Mirror, Mirror on the wall who’s the fairest of them all

Mirror, Mirror on the wall who’s the fairest of them all

Lately it seems like a day can’t go by without hearing about yet another deal being made. Now whether these deals are being made to save taxes or actually for strategic reasons is another matter. Nonetheless it looks like we’ve once again entered a time where if a company isn’t doing a deal everyone wonders why not. This got Diabetic Investor thinking, yes we know that dangerous, about who in this wacky space is the fairest of them all.

Now to be fair the wacky world of diabetes needs to be divided between device and drug companies. While some companies have tried to play in both worlds, i.e. Sanofi (NYSE:SNY) and to a lesser extent Johnson and Johnson (NYSE:JNJ), generally when it comes to playing in the diabetes market companies generally can’t seem to play in two sandboxes at the same time. This is a real problem for some as Diabetic Investor remains convinced that in the future that patients will be prescribed diabetes management systems that will include both drugs and devices.

Yet we digress and need to get back to who is the fairest of them all. Which diabetes device company offers the value proposition and which drug company should the big boys pursue. Now a few ground rules here; first Diabetic Investor will immediately take AstraZeneca (NYSE:AZN) off the list even though we consider Astra to be the most valuable company in diabetes.  We do this as we, like many others, believe it’s just a matter of time and money before Pfizer (NYSE:PFE) owns Astra.

We’re also taking MannKind (NASDAQ:MNKD) off the list as they are now hooked up with Sanofi. Although it appears there is nothing that would prevent another company from coming along and buying MannKind, this would be an astonishingly stupid move. Although in a perverse way Sanofi may want this happen as perhaps they have an out-clause should someone come along and doing something dumber than what they did.

Perhaps what’s truly interesting looking over the various drug companies that are potential targets not one jump out. You have a host of smaller companies who are basically one-trick ponies, with products that would be nice to have but not must have. The simple fact is the big boys don’t need what the little guys are selling. Yes it would be nice to have but they really don’t need them. This is even truer when one looks at the future for diabetes drugs and what reimbursement will be like.

We’ve said it before and we’ll say it again when it comes to the market for diabetes drug we are on the path towards commodization where price trumps performance. Single source contracting will accelerate this move as will the coming of generic insulin’s. The fact that other than Astra there is not one drug company available who could fill the portfolio holes at Sanofi and Novo Nordisk (NYSE:NVO) creates some truly intriguing possibilities. Is it possible given this set of circumstances that Novo and JNJ would try and hook up again? Would Sanofi seek to acquire Medtronic’s (NYSE:MDT) insulin pump unit, believing this would lead to greater insulin sales?

Turning our attention the device side Diabetic Investor sees several solid targets. While some would consider Dexcom (NASDAQ:DXCM) and Insulet (NASADQ: PODD) to be the most coveted, Diabetic Investor actually thinks Tandem (NASDAQ:TNDM) might be acquired before either Dexcom or Insulet. As much as we believe that Dexcom is the most valuable diabetes device company, timing is not yet right for the company to be acquired. The same can said for Insulet, who is on the right path but still must lower cogs and improve margins.

What makes Tandem attractive is they have something someone not only wants but desperately needs. As we have chronicled recently things aren’t so good at Medtronic. The company continues to lose on two fronts, new insulin pump placements and keeping patients on their continuous glucose monitoring system. Given that it’s highly unlikely they would buy Dexcom to solve the later problem, they could easily solve the former problem by buying Tandem.

Now for those who think Insulet would be a better fit, think again. Yes Insulet has been around longer and comes with a larger installed user base; Medtronic just isn’t comfortable playing in the wireless sandbox.  It’s not like they don’t see value with a wireless system rather they just can’t get their arms around the math. The main question they keep asking is can a wireless system match the profit margins of the continual sales pf pump supplies. As we have noted on numerous occasions this is truly the goose that lays the golden eggs for the company. Pump supplies carry a high margin and with Medtronic’s huge installed user base provide the company with one of the most consistent annuities in the business.

By acquiring Tandem the company would solve some immediate problems. First, it would give them a pump that’s actually designed for today’s pump patients, patients who want iPhone like devices.  While there may not be that much performance difference between what Medtronic has and the t:slim, the fact is design matters, that patients want a more patient friendly user-interface. Looking over the Medtronic pipeline of new products it’s obvious that on their own they just can’t get with the program.

Tandem would also help the company reengage with patients new to insulin pump therapy, patients who are increasingly choosing the OmniPod or t:slim over Medtronic. Additionally it would help with existing patients who are coming off warranty, patients who are also moving in greater numbers towards a competing system when they decide to upgrade. All along Diabetic Investor has noted that this is the company’s Achilles Heel, as if any competitor could figure out how to steal existing Medtronic patients the damn might just burst.

Again it’s not like Dexcom and Insulet aren’t valued, it’s really more of who needs what.

Looking ahead Diabetic Investor sees a renewed interest in deal-making if for no other reason that this wacky world is transforming.  Long gone are the days of solid organic growth and equally solid margins. While innovation is important, it no longer drives share growth nor is innovation rewarded with premium reimbursement. The diabetes business has become one of scale combined with cost containment. These market dynamics will obviously impact which deals are consummated and which aren’t.

Still this is the wacky world of diabetes where anything can and usually does happen. The fact is the Sanofi/MannKind hookup is proof of just how wacky this world can be; a deal which was driven more by fear than any forms of rational thinking.  Looking at past deals in this space this unfortunately is not unusual.  So stay tuned this is going to be one wacky ride with some crazy twists and turns.