Taking a different view

It likely will surprise no one that we have a slightly different view of the recent round of earnings. Since Lilly began the recent round lets start with our friends In Indianapolis. While everyone is focusing on the continued pricing pressure in the diabetes drug sector, the further commodization of the insulin market and possible changes to Medicare reimbursement i.e. elimination of rebates, this is really old news. The reality is pricing pressure will not go away, insulin has been a commodity for some time and changes to Medicare reimbursement are almost a certainty with drug prices being a critical issue in the Presidential race.

Put in simpler terms these are all short term issues the mundane blocking and tackling that must be done to play the game. Yet hidden in the Lilly results and corresponding call was a glimpse into the future of diabetes management with an additional revelation as how diabetes management will be paid for. Largely unnoticed was the fact that Lilly has submitted their connected DISPOSABLE insulin pen to the FDA.

This was a significant milestone largely overlooked. Unlike others in the connected pen space Lilly is taking a different track with a DISPOSABLE connected pen. Others in this space have gone one of two ways developing either a insulin pen cap cover or developing a durable connected pen. To our knowledge Lilly is the only company that has developed a DISPOSABLE connected pen. A system that fits within their infrastructure and manufacturing systems.

As we have noted in the past it’s unlikely any of the insulin companies will be able to charge a significant premium for a connected pen. That in all likelihood the connected pen will be given away for FREE or at a very low cost. Keep in mind here that the goal is not to make money from the connected pen rather to make money from the continual sale of insulin plus and this is another factor that is being largely overlooked prepare for the day when reimbursement is based on patient outcomes.

All the insulin companies will soon have their own version of Tyler. This is a given. They all know that outcomes based reimbursement is coming and Tyler when used as designed should produce better patient outcomes. The Tyler market will then come down to external factors such as cost, ease of use and patient familiarity. Here with a disposable connected pen we see Lilly having a major advantage on all the fronts mentioned. Patients are already used to using a disposable pen. Given the scale Lilly has cost should also be under control.

Before we go any further this move to Tyler is also great news for Dexcom who during their recent earnings call noted that their growth is largely due to multiple daily injection (MDI) patients adopting their sensor. Unlike Abbott who’s lone partner in the connected pen space is Bigfoot, Dexcom has established relationships with all the major insulin companies. The companies who will control the Tyler market.

The arrival of Tyler will also have a significant impact on the insulin pump market and could well force a major change in how pumps are sold. Which leads us to the results released by Tandem and Insulet. Let’s look at Tandem first which by all accounts had a blowout quarter. However as astonishing as the results were the harsh realities of the insulin pump market were ever present. It’s no secret that Medtronic is getting their butts kicked, that the 670G is not living up to expectations and when it’s a level playing field patients will chose any pump other than Medtronic.

Well the problem for Tandem as they eluded to during their call is that its not a level playing field. As we have been noting Medtronic is many things but stupid is not among them. While they will never publicly acknowledge what we all know privately they are seeing the same thing we are. Tandem and Insulet have better system and soon will have systems that equal and surpass the 670G. Systems that work with the Dexcom sensor which everyone knows is vastly superior to the Medtronic sensor.

Yet as we have noted in the past Medtronic does have one huge advantage being the market leader, formulary position. An advantage they are using to stifle Tandem more than Insulet. The company is swinging a heavy bat with payors forcing Tandem into an uncomfortable position. Tandem’s recent growth spurt is largely due to the demise of Animas something that will not last forever. Therefore Tandem must beat Medtronic on price just to have a shot at gaining favorable position. A move which would crimp margins even further.

What was everyone talking about after the Tandem call not their great growth rather the absence of acceptable margins. Now some believe the company must drastically reduce their costs yet this is just a temporary solution and won’t solve the real problem which is gaining a level playing field. The fact is no matter what Tandem offered payors Medtronic would match it, they cannot afford not to. Therefore Tandem must do one better than reduce costs they must completely blow up the insulin pump pricing model.

To win this game Tandem should completely abandon the traditional insulin pump model and move towards a Shave Cub for Men pricing model. Yes this is a drastic and risky move however it is the only move which offers a chance at success. Such a move would not just allow Tandem to compete with Medtronic but also Tyler. All along we noted that Tyler will not just produce pump like outcomes but will do so at a cost far lower than a pump. Moving to lease versus buy model with everything included for a monthly cost Tandem will not just compete with Medtronic but Tyler.

Next they need to take a page out of the Insulet model moving from a durable medical benefit to a pharmacy benefit. As their results indicate Insulet is having solid success with their pay as you go model. The Achilles heal with pay as you go is the patient can switch systems easily there is no long term commitment. We like the lease versus buy model better as it binds the patient to the system for a longer period of time.

With the Control IQ coming Tandem could also take advantage of the coming of outcomes based reimbursement. The reality is driving cost out of the system will only go so far. Even a lease versus buy model will only get them so far. Driving better outcomes MUST be part of the package. Frankly it is essential for every insulin pump company to achieve this as payors are also looking to drive cost out of the system.

Once Tyler officially arrives payors will have even more leverage over insulin pump companies forcing them all to lower costs. They can set ups their formularies favoring Tyler over a pump. Insulet right now is best positioned of all the insulin pump companies to handle this yet they MUST get their Horizon system to market. With the Control IQ coming we see Tandem having the best technology but as we all know this market is not about who has the best toy in the toy chest. Medtronic has their own set of issues but for the moment still owns the most valuable piece of insulin pump real estate.

In case anyone hasn’t caught on yet a major winner here whether its payors favoring a Tyler or insulin pump companies finding a way to compete with Tyler, Dexcom is a BIG winner. Everyone mistakenly believes that once the Libre 2 arrives Dexcom will have problems but as their results indicate this just isn’t the case. Take this one to the bank unless Abbott makes major changes to the Libre the G7 will be a Libre killer.

Dexcom may have made some mistakes early on when Libre came onto the market but being the talented group they are they learned from these mistakes. This is not to say there won’t be a place for Libre as we have said consistently the CGM is large enough and growing fast enough for both Dexcom and Abbott to do quite well. THIS IS NOT A WINNER TAKE ALL MARKET.

In the end this comes down to what it always comes down to; MONEY WHO MAKES IT WHO SPENDS IT AND WHO SAVES IT. The silver lining this time around is that finally at long last outcomes will matter another fact driven by money. The reality is given the way our healthcare system is designed payors have an undue amount of influence over what drugs a patient takes and which devices they use. Payors have the upper hand and have learned from past mistakes. They will no longer pay for drugs or devices that don’t work those days are gone forever.

Payors want results and will use outcomes based reimbursement to lower their costs. They know they hold the keys to the to kingdom and will force drug and devices companies to capitulate. In the past they did this with rebates and discounts, with rebates coming under pressure and discounts questioned outcomes based reimbursement will become their method of extracting lower costs.

It’s time for everyone in our wacky world to wake up to this before its too late. Change is coming, dramatic change.