Is diabetes becoming the have’s and have not’s
While the toy makers play with their toys and the drug companies battle with payors, an interesting dynamic seems to be developing that’s worth exploring. Has diabetes become a case of the have’s and have nots. Has scale become so critical that it by itself trumps other concerns? Will this stifle innovation as companies grapple with increasing demands for lower prices? Can they successfully navigate the treacherous waters of satisfying the demands of stakeholders while battling with payors over formulary position, discounts and rebates?
Although no one talks about it much whoever has the most patients wins the game. This is true for the toy makers and the drug companies. Scale brings with it many of the efficiencies needed to make a profit. Scale is costly to obtain therefore creates a unique barrier for those who lack scale.
Just by way of example look at LifeScan in BGM. Their huge scale, more than 25 million patients globally, allows them to make money even in this very competitive environment. As we noted when the unit was up for sale as bad things have become in BGM LifeScan continues to throw of $500 million a year in free cash. It’s not surprising given this fact that Platinum Equities who acquired LifeScan for $2.1 billion then leveraged the hilt out of the transaction. As Momma Kliff used to say this is simple math as why should you use your own money when you can borrow it cheaply and can easily service the debt without lifting a finger.
Look at Medtronic and their huge installed user base. Without adding one single new patient, by just keeping the installed base in tact the goose will continue to lay those golden eggs. As we have noted many times competing with this scale requires boatloads of money and even then, that might not work. As we have stated before Medtronic is to the insulin pump market what Google is to the internet search market.
Although not a monopoly one could argue that Novo Nordisk and Lilly have a duopoly in the short-acting insulin market, There is a plenty of business to go around and unless one of them goes completely nuts both will make money. Sanofi could throw a monkey wrench into this as Lilly did in the long-acting market but for the moment they too busy rooting for Le Bleu and screwing up their partnership with Google.
It’s too early to tell but the CGM market could also proceed down this path with Dexcom and Abbott garnering the lions share of the market leaving the scraps to everyone else. Even mighty Medtronic with their scale, resources and payor relationships may not be able to crack this nut. Many would call this poetic justice as finally the evil empire and their Death Star gets wounded by the rebels.
This is what makes so stunning all these companies who think they can start from nothing and capture scale. Would it not be easier to acquire some scale, then build a better mouse trap so they can build on that scale. Listen these companies are spending millions on product development for a toy that when it gets here will be just another mouse trap. Each day they spend developing the toy is another day when they can’t sell anything. Momma Kliff called this foolishness in diabetes this is called standard operating procedure.
Drugs aren’t much different the long acting insulin and long acting GLP-1 markets are proof of that. These commodities and yes that’s all they are commodities force the companies into the endless cycle of discounting and rebating to gain formulary position. Payors know full well the power in their hands and have no problems using it. In Chicago we would call this extortion, in the diabetes drug business it’s a generally accepted business practice.
Now there are exceptions to every rule, the oral version of semaglutide could be one the Intarcia exenatide micropump could be another. These products have unique competitive advantages and could alter the landscape of the markets they will compete in. But as we note they are exceptions and not the rule.
That being said the reality for diabetes markets, drug, device and apps, scale is mission critical. Scale drives efficiencies which in turn drive profits. As we keep saying this isn’t about the toys in the toy chest or the drugs in the medicine cabinet nor is it about the coolest app ever – this is all about patients and whoever who has the most wins.
