ADA Day One
Ok before we get into today’s observations a few ground rules as we are covering this year’s conference differently than we have in the past. As always this is a very busy show for Diabetic Investor so unlike the past when we tried to write a wrap each evening, this year we have decided to write when we have break between meetings. Basically what this means is we write once per day, multiple times per day or not at all depends on finding the time. Next as we noted prior to the show beginning we will be Tweeting as well.
Now that we’ve got the rules straight here are some initial observations;
This once huge show has become a mere shell of what it once was. Glancing into the yet to open exhibit it’s obvious companies in this wacky world no longer see a return on investment. Besides the downsizing of booths many companies have decided it’s just not worth it to exhibit at all. Frankly Diabetic Investor isn’t shocked by any of this but it reinforces our belief that this wacky world continues to evolve, transform and change.
A second observation – Diabetic Investor has already meet with some diabetes app companies and have come to the conclusion that as way cool as these apps may be this market segment is unfortunately following a dangerous path. Just as the glucose monitoring market transformed from a medical device to commodity market so too is the market for diabetes apps. What killed BGM wasn’t competitive bidding, what killed BGM is that all the monitors did basically the same thing the same way. That it really didn’t matter to the patient whether they used an OneTouch or Accu-Chek meter as all they wanted was a reading.
This is exactly what’s happening with these apps as they all do basically the same damn thing. Yes there are variances between them and yes they are way cool but the fact is from a patient perspective it really doesn’t matter which one they use. Simply put these apps company cannot explain why their particular app is better or different than another. They cannot state simply what their value proposition is what makes them stand out from everyone else.
Even worse their technology can be easily replicated, another similarity with BGM. Back in the day every supposed innovation in BGM was quickly copied by the competition. Alternate site testing, faster test results, and smaller sample sizes, no-coding and pretty colors. Diabetes apps are doing the same thing and unlike the device world where intellectual property lawsuits are a full contact sport, there is little these app developers can do to prevent this. They can attempt to patent what they have but in the fast moving world of app development having a patent isn’t the protection it may seem to be.
Another common theme with these companies is they confuse the ability to raise capital with the ability to run a commercially viable business. As we have said many times in diabetes a company can steal more money with a good PowerPoint presentation than they could with a gun. It astonishes Diabetic Investor that these companies cannot answer a very simple question; how are they going to make money. Yes there apps are way cool but way cool doesn’t pay the bills.
Yet the most prolific observation, so far anyway, is that the wacky world of diabetes is no longer about drugs, devices or technology. This wacky world is all about money, who makes it, who spends it and who saves it. Yes everyone here agrees we can always use better drugs, more patient friendly devices and technology that makes managing diabetes easier. Yet these same people also acknowledge that when used as intended the current crop of drugs, devices and technology work just fine thank you very much.
Looking ahead they see what Diabetic Investor sees a changing reimbursement environment, one where outcomes truly matter. Where outcomes replaces today’s fee for service model. They also fully acknowledge that current reimbursement policies impact outcomes, that higher co-payments, more restrictive reimbursement policies and higher patient deductibles adversely impact outcomes. Many express concern that given the rising costs of drugs and devices that payors aren’t allowing them to effectively manage their patients.
Looking ahead Diabetic Investor sees major changes coming in how companies work with payors to insure their drugs or devices are reimbursed or given prime formulary position. Think for a moment what would happen if Lilly (NYSE:LLY) went to major payor and basically said; Hey we know your spending a $100 million every year on patients with diabetes and this cost is going to go up in the future. Why don’t you give us the $100 million, we’ll manage these patients and be allowed to keep for ourselves whatever’s left should it cost us lees than $100 million. We’ll provide these patients with whatever they need – the drugs, the devices and apps – in other words a diabetes management system.”
In simple terms this becomes arbitrage as Lilly’s profits would be determined not by a single drug or portfolio of drugs rather by what the payor has contracted for and what it really costs Lilly. This not unlike the old Liberty Medical model back before competitive bidding came about. Way back in the day Liberty made fortune arbitraging the difference between their cost of box of test strips and what Medicare reimbursed for a box. Liberty could care less which meter the patient used all they carried about was what test strips were costing them. Having built the infrastructure and huge installed patient base Liberty could leverage these advantages and demand, more like extort, major price concessions from all the BGM companies. Companies which had little choice as they risked losing valuable market share if they did not capitulate to Liberty’s demands.
Lilly can do the same thing with their diabetes drug portfolio as they have already built the infrastructure, they are a trusted brand plus the drugs in the portfolio work as well or better than the competition. They also know that no one else in diabetes can match their portfolio. Novo Nordisk (NYSE:NVO) has insulin’s and GLP-1’s but no orals. Sanofi (NYSE:SNY) has insulin but nothing else. AstraZeneca (NYSE:AZN) had the best chance to compete but with Onglyza and Farxiga under fire and no insulin they have basically become a one-trick pony known as Bydureon.
Now this transformation will not occur overnight but it is coming. The simple fact is payors want to lower their costs and with formulary placement can determine the success or failure of a drug and device. Just as they gained the upper hand with BGM companies, they are gaining the upper hand with drug companies as well. Yet they know as the diabetes population continues to grow even with their power further costs reductions will be needed to insure continued profitability. A fixed cost system as we have described fits into the new and changing world of healthcare.
We know it drives many crazy but the fact is they call this the business of healthcare for a reason. These companies are not charitable organizations as they have stakeholders who demand and quite frankly expect them to make money. This is not to say they don’t care about the patient rather they understand if they are to help patients it’s a pretty good idea to stay in business and about the only way that happens is if they make money.
About the only institution we are aware of that can continually lose money, be mismanaged continually while remaining in business is the federal government and we all know how that’s working out.
