Day Two Early Sessions

Day Two Early Sessions

It’s difficult to characterize what is going on with our wine drinking friends in France. Sanofi (NYSE: SNY) who presented this morning is somewhat of an enigma when it comes to diabetes. On the one hand they deserve some credit for not giving up. They could have easily thrown in the towel and given up on diabetes. Yet on the other hand based on what we heard today they haven’t learned anything from past mistakes.Here are just a few examples;

1. In a rare admission of a misstep in the breakout session CEO Olivier Brandicourt admitted the company missed the contracting window for their biosimilar short-acting insulin Amdelog (R). Noting that there will be some action in 2018 but 2019 is more realistic target.

2. He also noted that the companies partnership with Verily, OnDuo is progressing and we should see something soon, just what is unclear. Although we did find it noteworthy that he specifically mentioned the partnership has access to the Dexcom (NASDAQ: DXCM) CGM platform which leads us to believe that this partnership could yield a Tyler.

3. The pipeline while interesting seems misdirected. As the pipeline was outlined we began to wonder if the company bothers to look ahead to what the market will be like should these compounds make it. Sanofi has a tradition of being a day late and a dollar short coming to market late with me too copycat drugs. While we would not necessarily characterize the current pipeline as me too copycat however we would not call it innovative either. If we didn’t know better we would say they like to get into markets or categories with lots of competitors making gaining share next to impossible without using price as a weapon.

The good news here is expectations are so low they just might exceed them. On the flip side we aren’t overly optimistic given their track record. Sanofi has an uncanny ability in diabetes to turn gold into sand. They could not capitalize on the huge success of Lantus and every diabetes partnership they have entered into has been an unmitigated disaster. Today we saw and heard nothing to indicate they have learned anything either.

In many respects Sanofi is in the same position Johnson and Johnson (NYSE: JNJ) was just a few years ago in that it’s time to go big or go home, there really isn’t a third option. As we know JNJ has decided to go home closing Animas and divesting LifeScan. Given the company has invested $250 million with Verily to create OnDuo, the platform exists for them to go big. Yet we sense that this partnership is having a difficult time finding a sense of direction. The problem as we see it is the window is closing and if they don’t start building now it will be too late.

As Alex Gorsky JNJ’s CEO noted yesterday and we noted before the show begin Amazon is on the horizon. The reality is none of the drug or device companies can afford to ignore not just Amazon but Google, Apple and Facebook. The fact is the time to act is now and we’re just not sure Sanofi can come to grips with that.

Moving onto Dexcom the simple story is the company is well positioned for the future while the analysts are focused on the present. The company acknowledged they are facing some headwinds in the near term yet we wonder if anyone today got the bigger picture. Part of the problem here is everyone seems to believe that price is the ONLY factor. That the coming price war in CGM will somehow cripple the company and nothing could be further from the truth.

Let’s be very clear here the near term will be difficult but not impossible. The company is well aware of what they are facing and are taking steps to deal with it. They are not contrary to belief sitting around crying. Their new G6 will be here in the second half of 2018, it will not require calibration and it will have a more patient friendly insertion system. Their slap it on turn it on sensor they are working on with Verily is making excellent progress too. Most importantly their deal with UnitedHealthCare focusing on CGM and Type 2 patients will lay the groundwork for expanding the CGM into the biggest market of all non-intensively managed patients.

As we noted yesterday and as the company stated today CGM has a place with non-intensively managed patients it will just be used differently than with intensively managed patients. This however is a story that analysts just can’t grasp just yet as they see CGM and insulin usage joined at the hip. As we have said all along insulin using patients are the low hanging fruit for CGM and there are plenty of these patients for both Dexcom and Abbott (NYSE: ABT). However the big basket the real money will come from CGM replacing BGM and penetrating the non-intensively managed patient population. This is where Dexcom is headed.

The reality is Dexcom will actually have an easier time competing over the long term as it’s easier to run downhill than climb uphill. Unlike Abbott who must add cost to the Libre to make it a full blown CGM, Dexcom can take cost out of the system when they come out with a more basic model.

Although it was overlooked yesterday when Abbott presented they did acknowledge as this markets develops they will make enhancements to the Libre to match what the Dexcom system does today. Or in other words another Diabetic Investor prediction will come true as CGM will not be a one size fits all device rather a device that comes in two or three configurations – basic- intermediate and advanced.
Each of these systems will be targeted at different patient populations and come with different price points and support options.

Given the huge population of patients, the continued growth in diabetes on a global basis and the growing acceptance of CGM as the standard for glucose measurement both Dexcom and Abbott will do just nicely. This is NOT a winner take all market, this is a large, growing market which is barley penetrated today that can support multiple players provided it’s not a race to the bottom. Take the nuclear option off the table and this can be one hell of a market.

Before we head off to the afternoon sessions it’s worth noting our friends in beautiful San Diego released preliminary fourth quarter results. Per a Tandem (NASDAQ: TNDM) press release;

“ As of December 31, 2017, the Company had approximately $24.2 million in cash, cash equivalents, short-term investments and restricted cash.”

Just in case anyone was wondering according to their third quarter results they burned $19.2 million during that quarter and had $22.5 million in cash as of September 30th. Which basically means the company had a solid finish to the year as it should since as we all know the fourth quarter is always a good quarter for device companies. However we are now headed into the slowest quarter of the year which basically means without a major capital infusion the well will run dry sometime in the second quarter.

My friends this is not rocket science just market dynamics combined with simple math. It should be noted that today’s release contained the following passage;

“With our robust product pipeline and increasing number of customer renewal opportunities, growth remains a top focus, but equally so is closely managing our expenses as we leverage our existing infrastructure in 2018,” said Leigh Vosseller, Senior Vice President and Chief Financial Officer. “We believe our early investments have well-positioned the Company to achieve and support the scale necessary to reach our profitability goals, and we expect to make meaningful progress in reducing our cash use in 2018.”

This is a revelation from the company that for the first time to our knowledge acknowledges what we’ve been saying all along; without a major capital infusion the company must make some serious cuts to conserve cash. A refreshing admission from the company we just wonder if it’s too little and too late.

More later and yes the sun does shine in San Francisco.