Why?

Before we get into the gist of today’s post let’s get some numbers out of the way as the results released by Lilly today were pretty damn good. As expected, sales of Trulicity, Jardiance and Basaglar continue to accelerate while sales of Humalog continue to struggle due to continued pricing pressure, nothing new and/or unexpected.

The company should also be congratulated for the approval of Baqsimi the first nasally administered glucagon to treat severe hypoglycemia. Although we don’t expect Baqsimi to have a material impact on revenues it’s an innovative product which will help patients deal with this serious issue.

Yet right there on slide 22 of earnings presentation was a sign that perhaps the company has taken leave of their senses. The slide states;

“Automated Insulin Delivery System

• First step in process to closed loop connected pump

• Currently testing in multiple Phase 2 studies, expect to initiate Phase 3 in 2020”

Now we get Lilly developing a connected insulin pen and moving closer to a Tyler, this is not just a sound move but strategically imperative as Novo Nordisk and Sanofi are also moving in the same direction. As we keep saying Tyler won’t just help patients more effectively dose their insulin it will be used as tool by all the major insulin companies to protect their struggling insulin franchises. Insulin has become a commodity and as we saw today and will see when Novo reports pricing pressure continues to intensify.

What we don’t understand what we can’t wrap our arms around is why the hell the company insists on getting hit in the head with a baseball bat. Yes, the company has a way cool whiz bang insulin pump developed and sold multiple times by Dean Kamen. Yes, they have Humalog which they can sell with this way cool toy and even sell it pre-filled. They also have a relationship with Dexcom the best CGM on the planet.

So yes, they have all the pieces of a way cool whiz bang closed loop insulin delivery system expect they have no experience doing this nor do they have the infrastructure to sell and support such a system. Worse they seem clueless to what this world is really like and how even if they have the best damn toy in the toy box, they won’t make any damn money and likely will lose millions.

Even worse Medtronic, Tandem and Insulet all have or will have versions of this on the market by the time the Lilly system makes it to market. Not to mention all the hacked systems circulating around in pump land. Medtronic, Insulet and Tandem also have the infrastructure in place and years of experience selling and supporting pumps.

Plus the worst fact of all the insulin pump market is not large enough or growing fast enough to support all the players in the market let alone the many players who want to enter this market. While Tandem is no longer on death’s doorstep its recent growth is more related to Medtronic screwing up the Animas deal rather than overall growth in the insulin pump market. Insulet is about the only company that is truly expanding the market having good success converting multiple daily injection patients to the OmniPod system.

Now here comes the nightmare scenario as the folks at Lilly aren’t stupid. Surly they are aware of what’s going on in the insulin pump market. They have likely assessed the competitive landscape and seen what everyone else is working on. Insulin pump companies as we have recently seen at ADA just love to talk about all the way cool whiz bang toys they are working on. At this point we would recommend sitting down and taking a deep breath.

You can take it to the bank that during one of the many meetings the company has had on this ill-advised project someone stood and stated; “Hey about the only way in hell we’re going to be able to compete in this market is to GIVE OUR PUMP AWAY FOR FREE.” Now as crazy and foolish as this idea may seem especially given the high sales and support costs associated with insulin pumps this is not an original idea. Others have flirted with the idea of giving away the hardware and making money on the continual sale of pump supplies.

Yet the only way this model works is to completely eliminate the high sales and support costs associated with insulin pumps. Now Lilly could follow Insulet’s lead and sell the pump as a pharmacy benefit and then transfer the support costs to CVS and/or Walgreens. They could also outsource and/or automate support lowering that cost. If they want to be truly innovative this way cool whiz bang toy will surly come with a way cool whiz bang app which besides collecting patient data could be used as diagnostic and reorder tool.

Still even with these innovations this is a crowded market which is getting more competitive which will create greater pricing pressure. The market is growing in the low to mid-single digit rates which isn’t promising, and Tyler is coming along which will deliver pump like outcomes at a fraction of the cost. So why develop a way cool whiz bang toy the same toy that everyone else has and has before you have it.

The only other possible explanation is that Lilly is following the same strategy they did with their drug portfolio. As we have noted before Lilly is the only company with a complete and comprehensive portfolio of diabetes therapies. A move which has paid huge dividends for the company as it forces the competition to play defense while providing payors a one stop shop for all their diabetes drugs needs.

This same strategy just might work with insulin delivery systems. Payors know that insulin isn’t the only commodity insulin pens and insulin pumps have also commoditized. Lilly could approach a payor offering a diabetes bundle which includes all their insulin delivery options. Options which would be basically given away for free therefore forcing the competition into an unwinnable choice. Lilly would be able to make money from insulin and pump supplies allowing them to give away their connected pen or closed loop pump.

Lilly also has the scale and resources to make this happen. About the only pump company that could possibly match Lilly would be Medtronic. Neither Tandem nor Insulet could play in that sandbox successfully and we have serious doubts that Medtronic would want to play in that sandbox.

Still even if all the stars align perfectly and they execute flawlessly we aren’t sure the effort is worth it. As we have seen numerous times big pharma and medical devices diabetes devices in particular are like oil and water they don’t mix well together and more often than not fail. Yet the company seems committed to entering the insulin pump market even with all the issues ahead of them. Is this arrogance? Is it hubris? Or are they way ahead of the curve?

Time will tell but frankly we just don’t get it.