The Most Valuable Asset
Yesterday after completing our travel plans for the upcoming ATTD conference in Vienna we thought great we get to be at another conference where everyone will talk about their way cool whiz bang toy. The only difference being of course we’ll be in Vienna which looks to be a cool place to visit. Looking ahead to ATTD there is likely one thing we won’t here, how all these toy makers plan on getting patients to play with all these way cool whiz bang cloud enabled toys.
See what gets lost with all toy makers is most patients don’t get to choose which toys they play with. This is not like a child who goes to Mom and Dad before Christmas and tells them which toys they’d like to find under the tree on Christmas morning. In the real world it’s the patient’s insurance coverage which determines which toys they can play with. Sure, there is a minority of patients who have the luxury of choosing which toys they play with. But for most insurance coverage is a major factor.
Now one would think this fact would dawn on the toy makers, but they remain oblivious to it. Lilly (NYSE: LLY) seems to think that when their way cool whiz bang insulin pump gets here patients will use it because it’s “different” than all the other pumps. Never mind that Medtronic (NYSE: MDT) not only has locked up most formularies, has a brand name and 80%+ market share. Nope patients will want to play with the Lilly toy because it’s different.
We can just imagine a conversation between Lilly and the folks at UnitedHealthCare or any other payor for that matter. Payors who care about one thing and one thing only; cost. Payors who will be very polite and very impressed with the toy but at the end will ask one simple question; can they beat Medtronic’s price. If they can the conversation will continue if not end of discussion.
Now just for grins and giggles let’s say Lilly can or is willing to sell their way cool whiz bang toy for less than Medtronic, would not the payor then go back to Medtronic and give them the opportunity to match or beat Lilly’s price. Even if Lilly won this price war, which they won’t, it’s just the beginning as they then must be able to run a commercially viable insulin pump unit something no one other than Medtronic has been able to do.
Would it not make better sense for Lilly to buy Tandem (NASDAQ: TNDM), capture their 55,000 plus patients then covert these patients to their whiz bang way cool toy when it’s ready. Would it not be better than starting from scratch? Tandem may have issues, but they also have established relationships with payors. They have an infrastructure in place to sell and support their systems. They have relationships with physicians and CDE’s and they have lots of patients. Lilly has none of this and must build it all and that won’t be cheap.
However, Lilly is not the only toy maker who has this delusion they can start from scratch and be successful. This delusion extends to some of our friends in the Valley yes, those high-tech cash rich companies who are making the deep dive into diabetes. They also suffer from the if we build it they will buy it syndrome.
Look at it this way Johnson and Johnson (NYSE: JNJ) is doing their best to unload LifeScan. Now it’s true that BGM is dying a slow and very painful death. It’s also true that CGM is the future for glucose monitoring. Yet LifeScan also has over 20 million patients. Think if just a third of these patients were converted to CGM. Let that sink in just for moment.
If any of these companies were serious about diabetes, if they really wanted to make a difference they would stop undervaluing the most valuable asset in diabetes, the patient. They would understand what we say all the time, it’s easy to build the damn toy but it’s a herculean task to get the patient to use it. That scale is critical in this business and that achieving scale isn’t easy and next to impossible when starting from scratch.
It took JNJ years and a few million bucks to build LifeScan, so what if they are asking too much for the raw assets. They have more than 20 million patients. Same with Tandem yes, they have many issues, but they also have 55,000 or so patients.
Given the power in the hands of payors, the power to determine winners and losers does it not make sense to come to the negotiating table with something rather than nothing. Listen there are some very smart people who are about to do some very dumb things. Either they are not paying attention, or they are delusional there is no third option.
The most important asset in diabetes is not the toy. The most valuable asset in diabetes isn’t way cool whiz bang cloud enabled. The most important the most valuable asset in diabetes are patients with diabetes. Whoever accumulates the most patients wins and yes, it is that simple.