In the extremely competitive world of Big Pharma, companies have to be careful to keep all of their ducks in neat little rows. I have made no secret of the fact that I believe Lilly (LLY -0.54%) struggles in that regard, and yesterday's surprising announcement that the FDA rejected empagliflozin over manufacturing issues at a plant owned and operated by its partner Boehringer Ingelheim doesn't help matters.

Details matter
The FDA most often rejects new drug applications due to concerns that efficacy has not been adequately substantiated, the drug in question is not safe, or there is not a sufficient trade-off between risk and benefit. A lesser known, but still important, part of the process is that the facility in which the new drug is to be made must be in compliance with FDA rules.

It is that latter point that has tripped up Lilly. Lilly announced on Wednesday morning that the FDA had rejected its application for a new SGLT-2 inhibitor called empagliflozin due to cited deficiencies at the Boehringer Ingelheim plant where the drug is to be manufactured. BI and Lilly became partners in diabetes drug development back in 2011, with BI combining its R&D and manufacturing abilities with Lilly's marketing muscle in the diabetes space.

A BI representative later indicated that the company has responded to the previously identified issues at the plant and that an FDA reinspection was under way. Assuming that the FDA is satisfied with the response, that rejection should be reversed but it will likely take at least six months for the full inspection process to end and for the agency to reconsider the submission.

Time to market matters
With Lilly/BI's challenges, Johnson & Johnson (JNJ -2.13%) and AstraZeneca (AZN -0.68%) stand to benefit at least a little bit. Johnson & Johnson is nearing the one-year anniversary for the approval of its SGLT-2 drug Invokana and the drug leads the nascent space for SGLT-2 inhibitors. AstraZeneca, which got approval for Farxiga about two months ago (January 8, 2014) has actually since its new drug tracking ahead of Invokana in these very early days of the launch.

Branded drugs may have useful commercial lives of 10 to 15 years, if not longer, so does a six-month delay really matter? In the case of diabetes medications the answer may well be yes. Diabetes is not like depression, where patients will often cycle through multiple drugs before settling on one that works, and doctors and patients tend to stick with what works.

By being the third to arrive at the table, Lilly has a bigger challenge ahead in convincing doctors to switch their patients to its SGLT-2 drug. One factor that should play in Lilly's favor, though, is the ability to sell combo-drugs – combinations of empagliflozin and metformin and empagliflozin and BI's DPP-IV inhibitor Tradjenta – that Johnson & Johnson cannot match.

Ultimately the rejection of empagliflozin is likely to be a temporary glitch – BI will almost certainly get the manufacturing issues resolved, the FDA will reverse its decision and approve the drug, and everyone will go on their merry way. But it may well prove to be a headwind that has some permanent repercussions on the drug's peak sales.

Not all bad news
The rejection of empagliflozin may have come as a negative surprise, but the company has had some recent positive news on the diabetes front. The company's AWARD-6 non-inferiority study comparing Lilly/BI's dulaglutide (a long-acting GLP-1 agonist) to Novo Nordisk's (NVO -0.36%) once-daily Victoza did achieve its goal of non-inferiority in HbA1c reduction at 26 weeks, with no untoward or new safety issues.

Non-inferiority may sound like weak tea, but it's actually a pretty significant achievement. AstraZeneca's once-weekly GLP-1 agonist Bydureeon was not able to show equivalent efficacy to Victoza and, combined with some administration issues with Bydureon, Novo Nordisk has been able to maintain leading (approximately two-thirds) market share, despite the fact that Victoza users must inject it every day.

With dulaglutide showing better efficacy and offering once-weekly administration (not to mention the possibility of drug and insulin combos with other Lilly products), Lilly has a chance to gain some business here before Novo Nordisk gets its own long-acting version on the market (likely not until 2017, given pivotal data on long-acting semaglutide is expected in early 2016).

The Bottom Line
I don't want to beat up on Lilly all that much over this rejection. First, this is something that can and does happen to many drug companies. Second, it wasn't a Lilly facility that was the issue. Even so, it is another bump in the road for a company that has already given its shareholders a rough ride. Although the AWARD-6 data is far more positive for Lilly than the empagliflozin news is negative, I still am not all that favorably disposed toward Lilly at this time.