What does it all mean?

What does it all mean?

Looking back at the J P Morgan conference it’s clear that the wacky world of diabetes is, well getting wackier. It’s also pretty clear that the more things change the more they stay the same. Although Novo Nordisk (NYSE: NVO) did not present at the conference they along with Lilly (NYSE: LLY) who did present continue to be leaders. It’s also clear that Medtronic (NYSE: MDT) continues to lead the way in the crowded insulin pump market. There is also no question that the hottest company going is Intarcia.

On the flip Sanofi (NYSE: SNY) faces the most daunting issues and not just because they terminated their partnership with MannKind (NASDAQ: MNKD). While the company continues to insist they are a major player in diabetes the facts tell a different story. Same can said about AstraZeneca (NYSE: AZN) as they like Sanofi are fighting this war on multiple fronts with an inferior arsenal of products.

Looking at the diabetes drug space specifically Diabetic Investor saw nothing that would indicate that this market is not headed for a major price war, that this market continues to march towards becoming a full blown commodity market. The bottom line here is that there are just too many products in each category which do the same thing the same way. Either companies find ways to differentiate their respective offerings or become lean and mean. Frankly there is no middle ground here.

The device space isn’t much different with some notable exceptions. Dexcom (NASDAQ: DXCM) continues to demonstrate why they are the posterchild for how a diabetes device company should be run. As we suspected the company’s biggest problem is meeting expectations. Frankly there is no other explanation for the recent slide in Dexcom shares. We suspect this slide is temporary and for smart investors presents a buying opportunity.

Think of it this way Dexcom is the diabetes device equivalent of the Chicago Blackhawks, a team that has won 3 Stanley Cup Championships in the last six years.  A major accomplishment which carries with it major expectations from Blackhawks nation as we now expect Coach Q to bring home a Cup each year. Now we’re not sure about anyone else but to Diabetic Investor this is the right problem to have and is certainly better than the alternative.

One company that could throw a monkey wrench into the device market, the insulin pump market in particular is BigFoot. Although the company did not present at JPM Diabetic Investor had the opportunity to sit down with them and finally got a look at what they are working on. Suffice it to say we were not just impressed with the system they are developing but was more impressed with how they plan to market and price their system.

BigFoot is one of many pump companies working on a closed loop insulin delivery system. The difference between BigFoot and the others is they understand that as innovative as a closed system would be this is also a business. That if they are truly to have an impact that they must not just have solid technology, which they do, they must also have a solid business. What makes their business approach so intriguing is they understand not just what patients want but also what payors want.

A huge obstacle to getting more patients on insulin pump therapy is cost. With the newer sensor augmented systems it can cost upwards of $10,000 plus to get a patient on pump and another $3,000 or so in annual pump supply costs. Diabetic Investor has long believed any company which adopted a lease vs. buy pricing model would give Medtronic a serious run for their money. Insulet (NASDAQ: PODD) was the first company to give this pricing model a try unfortunately the company had other issues which prevented them from being successful.

The failure of Insulet was not due to its innovative pricing model nor was it due being the only wireless/tubeless system on the market. The problem was and continues to be how the company is managed. We’ve said it a million times making a pump isn’t hard the hard part is running an insulin pump company.  To date Medtronic is about the only company that’s been able to do both, make a pump and run a successful pump company.

Animas, a unit of Johnson and Johnson (NYSE: JNJ), has NEVER made a profit for JNJ. Disetronic, a unit of Roche, is a disaster. Tandem (NASDAQ: TNDM) who has perhaps the best pump design continues to struggle financially. Bigfoot themselves is the beneficiary of this difficulty as their platform is based on the Asante system which they acquired for pennies on the dollar.

The difference we see with Bigfoot and the others is they have found a way to make money under the lease vs. buy pricing model. Instead of a huge upfront cost to payors BigFoot charges a monthly fee which includes everything the patient needs, hardware and supplies. Even better for BigFoot is they aren’t handicapped by high costs of goods, a problem which continues to plague Insulet. Also on the plus side they have a system patients want, as we noted previously sensor augmented pumps are the hottest thing going. This is another problem with Insulet who has yet to introduce a sensor augmented OmniPod.

Now before we get too excited the normal caveats apply here as the system has not made it through the FDA yet which we all know is no small task. Nor has the company built the infrastructure to sell and support the system, another huge task. Finally, as much as we like the team the company has assembled they have yet to prove they can actually run an insulin pump company.

Still we like what we see and believe BigFoot has a better than 50/50 chance at being successful. That may not seem like much of a chance but given the history in this space that’s better the many others who want to enter this space.

One last thing and we cannot stress this point enough – why is it that Dexcom, Medtronic, Lilly and Novo continue to lead and be successful? Why is it that Sanofi, Insulet, AstraZeneca and Tandem struggle? What separate the winners from the losers? It’s not the products they sell as in some cases the companies that are struggling actually have better products then those who are succeeding. Nor can lack of success be blamed solely on market dynamics.

Going back to our Blackhawks example for moment this great run has come in the salary cap era, which makes their run even more impressive as management due to salary cap must consistently find new talent to replace talent lost because of the salary cap.

The fact is the winners in the diabetes market have much in common with the Blackhawks. Like the Blackhawks they have solid experienced management. Like the Blackhawks they have an abundance of talent. Like the Blackhawks the goal is to win. Like the Blackhawks they not only have a well thought strategy they are executing that strategy.

We’ve said it before and we’ll say it again anyone can build a diabetes company but it takes real talent to run a successful diabetes company.