JPM CES – What have we learned.

JPM CES – What have we learned.

As we rap up here in that beautiful city by the bay some final thoughts on what we learned at both JPM and CES.

Glucose Monitoring – The 21 Cent Solution

Yes the conventional glucose monitoring market is in a world of hurt, however this does not mean the market is dead, at least not yet anyway. As Bayer is finding out as they try again to sell their diabetes device unit, there aren’t too many companies willing to spend billions to enter a market that has seen better days. Besides competitive bidding, the market is facing a host of issues. Yet this does not mean money cannot be made in BGM.

Perhaps the best way to look at this market is to look at the current reimbursement level set by competitive bidding, $10.72 for a box of 50 test strips or approximately 21 cents per strip. Given the way the branded players have been complaining one just might come away with the impression there is no way they can make a decent profit at this level of reimbursement. That is until one looks at what it actually cost to manufacture and market a box of 50 test strips.

Although costs can vary from one system to the next and is greatly influenced by volume, the actual cost of manufacturing and marketing a box of 50 test strips comes in around $6 per box. Although companies in the market are not making the obscene margins when reimbursement was $37 per box, they are still making a decent profit with reimbursement at $10.72 per box. Hence the reason there are so many companies still entering the market.

The main differences between the old guard and these newcomers is one of structure and perspective. The fact is companies like Bayer, Roche, Abbott (NYSE:ABT) and Johnson and Johnson (NYSE:JNJ) came of age at a time when money was falling from the sky. Although it seems difficult to comprehend today at one time BGM was major cash cow. The market was growing at double digits, reimbursement conditions were favorable, companies were in control over pricing and it’s was fairly easy to grow share. Yes back in the day it seemed as all a company had to do to grow share was introduce new technology and share growth would follow.

It’s perfectly understandable why these major players then built huge infrastructures to support their BGM units, simply put they could afford it and the payoff was huge. This all changed as meters became a commodity and pricing control transferred from the manufacturers to payors. As we have noted previously competitive bidding did not kill this market, it merely hastened its demise.  The fact is the major players were ill-equipped to deal with these changes and did the only thing they knew to keep margins decent by cutting costs with reckless abandon. Simply put these units were not built for a world where reimbursement was $10.72.

This is not the case for the many newcomers who are coming of age today. These companies are built to operate efficiently and don’t carry with them bloated and very costly infrastructures. Lean and mean is the order of the day.

These newcomers also have the advantage of not been crippled by past mistakes or beliefs about how this market operates. They are not afraid to experiment with different pricing models or distribution channels. They further realize that if their product is going to have any value it cannot just be a device that delivers a number. They understand that in the future meters are part of a diabetes management system which takes that number and turns it into actionable information. Information which hopefully will help the patient achieve better outcomes.

The best of the bunch also know how to operate in two worlds, today’s world where reimbursement still maters and tomorrows world where outcomes mater. The see the potential of interconnected diabetes management (IDM) and are positioning themselves so they can prosper when IDM becomes the standard of care.

Looking to the future Diabetic Investor sees these newcomers chipping away at the market share of the branded players as the market transitions to IDM and outcomes based reimbursement. Five years from today we see only one or perhaps two of the branded players still in existence. Meter choice won’t be influenced by formulary position rather by which system best integrates into the patient’s diabetes management system, a system that will include other interconnected devices.

Diabetes Drugs – The Influence of pricing pressure.

This morning Pascal Soriot, CEO of AstraZeneca (NYSE:AZN) became the latest CEO to acknowledge what we already know, the diabetes drug market is transforming to a commodity market where price trumps performance. That pricing pressure is intensifying and companies are not rewarded for bringing innovative therapy options to market. Although Mr. Soriot did not specifically mention it, this fact is reinforced when one considers the cost, time and regulatory risks of bringing novel therapy options to market.

This commodization of the diabetes drug market was perfectly captured during the Lilly (NYSE:LLY) presentation with a slide that should how many options exist in each category. There are 3 DPP4’s, 4 SGLT2’s, 5 GLP-1’s, 4 Short-acting insulin’s and 6 (yes 6) long-acting insulin’s. This doesn’t include metformin the most commonly prescribed diabetes medication. Now each company will publicly disagree with this statement but the fact is there really isn’t much difference between the 3 DPP4’s, 4 SGLT2’s and so on.

A fact not lost on payors who know that formulary position is the determining factor between a drug being a success or failure. And just as they did in BGM payors are demanding and receiving major price concessions from the players to gain favorable formulary placement. In essence like BGM pricing power has transferred from the companies that make these drugs to the payors.

Equally disturbing for drug companies is the diminishing impact of being first to market with a new therapy option. Invokana is a perfect example of this as the drug got off to a very start, and by all accounts exceeded expectations. Yet this first to market advantage has quickly dissipated as the drug now faces multiple competitors something which has forced JNJ to resort to fight back with co-payment equalization programs, a tactic not normally used until much later in a new drugs life cycle. The simple fact is their competition is using price as a weapon to gain share, a tactic which is working.

Some may point to the blockbuster Januvia from Merck (NYSE:MRK) as an example that first to market still means something. That is until one looks back at the history of this drug and market conditions at the time. As Diabetic Investor has documented Januvia besides being a major blockbuster is perhaps the luckiest diabetes drug of all time. Many seem to forget that Januvia had no competition when it came to market and Merck was in desperate need of a blockbuster. It also came to market during the Avandia controversy when physicians were looking for a replacement therapy plus Lilly and Amylin were busy screwing up the launch of Byetta. In essence the perfect storm was created that propelled Januvia to mega-blockbuster status and Merck to their credit didn’t screw up a good thing.

Still looking at recent sales numbers even the mighty Januvia franchise is running into headwinds.

Looking towards the future Diabetic Investor sees an all-out price war developing in the diabetes drug market as the respective players will have little choice for the risk would be regulated to adverse formulary status. Fuel will be thrown on the fire when Lilly gets their generic Lantus to market and begins pressing their advantage having the most comprehensive portfolio of diabetes therapy options. As we have noted previously Sanofi (NYSE:SNY), Novo Nordisk (NYSE:NVO), GlaxoSmithKline (NYSE:GSK), AstraZeneca, JNJ and Merck will be forced into some very difficult decisions as each tries to protect their respective diabetes franchises.

CGM, Insulin pumps and other whiz bang technology

Just in case anyone didn’t believe that continuous glucose monitoring would have a favorable impact on diabetes management we suggest listening to yesterday’s Dexcom (NASDAQ:DXCM). Yet even as well as Dexcom is doing and they are doing extraordinarily well, the company correctly understands that to maintain sustained success they must evolve as the market evolves. That selling hardware is just one piece of the puzzle and turning all this great data into actionable information which produces better patient outcomes is where the real money is.

In the insulin pump space Medtronic (NYSE:MDT) also gets it, the question is can they execute taking full advantage of their market dominance.  As we have noted in the past although Medtronic has huge scale the competition is chipping away. Tandem (NASDAQ:TNDM), Insulet (NASDAQ:PODD) (Insulet presents later today), Animas and Asante are all chomping at the bit and will pounce on any Medtronic misstep. This market too will face intensifying price pressure and like CGM it will have to be about more than just selling hardware.

Contact lenses that measure glucose, smart insulin pens, glucose meters that become a diabetes information hub are just a small sample of the way cool whiz bang technology coming our way. Apple, Samsung, Qualcomm, Panasonic, Google and Facebook are just some of the high tech companies who are entering this wacky world. The only issue even with all their whiz bang technology and piles of cash they haven’t quite figured out just how wacky this world is, they will but today is not that day.

Well that’s all today time to head home, as the song says it is been a long and winding road.