Why this deal HAD to be done.

Why this deal HAD to be done.

There are two camps when it comes to evaluating Bristol Myers Squibb (NYSE:BMY) and AstraZeneca (NYSE:AZN) purchasing Amylin (NASDAQ:AMLN) for nearly $7 billon; either BMY/AZN vastly overpaid to basically own Bydureon or they now own the most valuable asset in diabetes which will bring BMY/AZN back to prominence in the space.  (The fact that this deal could help people forget these are the same two companies who brought us Onglyza, is an added bonus.)

The simple truth is this deal HAD to get done as both BMY/AZN risked becoming irrelevant in the diabetes drug space due mainly to the failure of Onglyza and problems associated with Dapagliflozin, which is languishing at the FDA. Had Amylin fallen into the hands of Merck (NYSE:MRK) or Sanofi (NYSE:SNY), both of whom were very close to buying the company, the BMY/AZN partnership would have been dead in the water and virtually worthless. Without a viable GLP-1 these partners would have no entry in the fastest growing segment of the diabetes drug market. Just as important without Amylin their choices in the GLP-1 arena were limited as the most promising GLP-1’s not owned by Amylin were already committed to others in the space.

As Diabetic Investor has been stating for many years, GLP-1 therapy is becoming the therapy of choice for patients with Type 2 diabetes who are failing on standard front line therapies. Trends are also helping GLP-1 therapy replace long-acting insulin’s like Lantus, as the add-on therapy when a regimen of oral medications alone just aren’t getting the job done. Add in the fact that the market forGLP-1 therapy will expand from diabetes and into obesity/pre-diabetes, a market which is growing as fast as the diabetes market and impacts as many, actually more patients then diabetes and all of sudden $7 billion doesn’t seem like too much money. Considering that Bydureon could reach annual sales of more than $3 billion and will have no credible competition for at least 18 months, most likely longer and $7 billion even seems reasonable.  Throw in the fact that Bydureon has a long shelf life with years of patent protection and $7 billion begins to look like a bargain.

This is why the biggest loser here is not Merck but Sanofi. The fact is physicians will always prefer oral medications over injectables as front line therapy options for the vast majority of their Type 2 patients. About the only thing Diabetic Investor sees changing as we move into the future is which orals the patient starts with and given recent trends it looks like metformin and Januvia will be the initial drug combo preferred by physicians. Once this combo shows signs of failing, physicians will add a GLP-1 (most likely Bydureon) rather than insulin. Given that 80% of all patients are treated by primary care physicians (PCPs) who don’t have the time or resources to properly train patients on insulin therapy but have become very comfortable with the simple dosing and administration of GLP-1’s and it’s easy to understand why Sanofi is the big loser here.

While it is true Novo Nordisk (NYSE:NVO) has issues as well, at least they also have their own GLP-1 franchise. Already the company is trying to reposition their once-daily GLP-1 Victoza as a weight loss and pre-diabetes drug. They are working on longer acting versions of Victoza and combining Victoza with their popular line of insulin’s.

Now it is true that Sanofi has a GLP-1 under-development and has plans to combine this once-daily Victoza copycat with Lantus yet they well behind Novo here. Nor does Sanofi have credible short-acting insulin with any real market share which would minimize the impact of slowing Lantus sales. The harsh reality for Sanofi is, as hard as they have tried the company remains overly dependent on Lantus sales which will face generic competition in the not so distant future.

Diabetic Investor is not predicting that Lantus sales will immediately plummet or that a generic version will appear right after the Lantus patent expires. Nor do we believe that Lantus will not be part of the treatment regimen for patients with Type 2 diabetes.  However, this is not about what’s happening today or even in the near term future, this is about which therapy options have the most promising growth pattern, this also just so happens to be what investors care about when valuing a company. The fact is looking ahead even a few years and Diabetic Investor sees Lantus sales at best flat.

This is the reason the company wanted Amylin as Bydureon would have plugged a huge and growing hole in their long term diabetes strategy; a strategy for all its moving parts which has Lantus at its center. Unlike Novo who has stayed away from diabetes devices outside of the core competency, insulin delivery systems or more accurately insulin pens, Sanofi is trying to become the first company to offer a complete interconnected diabetes system which provides everything a patient needs. A system which besides including drugs and devices is designed to help patient’s better manage their diabetes using Sanofi devices which not only communicate with each other, but also with the web/cloud. Diabetic Investor has believed this strategy was aggressive but will only be made tougher without a long-acting GLP-1.

Frankly BMY/AZN learned a hard and costly lesson with Onglyza, a drug which came to market well after Januvia was established and really never stood much of chance to be successful. The partnership then suffered another serious blow when Dapagliflozin ran into problems at the FDA. To their credit they realized where things were headed and understood to remain a player they needed to own the most promising drug in the GLP-1 space. They also knew that unlike Sanofi or Novo they did not have to worry about cannibalizing a legacy franchise. Simple put they HAD to do this deal.

Looking ahead it will be interesting to see how the three major insulin players, Novo, Sanofi and Lilly (NYSE:LLY) deal with the changing market dynamics. Making the situation even tougher is many of these dynamics cannot offset one fundamental fact, insulin use will start declining and the Type 1 market is not large enough or growing fast enough to support all three players. Physicians, primary care physicians in particular, are just beginning to embrace GLP-1 therapy. Now in the hands of well capitalized and well-motivated BMY/AZN partnership all of sudden these insulin companies have new and stronger threat.

Let’s see who’s up to the task, who can successfully navigate what surly will be difficult and choppy seas. Things are getting more interesting in the diabetes space and Diabetic Investor sees this just as the beginning.