$1.44 vs. $.40
This past Sunday while glancing at the circulars in the Sunday papers Diabetic Investor came across the Walgreens circular. According to the circular a patient with diabetes can purchase a box of 50 True Metrix™ or True test®, the store branded strips made by Nipro, for $19.99 or about $.40 per strip. This same patient also according to the ad could purchase a box of 25 OneTouch Ultra Blue test strips for $35.99 or about $1.44 per strip. Now we realize that only about 10% of patients actually pay cash for their testing supplies but this contrast between systems is indicative of why the glucose monitoring market is headed down the toilet.
Long ago way back when Diabetic Investor was a print publication we wrote about an experiment we conducted. We walked into several local pharmacies, told the pharmacist we were a newly diagnosed patient looking for a meter and asked which system they would recommend. Once we had the recommendation we asked if there was any real difference between the system they recommended and another brand and 9 times out of 10 the answer was no. The next obvious question in our mind was, if you remove the influence of insurance, with all the systems being basically the same wouldn’t patients just chose the cheapest option.
It was at the moment that we knew the glucose monitoring was in big trouble and it was just a matter of time before the market fully transformed itself from a medical device to commodity market. Well here we are almost 20 years from that experiment and that’s exactly what’s happened. Along the way we have literally witnessed the destruction of a once highly profitable market along with the infrastructure that supported it.
Yet the contrast in the Walgreens circular shows that old habits die hard. For grins and giggles let’s assume for a moment that this Walgreens customer actually tests their glucose levels four times per day, this translates into a daily cost of $1.60 using the store brand versus $5.76 using the major brand, a difference of $4.16 PER DAY or $1,518.40 PER YEAR. While Johnson and Johnson (NYSE:JNJ) the makers of the OneTouch Ultra Blue strips would beg to differ, the question has to be asked is it $1,518.40 better?
The simple fact is take away the influence of insurance and formulary position and the major brands don’t stand a chance. This is the same reason they have basically abandoned the Medicare market as Medicare only reimburses $10.72 for a box of 50 test strips or about $.21 per strip. The harsh reality is even with all their cost cutting JNJ, Abbott (NYSE:ABT), Roche and Bayer (or whoever ends up owning Bayer) can’t compete and maintain anywhere close to the margins they once had. As we have noted before money can still be made in the market just not the kind of money that used to be made.
This is why Diabetic Investor just can’t understand why a company like Panasonic/KKR would willingly invest billions to enter this market. A market that isn’t growing, where margins continue to erode and operating lean and mean is the order of the day. Even with the cuts Bayer recently instituted they are not structured for the new realities of this market. The reality is should Panasonic/KKR actually buy the unit they would have to completely transform it to have even the slightest chance at being successful.
This is also why Diabetic Investor believes companies like TelCare, Livongo, and iHealth actually stand a chance as they were built AFTER the BGM market became a commodity market. These companies can only dream of the obscene margins once captured by their branded competitors. They know little of lavish sales and marketing budgets or double digit growth rates. No these new smaller and leaner companies must rely on innovation to survive. They see how diabetes management is changing and unlike their larger brethren are adapting to this change. Unable, for the moment, to crack the stranglehold branded companies have on formulary position, they must find new and innovative ways to sell the products they make. Perhaps the biggest difference between these newcomers and the old guard is they don’t see their systems as delivery device for test results, they see their meter as part of a diabetes management system which transforms that number into actionable information.
Looking down the road payors would be delighted to pay $1.44 per test strip IF patients using that strip achieved better outcomes. We all know that in the future it’s outcomes that will matter and influence reimbursement but that’s the future and not today. The harsh reality is cost containment is the order of the day and payors won’t and aren’t paying $1.44 per strip.
So we ask once again is the branded system really $1,500 per year better than store branded offering? Maybe Panasonic/KKR believes the answer is yes but they are the only ones.