Eli Lilly (NYSE:LLY) announced March 4 that it was introducing a half-price generic version of Humalog, the company’s insulin injection medication. Not surprisingly, LLY stock barely budged on the news, losing 1.4% on the day.
I don’t own LLY stock. I’ve never contemplated holding it, and this latest move by the company ensures that I will never own Eli Lilly stock. Here’s why.
A Purely Financial Reason
In 2018, Humalog generated $3.0 billion for Eli Lilly, 5% higher than a year earlier. Assuming Humalog’s gross margin is 73.8% (I’m using the company’s overall gross margin; it’s likely higher), Eli Lilly had $2.2 billion in gross profits from this single drug.
Except for Trulicity, the company’s bestselling diabetes drug, Humalog is the company’s second-largest revenue and profit generator.
In 2016, the Washington Post found that Eli Lilly increased the price of Humalog from $21 a bottle in 1996, to $255 two decades later, a 700% increase adjusting for inflation.
I wish I could get a 700% increase in my annual earnings over the next 20 years, but that’s unlikely to happen.
Why would the company introduce a half-price version of a drug when it’s a cash cow?
“While this change is a step in the right direction, all of us in the health care community must do more to fix the problem of high out-of-pocket costs for Americans living with chronic conditions,” CEO David Ricks said in the company’s press release. “We hope our announcement is a catalyst for positive change across the U.S. health care system.”
That’s the Official Explanation
The truth is far murkier.
“By offering a generic version, it allows Lilly to fend off the criticisms,” said Andrew Ching, a professor at Johns Hopkins University’s Carey Business School. “By keeping the branded version, it allows them to keep charging a high price to the segment of consumers who are willing to pay more.”
Why on god’s green earth would you pay more if you didn’t have to? On the surface, it’s good news for patients.
“Lilly isn’t the first drug maker to cut list prices on a best-seller, but it is the first to do so for a product as widely used as Humalog, and the move could have ramifications for the entire market,” stated Max Nisen of the Peoria Star. “For patients, it’s good news.”
But is it?
Eli Lilly Falls Way Short of the Target
Excellent news would be the company ending full-priced Humalog sales, replaced permanently by Insulin Lispro, the name of the new generic version, but that’s not going to happen.
The company is going to continue to herd as many people as possible into the more expensive version, which is good news if you own LLY stock, but terrible news if you’re hoping this is the start of healthcare reckoning day.
The price of a vial of Humalog is close to $300. Cut that in half, and we’re still talking about pulling one Benjamin Franklin and five Alexander Hamilton’s out of your pocket.
Here’s a tweet from Senator Dick Durbin:
“Eli Lilly is trying to save face by lowering prices for some to $140 for a vial of insulin that’s available in Canada for as little as $38. It’s time for Big Pharma to stop the #PharmaFleece.”
If Durbin’s tweet doesn’t highlight just how broken America’s healthcare system is, I don’t know what will.
The Bottom Line on LLY Stock
This move by Eli Lilly is an act of desperation to save its gravy train. Do not for one minute think this is anything more than a PR stunt meant to appease the federal government so it won’t introduce legislation forcing lower drug prices.
“If drug companies want to be part of the solution, rather than part of the problem, they should lead the way in simplifying our healthcare system so that patients can obtain affordable medicine that still provides manufacturers with a reasonable return on their investment,” wrote Los Angeles Times columnist and Humalog user, David Lazarus.
As someone who lives in Canada, I am so thankful that I don’t have to negotiate my way through the American healthcare system. I’m not saying the Canadian system is perfect, far from it, but this move by Eli Lilly reeks of a payoff.
The system is broken. And now, so is LLY stock.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.