Blood in the water

Blood in the water

Word is coming out of Novo Nordisk (NYSE:NVO) that the company is in the midst of a restructuring which …wait for it … comes with the obligatory reduction in head count. That with Tresiba still awaiting FDA approval combined with the ultra-competitive environment in the insulin and GLP-1 markets Novo has decided enough is enough. That if they are to remain competitive, to maintain share and keep margins at reasonable levels they little choice but to reduce costs.

Yet Novo isn’t the only company feeling the pain as AstraZeneca (NYSE:AZN) in attempt to remain competitive in the SGLT2 market has introduced a savings card which basically gives the drug away for free. As we noted many times these co-pay equalization cards carry a high cost as while the patient sees no out of pocket expense the cost is passed onto the company therefore eating into already thin margins.

This move may backfire not because Johnson and Johnson (NYSE:JNJ), the makers of Invokana, will fight back, as we’re sure they will. Rather because Invokana and the entire SGLT2 category is now firmly in the sights of class action attorneys who have begun trolling for patients who use these drugs. Yes as we predicted when concerns over use of these drugs and DKA came to light it was just a matter of time before we saw class actions suits.

We also remain firm in our belief that it’s just a matter of time before Sanofi (NYSE:SNY) joins this group and begins reducing their head count. Sales of Toujeo and Afrezza continue to disappoint leaving the company few if any other options but to reduce costs.

While we have been predicting many of these moves the biggest predictions to come true is the nature of the diabetes drug market itself. The transition to a commodity market where price trumps performance. The fact that as much as these companies don’t want a price war that’s exactly what’s happening. Given that few drugs stand out in their respective categories combined with payors zest to reduce costs diabetes drug companies have little choice but to compete using price as their primary weapon. This in turn then forces companies to reduce costs if they are to have any chance at maintaining reasonable margins.

We shudder to think what will happen when the biosimilar version of Lantus hits US shores or when there is a biosimilar short-acting insulin on the market. Already an ultra-competitive market, payors will have even more leverage.

Lean and very mean is the order of the day and while no one likes to see any person lose their job this is the harsh reality of the diabetes drug and for that matter diabetes device companies. Conventional glucose monitoring companies have already undergone their transformation cutting costs with reckless abandon. Now it’s time for diabetes drug companies to hack away at costs. There simply is no other option.

Looking into the future it’s difficult to see anything changing all that much. Yes there are some intriguing early stage compounds however unless they are truly extraordinary it’s hard to imagine payors providing premium reimbursement. This is one reason we have always been skeptical that a true closed loop insulin delivery system would be commercially viable. Besides the technical hurdles that must be overcome the cost, which even by conservative estimates would be significant, is a major hurdle to widespread adoption.

We understand that the Google/Dexcom (NASDAQ:DXCM) partnership has the diabetes world buzzing. Yet what really makes this partnership so intriguing isn’t the technology, it’s the possibility that they could create a low-cost continuous monitoring system which would open the door to the largest diabetes market, patients with Type 2 diabetes. According to the American Diabetes Association over 29 million people have diabetes of which only 1.25 million are considered Type 1. Listen you don’t have to be mathematician to figure out that if Dexcom/Google can capture even a small percentage of the Type 2 market it will provide a major revenue boost.

Dexcom correctly understands that costs are as important as technology. That the only way such a system has a chance to be commercially successful is for it to be priced on par or lower than using a conventional glucose monitor. As we noted when this deal was first announced if successful this partnership could forever alter the balance of power in glucose monitoring.

Not to be left unmentioned the insulin pump market is also feeling the pinch. As we noted just the other day the only way companies such as Tandem (NASDAQ:TNDM), Insulet (NASDAQ:PODD) or Animas can see any real growth is take share away from market leader Medtronic (NYSE:MDT). Given that the insulin pump market has also commoditized about the only weapon left in the arsenal is …wait for it.. price.

The bottom line is for both drugs and devices there is blood in the water and the sharks are circling. Companies in both markets have few options other than cost cutting. It’s time to face the facts lean and very mean is the order of the day.