Gaining steam and losing momentum

Gaining steam and losing momentum

This morning’s earnings calls by Bayer and Sanofi-Aventis (NYSE:SNY) were one more example of the shifting diabetes landscape. While Sanofi continues to accelerate their move further into the diabetes market, Bayer’s diabetes unit has run into a serious headwind. Diabetic Investor also believes Sanofi should pay close attention to what’s going on at Bayer as it shows just how difficult the diabetes device market has become, a market Sanofi has set their sights on.


Sanofi noted today they will be introducing their own blood glucose monitoring system late in 2010 in Europe and early 2011 here in the US. This system is first product to come out of their relationship with privately held AgaMatrix. Given the dismal market dynamics for BGM some may wonder why a well run company like Sanofi would even want to be in this highly competitive market. Bayer’s results show just how difficult the market has become.


The company has launched two outstanding new products, the ContourUSB and the Didget. The ContourUSB is targeted directly at insulin using patients, the most frequent testers, while the Didget is targeted at children allowing them to earn points for testing. Both are excellent products, each offering some unique features never seen before in glucose monitoring. Still as good as these products are the company is finding it tough going in the marketplace. The reality of the BGM market is that formulary placement is actually more important than product innovation. While there is a narrow segment of the market that will seek a particular monitor, the majority of patients will use whatever monitor is covered by their insurer.


Diabetic Investor suspects the Sanofi system will also be an excellent product. Although AgaMatrix has a minor share of the market, they do offer some excellent systems. It remains to be seen, however, if this new system will gain traction in the marketplace no matter how innovative it may be. This is one reason Diabetic Investor continues to believe at some point if Sanofi plans on being a serious player in BGM they will need to acquire one of the big four BGM companies for no other reason than to gain immediate formulary access.


Considering that Sanofi’s goal is to sell more insulin we would also suspect that this new system will offer enhanced features allowing insulin using patients to more effectively dose their insulin. This strategy is almost the exact opposite of US market leader LifeScan, a unit of Johnson and Johnson (NYSE:JNJ) who has targeted insulin users to sell more test strips. This is the main reason JNJ added to their diabetes franchise when they acquired Animas. As noted previously insulin pump patients are the most frequent testers and account for nearly 25% of all test strips sold.


That being said Diabetic Investor would further anticipate that Sanofi would extend their acquisition quest beyond a BGM company and look to add an insulin pump company. Going back to Bayer for moment, the lack of high frequency testers has been the Achilles Heel of the company.  While the company did an outstanding job of promoting their no-coding monitors, these patient friendly systems were not widely adopted by high frequency testers. This is the main reason for the ContourUSB, however by the time this system arrived JNJ had already captured the insulin market and used their formulary access to blunt advancements by the competition.


Frankly buying both LifeScan and Animas would be the perfect match for Sanofi and while this may seem out of reach even for a company with Sanofi’s resources, nothing is outside the realm of possibility today. Many, including Diabetic Investor, Sanofi would acquire Abbott’s (NYSE:ABT) diabetes device unit and then add on Insulet (NASDAQ:PODD), who reports after the market closes today. Yet as we have seen recently Abbott continues to struggle with their BGM unit, while Insulet continues to struggle with COGS. It is also known that the company had some preliminary discussions with Medtronic (NYSE:MDT) to acquire their insulin pump unit, but Medtronic’s asking price was above where Sanofi wanted to be.


Several months ago rumors were circulating that JNJ was considering spinning off LifeScan and Animas along with some of their other mature units. Although Diabetic Investor could not confirm these rumors and it would seem unthinkable that JNJ would sell LifeScan and Animas, JNJ is not just known for acquiring companies but selling units as well.  Crazier things have happen, which when you think about it is a rather redundant statement when it comes to diabetes device deals.


On the drug front Sanofi continues to move forward with their GLP-1 and has enhanced their pipeline with several new products. Yet the straw that stirs the drink continues to be Lantus. While some are concerned that Degludec from Novo Nordisk (NYSE:NVO) will hurt Lantus, the product while promising still has a way to go and Diabetic Investor sees Bydureon from Amylin (NASDAQ:AMLN), Lilly (NYSE:LLY) and Alkermes (NASDAQ:ALKS) as a bigger threat to Sanofi’s insulin franchise. A sentiment the company acknowledged during today’s question and answer session.


This is one reason Diabetic Investor sees Sanofi becoming a major player in diabetes beyond Lantus, quite simply the company gets it. Unlike so many others in this space who ignore market realities, Sanofi clearly sees where the market is today and just as importantly where it is going in the future. While the move into BGM may seem crazy, Diabetic Investor believes the company has more up their sleeve and does not see BGM as the end all but rather a means to an end. The bottom line here is that Sanofi is the company to watch in diabetes and could well change the competitive landscape in both drugs and devices.