We’ll see

We’ll see

Ok before everyone gets excited YES we are reposting this post which went out in the morning. We discovered a glitch (love that word) with the site – which has been corrected – but out of an abundance of caution (love that phrase as well) we decided to send this out again just in case. 

There’s a great scene at the end of Charlie Wilson’s War, a great movie by the way, when Tom Hanks and the late Philip Seymour Hoffman are standing on the balcony discussing what happens now that the Russians have left Afghanistan. Hoffman shares the story of the Zen master and the little boy which begins with the boy getting a horse and everyone saying how wonderful that is with the Zen master saying We’ll see. When the boy falls off the horse and breaks a leg, everyone says the horse is a curse. “We’ll see,” says the master. Then war breaks out, the boy cannot be conscripted because of his injury, and everyone now says the horse was a fortunate gift. “We’ll see,” the master says again.

The point of the story, and this scene is available on YouTube and well worth watching, is not everything is at it appears. That what initially looks like a great thing may in fact be not so great. We thought of this scene when we read that the new Teladoc/Livongo management team will NOT include Livongo’s CEO, CFO, president or SVP of business development. Now we cannot blame this people for cashing out and moving onto their next carnival, buying their next boat or taking a long luxurious vacation. Yet we can’t help but think these people who understand what’s really going on behind the scenes feel as we do that Teladoc vastly overpaid for Livongo and there is no way in hell this combined company will ever live up to expectations.

Since this merger was announced back in early August everyone and we do mean everyone has been pontificating about what this merger means. Is this the watershed event that pushes digital health from a good idea to the standard of care? Or is this COVID driven deal going to blow up over the long term as the combined companies struggles to adapt to the post-COVID world? Since COVID is still here and does not appear to be going away anytime soon it might be some time before we know. But what we do know is already the digital health landscaped is changing and these changes are not positive for Teladoc/Livongo.

More competition is here, competition which is pulling out all the stops to compete for new customers and steal old ones. More competition which will drive down fees, go 100% at risk and force Teladoc/Livongo to reexamine their reoccurring revenue model, the model which made their investors do the hippie hippie. Competitors which have the financial resources and built in customer bases of their own making life even more difficult for Teladoc/Livongo.

So will this COVID driven deal be the watershed event many expect it to be? We’ll see.

The Zen masters story also applies to what’s happening between Abbott and Dexcom, or should we say how the conventional analysts are looking at the CGM market. This morning we went back and read the transcript from yesterday’s call. We wanted to make sure we didn’t miss anything paying very close attention to comments made about Libre 2 and Libre 3. See many of the analysts seem to believe that since Abbott continues to roll out new versions of Libre while maintaining its low price that eventually they will clean Dexcom’s clock. The conventional theory is that payors will do what they did back when BGM was the standard for glucose measurement and turn this into a commodity market.

Now this could happen IF and this is a huge IF all the CGM’s were created equal, which they are not. While there are several reasons why BGM became a commodity one of the biggest was they all did the same thing the same way, there were some very minor differences between platforms but none that made one system stand above the rest. With BGM it became all about price.

CGM is nowhere near that point yet. It likely will get there but that day is still a long ways away. As we have noted the Libre 2 which was approved by the FDA back in June did come with an iCGM designation but also a warning as the system cannot be used with automated insulin dosing (AID). As we stated in yesterday’s post this has huge implications here in the US, a market where insulin using patients drive CGM growth.

Many analysts simply assume this issue will go away and that Libre 3 which was just approved in Europe will also soon receive FDA approval. Let’s look at the first point as yes we do believe the AID issue will eventually go away, when is another story but it will at some point. There was no mention of this issue yesterday and no one even bothered to ask about it which shows us how little these analysts understand the differences between the US and international markets. Nor do these analysts understand the differences between getting a CE mark and an FDA approval.

To provide some perspective on this last point the Libre 2 received it’s CE mark in September 2018. The FDA did not approve Libre 2 until June of this year, nearly two years later and that approval was incomplete given the AID issue. While the clinicals are underway for the Libre 3, Abbott hasn’t even submitted it to the FDA. Here in the US Abbott must first solve the AID issue with Libre 2, then finish the clinicals for Libre 3 before submitting it to the FDA. Using the Libre 2 as a guide that means Libre 3 likely will not become available in the US for at least two years.

Meanwhile Dexcom is not sitting around clipping their toenails as they have the G7 coming, a system which comes with lower COGS. Dexcom has already made clear that G7 will be price competitive. The issue for Dexcom won’t be whether the G7 is competitive. No the issue will be can they make them in massive scale to meet the anticipated demand. Based on their history and outstanding management team our money is on Dexcom to make sure this isn’t a problem.

There is no question in our mind that eventually the CGM market will commoditize just as the BGM market did. However that day is not here and likely won’t be here for some time. That will NOT happen until all CGM’s do the same thing the same way which is NOT where we are today.

So will Abbott clean Dexcom’s clock? We’ll see.