As the healthcare universe leaves that beautiful city by the bay a few final thoughts on this most recent addition of JPM.
1. The Battle for the patient intensifies
As we noted previously everyone is guessing how Amazon will be as disruptive in healthcare as they have been everywhere else. As we noted during one conversation, we had at the conference there is not one thing a patient uses that cannot be supplied by Amazon. With the addition of Pill Pak all Amazon now needs is to have licensed pharmacies in all 50 states and we can add drugs to this list. Everyone expects Amazon to do this and we do too.
Yet as we witnessed with both Walgreens and CVS these “traditional” retailers will not go quietly into the night. Each in their own distinct way has begun to fight back. CVS made it clear why in their presentation noting that of the $2.4 Trillion of medical spending here in the US $2.1 trillion is spent on chronic diseases of that $500 billion is preventable and there is the potential to save between $25 to $100 billion with various initiatives.
As we say all the time this is all about money – who spends it – who saves it and who makes it. As the battle lines are drawn the patient with diabetes will be targeted aggressively. Using a combination of technology and traditional brick and mortar locations (remember Amazon now owns Whole Foods) these players will seek to capture this large, growing patient population which spends not only a ton of money on diabetes drugs and supplies but also on lots of other stuff these players sell.
This set of circumstances creates some very juicy possibilities for all the diabetes companies. Already Walgreens has partnered with OnDuo for a diabetes program. Insulet noted they are also moving into the pharmacy; a place Abbott is already with the Libre. As we move into the world of interconnected diabetes management (IDM) the day is not just coming when the patient’s smartphone becomes the hub of their healthcare but also provides a method to verify outcomes.
Thanks to CGM it is now possible to definitively track how a patient is doing. This is important in another aspect given how time in range is becoming a new metric for measuring control. While we don’t see time in range replacing HbA1c as the gold standard we do see it becoming an important metric.
This in turn creates another intriguing possibility considering everyone, including us, believes it’s not a question of if outcomes-based reimbursement gets here but when it gets here. While we’re not sure when it will happen in the future drug and device companies (who are also hooking up) will get paid based on performance rather than what we have today. Future contracts with payors will move away from the traditional list price less discounts and rebates to pay for performance.
These hook ups between drug and device companies also moves us closer to another prediction we have made coming true for in the future we see patients being prescribed a diabetes management system rather than individual pieces of the system. This system will include everything the patient needs – not just drugs, devices and supplies but also all the apps and coaching
2. Expanding beyond traditional core competencies.
As we have noted many times the diabetes drug world and the diabetes device arena are two completely different businesses. Based on past performance we cannot think of any pharma company being successful when they venture from the drug business into the device business. Yet this hasn’t stopped everyone from trying. Lilly is the most recent drug company to make the deep dive into the device pool developing not just a patch pump but also a Tyler.
On the flip side Medtronic is actively pursuing a move into the insulin business. As we’ve witnessed in the long-acting insulin space biosimilars can wreak havoc. This same scenario will play out once biosimilar short-acting insulins become common. Just as Lilly sees entering the device space as way to sell more insulin, Medtronic sees selling their own short-acting insulin as another revenue stream from their huge base of installed patients.
3. Will we cross the 30% threshold in the insulin pump market?
It was asked many times with all the new way cool whiz bang toys here or coming why don’t more patients use an insulin pump. Why only 30% of the Type 1 population uses an insulin pump. While there are several reasons for this as we look into the future, we really don’t see insulin pump therapy getting much beyond this level without some drastic changes being made.
Traditional insulin pumps as effective as they are have a major cost disadvantage. Besides the initial cost of the hardware there is the heavy annual cost of pump supplies, which thanks to sensor augmentation, is increasing. Payors who are always under pressure to lower costs would like nothing better than a system which can produce pump like outcomes at a fraction of the cost of the pump, a system that does not come with a huge investment upfront nor heavy annual costs.
This is exactly what Tyler does and why every company in diabetes is racing to be the first to bring Tyler to market. Tyler is the single biggest obstacle to the future of the insulin pump market as he will produce pump like outcomes at fraction of the cost of a pump. Although we don’t see existing pump patients converting to a Tyler, although some will, we see payors using Tyler as their preferred tool for treating the growing number of patients using insulin. Again, this is all about money and Tyler will become the most cost-efficient tool to treat insulin using patients.
4. CGM CGM CGM
It seems almost unthinkable that we know have two companies, Dexcom and Abbott, with a BILLION dollars in CGM sales. Even more amazing is this market is still in its infancy. Saying the upside in CGM is huge is like saying it’s warmer in San Diego than Chicago during the winter.
The real question isn’t whether Abbott and Dexcom will make tons of money, they will. The real question is who will secure third place. Will Medtronic get their act together or maybe Senseonics or perhaps one of the many CGM wannabes will move beyond fantasyland into reality. Right now, our money would be on Senseonics for a few reasons.
First the damn thing actually works which seems obvious but is no small feat in CGM land. Second being implantable it’s differentiated from the G6 and Libre. Third SHOULD they be able to increase sensor life and eliminate any outer body attachments there is a real place for this system.
See Medtronic’s issue isn’t just being able to make it in massive scale. No, the issue is SHOULD they fix the issues with their system it will be just another CGM, there will be no compelling differentiating factor that will distinguish it from the G6 or Libre. This will force Medtronic to play the price game and given how things are with their diabetes unit this is not a game they will want to play.
This is something that also gets lost on all the CGM wannabes being as good as Dexcom isn’t enough. Being cheaper than Dexcom isn’t enough. Having way cool whiz bang apps that collect and analyze all the data isn’t enough either. They have to do all this and somehow be different than Dexcom and the Libre. This is another reason we like Senseonics chances as they are so far ahead of everyone else in the implantable CGM segment they must be taken seriously.
5. New players, same results?
When news broke years ago that Google, Apple, Samsung, etc. were making the deep dive into the diabetes pool we were very excited. And not just because they had tons of money. These tech titans and others who have made the dive didn’t bring with them the heavy baggage of the past. They were not entrenched into the old way of doing things. Even better they were consumer oriented, they understand that design matters, that systems should not be made by engineers to be used by engineers.
Yet the best thing we thought was they did not NEED to be in diabetes they WANTED to be in diabetes. To these techie’s diabetes is a platform play NOT a critical revenue stream. Don’t be fooled they do want to make money, but they don’t need to make money immediately as their other units are doing just fine thank you very much.
However, this lack of urgency has created a huge problem, no clarity of purpose. Universally these tech companies seem to be wondering in the desert chasing down every mirage. With boundless amounts of cash, they throw money into crazy bets which have a one in a zillion chance of paying off. Worse still is they are inflicted by a common problem of traditional diabetes players, the not invented here belief or put more bluntly hubris.
As Momma Kliff used to say just because you are very good at one thing does not mean you will be very good at all things. But don’t tell tech that for as sure as the sun rises in the east and sets in the west, they think they can conquer any problem no matter how complex. While we agree much of the old way must change, we should also not throw the baby out with the bath water.
Our hope is they have the capacity to learn, something we have not yet seen. That they will find a balance between the old way of doing things and the new way. Look at it this way the game of football has changed dramatically over the years. The skill positions quarterback, running back and wide receiver are played by vastly different players than they were only a few years ago. But one thing hasn’t changed when it comes to winning the game it’s the big uglies that protect that million-dollar QB so they can throw the ball to those wide receivers and block for those lightning fast running backs.
Or put another way more often than not winning comes down to the fundamentals, blocking and tackling. (That is of course unless you have a kicker who has a fondness for hitting the goal post. But please let’s not go there.)