Oil and Water

Oil and Water

Before we get started a quick point due to some scheduling conflicts we were unable to attend the Insulet (NASDAQ: PODD) session so until we listen to the web cast it’s unfair to comment. So stay tuned for that one.

We did however attend the Lilly (NYSE: LLY) presentation and breakout and came away feeling that we’ve seen this movie before only it was in French. Now as everyone knows Lilly has done an outstanding job of building the most comprehensive portfolio of diabetes therapies, our belief here hasn’t changed. The problem as Momma Kliff used to say comes when you try to mix oil and water, two things that don’t mix. Or as a now retired diabetes executive once told us, a drug company should stay away from devices and vice versa.

Lilly has been very public about their move into devices and today CEO David Ricks reinforced this effort. Talking up … wait for it … connected care. As part of this connected care effort they are building their own way cool whiz bang cloud enabled insulin pump, a product which Mr. Ricks states will be different than anything anyone has seen before. While this may be true by our view an insulin pump is an insulin pump, they all do the same thing the same way.

So when asked why they didn’t buy their way into the insulin pump market. A market where scale is critical, a market which is dominated by one player, a market where the cost to acquire patients isn’t cheap, why did they decide to build their own way cool whiz bang toy rather buy either Animas from Johnson and Johnson (NYSE: JNJ) or Tandem (NASDAQ: TNDM) or both, while at the same time building their own. Why start from scratch when they could acquire almost 150,000 patients, become a player immediately.

The answer according to Mr. Rick’s besides they are building the coolest toy in the toy box, starting from scratch was … wait for it .. cheaper. Which we guess is true from a hardware standpoint but not when you consider what it will cost them to build market share. Or as we like to say building the damn thing is easy any idiot can build an insulin pump. It’s running a commercially viable insulin pump franchise that’s the hard part. Or as one ex-pump executive stated the basic blocking and tackling that while not fancy wins games.

But that’s just the beginning the French Revolution. During his fireside chat Mr. Ricks mentioned that he’s gotten a lot of questions on the impact Amdelog® , Sanofi’s (NYSE: SNY) biosimilar short-acting insulin will have on Humalog a multi-billion franchise for Lilly. Well according to Mr. Ricks the short-acting market is not like the long-acting market and formulary space is locked up and prices have already come down.

When we asked him why Sanofi won’t do to them what they did to Sanofi with Basaglar, a product which killed Lantus he noted that Sanofi kept raising prices for Lantus, Basaglar did the same thing and they priced it lower than Lantus. He noted Sanofi could do the same thing but would have to accept lower margins as a result. Ok think about that one just for a moment, let that sink in.

Listen we know that Sanofi isn’t the sharpest tool in the shed but payback is a bitch. The fact is Sanofi can and likely will do exactly what Lilly did to them and undercut prices and grab formulary position. In fact we would venture to guess that payors are salivating at just this scenario. That just as they loved it when Lilly came in with Basaglar they will fall in love again with Amdelog. Or put another way betting that Sanofi will do the stupidest thing possible, as wise as that may be, is not a strategy we would hang our hat on.

Whether he wants to acknowledge it or not insulin short or long acting has become a commodity and in a commodity market price is all that matters. Sure Lilly may be able to maintain share but only after they heavily discount and rebate Humalog. Oh and we have this funny feeling that Novo Nordisk (NYSE: NVO) might just try and protect their short-acting insulin NovoLog.

The fact is Lilly has done an excellent job being a diabetes drug company but shouldn’t believe this performance can be duplicated with devices. As we said before we’ve seen this movie before only it was in French. We witnessed how Sanofi said no worries about Basaglar Lantus will be just fine. We witnessed Sanofi say no worries we can be a BGM company with the way cool now way dead iBGStar. We witnessed Sanofi blow every diabetes partnership they had.

Lilly is now making the same movie in English. They should know from their own experience what Amdelog will do to the short-acting market. They should know that no matter how way cool whiz bang their device is, devices are a completely different market from drugs. They should know that oil and water don’t mix.