Earnings Round Up Merck and Tandem

Earnings Round Up Merck and Tandem

Looking at the earnings posted by Merck (NYSE: MRK) we could not help but compare and contrast them with what Sanofi (NYSE: SNY) said this morning. Like Sanofi had with Lantus, Merck has a mega-blockbuster with Januvia. Just as Lantus was getting long in the tooth and facing patent expiration so too is Januvia. The main difference is how each company planned for life beyond their respective mega-blockbusters.

While Sanofi tried and so far, failed to replace Lantus with Toujeo, Merck is taking a different tac with Januvia.  Take a look at this passage from the earnings release;

“At the 76th Scientific Sessions of the American Diabetes Association in June, Merck and Pfizer announced that two pivotal Phase 3 studies of ertugliflozin, an investigational oral SGLT-2 inhibitor for the treatment of patients with type 2 diabetes, met their primary endpoints, showing significant reductions in A1C (a measure of average blood glucose). The companies continue to expect to submit New Drug Applications to the FDA for ertugliflozin as a monotherapy and two fixed-dose combination tablets (ertugliflozin plus JANUVIA [sitagliptin], and ertugliflozin plus metformin) by the end of 2016.”

Now there is nothing exciting about having another SGLT2 come to market, especially since it will be the fourth SGLT2. Nor is there anything notable about coming with a fixed dose SGLT2/metformin combo pill. However, it’s a whole different story when you combine one mega-blockbuster which has a huge installed user base with a compound from a category that could produce multiple mega-blockbusters.

Unlike Sanofi who knows about as much about strategy as the Keystone Cops, Merck knows not just strategy but how to execute. This is not say that this SGLT2/Januvia combo is a sure hit, all the usual caveats apply here, but it does look interesting.

Merck is actually doing a pretty good job of fending off Januvia competitors and while sales may not be growing much they are not falling either. Basically they are keeping the user base intake while the SGLT2/Januvia combo goes through the regulatory process.  And unlike Sanofi the Merck/Pfizer partnership wouldn’t mind one bit if this combo product cannibalized sales of Januvia. Heck the drug is going generic anyway why not extend its life using this combination.

Will the strategy work, that’s anyone’s guess but it sure looks interesting.

We wish we had the same positive thoughts for Tandem (NASDAQ: TNDM) who reported late yesterday afternoon. Perhaps the most telling statement came from John Cajigas, the company’s CFO who was asked the following question – “And then last question for me, just, John, it sounded when you gave the cash flow update and kind of the cash update, you’re now almost assuming you’re going to take that 35 million from CRG. In the past, I think that was a little questionable. Obviously, you guys have a lot going on here with moving manufacturing and a lot of new exciting products. I guess it’s somewhat understandable, but is it fair to just presume you’re probably going to have to exercise that 35 million at this point at the very least?”

Here is his very telling answer;

“I think we’re still continuing to manage on the cash we have today, our burn is decreasing and typically our burn decreases throughout the year once we move past the first quarter. But it is an assumption that’s reasonable that we might take the money, but I have not committed to taking the money yet.”

That answer in a nutshell describes Tandem’s problem. Yes, they have some great products, yes they have some great products coming but they have also run into the Medtronic (NYSE: MDT) buzz saw and they are bleeding cash.

Sure sales are accelerating but they should be given the sales force expansion, an expansion which is now over in another attempt to conserve cash. The company also acknowledged that the UnitedHealthCare/Medtronic deal is going to hurt sales something that just don’t need but must deal with.

The question as we see it is how long they last until Medtronic or Johnson and Johnson (NYSE: JNJ) buys them. Two companies which are basically asking the same questions and doing the same math. Just what do we get, how many patients will we add to our user base. Will these new patients be accretive to earnings? What would happen if our main competitor got them instead of us? Beyond the existing patient base can we use their platform to help us grow our insulin pump business?

The way we see it JNJ is the more logical fit as they quite frankly need the additional users more than Medtronic. They are also in desperate need of a replacement for their Animas pump and the Tandem patient interface really would be a big help. Tandem, like JNJ, has partnership with Dexcom (NASDAQ: DXCM) so no issues there either. The real question is how serious is JNJ about their diabetes echo system.

We’re not exactly sure what’s being discussed in New Brunswick but when it comes to diabetes it’s time to either go big or go home. Time to stop all this talk, all the damn meetings, decide upon on a strategy an endpoint and go balls to the walls. There is just no middle ground not the way the diabetes landscape is changing. Now if they don’t want to go big no problem either, spin it off or sell it.

The Tandem story points to something we have been saying for years the insulin pump market is not large enough nor is it growing at a rate that can support not just the existing players but the many companies who want to enter this market. About the only way we see anyone competing seriously with Medtronic is to go big, buy not just Tandem but Insulet (NASDAQ: PODD) too, another company that is also working with Dexcom, who by the way should be bought as well.

This would set up a head to head clash between two titans, Medtronic and JNJ. And believe it or not under the scenario we described above JNJ would actually have the edge as its clear sensor augmented pumping is the place to be and it’s clear that Dexcom is the preferred sensor. It certainly doesn’t hurt any that Dexcom is also partnered with a little company in Mountain View or that the CGM market has a very bright future or that future versions of CGM fit very nicely into this diabetes echo system JNJ keeps talking about.

The time for talk is over – either get in the game or get out of the way.  Staying with the present plan will only guarantee one thing, getting run over by competitors who not only have the vision but the capital to make this all happen.