Inflection Point

Inflection Point

“Is Novo Nordisk (NYSE:NVO) working on a patch pump?” This is a question Diabetic Investor received yesterday and to the best of our knowledge the answer is we’re not sure. Novo has sniffed around the insulin pump space before but to date nothing has materialized. The fact is even if Novo was working in this area so what, the last thing we need is yet another insulin pump that does the same thing the same way just in a different box. Frankly if Novo was interested in entering the already overcrowded insulin pump market they’d be better off buying Tandem Diabetes or Insulet (NASDAQ:PODD) or both.

Now we know things aren’t going all that well at Novo, but entering the insulin pump market is not the solution to the issues they face. As we have noted several time the insulin pump market is not large enough nor is it growing fast enough to support the existing players already in the market let alone the many companies seeking to enter the market. If that’s not bad enough insulin pumps will be the next diabetes device to face competitive bidding and while Diabetic Investor does not expect pumps to face a 72% price reduction as test strips did, there is no question cuts will be implemented; cuts that will trickle down from Medicare to private payors.

Diabetic Investor believes it’s time for everyone to come to grips with certain facts about the current state of the diabetes market, both drugs and devices. After listening to several very dull and unexciting earnings reports, it’s becoming clearer and clearer that the diabetes market has reached an inflection point. After years of double digit growth, favorable reimbursement and the introduction of innovative devices and drugs, the market is now one of low single digit growth rates, unfavorable reimbursement and a lack of innovation.

The simple fact is drug and device companies are slowly realizing that they will need to do more with less capital. This transition has already begun in the device world where cost cutting is the strategy du jour.  This zest for cutting costs will soon spread to the drug side as quite frankly the days of a large army of sales reps are coming to an end. Besides the high cost of maintaining this army, the functions performed by sales reps are no longer relevant in today’s digital age. This does not mean that each and every rep position will be eliminated rather the majority will be as technology even after development costs is a more cost effective tool.

The real question then becomes what happens after all this cost cutting is over; as we have noted before we’re not aware of too many market where a company can cut their way to growth. Yes cost cutting will temporarily make the bottom line look better but only temporarily. At some point the stakeholders in these companies will want to see growth and growth will only occur through innovation.  Now to many people when we use the term innovation they believe this means new and better drugs or devices. This is only partially true, as innovation needs to occur in how these drugs and devices are marketed and supported. Again as we have said before even without an army of sales reps drugs and devices still need to be marketed and supported.

As Charles Kettering once said; “My interest is in the future because I am going to spend the rest of my life there.” Yet far too many drug and device companies lack the vision or wherewithal to plan for the future. They are far too caught up in what’s happening next quarter. This short-term thinking will have serious consequences as the market is changing dramatically and failure to plan for what’s coming will likely change the balance of power.

Quite frankly this lack of vision has already reared its ugly head in the glucose monitoring market. For years Diabetic Investor noted that the market was transitioning from a medical device to a commodity style market and that unless BGM changed their practices they were doomed. Yet back in the day these companies were fat and happy, falsely believing that the good times would last forever.  Today these same companies who were once fat and happy are now like hogs headed for slaughter.  The good times are over and their past failures are coming home to roost.

Insulin pump and drug companies should pay close attention to what happened in BGM as their markets while different are headed in the same direction. Diabetic Investor believes it’s only a matter of time before the government in their continuing quest to control healthcare costs will not just push competitive bidding to insulin pumps but branded non-generic medications. We further believe that one day the FDA will not only consider safety and efficacy when approving new drugs and devices but will also consider cost effectiveness.  Again like with BGM companies drug companies share part of the blame for what’s coming down the road. Honestly do we really need 4 DPP4’s all of which do basically the same thing the same way?

The biggest question of all is which companies understand that we have reached this inflection point and which are sticking their heads in the sand.  The future will arrive soon enough and failure to act today will cost these companies dearly. As Martin Luther King, Jr. once said; “Nothing in the world is more dangerous than sincere ignorance and conscientious stupidity.”