The Business of Diabetes: News from the Diabetes Industry

Just a quick update here on several major players in the diabetes business. More will likely follow, but these two are "hot off the press". My overview differs slightly from the major media's coverage of the same items in that mine are reviewed from the perspective of a person with diabetes.

Eli Lilly and Company Q1 2007 Earnings Down 39%

On Tuesday, Eli Lilly and Company reported a 39% drop in Q1 profit on various charges, although revenue rose 14% on higher sales of treatments for mental illness and impotence. The results were not completely unexpected, as Lilly acquired Icos LLC (a partner since 1998) for $2.3 billion. The acquisition allowed Lilly to gain complete control over Cialis, a drug used to treat erectile dysfunction. The initial attempt to acquire Icos failed under pressure from large institutional shareholders, causing Lilly to revise its inital offer. ISS, a proxy advisory firm, advised Icos shareholders to reject the proposal as "undervalued" but the acquisition was approved by Icos shareholders and Lilly completed its acquisition of the company on January 29, 2007. Also, in January 2007, Lilly entered into an agreement with OSI Pharmaceuticals, Inc. to acquire the rights to its compound for the potential treatment of type 2 diabetes. At the inception of that agreement, the compound was relatively early in the development stage (Phase I clinical trials). The charge related to this arrangement was $25.0 million and was included as an expense in Q1 2007.

Lilly executives said that increased prescription volume for several key products was playing a greater role in the overall sales increase, although Lilly has been relying more on price increases to drive sales growth in recent periods. The company's large endocrinology business, consisting largely of insulin and the new but rapidly-growing Byetta product accounted for just under 32% of the company's total revenue last year. But growth in that business (and insulin, in particular) has been significantly smaller (Humalog up 11% during Q1, Humulin up just 3% during Q1) relative to its other business lines, and that growth most likely reflects the overall growth in the number of diabetes patients worldwide rather than specific progress being made by Lilly in selling its products.

The company noted in its earnings presentation to Wall Street that it is "committed to re-acceleration of the Humalog franchise" and has increased its sales force by 40%, as well as launched 2 new insulin pens. However, given that rival Novo Nordisk already has a full line of insulin pens and announced in November 2006 its intention to increase its own sales force by another 800 (bringing the total to somewhere around 1,900 in the U.S.), analysts had every right to question the sincerity of company's commitment. The recent increases in the sales force for Lilly will most likely only result in putting the company on an equal footing with the Danish giant. Furthermore, Lilly's 2006 Annual Report (see pp. 3-4) said much the same.

"In the U.S., for example, our Sales Force of the Future now delivers true portfolio expertise, while allowing our sales representatives to be more productive than they were under the older system of detailing individual medicines" the report notes. However, some clinicians in the field believe otherwise, at least when it comes to the sales force truly understanding the complexity of diabetes. Another issue is that Lilly has not mentioned any long-acting insulin analog is even in development, therefore the company is lacking what its two global rivals (Novo Nordisk and Sanofi Aventis) do have: both a rapid-acting and long-acting analog, which suggests that the business is likely to struggle for the foreseeable future.

The bottom line is that Lilly continues to have drug development pipeline problems overall (with nothing for type 1 diabetes other than drugs for treating complications), and that the outlook has most analysts rating the company's stock a "hold" reflecting the weak outlook for earnings growth. Lilly said that the FDA had rejected its appeal of an "approvable letter" issued last year for the experimental Arxxant (which is meant to treat diabetic eye disease) which signals that the agency might give final approval to a drug only after certain conditions are met. The FDA reiterated its request for a 3-year study of the drug before considering approval. Lilly said it is considering its next steps for Arxxant, and has withdrawn its application for European regulatory approval of the drug. The Arxxant setback also contributed to an increase in expenses for the quarter.

"Obviously, the probability of success has lessened quite a bit" for Arxxant, said Lilly CFO Derica Rice in an interview.

Abbott Introduces New Blood Glucose Meter

This week, Abbott Diabetes Care announced that the company had received FDA 510(k) clearance from the U.S. Food and Drug Administration (FDA) and was therefore launching the FreeStyle Lite™ blood glucose monitoring system. The FreeStyle Lite blood glucose monitoring system will be available in the U.S. beginning in May 2007.

At its core, the new system is very similar to the original FreeStyle system, offering test results in just 5-7 seconds and a very similar test strip design with what the company calls coulometric measurement, which is a patented, electrochemical technology designed for measuring tiny blood sample sizes, requiring a sample size of just 0.3 microliter.

However, most people with diabetes find the company's widely promoted advertising claim that its systems deliver "virtually pain-free testing" completely baseless, as the sample size required does not change the necessity of using a lancet in order to pierce the skin for blood, thus the "pain" element required is the same regardless of the sample size required. However, the new Abbott FreeStyle Lite system does have an automatic calibration feature that eliminates the manual coding step usually required by most blood glucose meters before starting a new vial of test strips. And similar to the company's popular FreeStyle Flash system, the FreeStyle Lite system includes a large, high-contrast display and a backlight for easy, on-the-go testing.