What will it look like?

What will it look like?

One of the more perplexing questions facing drug and devices companies is finding the right size, how to best allocate capital in a dynamic market that’s under intensifying price pressure. In the old days these companies deployed an army of sales reps who descended upon physician’s offices leaving a boatload of samples behind. The game wasn’t all that complex as reimbursement levels and formulary access wasn’t as complex as it is today.

In the device world increases sales were primarily driven by the introduction of new products. The device market whether it was glucose monitoring or insulin pumps was growing at double digit rates back then.

The diabetes drug market was also driven by innovation and being first to market with a new therapy option typically translated into a major sales advantage. Given that diabetes was growing at epidemic rates it was not unusual back then to see multiple blockbuster drugs in the same category, Actos and Avandia for example.

It’s a huge understatement to say that the dynamics of both markets have changed dramatically. The diabetes device market was the first to transform into a commodity market and has now been followed by the diabetes drug market. Additionally, in the drug market the cost of bringing a new therapy to market thanks to a more conservative FDA not only takes longer but is even more expensive given the additional studies that are now required by the FDA.

Just to throw gasoline on fire the payor environment has become ultra-competitive as payors have the upper hand when negotiating with drug and device companies. Add in the fact that these same payors are now limiting what options a physician can use while at the same time increasing patient co-payments has created a new paradigm.

The device world was the first to react to this new paradigm dramatically downsizing field sales operations, slashing marketing budgets while outsourcing research and development projects. This downsizing of operations is now in full swing on the drug side. Whereas big and bold was the mantra of the past, lean and mean is the new tune being sung. The bottom line is it’s the bottom line that matters.

That being said one has to wonder now that downsizing is in full swing in the drug space what exactly is the right balance between operational costs and results. Do companies like Lilly (NYSE: LLY), Novo Nordisk (NYSE: NVO), Sanofi (NYSE: SNY) and AstraZeneca (NYSE: AZN) follow the slash and burn philosophy used by device companies or do they stand pat. The answer the way we see it is a little of both and largely dependent on their respective product portfolios.

Perhaps the best way to look at this is to compare and contrast Lilly vs. Sanofi. Although it seems hard to imagine it wasn’t that long ago when Lilly was facing the same situation that Sanofi faces today, becoming a minor player in the drug space. Some may recall when we noted that this legacy franchise for Lilly was on the brink of extinction, that if something wasn’t done in a hurry this once proud franchise would sink into the abyss. Needless to say Lilly got the message and is once again leading the way in diabetes.

Although Sanofi is not in the exact same situation as Lilly was back then they ae close. As everyone knows Lantus will soon face biosimilar competition, ironically from Lilly. The products that were supposed to lesson this blow have failed miserably as neither Toujeo nor Afrezza have come anywhere close to filling the huge hole Lantus is leaving behind. Nor can it be said that any of the products in the pipeline look all the promising. This situation has lead the company to terminate their partnership with MannKind (NASDAQ: MNKD), slash prices and/or increase rebates for Lantus and Toujeo, outsourcing R&D and now downsizing field operations while also slashing marketing budgets.

The question is can Sanofi like Lilly turn things around and once again become a serious player in the diabetes drug space. The quick answer is no and not just for the reasons that seem obvious. The fact is the market has changed dramatically since Lilly has regained their mojo. Baring a major acquisition Sanofi just doesn’t have the portfolio, pipeline or organizational skills that would offer hope for the future.

The fact is Lilly had the fortitude to acknowledge their issues then implemented and executed a strategy that now has them back on top. Sanofi by way of contrast failed to capitalize on the huge success of Lantus, failed to acknowledge what was obvious and most of all never developed a well thought out strategy to deal with the coming loss of Lantus patent protection. Worse still the company just couldn’t and still cannot execute.

Although it seems like the distant past it wasn’t that long ago that Diabetic Investor was singing the praises of Sanofi’s strategy. Yes, we know this hard to believe considering how we write about our wine drinking friends today but check out the archives section of the site as it is true. There was a time when it looked like Sanofi actually had a well thought strategy, a strategy which back then was not just innovative but actually in line with where the market was going.

So what happened? Well Sanofi happened as they just couldn’t execute. A contributing factor to this poor execution was a lack of accountability. By our way of think you cannot have one without the other as without accountability there is no incentive to execute. This like a peanut butter and jelly sandwich without the bread to hold it all together. Instead of a tasty sandwich all you have is a huge mess. Which is exactly what Sanofi has today.

So getting back to our original question as what’s the right balance between operational costs and results we see the following;

  1. Downsizing is a must with the extent of downsizing being determined by a company’s product portfolio and pipeline. This is why the cuts coming at Sanofi will be significant while the cuts at Lilly will be less so.
  2. Formulary position is HUGE which means the price war no one wanted is coming. Another reason to be lean and mean.
  3. Scale has become critical as scale drives margins, another reason a price war is imminent. Companies will do whatever they can to maintain and increase share and right now price is about the only weapon they have to make this happen.

Just to clarify one item even under today’s stressful market conditions true innovation will still be rewarded, one of the reasons we maintain our belief that Intarcia has the hottest product in diabetes. We also want to reinforce what we said just the other day as delivery systems and additional study biomarkers will take on even greater importance as companies will look for any advantage they have to differentiate their offerings from the competition.

The simple fact is the days of being fat and happy are over and they are not coming back. The wacky world of diabetes is now on diet as lean and mean is the order of the day.