number that jumped out today was sales for their once-weekly GLP-1 Trulicity which reached full year sales of over $2 billion.

However, as well as diabetes is doing the company is facing several challenges. As the company noted the diabetes drug space is very competitive resulting in increased rebating and discounts. Simply put as we anticipated their competitors are using the one weapon they have to compete, price. This is the price Lilly must pay to maintain their leadership position.

2. Many threats loom on the horizon.

Humalog sales reached of nearly $3 billion for the year yet Amedlog from Sanofi (NYSE: SNY) is coming. Basaglar reached over $430 million for year yet more biosimilar long-acting insulins are on the way. Jardiance had sales of almost $450 million for the year but the SGLT2 class is crowded and while the class is growing competition is fierce. As we noted Trulicity is doing great however the oral version of semaglutide from Novo Nordisk (NYSE: NVO) isn’t far off. Additionally, with the label change coming for Victoza also from Novo the GLP-1 arena like everything else in diabetes is becoming an all-out fist fight.

Before we go further we should note that Novo reports tomorrow and we suspect given the comments made by Lilly this morning they too will confirm just how competitive this space has become.

3. Today’s press release stated;

“The company initiated a clinical trial to evaluate the functionality and safety of its automated insulin delivery system in Type 1 diabetes, which is a hybrid closed-loop platform that uses connected devices — an insulin pump with a dedicated controller, dosing algorithm and continuous glucose monitor — to automate insulin dosing. This system is part of the Connected Diabetes Ecosystem, which is being designed to make diabetes management easier by enabling people to use insulin more effectively.”

First, we suspect that Lilly will have no problem getting this system through the FDA and onto the market. That’s the easy part. We continue to have major reservations on whether the company truly understands the insulin pump market and if they are prepared to handle it’s many complexities.

We did get a good chuckle with the ecosystem remark. Yes, it seems Lilly has fallen in love with interconnected diabetes management as did Johnson and Johnson (NYSE: JNJ), Sanofi and nearly everyone else in diabetes. Too bad this ecosystem is polluted with the realities of how our wacky world operates. Lilly like others before them and others to come continue to be fascinated with the toys and fails to grasp this isn’t about way cool whiz bang toys, this is all about getting patients to play with these toys.

Going forward nothing much has changed in terms of the diabetes drug space. The space has commoditized and even new products like Jardiance, Trulicity and Basaglar are already using heavy rebates and discounts to fend off competitors. We remain very concerned that the company continues to ignore the impact Amedlog will have.

This push into devices, in particular insulin delivery systems seems somewhat misguided. No matter how way cool whiz bang their insulin pump may be Lilly is about to experience what everyone else in the insulin pump space has felt the heavy hand and dominance of Medtronic (NYSE: MDT). We would have felt mush better had they began this move into devices by developing a Tyler (smart insulin pen/CGM/app) rather than insulin pumps but it is what it is.

One last note as how CEO Dave Ricks handles these threats will be a real test of his leadership. Lilly is the unquestioned leader in diabetes, but they have been here before only to fall from grace. Today the company is benefiting from this fall, but market conditions have become much more difficult too. A big issue in our opinion is that Mr. Ricks hasn’t learned from past mistakes made not just by Lilly but others in this space. That he like others before him suffers from institutional bias.

As Momma Kliff used to say; “It’s not easy being the king.” Dilly, Dilly