Wackiness at it’s fullest
To say that healthcare is undergoing massive change is like saying it’s freezing here in Chicago. We’ve got a major retail pharmacy chain buying a major health insurer, a major health insurer buying a large physicians group, the other major pharmacy retail chain taking a 40% stake in Chinese pharmacy chain and driving all this is a company that’s not even officially in the healthcare or pharmacy business.
In our neck of this wacky world we’ve got Lilly (NYSE: LLY) making the deep dive into the device market. We’ve got the other insulin companies looking to do the same thing. Each day it seems we hear about yet another company developing a wearable device which will measure glucose continually non-invasively and of course send this information to the patient’s smartphone, so it can be analyzed by an app which in turn will regurgitate this information back to the patient.
All this activity is enough to make your head spin or take the day off and binge watch the Queen on Netflix. But alias we do get paid to interrupt all this wackiness and figure out what it all means. Well most people pay for our musing but there are some who love to read our musing but don’t like paying for it. Be that as it may allow us to muse just a little on what all these events mean.
First and foremost, lets look at what’s not changing;
1. The diabetes drug and device markets continue to commoditize.
2. Google, Apple, Amazon and the rest of the cash rich high-tech players will push further into our wacky world.
3. Unless these companies think out of the box nothing much will change when it comes to patient outcomes.
Lost in all this change is the fact that two companies, Dexcom (NASDAQ: DXCM) and Abbott (NYSE: ABT) stand to be the biggest winners. Since everyone else is working on some way cool whiz bang diabetes management system, a system which will analyze patient data and attempt to turn this data into patient relevant, patient actionable information. Data which will come from a CGM, as this is the most patient friendly method to gather the data. As it stands now Dexcom and Abbott have the two best systems to do this and both systems will get better, more patient friendly and most importantly cheaper.
Yes, there are other players in the CGM sandbox but none have the experience or scale to compete. This does not mean these CGM wannabees won’t gather additional investment or that maybe one or two might get acquired. Rather what it means is that when it comes to CGM Dexcom and Abbott are the kings of the castle and everyone else are mere after thoughts.
Now right now some are saying hold on just for a moment isn’t Medtronic (NYSE: MDT) also playing in the CGM sandbox. Are they not a formidable company in their own right? The answer is yes and no. There is no question Medtronic wants to play in this sandbox. There is also no question that with the scale they have achieved in the insulin pump market it would be foolish to ignore them. However, to keep things simple Medtronic’s CGM lacks the easy of use and elegance of design that Dexcom and Abbott have.
Another key difference between Medtronic, Dexcom and Abbott is their approach to the market. Yes, Medtronic will be entering the stand alone CGM market but for the moment their CGM platform only works with Medtronic insulin pumps. Although Dexcom’s insulin pump partners seem to be falling into the insulin pump graveyard, they do have deals with Insulet (NASDAQ: PODD), Lilly and are partnered with Google. Abbott currently has a deal with Bigfoot, but we see more deals coming.
With the coming expansion of the “smart” insulin pen/CGM/App system market Dexcom and Abbott will be the preferred partners for the insulin companies. Medtronic will play in this sandbox as well, but their system will not just be proprietary but will use a biosimilar short-acting insulin. Simply put Medtronic will become a competitor of Lilly, Novo Nordisk (NYSE: NVO) and Sanofi (NYSE: SNY).
This is Medtronic’s biggest issue when it comes to CGM. The company will do just fine in the insulin pump market but it’s difficult to see them competing effectively in the stand alone CGM market. And this is one time where price may not matter for two reasons. First, a price war is going to happen no matter what Medtronic does and second Dexcom and Abbott have better overall systems than Medtronic does.
Medtronic also has some other issues to deal as their competitive environment is about to change dramatically. Yes, they rule the roost now but soon they will not just be competing with Insulet and for the moment Tandem (NASDAQ: TNDM) but also Lilly, Novo and Sanofi. The fact is every insulin company is or is getting set to enter the insulin pump market. Insulin companies don’t see insulin pumps as profit center per se but as another way to sell more insulin. This is the same reason all the insulin companies are also developing their own or partnering with “smart” insulin pens.
This situation makes us wonder why one of the insulin companies have not gone after Tandem. The company may have a host of issues, but they do have almost 55,000 patients. The insulin companies also have the capital necessary to fix Tandem. We must wonder if they like everyone who has looked at Tandem believe it’s better to start from scratch, or are they like others just waiting for Tandem to implode naturally and will come in after the company declares bankruptcy.
See in the old days Medtronic and insulin companies were sitting on different sides of the fence. However, in the future as we move towards a systems approach to manage diabetes they will be on the same side of the fence. They will go from allies to competitors. Medtronic is aware of this and with the coming of biosimilar short-acting insulin can do their own deals. In effect Medtronic will be in the insulin business.
Years ago, we predicted that in the future patients would be prescribed a diabetes management system. A system which would include everything they need to manage their diabetes. Back when we first made this prediction we did not have thousands of apps and CGM was in its infancy. Today we see the cornerstone of any system being a slap it on turn it on CGM, which of course will talk to an app. Also talking to this app will be an insulin pen or insulin pump. There is no question in our minds that insulin using patients will be the first to experience the systems approach. The reality is this system already exists its just not under one roof yet.
The bigger market opportunity as everyone knows is non-intensively managed patients, a market which is set up perfectly for Lilly as they have the most comprehensive portfolio of diabetes medications and not just insulin. These patients will USE CGM it will just be used differently than with an insulin patient the goal being improving medication adherence. The technology for both systems, intensive and non-intensive, will be the same. The differences will come in how the data is presented to the patient and how the patient is interacted with.
This is where we see the value of all the interconnected companies all of whom are using old technology to collect the data. The value of these companies is not tied to the products they sell but the services they perform. The critical question for these companies is will the builders of the system buy or build. With Dexcom partnered with Google and Lilly it’s unlikely they would be a buyer. Nor do we see Sanofi being a buyer as they too are partnered with Google and by association Dexcom. But then again this is the wacky world where anything can and normally does happen.
The bottom line here is that we’re at the very beginning of a systems based approach to diabetes management. But there is no question in our minds that the biggest winners are Dexcom and Abbott. For it is their technology that drives these systems, that their systems do not just provide better data, they are easier for the patient to use and are more cost effective. CGM is not just the glue that keeps a closed loop insulin delivery system from falling apart. It’s also the cornerstone of the future of diabetes management.