The business model does matter!

Listen we know it’s not popular to discuss such mundane things like having a business model which ultimately allows a company to make money. Nor is it popular to discuss such mundane items such as having a management team that gets more than whiz bang way cool. The good-looking quarterback may get the glory but think of what Tom Brady would be like if the big ugliess in front of him didn’t do their job. Even toy makers need to execute the mundane aspects of running their toy factories.

We mention this as it seems like each day, we get more evidence that our friends in the Valley are struggling more than most realize as they venture into areas other their core competency. Google was the latest to report earnings and the latest tech behemoth to deflect any questions of their efforts outside of their core business. It seems the street is finally waking up to the fact that these cash rich companies have thrown a lot of money around but don’t seem have to anything to show for all this money spent.

Take a look at OnDuo the joint venture between Verily and Sanofi which to date has produced some limited size deals but nothing of substance. The fact is and this just shows how wacky our world has become as Sanofi wants to see results and like yesterday. Keep in mind this the same company that spent $30 million on social media WITHOUT expecting a return on investment. Yet Sanofi who is struggling mightily in diabetes has invested $250 million in this damn thing and wants to see something other than way cool whiz bang.

Verily for their part is perfectly content as they have just raised a billion bucks and quite frankly doesn’t need OnDuo to do much of anything. As we keep saying when it comes to all the high-tech cash rich companies making the deep dive into the diabetes pool, they want to be in diabetes they do not need to be in diabetes. Nothing would make Verily happier than Sanofi becoming so frustrated that they execute their option to buyout Verily.

The real problem here that no one talks about is these high-tech cash rich companies with all their money and deep pool of talent are running into the same problems as the old guard. They are slowly finding out that way cool whiz bang looks great on a PowerPoint slide, but it does not mean much when the patient with diabetes doesn’t play along. It also doesn’t help much that there are only so many ways to combat diabetes much of which involve one simple fact; getting patients to take their meds.

What’s surprising here is for companies who supposedly are great at thinking out of the box how conventional their approaches are. How unwilling they are to be truly innovative. As Momma Kliff used to say you can dress up a pig, put lipstick on a pig and spray it with cologne but it’s still a pig.

Another company running into problems with their business model is Senseonics. Just yesterday the company announced 2019 full year revenue estimates of between $28 and $32 million well below consensus estimates of $48 million. At the same time, they announced an extension of their agreement with Roche which unfortunately came with a major concession on price.

The problem as we have noted before comes with reinsertion rates which are coming in below expectations. Being an implanted system the key for Senseonics is not just getting the patient to try their device but to keep using it. It doesn’t help either that Dexcom and Abbott are gobbling up patients with their systems which don’t require insertion and do the job very well.

As we have noted in the past, we do see a place for the Eversense system however given the fact it must be implanted and then re-implanted limits it’s market appeal. While the G6 and Libre will filter into the Type 2 patient population Eversense is pretty much limited to intensively managed Type 1’s, a very narrow market. Something that won’t change materially when the Eversense goes from a 3-month life to a 6-month life.

Although they don’t have a problem with their business model per se Medtronic is having issues of their own. Which is why we weren’t surprised to hear they have extended their exclusive deal with UnitedHealthcare. The fact is given how things are going the company could not afford to lose this deal. The reality is the Empire is beginning to crumble which is why rumors are swirling that Medtronic is considering selling the diabetes franchise.

Medtronic is many things but stupid is not among them. They see what’s going on and do not want to make the same mistake JNJ made with Animas. Simply put they want to sell the unit while it still has value before the small leaks become big ones and sinks the ship. This unit still makes gobs of money and would fetch a nice premium IF sold now. Yes, there are issues with the unit, the ongoing FDA investigation being the biggest, however that goose is still laying lots of golden eggs and better to sell before that goose becomes an ugly duckling.

Before we close, we should note that the JDRF in particular is out to lunch condemning this deal between Medtronic and UnitedHealthcare. This deal has NOT hurt patient choice nor has it stifled innovation. It has NOT prevented patients from having access to insulin pump therapy. As Michael Corleone noted in the Godfather this isn’t personal this is strictly business and the JDRF should know better.

Just as the insulin companies are easy targets for the high cost of insulin Medtronic is an easy target for this deal. Never mind that the JDRF was once a strong supporter of Medtronic, was happy to take their money and then actively praised the company after the 670G was approved. Never mind that this deal hasn’t done anything everyone feared it would do. Or as we like to say never let the facts get in the way of a good fantasy.

Sorry to say but the JDRF is so disingenuous with its public condemnation of this deal that it makes us want to puke. This is the ultimate in hypocrisy which unfortunately has become standard operating procedure for the organization.