Just doesn’t add up
As we noted earlier today Sanofi (NYSE: SNY) received FDA approval for Admelog, their biosimilar short-acting insulin. A move which will just push all the insulin makers into the device world, somewhere Lilly (NYSE: LLY) has been very public about and somewhere Novo Nordisk (NYSE: NVO) will likely follow. We also believe that Medtronic (NYSE: MDT) will go in the opposite direction and get into the insulin business albeit not directly but via a third party.
As we have noted the insulin companies don’t see devices as a profit center per see, rather as an attempt to change the paradigm when it comes to selling insulin. Put another way this move into devices is more defensive than offensive. The thought process is that patients will be prescribed insulin delivery systems with the insulin being part of that system. It doesn’t take an advanced degree from MIT to turn an insulin pen cartridge into tool that will fill an insulin pump reservoir, nor do you need an advanced degree to sell insulin pumps with pre-filled reservoirs, something Ypsomed and Novo have already taken this step.
This makes us wonder why the folks at Lilly have decided it’s better to build their system than buy one. Why they did not go out and buy Tandem (NASDAQ: TNDM) and their patient base, fix the problems with the t: slim and still develop their own system. Now we know logic doesn’t apply in our wacky world but let’s use some to explain why this would be a better option.
First and this is obvious Lilly could easily afford to buy Tandem and then put in the additional capital to fix the problems with the t: slim. As we keep saying the most difficult task isn’t building a pump, the hard part is selling it, supporting it and getting it reimbursed. Owning Tandem would give Lilly a built-in customer base who in the future can be upgraded to the pump they are developing, a system which will take years to get to market. Lilly is basically saying we’d rather start from ground zero than to start with a built-in customer base. That makes no sense whatsoever.
With Animas going into the insulin pump graveyard, the time to strike is now. With the right team in place Lilly could turn the insulin pump world upside down and give market leader Medtronic a real run for their money. Lilly could change the entire dynamic of how a pump is sold and supported. Again, as we have said before in the old days Lilly and Medtronic were allies, well this alliance is falling apart with the introduction of a biosimilar short-acting insulin.
It should also be obvious that own Tandem would help in other ways. Lilly knows nothing about how pumps are sold or how they are supported. They may know how payors act when it comes to insulin, but they have no experience with payors and insulin pumps. Simply put Tandem, with a new management team, could ease the transition into the device world.
They could do all this while at the same time while developing their very own system. Should they continue to build rather than buy, they face other obstacles not the least of which being Medtronic and Insulet (NASDAQ: PODD) adding patients that could be theirs. Let’s say Lilly choses to stay on their path, and let’s say we’re right about Tandem and they implode. The path for Lilly just gets more difficult, Medtronic and Insulet will just divvy up the patients and make Lilly’s job ten times harder.
Now Lilly isn’t the only company facing this dynamic which makes us wonder if either Sanofi, whose had an interest in entering the insulin pump market or Novo who at one time invested in Asante would step in. And let’s not forget that Abbott (NYSE: ABT) and Bigfoot are collaborating. The longer it takes to build their own device the further behind Lilly and all the other insulin companies fall. No system no matter how whiz bang and way cool can overcome some of these structural hurdles. Scale is critical in the insulin pump market and achieving scale isn’t easy and only getting harder.
Now we know that everyone has kicked the tires at Tandem and so far, no one has bitten. But we suspect this has more to do with limited vision, some hubris and a basic lack of understanding of how the insulin pump market works. The bigger problem is classic as well, these companies just can’t think out of the box. They cannot get away from their past. Money isn’t the problem here.
The reality is Lilly is facing threats they did not anticipate. Think of how all the insulin companies will feel when Medtronic contracts with an insulin manufacturer to produce a biosimilar short-acting insulin and then starts selling that insulin to their huge installed patient base. There may not be as many patients using a pump as there are injecting but Lilly and Novo can’t be thrilled with the idea of losing almost one million patients.
By the way Insulet can do the same thing as Medtronic albeit in a slightly different way.
When your core franchise is about to come under siege, when margins are about to shrink even further you cannot sit around and wait for your way cool whiz bang new toy to be built. You act and act before your competitor’s act. With all it’s warts Tandem still has value and compelling advantages over many of the other insulin pump wannabes.
Let’s do some simple math here. Tandem has a market cap of approximately $27 million. The company has about $80 million in debt. They also have about 57,000 or so patients. For grins and giggles add a 30% premium to the share price and pay off the debt and it cost $115 million to own Tandem. Of course, Lilly could absorb the debt or negotiate better terms from Tandem’s creditors who would happily take something over nothing.
Let’s further assume that once acquired Lilly commits an additional $200 million to fix the issues with the t: slim, while revamping sales and marketing. All in cost $315 million. According to their last earnings announcement through the first nine months of the year the company has sold over $2 Billion worth of Humalog. That same earnings report notes the company had almost $4 Billion sitting in cash. Heck Lilly could easily afford to buy Tandem, fix it and develop their own way cool whiz bang toy. Like we said money is not the issue here.
Now before we go any further the thought must have dawned on many given what’s going why did Johnson and Johnson (NYSE: JNJ) surrender, why they could not find a buyer for Animas, why they felt it was better to get nothing then something. To say this is one of the bigger blunders ever by JNJ is an understatement and does not give us much confidence they will be able to find a buyer for LifeScan. The simple fact is JNJ blew it and blew it big time. People shouldn’t be pissed they gave Animas patients to Medtronic they should be pissed that JNJ was so stupid.
Ok, and frankly it needed to be said, think about why Lilly, Novo or Sanofi isn’t buying Tandem. Why is Lilly developing their own system when they can immediately pick up scale and still develop their very own toy. Listen we may not be fond of Tandem management or their Board of Directors, but they can only offer the company for sale, they cannot make anyone buy it no matter how cheap it is and how much sense it makes.
Something isn’t adding up here.