The Bull Case for SNY’s Diabetes Franchise

Richard

2017 consensus for SNY’s US basal insulins fell from $9.9B to $7.5B after the company warned 2015 sales growth would be flat, citing price competition. We believe estimates have fallen too far, and imply an unstable pricing environment with significant downside risks. In contrast, we believe current levels of US net pricing are at the very least stable, and may improve

Key facts: there are only two entrants in the basal insulin market; the market laggard (NVO’s Levemir) is an imperfect substitute for the market leader (SNY’s Lantus); SNY’s pending Lantus replacement (Toujeo, 1Q15) makes Levemir an even less perfect substitute; the entrants cooperate on price rather than competing on price; absolute net pricing levels are relatively low (about $60 / month); and, total basal insulin sales are only about 3% of total US drug spending

Because average Rx prices and total category spending are relatively modest, and because Levemir is an imperfect substitute for Lantus (and ultimately Toujeo), it is extremely unlikely that a large number of US payors will attempt to shift a large number of US patients from Lantus (or Toujeo) to Levemir. Having no reasonable prospect of large unit share gains NVO has no motive to price Levemir below Lantus

Instead, NVO has cooperated (and in all likelihood will continue to cooperate) on price. All of the US list pricing actions on Lantus and Levemir have fallen within 25 days of each other since at least 2009; on average the companies have raised list prices within 12 days of one another. The most recent price increases occurred in early November; both companies raised US list prices by 11.9%

SNY’s problem isn’t NVO – NVO couldn’t possibly be more cooperative, and they’ve done nothing to undercut pricing recently. SNY’s problem is payor frustration with the rate of price increase in the category. Being the category leader, SNY’s Lantus is the natural target of that frustration

Lantus lost less than 2 percent new unit share to Levemir in any given year from 2010 to 2013; however as price increases accelerated to more than 40% in 2014 (from more than 20% in 2013) a small but meaningful group of payors pushed back, and Lantus lost more than 4 percent new unit share to Levemir in the first 3 quarters

SNY increased its Lantus rebates in response, so that Lantus’s net price is now about 7% greater than Levemir’s as opposed to the 15% premium Lantus carried in 2013. It was SNY who blinked, not NVO

NVO almost certainly will not lower Levemir’s price (list or net), and SNY almost certainly will not move to a price (list or net) below Levemir’s. Payors cannot mount a wholesale shift of patients from Lantus to Levemir, because Levemir isn’t the right drug for the majority of patients, and the resulting non-Rx medical costs from a wholesale Lantus to Levemir shift would more than outweigh any savings from lower drug prices. The worst case scenario is that Lantus’s net price (currently $63.54 / month) falls 7% to the Levemir level ($59.12), and that list price growth in the category simply ends

The more likely scenario is that Lantus’s net pricing falls to the Levemir level, but that category list price growth falls at most to the industry rate (+/-13%) rather than ending altogether. Toujeo should at least stabilize SNY’s basal insulin share, and in all likelihood should regain modest share from Levemir

All in, SNY’s US basal insulin sales in 2015 could be +/-8% lower than 2014 (assuming zero list price growth), or more likely at least roughly flat (assuming some degree of list price growth is preserved). After 2015, stable market share and net price growth at the industry rate imply high single digit to low double digit sales growth, leading to 2017 sales potential of roughly $9B – $1.5B above current consensus

For our full research notes, please visit our published research site

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