The best and worst of times

The best and worst of times

As each year comes to a close it’s typical for newspapers, magazines, web sites and blogs to come out with their list of the best things that happened during the year and the worst events that happened in 2012. The diabetes world is not immune to this journalistic tradition with one list in particular catching the eye of Diabetic Investor. Just the other day a copy of Diabetes Forecast arrived in the Diabetic Investor mailbox, and yes there people who actually read magazines, with an intriguing cover shot which showed the iBGStar™ glucose monitor from Sanofi (NYSE:SNY), the t:slim insulin pump from Tandem and the new receiver for the G4 system from Dexcom (NASDAQ:DXCM).

According to the magazine the top trends for 2013 are, touch screens, color graphics and data, your way. Or as Diabetic Investor has been stating we are now ever closer to a fully integrated diabetes management system, a system which in theory will help provide the patient and the patient’s healthcare team with up to the minute information which in turn will be used so that the patient manages their diabetes more effectively which is supposed to result in better overall outcomes and therefore lower healthcare costs.

While there is no question that technology, especially wireless, smartphone and tablet technology, will play an ever increasing role in diabetes management. It is equally true that just as all this technology is finding its way into the hands of patients and healthcare professionals, no one wants to pay for it and in some cases the products aren’t being supported by the company that’s selling them. Perhaps the best example of this is the iBGStar from Sanofi. As Diabetic Investor has noted on several occasions Sanofi is desperately trying to reinvent their diabetes franchise and find something, anything that will help offset the revenue that will be lost when their blockbuster long-acting insulin, Lantus® goes off patent in 2014.

Their first effort was to come out with a short -acting insulin Apidra® which the company had hoped would be used in conjunction with Lantus. The only problem was the short-acting insulin market was dominated by Novo Nordisk (NYSE:NVO) and Lilly (NYSE:LLY). Even worse just as Lantus was facing the patent cliff so too were the more popular short-acting insulin’s, a move which will push this market ever closer to becoming a commodity market where the only thing that matters is price.

Next was the iBGStar a neat little glucose meter which worked in conjunction with the widely popular iPhone. The company had hoped to capitalize on the popularity of this platform and use the iBGStar along with the app that works with the unit to become the cornerstone of a much broader effort that would eventually morph into a true fully interconnected diabetes management system. The company had plans to launch an insulin pen that also communicated with the app and there was talk of going beyond providing raw data and bringing disease management into the loop. Had this strategy succeeded it is quite possible that Sanofi would have become the first company to sell a diabetes management system and not just the individual parts of the system.

That was until Apple, decided to change the connecter port on their new iPhone 5, which basically meant iBGStar was dead in the water. Yet, even if this event had not occurred it’s unlikely that the iBGStar would have succeeded in the long run and the reasons had little to do with the unit itself. Just as the short acting insulin market is transforming into a commodity market, the glucose monitoring has already become one. No matter how good the iBGStar was in terms of technology it could not overcome the dynamics of the glucose monitoring market. A market dominated by one very large player, LifeScan a unit of Johnson and Johnson (NYSE:JNJ), and three smaller players Roche, Abbott (NYSE:ABT) and Bayer. Prices for test strips have been declining for years while at the same time usage of test strips has remained flat over this same period, even though diabetes is growing at epidemic rates. To make matters even worse Medicare has moved to competitive bidding, a move which will only accelerate further price erosion.

Still as bad as the market has become there was a slight chance Sanofi could have succeeded, had they provided their device unit with the resources necessary to compete.  Yet for reasons known only to Sanofi management they expected their device unit to compete against Ferrari’s with a budget that couldn’t support a Hyundai.  Worse still is their continued pursuit of Bayer’s troubled diabetes device unit. While it is true the company must have scale if it is to have any possibility of success in the BGM market, it must also have the right type of patient base, namely insulin users.

The fact that the company continues to purse Bayer’s unit shows that Sanofi management is falling into a common trap in diabetes, spending a large fortune to make a small one. Let’s be clear here buying scale is not a bad idea rather it’s whose scale that’s being acquired. As so often happens when a company puts a troubled unit on the block, it’s only because nothing else they have tried has worked and the only option left is to sell. This is exactly what happened with Bayer, after seeing the unit rise from the ashes under the superior leadership of Sandra Peterson; the unit fell on hard times once again as no one could build on the momentum built by Ms. Peterson and her team.

Seeing the unit was going nowhere the company did what everyone else in BGM was doing and started cutting costs.  Just as the company was moving into the cost cutting mode they made another disastrous decision and decided they could no longer do business with Liberty Medical, then a unit of Express Scripts and also the largest seller of diabetes testing supplies in the huge Medicare market. This decision frankly is microcosm of how bad things are in the BGM market and who’s really in control of the market.  As Diabetic Investor has stated previously the power in the BGM market does not lye with the companies that make the systems rather with the companies that buy and reimburse for them.  About the only company that actually understood this fact, LifeScan, also happens to control the largest share of the domestic market.

One has to wonder what is going on at Sanofi and whether they actually understand the concept of due diligence. For even if Bayer had retained their relationship with Liberty the unit was in huge trouble as they lacked a significant presence in the most important market of all, insulin using patients. While it seems obvious to everyone else insulin users are coveted because they test more than non-insulin using patients and actually value the information provided by a meter. When it costs nearly $400 to acquire a patient how much they test becomes critical when recouping this investment. This is why every company in the BGM market has come out with systems that are designed specifically for the insulin using patient. The OneTouch® VerioIQ™ and the FreeStyle® InsuLinx are just two of the more recent examples.

The fact is if Sanofi was really serious about becoming a player in the diabetes device area and having any chance at all they would have pursued Abbott’s diabetes device unit which does not just consist of meters but the Navigator continuous glucose monitoring system, as well as an insulin pump already approved by the FDA but never launched. Abbott is almost the direct opposite from Bayer in terms of patient base as unlike Bayer, the Abbott patient base is more heavily skewed towards insulin using patients.  And regardless of any public statements made by Abbott about whether the unit is for sale, the truth is any unit can be sold if the price is right.

What Sanofi is likely thinking is they can buy Bayer’s unit on the cheap. The only problem here is this is like buying a used car without having it checked out by a mechanic. While the car might look good on the outside and seems to run ok, the real problems are hidden to the untrained eye and will only rear their ugly head later on and just add to the cost of what was a “cheap” car. Any money the company thinks they are saving will only be eaten up and added too when they see just how bad things really are.

Sanofi almost perfectly illustrates the promise and peril that lies ahead for all the diabetes device companies and will soon extend to diabetes drug companies too.  While the technology continues to advance the markets these technologies are sold in and paid for are changing dramatically for the worse. This is not unlike what Diabetic Investor noted when talking about some the issues facing Sanofi’s arch rival Novo Nordisk. Unlike Sanofi, Novo so far has avoided the device sector beyond their insulin pen franchise; the company instead is trying to grow by providing first in class therapy options. The problem for Novo is they are used to receiving premium prices for these products which is no longer the case as payors are basically saying to everyone and not just Novo, we’ll be happy to provide reimbursement for all these new fancy products but we won’t pay the premium price.

The fact is diabetes devices and now insulin’s have become commodity markets where price trumps performance.  There are really only a few way to beat this trend, either come out with truly innovative products or make money from software rather than systems. This is true whether a company sells devices or drugs. Looking over the diabetes landscape whether it is devices or drugs there are far too many me-to, copycat products which only drag the market further down the commoditization rabbit hole. Sanofi is about to jump down the hole in the GLP-1 market with Lyxumia, which is nothing more than a Victoza knock-off.

The fact is Sanofi had the right idea with the iBGStar as it was not the device itself that was important rather it was system it was part of that provided the patient with the greatest benefit. Had they expanded iBGStar beyond the Apple platform to include the Android platform they could have really had something. Keep in mind that the iBGStar was not the only device to come out of the company’s partnership with privately held AgaMatrix, the company that actually makes the iBGStar. Also part of this partnership was the BGStar which could have easily been adapted for use with the Android system and allow Sanofi to offer a device that worked no matter which platform a patient was using. This also would have protected the company from what happened when Apple decided to change the connector port for the iPhone 5.  Yet for reasons only Sanofi knows they decided not to market the BGStar here in the US and placed all their eggs in one basket, which is now more scrambled eggs.

And as the fairy tale goes Diabetic Investor does not think they can put Humpty Dumpty back together again. Perhaps the best way to think about this is to look at professional sports and the advantage held by teams who happen to reside in large markets; markets which by the very size provide these teams with huge dollars from television rights. This affords team like the Los Angeles Lakers, New York Yankees and Chicago Blackhawks a major advantage over teams from Sacramento, Kansas City or Tampa Bay. Only in the NFL can a team from relatively small TV market succeed and prosper as Green Bay isn’t exactly a major metropolis. Sanofi was trying to compete with the New York Yankees but had a budget more akin to the Kansas City Royals and as the standings clearly show they just couldn’t compete.

Yet just as the Yankees are trimming their cost by and large avoiding pricey free agents seeking to avoid the leagues payroll tax, so too is everyone in the device sector cutting back in attempt to remain profitable.  Competitive bidding may be the latest reason given as to why this happening but in truth this is a process that began years ago and is only becoming more necessary with competitive now a reality. Diabetic Investor actually believes this zest to cut cost has actually created an opportunity for newcomers like Sanofi to become competitive with the likes of LifeScan had they been willing to invest properly and take some calculated risks.

The fact is patients are hungry for systems that will help make living with diabetes less of chore. Take the new t:slim insulin pump which really is nothing more than a conventional insulin pump with a very patient friendly interface; or what about the all-in-one Pogo glucose meter from Intuity Medical and the new cloud enabled glucose monitor from TelCare. None of these systems are revolutionary rather they all stem from the same premise, in that they are designed with the patient in mind and making their lives easier. The iBGStar could have been among them had Sanofi really wanted to be a player and decided to be serious about the device market.

The bottom line is they could talk the talk but couldn’t walk the walk. Like far too many before them they failed to believe the facts about the market they were entering and falsely believed they would succeed where so many others have failed. Like so many others who believed they could build a better mouse trap they too believed they would succeed without doing anything different than those who have failed. It’s one thing to enter a tough market and try and be different but it’s the height of arrogance to believe that you can succeed without doing anything different than those who have already tried and failed. As had been said so often, those who ignore history are doomed to repeat it.

Even with this as we head into the New Year and beyond Diabetic Investor is thankfully for companies like TelCare, Intuity, Tandem , Dexcom and others who understand that when it comes to diabetes management it helps when you actually listen to the patient and/or those who treat and care for patients. These companies prove that huge budgets and billion dollar acquisitions doesn’t guarantee anything and most certainly shows that resources don’t make up for poor planning or poor execution.  The diabetes market is changing and success in the future whether it is in diabetes devices or drugs requires that the companies who play in the markets change as well.

It’s almost ironic that as we head into the New Year it is the large companies like Sanofi who are facing the most serious issues. While size is still a major advantage in the diabetes market it is no longer the advantage it was years ago. The key now is not the amount of money spent but where and how this money is spent. Sometimes this will mean walking away from a deal or actually spending more to get what is really needed.

Looking ahead its best not to confuse size with success as the old saying goes the bigger they are the harder they fall. That could well be the mantra of 2013.