A battle between the BIGS

A battle between the BIGS

Yesterday Novo Nordisk (NYSE:NVO) released results from a Phase 3a trial for their once-weekly GLP-1 semaglutide which were encouraging. As with other GLP-1’s there was significant reductions in HbA1c plus the added benefit of weight loss. While the once-weekly GLP-1 is becoming crowded Diabetic Investor would not discount Novo’s ability to gain share in what is becoming a growing market. This news also validates Novo’s repositioning of Victoza as a treatment for obesity, another growing market. Although Novo is still lacking a presence in the oral area they are well positioned to compete going forward.

As we have noted previously Novo is one of the few, perhaps only company, who can effectively compete with Lilly (NYSE:LLY) in the diabetes drug market. Sanofi (NYSE:SNY) continues to flounder, AstraZeneca (NYSE:AZN) continues to struggle, with Merck (NYSE:MRK) and Johnson and Johnson (NYSE:JNJ) dependent on one hit wonders.

Looking at the device side JNJ and Medtronic (NYSE:MDT) are beginning to become even more fierce competitors. This really has more to do with Medtronic’s move into the Type 2 area. Although we doubt that the company would buy their way into the conventional glucose monitoring space we would not discount that possibility. The simple fact is both JNJ and Medtronic recognize that to grow in this space they cannot limit their offerings to just Type 1’s. They must penetrate more deeply the larger Type 2 market and this means moving away from their core competencies.

As we reported this morning JNJ has put Roche and Abbott (NYSE:ABT) between a rock and hard place in the conventional glucose monitoring market. They know that neither company can effectively compete and make a profit. Listen when it comes to BGM it’s actually a very simple game these days; it’s all about scale and formulary presence. The harsh reality is the only way Roche and Abbott can increase scale is to buy formulary presence and given pricing dynamics they cannot do this and make money at the same time. Based on what we’ve seen so far both Roche and Abbott have resigned themselves to fighting each other rather than JNJ.

What this basically means is the diabetes market, both devices and drugs, is becoming a battle of the big boys. Yes there are some exceptions most notably Dexcom (NASDAQ:DXCM) on the device side, as they are the clear leader in continuous glucose monitoring. Still with pricing remaining a major issue and outcomes based reimbursement on the way the big boys have a clear advantage. Besides having human and financial resources they can use their size and partner with smaller players who can provide the missing pieces to the puzzle.

This is not necessarily bad news for companies like TelCare, Livongo or iHealth in the BGM market as they have products better suited for the coming of interconnected diabetes management (IDM). Nor is it bad news for a company like Intarcia on the drug side.

The real losers here are companies like Sanofi and AstraZeneca on the drug side and Insulet (NASDAQ:PODD) and Tandem (NASDAQ:TNDM) on the device side. Although it likely won’t happen the best possible scenario for Sanofi and Astra would be to combine their respective diabetes franchises into one franchise. The best scenario for Tandem and Insulet is an outright takeover.

Combine the epidemic growth rate of diabetes with current pricing/reimbursement dynamics and what you have is an environment where bigness is a clear advantage. Frankly Diabetic Investor is not surprised as the market has been moving in this direction for some time. Smaller companies may have the advantage of moving more quickly or being more innovative however they are handicapped as they need scale to survive. Yet they lack the resources to gain scale.

Perhaps the best to think of this is to look at the smartphone market, a market dominated by Apple and Android. A market where a behemoth like Microsoft just threw in the towel as they just can’t compete. Other than Samsung, every other Apple competitor must choose between either becoming a value player a market with lower margins or a premium player which means going up against Apple and Samsung.

Yes bigness does create its own set of issues but given the choice between evils better to have to deal with these issues than compete against them. The simple fact is the diabetes market is now structured where scale is critical.