A Path to …

With the market in a tailspin this week, Teladoc/Livongo/Lilly and Dexcom reporting earnings some news from LifeScan yesterday may have been lost in the shuffle.

“LifeScan, a world leader in blood glucose monitoring, serving 20 million people with diabetes and the maker of the iconic OneTouch® brand products, and Cecelia Health, one of the nation’s most scalable clinical coaching and telehealth companies focused on diabetes and other chronic disease management, today announced a partnership to deliver best-in-class, live, personalized coaching from Cecelia Health’s Certified Diabetes Care and Education Specialists through our OneTouch Reveal app beginning November 2020.”

This is just the latest in a series of LifeScan hookups as last week it was Truepill, before that Noom and before that Sanvita. About the only thing the company doesn’t have is a Tyler – that’s coming and an insulin pump, that isn’t. Slowly and methodically since being acquired by Platinum LifeScan has been reinventing itself as they know as we do that BGM will eventually become as extinct as dinosaurs.

Hence why their very first hookup was with Sanvita who has a CGM under development as LifeScan also knows CGM will become the standard for glucose measurement. They know as we do while Dexcom and Abbott are dominating the CGM market, this market like BGM before it will eventually commoditize and there will be room for other systems. As we have stated in the past glucose monitoring technology may have changed but the dynamics of the glucose monitoring market have not.

Back before JNJ sold LifeScan to Platinum we wondered aloud why Verily who back then was just building Onduo didn’t buy the company. Even though Onduo back then had a partnership with Dexcom one thing they didn’t have was customers. Even though Onduo correctly anticipated that CGM was the future for glucose measurement one thing they did have was customers. Yet for reasons only Verily knows they decided not to buy LifeScan even though they could have easily afforded to. And we all know where Onduo is today going nowhere in a hurry.

What makes this wackier is JNJ sold LifeScan to Platinum for just over $2 Billion. A deal that practically paid for itself as Platinum leveraged the deal to the hilt and LifeScan was throwing off millions in free cash flow because they had an established business with millions of established patients, they had the most valuable asset in diabetes MILLIONS OF PATIENTS. They had scale and scale as we keep stating is critical.

Platinum did not buy LifeScan to keep it they bought it as they want to flip it hence the reason for all the hookups. Platinum correctly anticipated where diabetes management was going and reasoned once all the pieces were in place someone who come along and take LifeScan off their hands as after all LifeScan had what everyone really wanted in the first place MILLIONS OF PATIENTS, HUGE SCALE.

LifeScan does not have possible patients and they make real money. LifeScan does not estimate the value of a contract they know exactly how much real money is coming in the door. They have MILLIONS OF PATIENTS.

So naturally when Teladoc was looking to enter diabetes management they merge with Livongo valuing the company at insane $18.5 BILLION. As we noted yesterday Livongo’s accounting methods are interesting to say the least. But let’s put that aside for moment what Livongo doesn’t have and what Teladoc really wants is MILLIONS OF PATIENTS, MILLIONS OF REAL PATIENTS NOT POSSIBLE PATIENTS.

Now Teladoc will say that Livongo has all this way cool whiz-bang artificial intelligence which is very nice but hardly worth $18.5 BILLION. The fact is and yes we know facts don’t matter when you buy the sizzle the Livongo platform is hardly unique and very easy to replicate. Besides LifeScan and Onduo OneDrop My Dario and UnitedHealthcare are just a few of the companies that quickly come to mind as doing the same thing Livongo does. You can’t swing that poor dead cat without hitting a diabetes management platform.

With all this competition one would think that Teladoc would have preferred to own a diabetes management platform that made real money and had real patients. That they would have understood basic business that when additional competitors enter a market prices go DOWN not UP. Perhaps they would done some due diligence about the diabetes market and seen this scenario play out over and over. Perhaps they would have understood that the most valuable asset in diabetes is not technology, it’s not whiz bang or way cool Its PATIENTS and the company with the most patients wins.

As we move into 2021 the diabetes management market will undergo many changes, changes which will force Teladoc/Livongo into some uncomfortable choices. Already we have seen Livongo competitors going all in 100% at risk only getting paid for producing real and verifiable outcomes. A move which we believe will begin the transformation where 100% at risk is the standard not the exception. Not to pound on Onduo but with their vast resources we never understood why they haven’t gone this route. They could cleaned Livongo’s clock if they had any vision but instead they focused on way cool whiz bang. Sad but typical in this wacky world.

What hasn’t happened and is about to is that so far no one has entered this market with access to MILLIONS of patients no one that is until UnitedHealthcare. United also works with Dexcom, has the ability to go 100% at risk and has access to MILLIONS of patients. Built in access no less. They also have the financial resources to compete and they have a very cool albeit not whiz-bang diabetes management platform which targets patients with Type 2 diabetes which just happens to be the largest group of patients.

See Livongo in addition to its other issues has another issue in that they target insulin using patients. Now this fine for the short term but dangerous over the long term because of Tyler. The simple fact is and yes these pesky facts are important with Tyler these patients do not need what Livongo offers. With their acquisition of Companion Medical Medtronic will likely be the first to offer Tyler, this in turn will push Lilly and Novo Nordisk to introduce their version of Tyler. And oh by the way Lilly and Novo have millions of patients too. Tyler will produce solid patient outcomes, be easy to use, will be covered by payors and will not require employers to pay any additional fees. This basically means when it comes to the diabetes management market Type 2 patients are where it’s at and Livongo ain’t there.

By now you just might be wondering why Teladoc decided to merge with Livongo valuing the company at a crazy $18.5 Billion plus diluting their own stock. You might just be wondering why if they wanted to be in the diabetes management market so badly why they did not buy instead LifeScan who besides having MILLIONS of patients would have come at a far cheaper price, a price that would include diluting their stock. Well wonder no more as Teladoc like so many before they bought the sizzle, they feel for way cool whiz bang over sound fundamental business dynamics.

There is no question in our mind that Teladoc is going to look back and regret valuing Livongo at $18.5 Billion, unless of course they follow the Livongo example and are themselves acquired before this major error in judgement is discovered. Yes the greater fool theory is alive and well.

One also has to wonder who if anyone will come along and acquire LifeScan and use the company and their MILLIONS of patients as entry into the diabetes management market. Could it be Walgreens, CVS or perhaps a United competitor. Maybe Apple who’s sniffed around the diabetes space will make the play. Perhaps Amazon who’s also dipped their toes in the diabetes waters will go for it. Maybe and this will sound crazy but that fits here it might be Google, yes the same Google that also owns Verily.

Not to get off track but it seems that Google and Verily have a strained relationship and these once happy partners aren’t so happy anymore. Don’t be surprised if Google cashes out of Verily when they do an IPO and then begins their own move into the diabetes management market.

Getting back to what happens to LifeScan no one really knows all we do know is they own the most valuable asset in diabetes MILLIONS OF PATIENTS. Not to be repetitive but in this game the COMPANY WITH THE MOST PATIENTS WIN. Diabetes never has been, never will be about whiz bang or way cool this is all about patients. This is a BUSINESS and when it comes to the business side of diabetes the fundamentals do not disappear just because something is cool.

Listen we’re happy for the Livongo shareholders, their management team and any of their employees lucky enough to have stock options. You cannot blame Livongo for playing the game about as well as it can be played. However you can blame Teladoc for being the greatest of all fools.

Finally if you haven’t already make sure you VOTE. Have a great weekend everyone.

La La Land

First congrats to the L A Dodgers for finally after many attempts winning the World Series. Also hats off to the Tampa Bay Rays for playing some damn good baseball. Now that LA has both the basketball and baseball titles and Tampa has the Stanley Cup I guess Tom terrific and his Buccaneers are going to win the Super Bowl this year. That probably won’t happen but hey this 2020 and as we have seen this has been the wackiest year EVER.

When this year is over and damn don’t we all want 2020 OVER like yesterday, one of the wackier moments will be the Teladoc valuing Livongo at $18.5 Billion that’s right $18.5 Billion with a capital B. Since the merger isn’t final just yet both companies reported earnings yesterday with Teladoc also holding a call. Per the Livongo release;

“We generated new record-high EVA (Estimated Value of Agreements) of $146 million in the third quarter, which we believe demonstrates the continued strong momentum in our business,” said Zane Burke, Chief Executive Officer of Livongo.

This one sentence captures why this deal is wacky, EVA is NOT repeat NOT REAL money coming in the door. This is an ESTIMATE which means roughly calculate or judge the value, number, quantity, or extent of. This is NOT real money coming in the door and even worse these ESTIMATES are for the LIFE of the contract ASSUMING that they hit these ESTIMATES. There are more holes in these EVA’s then there are in the Chicago Bears offensive line and they stink as bad as the Bears o-line.

Reading through the Teladoc transcript we can see that Livongo has transferred their panache for bullshit to their new owners. Check out these beauties;

“We’ve seen tremendous interest from our clients around the world. And we’ve already successfully closed our first major cross-sale to GuideWell Health, the parent of Florida Blue. Florida Blue has been a long-time client of Teladoc Health, and we’re extremely excited to expand that relationship and bring Livongo’s platform to 50,000 of Florida Blue’s members living with diabetes.” – Jason Gorevic Teladoc CEO

Yep we just love when companies do this as YES they are bringing Livongo to 50,000 POSSIBLE patients this does NOT mean that they are adding 50,000 PAYING customers although given the way Livongo calculates their EVA’s who knows. This also is NOT a new relationship just one that has been expanded which is nice but really not big of a deal.

“As part of the new leadership structure announced earlier this month, we are also in the process of creating a new integrated research and development organization.” – Jason Gorevic Teladoc CEO

Yeah the Livongo executive team had the good sense to leave and cash out as they knew the shit will hit the fan and they didn’t want to smell bed when this happens. As Amarillo Slim, the greatest proposition gambler of all time said, You can sheer a sheep many times, but skin him only once.”

“The similar mission-driven cultures and shared vision of the 2 organizations has become apparent through this process” Jason Gorevic Teladoc CEO

Jason hit the nail on the head with this one as both Teladoc and Livongo are full of it. Folks we hate to point out the obvious here, but we must – THIS DEAL WAS MADE POSSIBLE BY COVID WOULD NOT HAVE HAPPENED WITHOUT COVID AND WILL FAIL ONCE COVID GOES AWAY. Hence the reason the Livongo management team is leaving now.

Just by comparison Dexcom a company that has no reason to bullshit anyone, has a real product, real revenues, a great product and an ultra-talented management team is watching its stock get hammered because their third quarter results weren’t as great as expected. Combine this with the fact that most of the analysts who cover Dexcom still do not understand the dynamics of the CGM market.

We said this after Dexcom reported and will say it again EVERY TIME PEOPLE DOUBT THIS COMPANY, EVERY TIME SHARES SELL OFF THEY COME ROARING BACK ONLY TO NEW AND HIGHER HIGHS AND THIS TIME WILL BE NO DIFFERENT. We do not how long this will take but it will happen as there is nothing structurally wrong with Dexcom.

We would further recommend to investors still holding Livongo shares FOLLOW THE EXAMPLE SET BY YOUR DEPARTING MANAGEMENT TEAM – TAKE THE MONEY AND RUN.

Consistently Boring

Yesterday Dexcom pre-announced earnings which seem to disappoint the street so naturally in trading today shares got hammered falling almost 9%. Now that the full earnings have come out once again Dexcom is doing what they always do raising full year guidance. Where the stock trades tomorrow is anyone’s guess, but we’ll say this whenever the street doubts Dexcom, whenever the stock gets hammered it comes back and typically with a vengeance. This happens with such frequency it’s almost boring. As Robert Duvall said in that great movie Apocalypse Now; “Don’t these people ever give up.”

It’s about time everyone started comprehending some pesky facts, yes we know these pesky facts gets in the way of expectations, but they are facts.

1. The CGM market is nowhere close to maturing and quite frankly has not even hit its teenage years.

2. Dexcom and Abbott OWN this market and are coexisting quite nicely.

3. Once CGM makes the transition from insulin using patients to ALL patients watch out.

4. Prepare to be amazed  when CGM moves from diabetes to other areas with excuse the expression obesity being the biggest area for future growth.

5. Doubt Dexcom if you wish but as Momma Kliff said so often this isn’t exactly a bright move.

Now onto this afternoons call and what we learned.

2022 is setting up as an important year for CGM as the company noted today the G7 which was originally expected in 2021 will likely arrive in 2022. Along with this they noted that rather than launch G7 as a 15-day life it will initially come with a 10-day life. Neither of these items is all that shocking given the company’s focus on putting the patient first even when that means putting their business interest second. The reality is there is no rush to get G7 here and better to get right the first time around.

Now some may say that this news is more important to Abbott as they continue to deal with the automated insulin dosing (AID) issue with Libre 2 and also gives them time to complete the clinicals for Libre 3. Basically what this means is that 2021 will be more of the same and 2022 will be when the two companies go head to head, and it will be G7 vs. Libre 2 (without the AID issue) or Libre 3.

Given the growth in the CGM market combined with the respective strategies of both companies – Abbott value – Dexcom premium yet affordable – we don’t see any major changes.

That being said the analysts will likely take this news as a negative which for smart investors will create an opportunity to buy Dexcom at levels not seen in a while. This short-term focus by analysts combined with amazing rise in Dexcom shares, up over 74% YTD, over 158% 1 Yr. and 203+%2 Yr. – could create a buying opportunity. As we said when we started this post it’s not exactly a great idea to doubt Dexcom over the long term but it’s amazing just how many people do just that which proves something else Mom said there is no cure for stupid.

A Heavyweight Battle

Just in case anyone has forgotten that diabetes is a business today’s earnings from Lilly and Dexcom’s pre-announcement of their earnings yesterday reinforced what Momma Kliff said many times; If you want a friend get a dog. Shares in both companies are selling off this morning not because there is anything structurally wrong with either company, nor are the markets they play in contracting no they are selling off because results failed to meet analysts’ expectations. In. Lilly’s case Trulicity sales seem to be slowing while in Dexcom’s case great results were not great enough.

Since Lilly had their call first let’s review what was said, with a follow up post on Dexcom after they report later this afternoon.

Let’s start with the good news which could turn into excellent news for Lilly as they did note that Tirzepatide which has moved into Phase 3 continues to perform very well in clinical trials. As we noted yesterday this drug is very high on our watch list as it target is the largest patient population Type 2 patients and based on early results this has blockbuster written all over it. The next big event will be the top-line results from the SURPASS trial followed by more detailed results later in 2021. Not quite sure we’d classify tirzepatide as a game changer just yet, but it has that potential.

Now onto the not so good news as Trulicity, Lilly’s leading product, has run into competitive issues combined with changes to channel mix. There is no indication that the GLP-1 market overall is slowing and in fact continues to grow quite nicely. However Trulicity is not the only long-acting GLP-1 and faces a tough competitor in Ozempic from Novo Nordisk. Just as Lilly and Novo used to battle over their respective insulin franchises this fight has now shifted to their GLP-1 franchises.

Trulicity is also suffering from a channel mix problem. Rather than go into all the gory details let’s say this the better the drug does the more rebates the company pays. Throw in the fact that growth in the Medicare channel does add volume but also comes with a lower realized price. Put in very simple terms when it comes to sales where it’s sold is just as important as how much is sold.

We really don’t want to spend too much time on these issues as channel mix, rebates and net realized prices are part of the normal ebb and flow of the business. The analysts care about such things as they tend to focus on short term results while ignoring longer term trends. Here is what we know;

1. The GLP-1 market is solid and will continue to grow.

2. Competitive pressures in this market will only INTENSIFY over time as GLP-1’s have become the lead products for both Lilly and Novo.

3. Just as insulin became a commodity and an afterthought GLP-1’s will also commoditize over time.

4. This commoditization places increased pressure on companies to continually innovate and with Tirzepatide we see Lilly ahead of Novo when it comes to innovation.

5. This is a battle between two heavyweights Lilly and Novo Nordisk. This is Muhammad Ali vs. Joe Frazier II. Just as Ali Frazier battled three times Lilly and Novo have switched their fight from insulin to GLP-1.

As we state many times we’ve been covering this wacky world for more than 20 almost 30 years and since day one these two companies have been going at each other. Way back in the early days Lilly was fat and happy treating Novo almost as nuisance rather the serious competitor they were. This lackadaisical attitude cost Lilly dearly as Novo not only became a serious threat but started beating Lilly on a regular basis. Things became so bad at Lilly that their legacy in diabetes seemed to be over.

Thankfully they picked themselves off the canvas and began to fight again and fight they did. It was now Novo who became complacent ignoring how the market was changing. Lilly knew they had Novo on the ropes, and they pounded away relentlessly. Novo was wounded but not beaten as they slowly began to comeback, they changed their tactics and once again became a serious challenger.

Today Lilly has a more comprehensive diabetes portfolio while Novo has become more of a one option fighter. Yet neither company will surrender to the other nor will either allow another challenger to enter the ring. At one time Sanofi seemed poised to take the crown but like so many who tried and failed they didn’t have the legs or brains to stick with these real heavyweights.

We’re not sure if this battle will ever end as frankly there is no reason it should. These are two heavyweight champions both of whom who have worn the crown at one time or another. Lilly may have the big belt today, but Novo won’t be on the canvas long, it might be a standing eight count, but they haven’t been knocked out and when it comes to owning the crown it takes a knockout. With tirzepatide in the wings Lilly could be getting ready to deliver that knockout blow, time will tell.

Building the platform

Before we get into the meat of our post today a few housekeeping items. First and foremost we have come up with a title for our upcoming Special Report which will be … wait for it … The Convergence of Forces – A look into the future of the diabetes market – Will this be the big bang or a big whiff? And YES we are still offering a discount for orders received prior to the end of this month which means time is running out to receive what is an incredible discount. To secure your copy just email us at dkliff@diabeticinvestor.com with the subject line Special Report and we’ll get you all the details.

Now onto business which this week means Lilly and Dexcom take center stage with both reporting earnings tomorrow. Frankly we aren’t expecting any surprises which likely means we might get one or two. We should also note that Livongo also reports this week, the 28th after the markets close, but will not be holding a call given their pending merger with Teladoc.

Something tells us that the Dexcom call will be more interesting than the Lilly call. It might be our trick knee or the fact that shares of the company have been rising nicely leading up the call. Now this could just be the normal let’s buy before the announcement rise or it could be the sign of something bigger in the offing. Like we said before we don’t expect any surprises but that’s usually when we get one and with Dexcom if there is one it  likely will be a positive one.

With Lilly we hope to hear more about when their version of Tyler will get here but likely won’t hear much on this subject. The simple fact is until Medtronic actually launches their Tyler there is no sense of urgency for either Lilly or Novo Nordisk to launch their Tyler’s. Both Lilly and Novo are focused on their growing GLP-1 franchises with insulin becoming an afterthought. Hopefully Lilly will throw in an update on tirzepatide currently in Phase 3 a drug many see as game changing.

Not earnings-related news comes today that LifeScan continues to reposition itself from a traditional BGM company to a diabetes management company. This morning the company announced a partnership with Truepill™ which according to their press release:

“LifeScan, a world leader in blood glucose monitoring serving 20 million people with diabetes and the maker of the iconic OneTouch® brand, today announced its partnership with TruepillTM, the digital health platform powering consumer health experiences through its API-connected infrastructure. The partnership supports LifeScan’s strategic move to expand its OneTouch brand offerings beyond diabetes testing supplies to innovative digital wellness offerings for diabetes and related health conditions, including weight loss, fitness, and hypertension. The partnership will launch in November with an eCommerce platform embedded directly in the OneTouch Reveal® mobile app enabling users to buy testing supplies and wellness services from their homes. “

Now if this sounds like LifeScan, which also has a partnership with Noom®, is trying to become Livongo you don’t need to have your hearing checked as that’s exactly what they are trying to become. And of course LifeScan isn’t the only one as you can’t swing that poor dead cat without hitting companies who want to be Livongo. Listen with Teladoc valuing Livongo at $18.5 BILLION can you blame these companies. But it does make one wonder with all this coming competition did Teladoc vastly overvalue Livongo? Well it doesn’t make us wonder as we know they did.

We’ll see

Ok before everyone gets excited YES we are reposting this post which went out in the morning. We discovered a glitch (love that word) with the site – which has been corrected – but out of an abundance of caution (love that phrase as well) we decided to send this out again just in case. 

There’s a great scene at the end of Charlie Wilson’s War, a great movie by the way, when Tom Hanks and the late Philip Seymour Hoffman are standing on the balcony discussing what happens now that the Russians have left Afghanistan. Hoffman shares the story of the Zen master and the little boy which begins with the boy getting a horse and everyone saying how wonderful that is with the Zen master saying We’ll see. When the boy falls off the horse and breaks a leg, everyone says the horse is a curse. “We’ll see,” says the master. Then war breaks out, the boy cannot be conscripted because of his injury, and everyone now says the horse was a fortunate gift. “We’ll see,” the master says again.

The point of the story, and this scene is available on YouTube and well worth watching, is not everything is at it appears. That what initially looks like a great thing may in fact be not so great. We thought of this scene when we read that the new Teladoc/Livongo management team will NOT include Livongo’s CEO, CFO, president or SVP of business development. Now we cannot blame this people for cashing out and moving onto their next carnival, buying their next boat or taking a long luxurious vacation. Yet we can’t help but think these people who understand what’s really going on behind the scenes feel as we do that Teladoc vastly overpaid for Livongo and there is no way in hell this combined company will ever live up to expectations.

Since this merger was announced back in early August everyone and we do mean everyone has been pontificating about what this merger means. Is this the watershed event that pushes digital health from a good idea to the standard of care? Or is this COVID driven deal going to blow up over the long term as the combined companies struggles to adapt to the post-COVID world? Since COVID is still here and does not appear to be going away anytime soon it might be some time before we know. But what we do know is already the digital health landscaped is changing and these changes are not positive for Teladoc/Livongo.

More competition is here, competition which is pulling out all the stops to compete for new customers and steal old ones. More competition which will drive down fees, go 100% at risk and force Teladoc/Livongo to reexamine their reoccurring revenue model, the model which made their investors do the hippie hippie. Competitors which have the financial resources and built in customer bases of their own making life even more difficult for Teladoc/Livongo.

So will this COVID driven deal be the watershed event many expect it to be? We’ll see.

The Zen masters story also applies to what’s happening between Abbott and Dexcom, or should we say how the conventional analysts are looking at the CGM market. This morning we went back and read the transcript from yesterday’s call. We wanted to make sure we didn’t miss anything paying very close attention to comments made about Libre 2 and Libre 3. See many of the analysts seem to believe that since Abbott continues to roll out new versions of Libre while maintaining its low price that eventually they will clean Dexcom’s clock. The conventional theory is that payors will do what they did back when BGM was the standard for glucose measurement and turn this into a commodity market.

Now this could happen IF and this is a huge IF all the CGM’s were created equal, which they are not. While there are several reasons why BGM became a commodity one of the biggest was they all did the same thing the same way, there were some very minor differences between platforms but none that made one system stand above the rest. With BGM it became all about price.

CGM is nowhere near that point yet. It likely will get there but that day is still a long ways away. As we have noted the Libre 2 which was approved by the FDA back in June did come with an iCGM designation but also a warning as the system cannot be used with automated insulin dosing (AID). As we stated in yesterday’s post this has huge implications here in the US, a market where insulin using patients drive CGM growth.

Many analysts simply assume this issue will go away and that Libre 3 which was just approved in Europe will also soon receive FDA approval. Let’s look at the first point as yes we do believe the AID issue will eventually go away, when is another story but it will at some point. There was no mention of this issue yesterday and no one even bothered to ask about it which shows us how little these analysts understand the differences between the US and international markets. Nor do these analysts understand the differences between getting a CE mark and an FDA approval.

To provide some perspective on this last point the Libre 2 received it’s CE mark in September 2018. The FDA did not approve Libre 2 until June of this year, nearly two years later and that approval was incomplete given the AID issue. While the clinicals are underway for the Libre 3, Abbott hasn’t even submitted it to the FDA. Here in the US Abbott must first solve the AID issue with Libre 2, then finish the clinicals for Libre 3 before submitting it to the FDA. Using the Libre 2 as a guide that means Libre 3 likely will not become available in the US for at least two years.

Meanwhile Dexcom is not sitting around clipping their toenails as they have the G7 coming, a system which comes with lower COGS. Dexcom has already made clear that G7 will be price competitive. The issue for Dexcom won’t be whether the G7 is competitive. No the issue will be can they make them in massive scale to meet the anticipated demand. Based on their history and outstanding management team our money is on Dexcom to make sure this isn’t a problem.

There is no question in our mind that eventually the CGM market will commoditize just as the BGM market did. However that day is not here and likely won’t be here for some time. That will NOT happen until all CGM’s do the same thing the same way which is NOT where we are today.

So will Abbott clean Dexcom’s clock? We’ll see.

The technology has changed the dynamics haven’t

Before we begin our analysis of the Abbott earnings and call a word on the music selected as we waited for the call to begin. Now we know it’s typical to hear this boring classical stuff but being a Chicago based company, the headquarters are actually located in Libertyville, but hey close enough, why not get with the spirt using the theme song for our beloved first place 5-1 Chicago Bears. Just saying.

Now another first place team is the FreeStyle Libre which continues its strong performance internationally while improving domestically. Yes sales growth in both markets is impressive yet the actual numbers tell more of the real CGM story. In the first nine months of 2020 diabetes sales totaled $2.35 Billion with 74% or $1.73 Billion coming from International markets. By comparison Dexcom sales are almost the exact opposite with the bulk coming domestically with international lagging.

It’s no accident Abbott launched their new FreeStyle Sport Biosensor and received a CE mark for the Libre 3 in Europe. No disrespect to our European friends but getting a CE is nothing compared to receiving FDA approval. Something Abbott found out with the Libre 2 which did get iCGM but cannot be used with automated insulin dosing (AID). And not to get off topic does anyone else believe that a little horse trading was done between Abbott and the FDA, with the FDA getting a COVID test and Abbott getting iCGM for Libre 2.

The simple fact is this Abbott kicked Dexcom’s butt overseas, Dexcom compounded this butt kicking by making mistakes and has been playing catch up overseas ever since. Domestically the opposite is true Dexcom is kicking Abbott’s butt with Libre lagging behind but improving.

While this dynamic is obvious it does have real implications on future sales numbers and growth rates.

1. Abbott is committed to their value strategy for Libre noting that Libre 3 in Europe will carry the same price point as previous versions. The company knows the G7 from Dexcom is coming and wisely has chosen not to provide any opportunity for Dexcom to undercut when it comes to price.

2. The company is also aware that domestically Dexcom has a stronger position with payors and while Libre might be cheaper than Dexcom it is not taking away Dexcom’s formulary advantage.

3. Now it would be possible for this to change IF Libre 3 was here in the USA or would be coming soon but it isn’t. First the company must solve the AID issue for Libre 2 before having any chance whatsoever for Libre 3. Based on the comments made by the company today and the AID issues surrounding Libre 2 our educated guess is that Libre 3 is a year or more away from being here in the USA.

4. This creates the following scenario with Dexcom launching their G7 in the USA well before the Libre 3 even gets submitted to the FDA. Besides being more advanced than the G6 the G7 also comes with much lower COGS allowing Dexcom to fend off any possible price competition.

5. The fact is the domestic market here in the USA is vastly different than the European market and not just in terms of the regulatory path. These differences extend to reimbursement, distribution and patient usage. These differences favor Abbott internationally and hold them back domestically.

As we have said continuously, and yes this play on words is intentional, Abbott and Dexcom OWN the CGM universe. Both companies are doing quite well and will continue to do quite well. CGM usage continues to increase becoming the standard for glucose measurement while at the same time usage outside of diabetes is showing signs of life which will only throw gas on an already raging fire.

What won’t happen is a major price war which would begin a race to the bottom decimating what is a very good thing. Abbott has the resources to pursue this option but won’t for several reasons. First there really is no reason to go nuclear as the franchise is doing fine and the outlook is very bright. Second, the FDA is standing in the way which prevents Abbott going head to head against Dexcom. As much as Abbott tries to downplay the AID issue with Libre 2, the AID market is important here in the USA and will become even more important when Tyler gets here, and Tyler is almost here.

We don’t think Abbott will make the same mistake with Libre 3 that they did with Libre 2 in that they will not submit it to the FDA if they aren’t 100% sure there will be no AID issues. They cannot suffer another embarrassment as they have with Libre 2 and Libre 3 MUST have this capability if it is to compete here in the USA. Yes CGM usage is expanding beyond insulin using patients but the fact is insulin using patients are driving growth just as they did when conventional BGM was all the rage. The technology is different now, but the market dynamics are not.

It would be a MAJOR mistake to believe that either Abbott or Dexcom would do anything to kill the golden geese who are laying all the golden eggs. Yes there is some serious competition between the two players, but this competition is very healthy. Neither management team is stupid nor wants to venture down a path which lead only to disaster. Both companies know competition is coming and this competition will use price as a weapon to compete and gain share. This happened in BGM and will happen in CGM.

Right now Abbott and Dexcom are both playing Pac Man gobbling up patients at an incredibly rapid rate. For the moment they are like Google and Apple peacefully coexisting with each staking out their own territory and in their own way helping each other by doing so. They know the clock is ticking, that competition will eventually get here but until then it’s all about patients and as we’ve said over and over the company with the most patients wins the game. Right now both Abbott and Dexcom are winning.

Looking for clues

One of the biggest perhaps the biggest question being asked right now is what will life look like after COVID. When it comes to healthcare everyone is wondering whether after COVID is over will patients continue to use digital health tools, i.e. virtual physician visits or will they go back to actually seeing their physician in person. Early data and it’s very early seems to indicate that while virtual visits gained in popularity during COVID in the post-COVID world patients seem to prefer physical visits.

Another question is just how many of the digital tools adopted out of necessity during COVID will remain in place when COVID is over. Will patients continue to be comfortable with being monitored remotely, sharing their data via a smartphone or will they begin to opt out after COVID is over.

These questions have huge implications for all the digital diabetes players, companies whose entire business model is built upon the premise that the post-COVID world won’t be much different than the COVID world. As we have stated before many already believe that the old way of doing things has passed that digital health/digital diabetes is here to stay. That COVID was such a transformational event patients have become comfortable with sharing data and being coached.

Given that COVID is still here everyone is looking for clues for what life will be like after COVID. Are the initial surveys correct, surveys which seem to indicate that in a post-COVID world digital health is here to stay but not used as frequently as it was during COVID. Or has new era truly dawned with digital health becoming the standard of care with in person visits becoming the exception. Our position has always been and remains that while digital health is here to stay in a post-COVID world life will go back to somewhat what it was like before COVID. Simply put digital health will become a supplement to care NOT the standard of care.

This position has been reinforced by the results released by UnitedHealthcare, who reported third quarter results yesterday. Results which seem to indicate that patients are once again getting out and seeing their physician. It appears that as restrictions have been lifted, that with patients no longer sheltering in place life is getting back to the way it used to be. That patients and their physicians have adapted to COVID with new procedures and guidelines making in person visits safer.

Keep in mind these early clues are still very early and COVID has not yet gone away. Still we can’t help but think that just as people began to go back to restaurants, grocery stores and other public places they also went back to their doctor. Facemasks have become commonplace, as has having your temperature taken plus social distancing have all contributed to people feeling ok with getting out. We are by no means anywhere near what life was like before COVID and quite frankly its difficult to imagine getting back to anything near what life was like before COVID. But as we have been saying all along people are adapting just as we adapted to life after 9/11.

Lost in the hoopla over digital health is a few of those pesky facts. First and foremost this transformation to digital health was happening before COVID. COVID just threw gas on a small fire and made a huge fire. Let’s be very honest here does anyone seriously think Teladoc would have valued Livongo at $18.5 BILLION had COVID not happened.

Second digital health is not new although many want you to think it is. For many patients with diabetes things like remote monitoring were already in place and being used before COVID. Coaching platforms were also being used. COVID may have temporally increased usage of these tools but we suspect that once COVID is gone the diabetes management world will go back to the way it was before COVID, with a small motivated group of patients who were using these tools prior to COVID continuing to use them, while a fair of percentage of patients new to remote monitoring and coaching discontinuing use after COVID is gone. Simple put the patients new to digital diabetes tried it out of necessity but didn’t really like it all that much.

Third and this gets ignored all the increased competition in digital health will drive profits DOWN not up. COVID may have changed many things but it hasn’t when it comes to how companies handle competition. Try as they might to differentiate themselves from each other when it comes to digital diabetes all the players do pretty much the same thing the same way. Listen for their fancy sounding terms there are only so many ways you can manage a patient.

Like so many other aspects of our wacky world diabetes coaching has become basically a commodity. And in a commodity market price trumps performance. This happened with BGM, insulin, insulin pumps is coming to CGM and will hit digital diabetes as well. This is the reason companies like Teladoc/Livongo are rushing to sign as many deals as possible before their competitors drop the big one. The big one being when Teladoc/Livongo competitors go 100% at risk offering their programs for FREE and only getting paid for verifiable improvements in patient outcomes combined with REAL cost savings.

Right now with COVID still here all the digital health players are enjoying unprecedented valuations. Each time they announce a new deal they play up the fact that a health plan has X amount of covered lives understanding full well that doesn’t mean X amount of lives with diabetes. We have seen this with the diabetes device makers and are seeing it again with digital diabetes. You would think by now that investors and analysts would have caught on to this game, but somethings just don’t change.

Keep in mind with each deal announced all this really means is that a company has access to patients with diabetes. Getting the deal is the easy part as the health plan and/or employer pays nothing until patients/employees begin to sign up, start using the program and remain on the platform. These deals make for great press releases which in turn drive share prices higher, but truth be told mean very little as the heavy lifting hasn’t begun.

There is no question it’s been a great ride for digital health, but this ride will NOT last forever and like the bubbles that have burst before this one will also explode. As Momma Kliff would say enjoy the good times while they last but keep in mind that good times as much as we want them to last forever always come to an end.

This is going to work how?

There comes a point in every business when reality hits you like a ton of bricks. When it comes to diabetes Medtronic seems to have reached that point. Just as quick review after years of absolutely dominating the insulin pump market, owning formulary and bringing out innovative product offerings the company has since been leapfrogged by the competition.  The Control IQ  from Tandem now is the coolest toy in the insulin pump toy chest becoming the standard from which all hybrid closed loop systems will be judged against. Insulet with their move to the pharmacy continues to gain share and will soon have their own hybrid closed loop system.

The biggest blunder of all came in the expanding CGM market, a market which Medtronic at one time claimed would generate billions in sales. Something that hasn’t exactly happened with Dexcom and Abbott owning CGM and sadly for Medtronic the troubles here have also cost them valuable insulin pump sales. Simply put the Medtronic CGM has been an albatross hanging from the franchises neck.

During today’s investor day presentation Sean Salmon outlined the future for the franchise, a franchise which he says is “getting competitive again.” Now before we go any further that statement from Mr. Salmon shows just how much things have changed at Medtronic, a company which in the past never ever admitted any weaknesses. Everyone else knew this franchise had some major issues and quite frankly it’s refreshing that the company itself is no longer sticking their head in the sand. As Momma Kliff used to say the first step in fixing a problem is to admit you have a problem. So kudos to Mr. Salmon for the honesty.

That being said getting competitive again won’t be that easy especially for their core insulin pump franchise. First they have lost the most valuable asset they had and no longer own formulary. Second they no longer have the coolest toy in the toy chest and quite frankly have fallen to third position in terms of advanced insulin pump technology. Worst of all they continue to lag well behind in terms of CGM technology.

To fully illustrate how far behind they are in CGM the company that a goal for Zeus, their newest CGM sensor is to reduce or eliminate finger sticks. Their next generation product Synergy seems targeted at the Libre as it’s supposed to have a profile 50% smaller than Zeus, easy insertion and is fully disposable.

Now before any in Minneapolis or Northridge starts doing the happy dance a few pesky facts. Neither the G6 or Libre require finger stick calibrations. The fact Medtronic has yet to overcome this hurdle is quite frankly embarrassing. While Synergy sounds nice it will come to market way late as the G7 and Libre3 will be here ahead of it.

The harsh reality for the company is that their new products are NOT BETTER than the competition and when it comes to CGM aren’t even on par with the competition. The company had fallen so far behind in terms of technology they are now playing catch up just to get on the same level as the competition. The problem being of course once they get on par their competition has moved ahead and this cycle continues. In the past this wasn’t a huge issue given their formulary dominance but with that gone the company has a very steep hill to climb.

Now things aren’t all bad as one area where the company is ahead of the competition is Tyler. With their acquisition of Companion Medical Medtronic appears ready to be the first company to launch Tyler. As we have noted in the past if executed correctly Medtronic has a huge opportunity here especially since Lilly and Novo Nordisk continue to move at glacial speed with their version of Tyler. Medtronic is also aware of the impact Tyler will have on the insulin pump market and how it can also be used as transitional tool to increase insulin pump sales.

The key here of course is can the company execute, get Tyler to market and then fend off the competition.

The reality here is the franchise may have a new attitude, but the damage inflicted by previous management was so serve we’re not sure this new attitude will help all that much. The dynamics of the insulin pump market have changed dramatically. The advantages the company once had are gone forever. Try as they might to rebuild the Death Star the rebels are not surrendering their dominance.

Perhaps the best way to describe this situation is try as they might to be young again, try as they might to recapture their youthful exuberance this franchise has not aged very well. The changes we’re seeing today are merely cosmetic surgery designed to make the franchise look better on the outside but cannot hide fact inside they are a senior citizen. This does not mean they cannot have success rather they will never be what they once were.

Just as we have seen with the seniors playing in the NFL this year, all the experience in the world, all the Super Bowl rings won cannot change the fact these once great players while still good are showing signs of their age. We don’t see Patrick Mahomes or Russel Wilson forgetting what down it is.

It’s a new world

Since it’s Columbus Day which to us anyway celebrates the discovery of the new world it’s appropriate to examine the discovery of another new world, the post-COVID world. Yes we know COVID is still here but one day we will have a vaccine, likely several, and we will get back to whatever normal becomes. We did this after 9/11 and we’ll do it again after COVID. Just as we adapted to the changes made after 9/11 we shall adapt to the changes made due to COVID.

One area that continues to garner an outsized amount of attention is the role digital health will play. No one is quite sure when or IF we people will return to their offices. Several large companies Microsoft being the most recent has told employees they do not need to return and can work at home 100% of the time. Now the digital health players will say this is even more reason to use their services as remote monitoring is critical to better outcomes and as a result lower overall health care costs. But is it really?

Even before COVID remote patient monitoring was being used and the results while encouraging were somewhat of mixed bag. The simple fact is some people are receptive to remote monitoring while others aren’t. The problem comes in as the people most receptive to remote monitoring are the patients least likely to need it. These patients are already actively engaged with their diabetes management and tend to embrace any new toy or service that can help them. They are active, informed and willing to do all the heavy lifting needed to achieve better outcomes. Plus they do this because better outcomes ARE IMPORTANT TO THEM ON A PERSONAL LEVEL.

However the patients who really need help, patients who would truly benefit from remote monitoring and coaching are the least receptive to it. Worse for digital health companies this is by far the largest group of patients. They are patients either on oral therapies alone or orals plus insulin. Unlike their more engaged counterparts’ better outcomes ARE NOT IMPORTANT TO THEM ON A PERSONAL LEVEL. This isn’t to say they don’t care rather they just have other things that are more important. They don’t want to do all the heavy lifting as they don’t see a payoff.

In a post COVID world this will not change.

We are continually fascinated watching all the active in the digital health space as investors seem to have accepted the fact that digital health will become the standard. This could be true, but humans are still human and COVID or no COVID that isn’t going to change. Whether their health care is delivered in person or virtually each patient still has a decision to make. Do they take ownership of their diabetes and put in the work? Or do they as they were doing pre-COVID make a trade off prioritizing other areas of their lives? Do they decide to LIVE WITH AND NOT FOR THEIR DIABETES?

This is one reason we believe the companies who contract with digital health companies will become disillusioned over time. That they will be encouraged by early results as their employees are playing with their shinny new toy. But as time passes the allure of this shiny new toy fades and people return to the same behavior they practiced before. This is one reason all the digital health players consistently promote quick improvements in outcomes, quick reductions in health care costs. They surely know what we do that short-term results are no guarantee for sustained long term improvements. We have seen this over and over as it’s exactly what all the disease management companies did years ago.

The fact is COVID has been a boon for digital health. The herd has already accepted that digital health will become the future, that the future is now here. This by the way is exactly the same thing we heard when disease management was the shiny new toy. What disease management and now digital health has never understood is that behavior change is the most difficult hurdle to overcome when it comes to diabetes management, hence the reason they have come up with way cool terms for what in essence is behavior change.

Many things will change after COVID is gone but when it comes to diabetes management and the masses one thing won’t change. The masses will chose to LIVE WITH AND NOT FOR THEIR DIABETES.