JPM Wrap Up

JPM Wrap Up

When it comes to real estate the old saying is location, location and location. When it comes to diabetes management the new mantra is outcomes, outcomes and outcomes. This was a key trend that emerged at the most recent J P Morgan Healthcare conference. As Diabetic Investor has been predicting the time is quickly approaching when physicians will be incentivized when their diabetes patients achieve better outcomes. The days of fee for service reimbursement will soon be a thing of the past as in the future reimbursement will be based largely on patient outcomes.

This coming change in reimbursement will have a dramatic impact on both diabetes drug and device companies. Diabetic Investor further anticipates that another long held prediction will soon become a reality as companies will begin offering complete diabetes management systems; systems which will include everything the patient needs to manage their diabetes including patient coaching. Systems which will be use existing technology to share information between the patient, their physician, their insurance company, their pharmacist and certified diabetes educator (CDE).

While this coming change in reimbursement and focus on outcomes is plainly obvious it’s somewhat surprising how many companies in the diabetes space continue to ignore what’s coming and live in the past. Actually it really isn’t that amazing as this is the wacky world of diabetes where anything can and usually does happen. Keep in mind this is the industry which believed that patients would test their glucose levels more frequently because their glucose meter came in pretty colors.

However there were a few companies who presented at JPM who clearly get it. Medtronic (NYSE:MDT) the dominate player in the insulin pump market clearly gets it. Already facing increasing pricing pressure, greater competition and stagnate market growth Medtronic realizes that while they may own the market no lead is safe when reimbursement is based on outcomes and not strictly system sales. They also see the government bearing down on the industry as insulin pumps is the next device on the competitive bidding hit list. Finally they realize that while the insulin pump market has not fully transformed into a commodity market like BGM has, the market is moving in this direction. Simply put if they have any hope at remaining profitable Medtronic patients must achieve better outcomes.

Diabetic Investor believes that the company’s strong background in the cardiovascular space will benefit them immensely. Medtronic is well versed in systems which remotely monitor the patient which also communicate with the patients’ healthcare team. In the future physicians are more likely to recommend products which they see as helping them achieve their outcomes bonus. While none of the pump companies like to admit it all insulin pumps do basically the same thing the same way. Yes there are some differences between systems but nothing so dramatic that a well-trained patient would see better outcomes on a Medtronic pump versus an Animas pump. Medtronic understands that if they are to maintain not just their leadership position but profitability they need to help the physician by providing a complete diabetes management solution.

Another company on the leading edge of this change is Alere (NYSE:ALR) who’s back in diabetes and back in a big way. The company is developing a complete diabetes management system which includes connected devices, education and clinical support; a system which allows the physician to interact with their patients electronically. What Alere knows, probably better than anyone else, is that patients and physicians really don’t care which glucose meter they use, what they want are systems which are easy to use and fit within their already hectic lives.

Although not a true diabetes management system Lilly (NYSE:LLY) is following a similar path with their diabetes drug strategy. Lilly sees that the diabetes drug market is quickly transforming into a commodity market where price trumps performance. Yet they also know that while margins may not be what they used to be the company can still make plenty of money if they can move the merchandise. By developing a portfolio of largely me-too products in every category they can offer payors better pricing by taking the whole portfolio and not individual pieces of the portfolio. While the company will publicly claim their offerings perform better than the competition the data clearly indicates otherwise. Still it really doesn’t matter as the Lilly drug only has to be as effective as the competition it does not have to better.

This strategy is also brilliant when one considers that it clearly places the competition in a defensive position. The best example of this is Lilly’s Lantus knock off which is now at the FDA. Lilly knows that Sanofi (NYSE:SNY) is scared to death about this product as the company has nothing to replace Lantus when it comes off patent in 2015. They also know that Sanofi really has nothing of substance in their diabetes pipeline. Basically Lilly can go to payors and offer a major discount for their Lantus knock off as they know payors will jump at the chance to squeeze Sanofi who’s been forcing Lantus price increases down their throats these past few years. Sanofi will be in the very uncomfortable position of capitulating to payors demands for price cuts or lose valuable share to Lilly.

It was interesting to listen to Sanofi’s CEO field questions on the impact Lilly’s Lantus knock off would have on the company. Last year when asked about this product the company noted that coming out with a biosimilar version of Lantus wasn’t all that easy. That any company attempting to enter the market would need manufacturing, regulatory and marketing; all of which Lilly has with the added benefit of a recognized name with years of diabetes experience. Now that Lilly has submitted their Lantus knock off to the FDA, Sanofi has changed their tune and is now trying to convince everyone that a biosimilar Lantus won’t have high margins to make pursuing one worthwhile.

The reality is Sanofi is scared to death and is clueless as to what to do about this coming threat. As we noted earlier the company has nothing in their pipeline, and no U300 the so-called new and improved version of Lantus will not help as it’s just an incremental improvement not worthy of premium reimbursement. Apidra has no market presence, the company’s GLP-1 won’t see the light of day as a stand-alone offering and the company’s attempt at becoming a player in the diabetes device sector has been a colossal failure. It was actually quite laughable when the company noted that they were the ones who turned the way cool iPhone into a glucose meter. Too bad that iBGStar is now as dead as a door nail. Listen if the company really believes the iBGStar was an example of success then they have truly serious issues and should seek immediate medical help.

Perhaps the most revealing presentation was given by Roche, a company who at one time dominated the glucose monitoring market. A presentation which didn’t include a mention of this once dominate franchise, nothing, zilch, nada. At least Abbott (NYSE:ABT) mentioned their struggling franchise during their presentation; why we’re not sure but they did mention it. The simple fact is the BGM market is in a death spiral. Johnson and Johnson (NYSE:JNJ), who did not present at JPM, has awoken to this fact and has stripped, pardon the pun, as much as cost as they can out of their BGM unit. The reality is none of the major players can find any company dumb enough to buy their BGM franchises. And let’s be honest it about it why would any company spend billions to enter this declining market. Nope when it comes to BGM the order of the day is to cut costs to the bare minimum, make what they can until the market self-destructs entirely.

Folks the diabetes market is about to undergo dramatic change. Biosimilar insulin’s, me-too GLP-1’s and me-too orals will push the diabetes drug market further down the path to commoditization. Insulin pumps will be the next diabetes device to be whacked by competitive bidding and the BGM market as we know it today will cease to exist.  The winners in this market won’t be determined by who has the most innovation product offering rather who can control costs while avoiding any major missteps. The glory days are over, time to hunker down for the difficult seas that lie ahead.