Starting from the wrong premise
Yes, not a day goes by without us looking at yet another way cool whiz bang toy. Even though the insulin pump market is dominated by Medtronic (NYSE: MDT) it seems as if everyone wants to play in this sandbox. Same can said for CGM, even though Dexcom (NASDAQ: DXCM) and Abbott (NYSE: ABT) are well ahead in this expanding market everyone wants to jump in. Heck even with BGM dying a slow and painful death money is still being thrown at ideas whose time has come and gone.
As we witnessed at JPM when Lilly (NYSE: LLY) talked about their jump into the insulin pump pool these new toy makers are starting with the wrong premise. Lilly says people will use their toy because it will different than the other toys in the toy box. Others say not enough attention is being paid to patient outcomes and how their toy will produce better outcomes.
Now years ago, it may have been true that a company could build a toy that was different or that their toy helped patients achieve better outcomes. But today the world is different and whiz bang way cool doesn’t matter nor do outcomes matter. What matters is getting as many patients as possible to use the toy and given that payors control access to whose able to play with these toys why not begin this process with payors in mind. Why not design a low-cost system that payors will embrace because it works just as well as the other toys only it’s cheaper?
Lilly of all people should know this as Basaglar proves this. It’s no better than Lantus or any of the other long-acting insulin’s but its cheaper. As we keep stating payors aren’t interested in way cool whiz bang nor are they interested in outcomes what the care about, the only thing they care about is money. So why not build a system where low cost is the goal?
Look at what Abbott has done with Libre. As we noted this morning the reason Libre is adding 50,000 patients a month not because its any better than the Dexcom system. In fact, we could make a very strong argument that the Libre is inferior to the Dexcom system, it’s not a true CGM, it lacks connectivity with smartphones, there are no alerts or alarms and sensor accuracy while ok is still not as accurate as the Dexcom sensor. No, a big reason Libre is gaining patients is that it’s cheaper than the Dexcom system.
Although the newer insulin pumps carry a higher cost of goods Medtronic owes a large debt of gratitude to MiniMed for designing an elegant system with low cost of goods. One reason no one has been able to effectively compete with Medtronic is their systems cost too much to make. A lower cost of goods would have allowed these systems to compete more effectively. Animas and Tandem (NASDAQ: TNDM) failed in large part because they tried to build a cooler mousetrap when they would have had a better chance building a cheaper mouse trap.
Let’s be honest all insulin pumps do basically the same thing the same way, they are commodities. Although we aren’t there yet the CGM market is headed in the same direction. Well in a commodity market where price trumps performance low cost of goods is everything. Way cool whiz bang doesn’t matter, manufacturing efficiencies matter. Cloud enabled doesn’t matter, low sales, marketing and support costs matter more.
All the toy makers seem to think they can a build a better mouse trap. They believe that their toy will be “different” than the other toys. That patients will chose their toy over the other toys because its “different”. Well the fact is most patients don’t get to choose which toys they play with their insurance company does. The real customer isn’t the patient, the real customer is the people who pay for the toys and that isn’t the patient. The real winners aren’t the toy companies with the coolest toy but the toy company with the most patients.
We’ll take the company with the most patients over the one with the coolest toy hands down and twice on Sunday. For goodness sake Tandem has one of the coolest toys around yet loses money on each toy they sell is it any wonder they are bleeding cash and running out of money. Many of the systems we’ve investigated are also way cool, but they are so damn expensive to make they don’t stand a chance.
Listen Johnson and Johnson (NYSE: JNJ) isn’t getting $3.4 Billion for LifeScan because its way cool whiz bang. They are getting that because they have nearly 25 million patients and have wrung all the cost out of the business so much so that it continues to throw off boatloads of free cash in a market with continual price contraction. Think had Google bought LifeScan and converted a third of these patients to the Dexcom slap it on turn it on sensor, that my friends is not just a ton of sensors that’s some serious money.
The diabetes game is all about patients the company that accumulates the most patients win. This is true in drugs and devices. And given the power held by payors the real customer isn’t the patient it’s the payor. As we noted today the only way CGM expands beyond insulin using patients is for payors to make CGM more accessible to ALL patients.
Yet for reasons only the toy makers understand they begin their quest thinking about way cool whiz bang cloud enabled when they should be thinking about costs. Whiz bang way cool cloud enabled won’t get them what they need most, patients. Payors control the keys to the kingdom and are the true customers. Dilly Dilly