Don’t bet against the big dog

Don’t bet against the big dog

As we have stated before patent litigation in the diabetes device arena is a full contact sport. Just as football teams do everything they can to protect their star quarterback’s, diabetes device companies will use almost any means possible to protect their intellectual property. History is replete with examples of just how important and damaging patent litigation can be. Years ago Smith’s Medical was basically forced out of the insulin pump business after settling a suit brought against the company by market leader Medtronic (NYSE:MDT), who recently claimed another victory by getting Insulet (NASDAQ:PODD) to pay them $10 million to settle yet another lawsuit.

Yet the insulin pump market is not the only diabetes device market where patent litigation is rampant. Over the years the blood glucose monitoring space has seen its fair share of litigation. For years companies have been trying, so far unsuccessfully, to develop and sell a generic test strip. Diabetic Investor has been impressed by the zeal these companies have and to the lengths they will go to in an attempt to get around another company’s patent portfolio. Even more impressive is these situations often pit a corporate behemoth against a small startup, the ultimate David versus Goliath scenario.

It should be noted that when it comes to patent litigation it’s not always about who’s right and who’s wrong rather which company has the bigger bankroll. To say that patent litigation is time-consuming and very expensive is like saying that Julia Roberts has a nice smile. The fact is the odds are stacked against smaller companies as besides having greater resources corporate behemoths usually have better lawyers than their smaller less well funded rivals.

Given this set of circumstances it was surprising when last week the U.S. Federal Court of Appeals ruled that Shasta Technologies, a subsidiary of Decision Diagnostics, could sell a generic test strip, and that any decision allowing LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), to block sales would be unfairly eliminating competition. Now at first glance this appears to be a major blow to JNJ and a great victory for Shasta. Yet as happens so often this one ruling does not tell the whole story and this fight is far from over.

Now Diabetic Investor has no plans to go into a detailed discussion of patent law, as quite frankly we are not qualified to do so, however we have spoken with several patent law experts with deep experience in the diabetes device arena. The general consensus among these experts who have no vested interest in the outcome, this fight is far from over and it would be unwise to bet against the big dog in this fight. Diabetic Investor has also spoken to our sources inside JNJ and while they would not go on the record it’s fair to say the company is confident they will prevail.

Lost amongst this back and forth speculation over who will eventually win this case and what the outcome could mean for the BGM market are some essential facts about the BGM market. Or put more simply even if Shasta wins it could be a hollow victory. Here’s why:

Let’s say that Shasta out and out wins the case, the general speculation is the company will either be acquired by JNJ or find a well healed partner as the company would be unencumbered. Again at first glance this seems to make sense after all LifeScan is the BGM market leader and given the current pricing dynamics in the marketplace a generic strip looks like an instant hit. JNJ could simply eliminate the threat of a generic test strip by acquiring Shasta and shelving the product. It also seems to make to sense that if JNJ does not acquire the company that Shasta would easily find a partner who would bring the funds the company needs to properly manufacturer and market the generic test strip.

As much as this speculation seems to make perfect sense it fails consider several key facts, first of course is the fact that this case is far from over. Given their vast resources JNJ can easily drag this case out of years forcing Shasta to spend their limited resources on litigation rather than actually marketing their product. Diabetic Investor has seen our fair share of stupid decisions in the wacky world of diabetes devices but we can’t see any company dumb enough to partner with Shasta when the outcome of the case is still in doubt.

Secondarily given what’s going on in the BGM space it’s equally unlikely JNJ would acquire Shasta anytime in the near future. Not only can they still win this case a generic test strip may not be the threat everyone thinks it will be. As everyone knows competitive bidding has effectively driven prices even lower already so the price differential between a branded test strip and a generic likely would not be that substantial.

Diabetic Investor also believes that payors and retailers might shy away from a generic test strip for several reasons, notably quality and quantity. With strip prices continuing to decline the last thing payors and retailers need are unhappy consumers and while Shasta may claim their generic strip is just as good as branded strip history tells a different story. Nor do payors and retailers want to worry about having an adequate supply of test strips, keep in mind patients use millions of test strips each day. Even if the generic works as well as the branded offering there is no guarantee that Shasta can manufacturer them in the quantities needed. It’s one thing to make a few batches of strips it’s quite another to have the infrastructure in place to not just manufacturer strips, but keep the supply chain filled while also supporting the product.

Another very real reason why JNJ won’t buy the company and Shasta will have a difficult time finding a partner is the product itself. Although JNJ has had some difficulty with their new OneTouch VerioIQ system, the company is committed to this system and just have they done in the past they will eventually phase out their older offerings making the VerioIQ platform their primary system. Yes there will still be patients using older systems but not nearly as many as Shasta would have hoped for.

Back in the day before competitive bidding and the commoditization of the BGM market there was a place for a generic test strip. However that day has come and gone as market dynamics have made the need for an ultra-low cost BGM system obsolete. Listen when the world’s largest retailer is selling a box of 50 test strips for $9 and Medicare is reimbursing the same box for under $11 just how much lower would a generic test strip be.

The fact is this fight is far from over and any thoughts that Shasta has won a major victory are premature. In the full contact sport of patent litigation it’s unwise to claim victory at halftime, there is still another half to be played and while the team that’s favored to win may be behind the game is not over by any means. Now is not the time to bet against the big dog.