It’s all about franchise protection

It’s all about franchise protection

This morning Lilly made the following announcement:

“Eli Lilly and Company (NYSE: LLY) and Ypsomed (SWX: YPSN) announced today a non-exclusive, global agreement to advance an automated insulin delivery system as part of Lilly’s connected diabetes solutions. Under the terms of the agreement, Lilly will commercialize the system, which is currently in development and will include an insulin pump developed and manufactured by Ypsomed.”

Now keep in mind this will be the SECOND insulin pump Lilly has, the first not yet launched pump is a Dean Kamen design which Dean has sold more than once. (Nice gig if you can get it.) Lilly also has a Tyler under development also not yet launched. Ironically the Ypsomed pump, which is pretty slick, works with a prefilled insulin cartridge provided by … wait for it … Novo Nordisk. And no we are not making this up.

The reality here is the insulin delivery and insulin markets are combining. As we noted with the recent launch of the InPen from Medtronic the long-term plan for Medtronic is to enter the insulin business with a biosimilar short acting insulin. This is the same reason Lilly and Novo, remember Novo also has a Tyler under development, want to be in the insulin delivery business. Novo however seems content to, excuse the expression, stick with pens rather than enter the insulin pump business.

Given that insulin has become a commodity and that biosimilar short-acting insulins are coming Lilly and Novo are doing whatever they can to protect their insulin franchises. We should note that Sanofi, yes they are still in diabetes temporarily anyway, has a Tyler under development and they actually have a biosimilar short-acting insulin right now.

Here’s the kicker the insulin delivery business is all about scale which begs the question how will Lilly achieve scale in the insulin pump market and how will Lilly and Novo achieve scale in the Tyler market. Let’s take the later before the former as this is an easy one. When it comes to Tyler Lilly and Novo will give away for FREE their connected device and will use their existing formulary positioning to blunt Medtronic’s efforts. When it comes to Tyler it’s not the connected device or insulin that matters, Tyler is all about a reliable/accurate CGM and insulin dosing algorithm.

Now before we go any further let’s make something very clear given that the CGM plays such an important role this combination of the insulin delivery and insulin markets is GREAT news for Dexcom and could be great news for Abbott should they solve the automated insulin dosing issues with Libre2. We should also note that while Medtronic has made strides in improving their CGM sensor it still requires calibration and lags both Dexcom and Libre in terms of performance.

Looking at the insulin pump side things aren’t so clear. Given the critical importance of scale one could argue that if Lilly was really serious about being in this market they would have bought Animas when it was for sale or Tandem when they were on deaths doorstep. That rather than trying to build share, which is costly, time consuming and not guaranteed it would ultimately be more cost effective to buy share. Let’s also not forget that besides having to build share Lilly also must build an insulin pump sales and support infrastructure.

Here is where things could get very interesting Lilly could decide to give away the hardware making money on the continual sale of pump supplies and insulin. They could also work out an arrangement with Dexcom to share in the sensor revenue. This would eliminate the high upfront cost of the pump and force both Tandem and Medtronic to rethink their business models. Payors would love this idea as they really don’t care which system a patient uses they care about money. Remember Lilly isn’t getting into the pump busines to make money per se from the pump they are getting in the business to protect their insulin franchise.

A second possibility would be to adopt a lease versus buy model. Rather than charge for the pump and supplies instead charge one monthly price which would include all the supplies including sensors and insulin. This pay as you go model would be similar to what Insulet does with the OmniPod yet go a step further with the inclusion of supplies and insulin.

To us anyway it’s a non-starter if they adopt the conventional insulin pump business model. Lilly is going to have huge hurdles to overcome and it would be a recipe for disaster if they play on Medtronic’s or Tandem’s turf. Medtronic may be down right now, but they aren’t going to let Lilly establish even a toe hold in the market. Tandem is rolling and they too won’t let this happen either. And it’s worth mentioning that Lilly isn’t the only company who wants to be in the insulin pump business as there are a plethora of OmniPod and Tandem wannabes.

We don’t see this news adversely impacting any of the major established insulin pump companies just yet. Lilly continues to move at glacial speed which combined with their conservative nature gives the established players time to adapt. Yes the insulin pump market is reinvigorated but it is still NOT large enough nor growing fast enough to support all the wannabes who want to play in this sand box.

IF and this is a huge IF Lilly thinks outside the box, if they change the paradigm then maybe just maybe they stand a chance. But this is one huge IF Lilly isn’t known for thinking outside the box or being major risk takers. Just as Dexcom and Abbott are making it tougher on all the CGM wannabes Medtronic, Tandem and Insulet are making tougher on all the insulin pump wannabes.

It will be interesting to see how this plays out, but we see the established players holding all the cards and we don’t see Lilly bluffing their way to a winning hand.