Earnings Call Round-Up

Earnings Call Round-Up

Before we get into our coverage of last week’s earnings calls, a quick housekeeping item; as everyone knows last week was the American Association of Diabetes Educators (AADE) annual conference in sweltering Las Vegas (and no matter what anyone says dry heat or not, it’s damn hot when it’s 111 degrees).  Diabetic Investor will be publishing our impressions from the conference later this week but don’t expect much as it was a pretty boring show and much to our dismay there was no Tradjenta toilet paper given away.

Last week was however a banner week for earnings calls with MannKind (NASDAQ:MNKD), Insulet (NASDAQ:PODD), Dexcom (NASDAQ:DXCM) and Novo Nordisk (NYSE:NVO) all reporting, given that MannKind had the quickest call, let’s start with this beleaguered company.  Actually this really wasn’t an earnings call but a desperate attempt by the company to convince investors there is still hope for the company. Sadly they failed as they company is basically on life support and the folks at the FDA have the power to kill the company.  Although the company has yet another meeting with the agency coming up on Wednesday, Diabetic Investor is not optimistic that anything positive will result and it’s just a matter of time before MannKind moves into hospice.

Although the situation at Insulet is not as serious as it is with MannKind, the company has issues of their own, which if not managed carefully could put the company in the ICU right next to MannKind. As expected the company continues to justify their acquisition of Neighborhood Diabetes and no matter how many times they try it doesn’t sound any better.  It’s becoming increasingly obvious that sales of their main product, the OmniPod Insulin Management System, just aren’t meeting expectations and their cost of goods are still way too high. The stark reality is Insulet bought Neighborhood as a diversionary tactic buying time and some revenue until the new smaller, less costly pod gets here.

During the call the company announced so many accounting moves that one began to wonder if they were setting a new standard for creative accounting. Even after getting a more detailed explanation of these moves from the company, Diabetic Investor wasn’t buying what the company was selling.  Since one would need an advanced degree in accounting to understand all the various moves made, Diabetic Investor has one example of where things just don’t add up. During the call the company was asked why they were having manufacturing issues with their new pod, which is now approved in Europe. During the company’s long explanation they noted that some purchase orders were issued late by their partner Flextronics which caused a delay in them getting the new equipment they need to make the new pod.

Since Insulet actually owns this equipment and pays for it in advanced combined with all the accounting maneuverers, Diabetic Investor suspected the company was having cash flow issues.  The company however contends that the delay was not due to them not paying Flextronics on time and it was Flextronics fault for issuing late PO’s to the company who actually makes the equipment  that caused the delay. (The way this system works is Insulet pays Flextronics in advance and then Flextronics in turn goes out and buys what they need.) All we can say at this point is that Insulet is taking a page out the Lilly (NYSE:LLY) playbook on how to treat a partner and seems to have no problem throwing Flextronics under the bus. What the heck there located in China and likely won’t even notice.

The reality is the company has bet the ranch on the new pod and if there any hiccups getting it through the FDA, the company could find itself under new management.

The situation is completely different at Dexcom, which was actually the only company of the four reporting were the sky wasn’t falling. As expected the company continues to see greater adoption of their products and is now pushing the edge of the envelope with their new, more advanced systems. The main challenge for Dexcom will be expanding usage of their product deeper into the insulin using population. Although recent studies have shown that CGM usage benefits Type 2 patients, the company is wise enough to understand that even with this data it would be unwise to try and capture Type 2’s.

Diabetic Investor actually believes that the company could see some help here from an unexpected source; the artificial pancreas project.  Many assume that artificial pancreas project would only help insulin pump patients but that is not the whole story. The folks at the JDRF who are spree heading this project noted that while it would be great to eventually have a completely closed insulin delivery system, their work will also benefit the many patients following multiple daily injection (MDI) therapy.  As they shared with Diabetic Investor the more we learn about insulin dosing the better and it would be foolish to believe that each and every patient would use a true closed loop system. The key is better insulin dosing patterns and no matter how the insulin is delivered a solid CGM is a critical component whether the patient uses a pump or injects.

The reality here as Diabetic Investor predicted long ago, the CGM adoption rate is following the same path as the early days of insulin pumps. It wasn’t until the results of the landmark DCCT came out, which validated intensive insulin therapy that insulin pump sales actually took off and given the growing body of evidence that CGM is becoming the standard of care for insulin using patients; the work being done on the artificial pancreas project could do for CGM what DCCT did for pumps.

Speaking of insulin, things aren’t going so well at the current market leader Novo Nordisk.  Although Victoza continues to perform well, the company’s core insulin franchise is facing much tougher market dynamics. Most notably Lilly has become super aggressive in their pricing and Sanofi Aventis (NYSE:SNY) isn’t far behind. The fundamental issue for Novo is will their long term strategy of developing superior products which command premium prices offset Lilly’s aggressive pricing. Given the way things going Novo could be caught with premium priced products in a value/commodity pricing environment.

In the past the company could charge ever higher prices for newer insulin’s as they were clearly superior to the insulin’s they were replacing. This may not be the case going forward for several reasons. First, looking at the short-acting segment its clear this is becoming a commodity market where price rules. Second, Lantus is going off the patent cliff and third, Degludec and DegludecPlus just aren’t that much better than Lantus that they would be able to command a premium price. The data for these products is good but not so good that physicians would prefer it over Lantus, especially when there is generic version available.

The fact is Novo is getting squeezed by factors they never would have envisioned when they implemented their premium product strategy. The world economy is hanging on by a thread and healthcare reform is spreading around the globe faster than an email virus.  As Diabetic Investor has been stating consistently in this new environment new drugs will not just be judged by their safety and efficacy. In the new world order new drugs will need to be clearly superior to command premium pricing and even with clear superiority getting this premium price won’t be easy.  The simple fact is all the insulin companies are facing the same problem glucose monitoring companies faced years ago when they too lost control over what they could charge for their products. Today managed care companies are doing to the insulin companies what they did to the BGM companies; either the company capitulates to the price managed care says it will pay or they will replace your product with another that is just as good. As we noted on numerous occasions no matter what the companies say there really isn’t that much difference between the three current short-acting insulin’s on the market.

This pricing environment will only get worse when generic insulin arrives and for a company like Novo which is heavily dependent on premium products could pose some very serious problems.  The reality is healthcare reform may not be the hot topic ten years from today but it really doesn’t matter as the wheels have been set in motion.  Looking ahead Novo basically has two choices, either cut their prices on their existing products and maintain volume, or prove that Degludec and DegludecPlus are clearly superior and worthy of their premium price. Neither frankly is a great option and Novo could just be between a rock and a hard place.