Medco Express Scripts – Diabetes Impact
Yesterday Express Scripts (NASDAQ:ESRX) agreed to buy Medco (NYSE:MHS) for $29.1 billion, should this deal clear antitrust hurdles it would create a company with enormous buying clout. This is not good news for the already beleaguered glucose monitoring industry, an industry which is already facing declining margins, intensifying pricing pressure and unfavorable reimbursement trends. Nor is it good news for the increasingly competitive insulin market, as with their new clout Express/Medco will embrace generic insulin once it becomes available.
One area which could see a positive impact from this deal is the many companies working on integrated diabetes management systems. In their quest to provide ever more services to their clients and help these clients lower or at least contain healthcare costs, they may turn to such systems. As Diabetic Investor has been stating integrated diabetes management systems have the potential to improve outcomes, assuming over of course patients actually use these systems as intended.
Diabetic Investor can envision a company like Express/Medco with their huge installed user base of patients adopting such a system. Using their heft they could incentivize patients to use these systems and pass along the savings generated to their clients. If there has been a problem with integrated systems it’s not the technology, it’s been getting patients to actually use these systems; a problem that could be easily rectified by providing the patient with an incentive to use them.
A reoccurring problem with diabetes management has been the ability to cost effectively deliver management services to the patient. Companies like Walgreens (NYSE:WAG) and CVS/Caremark (NYSE:CVS) have experimented with adopting the successful Asheville protocol but have yet to fully embrace the protocol due to cost considerations. Even though these patients are more compliant with their therapy regimen, refill their scripts with greater regularity and visit the store more frequently, the time spent with the pharmacist for their diabetes coaching takes the pharmacist away from their primary job of refilling scripts, the primary revenue stream for both companies.
Diabetic Investor also believes this merger could push forward the move towards single company provided diabetes management solutions. As we have been stating the day is coming when physicians will prescribe a diabetes management system rather than individual drugs and devices. This system will contain everything the patient needs to manage their diabetes with all the devices designed to speak to each other as well as delivering all this data to centralized diabetes management team.
The central fact is this merger could dramatically alter the balance of power in the diabetes space. The reality is the balance of power has already shifted in some areas, glucose monitoring being the most notable. Years ago it was the BGM companies who had the upper hand; having the ability to command ever higher prices for their products. This all changed when the companies who deliver and buy these systems realized that monitors had become a commodity and they were actually the ones who controlled which system the patient used. As we have said a thousand times before the patient may prefer brand A over brand B but it’s rare that the patient will actually pay more out of their own pocket to use brand A. The reality is in the patient’s eyes all monitors do basically the same thing so why should they pay more to use a particular brand. Understanding this fact, the payors and provides demanded and received price concessions. They knew the BGM companies could not afford to lose share and would have no choice but to capitulate to their demands.
This same scenario could play out for short-acting insulin’s. While Lilly (NYSE:LLY), Novo Nordisk (NYSE:NVO) and Sanofi-Aventis (NYSE:SNY) would beg to differ there really isn’t that much difference between their products. Already we have seen Lilly offering large rebates to payors for their product to stem the share they have lost to Novo and Sanofi.
Looking towards the future with so many me-too products in both devices and drugs, it’s the payors who have the upper hand and control market share. To combat this shift in power diabetes companies have two choices, develop truly innovative products that can command premium pricing or offer diabetes management systems which provide everything the patient needs in a single package.
The bottom line here is that diabetes management will be driven not just by the safety and efficacy of a particular drug or device. Given the changes taking place in healthcare with an increased emphasis on controlling costs and improving outcomes, companies in the diabetes space will be forced to adjust to these new realities or risk losing valuable market share. While we’re not there yet the future of diabetes management is changing and the forces driving this change are actually coming into clearer focus.