Will it happen?

Will it happen?

In a little over a month Sanofi will report third quarter results and a big question is will they also announce that finally at long last they have decided to divest their diabetes franchise. We’ve been anticipating such a move since the day Paul Hudson took over as CEO. Since taking over Mr. Hudson has been reshaping Sanofi for the future and with the diabetes franchise struggling it just might be time to bite the bullet.

Whether or not this move is made, and we think it will be there is no question the insulin market is in the final stages of a transformation. A transformation which began with the introduction of biosimilar insulin’s and the increased usage of GLP-1’s. The fact is insulin both short and long acting has become a commodity and while still profitable does not generate the once obscene margins it did just a few years ago.

The GLP-1 market however continues to expand while generating hefty margins, the exact opposite of the insulin market. Hence the reason that Lilly and Novo Nordisk have transformed their diabetes franchises favoring GLP-1’s first and insulin second. Without a significant presence in the GLP-1 market Sanofi basically had two choices continue to milk its insulin franchise until the well ran dry or sell the unit.

Even in its present state the unit does have value in the right hands and could generate nice multiple. Long ago we believed that Astra Zeneca would be the perfect buyer as their diabetes franchise lacked insulin. Adding insulin to this portfolio would have allowed the company to better compete with Lilly who has the most comprehensive portfolio of diabetes therapies. While this is still a possibility we doubt Astra will pull the trigger. Private equity is always a possibility as is another large player in pharma.

Given that insulin has become a commodity combined with the fact that insulin delivery systems are becoming all the rage it’s quite possible that someone could come along and at long last become a true insulin delivery company. While we doubt this happen but with their acquisition of Companion Medtronic would be a great fit. The company has already investigated selling not just hardware but also insulin with their portfolio of insulin pumps. With Companion now in the fold they could as we have noted be the first company to launch a Tyler, selling not just the InPen but the insulin cartridges used with the InPen.

For years insulin pump patients have been clamoring for prefilled reservoirs something that Medtronic has looked into before. The problem up to this point has always been twofold; cost and alliances. On average insulin pump patients spend approximately $2,500 per year on pump supplies. Supplies which are hugely profitable as they are made for pennies and sold for dollars. In the past it was not worth developing prefilled reservoirs as the insulin company who supplied the insulin for the prefilled reservoir also wanted their cut. Something that would be eliminated if a company like Medtronic had their own insulin.

This is one reason Lilly had an edge with their Tyler and was also developing a prefilled insulin pump. Novo for their part has the same advantage with their Tyler. Both Lilly and Novo would give away the hardware for Tyler making money on the continued sale of insulin. However with the commodization of insulin neither Lilly nor Novo has a sense of urgency to get Tyler onto to the market.

While highly doubt this would happen but the franchise strategically makes sense for Dexcom or Abbott the two leading CGM companies. Given that hybrid closed loop insulin delivery systems are becoming all the rage and that all the hardware needed for Tyler is here, Dexcom or Abbott could sell their insulin delivery system making money not on the insulin but on the sale of more sensors.

Another unlikely but strategically wise move would be for private equity to go big buying the diabetes franchises from Sanofi and Medtronic. Medtronic may be struggling but it remains the undisputed leader in insulin pumps and as we say all the time scale is critical in this market. This combined company could do what we have long anticipated start selling insulin delivery systems that include everything the patient needs in one box.

This in essence is what the future will look like and should Sanofi pull the trigger and sell their diabetes franchise the future just might get here. The old days of getting a pump from one company, insulin from another and apps/coaching from yet another are coming to end. The future of diabetes management as whole but insulin in particular lends itself to a systems approach. Systems which will also yield boatloads of data, data that can be monetized.

Think about this wacky idea for just a moment as who is well versed in monetizing data and also has a presence in diabetes but none other than Verily. While no longer partnered with Sanofi Verily could easily afford the franchise. They could also easily afford to add a Tyler plus an insulin pump to the Onduo portfolio. It’s been a rocky road for Verily/Onduo but with their resources they could easily buy their way out of their problems. Something we thought might happen when they first ventured into the diabetes market.

Verily also has another advantage, an advantage they had but have never used in that they are not a traditional diabetes company. They are not encumbered by the past. Heck they could go really big and buy LifeScan, something they should have done back when JNJ was selling LifeScan. Such a move would give them instant scale which again is critical. Remember this is not about way cool whiz bang this all about scale, getting as many patients as possible.

Verily just might be one of the few companies who could turn this market upside down. Given their resources, the dynamics of the market and a little moxie the company could be the first to move from the current dysfunctional, fractured approach to diabetes management to a holistic systems-based approach.

Granted this all major speculation and while a systems-based approach would be better for all concerned change comes slowly to our wacky world. Yet change, slow as it may be, is coming. The real question is who will drive this change leading the way. Who will follow and who will be left behind. Should Sanofi sell their diabetes franchise we just might get some answers to these very important questions.