A HUGE decision looming on the horizon

A HUGE decision looming on the horizon

Although no one is quite sure when the official announcement will be made sometime in the next 30 to 60 days we should learn the results from the latest round of competitive bidding. This announcement will forever change the glucose monitoring market and will set in motion a series of moves by the current players in the market.

To fully appreciate the impact this decision will consider that Medicare sales account of nearly one-third of all test strips sold. Yet, this is only half the story as many private payors will follow the governments lead and demand lower prices as well. Simply put, the glucose monitoring market already a commodity market will experience even greater pricing pressure which will lead to many of the existing players exiting the market entirely. Additionally it will force many of the newer, smaller players who have innovative new products out of the market as well. Finally, it will create a scenario where Medicare providers will have no choice but to buy cheap imports.

Just how bad are things going to get, according to many sources in the industry the winning bid will come in somewhere between $11 to $15 for a box of 50 test strips, or between 22 to 30 cents per test strip. That’s a dramatic cut given that Medicare is currently paying $33.50 per box of 50 test strips or about 67 cents per strip. Given that it only costs between 8 and 12 cents to manufacture a test strip there is still some room for profit, however the profit is nothing compared to the margins current players have grown accustomed to.

Keep in mind that the existing crop of players, Johnson and Johnson (NYSE:JNJ), Abbott (NYSE:ABT), Roche and Bayer (soon to be Sanofi (NYSE:SNY) have already cut costs dramatically. (Assuming Bayer can actually close the deal with Sanofi and that Sanofi is still dumb enough to buy them, Bayer’s decision to exit the business is looking better and better.)  Should the bids come in anywhere close to the numbers currently being thrown around look for even further consolidation as scale, which was important before competitive bidding, has become critical with the advent of competitive bidding.

And anyone who thinks the winner bidders will be able to service all their new customers, think again. There is no way these imports will be able to offer expansive customer service lines to answer consumer questions. Say goodbye to these companies having the ability to properly train these patients on how to use their new meters. And just because these cheap imports have been approved by the FDA does not mean in any way that their manufacturing processes will produce consistent quality. Basically a Medicare patient will be told here is your new meter that the government has approved, have a nice day.

But this is just the beginning; as we noted earlier many private payors will follow the governments lead and demand further price concessions. Already to cut costs private payors have raised patient co-pays and the day is coming when they will eliminate reimbursement for non-insulin patients. Competitive bidding will just add another bullet to their already fully load gun which they are firmly holding against the heads of the current players in the market. Players who have no choice but to accept the demands being placed on them or risk losing substantial market share. Look at what happened when Roche, once the number one player in the market, decided they didn’t want to play the formulary game and basically told private payors to take a long walk of a short prier. A decision which marked the beginning of the end for Roche and one from which they never recovered.

Diabetic Investor, already skeptical of all these new interconnected diabetes systems coming to market, is even more skeptical now. Does anyone really think that payors will actually pony up more money so that a physician or educator can actually take the time to analyze all this data?

The truly crazy part here is that companies like Sanofi, GE, Panasonic and Siemens, just to name a few, actually want to be in the market and will pay handsomely to get in. We don’t call this the wacky world of diabetes by accident.

The fact is the glucose monitoring market has been on a downward spiral for some time and that competitive bidding will only add grease to the slippery slope that began years ago.  Bayer better hurry up and get their deal done as the list of suckers willing to buy their business is dwindling by the day. At some point the bean counters will plug the new numbers into their spreadsheets and realize that it’s pure stupidity to throw good money into a bad market, which is actually getting worse. Perhaps one of the adults in the room will actually listen to these people and pull the plug.

But then again this is the wacky world of diabetes devices where everyone thinks they can succeed where everyone else has failed. They foolishly believe they have the magic potion, can kiss the frog and turn it into a prince. The simple reality is there is no magic slipper that can be slipped on Cinderella’s foot and she will not marry the handsome prince and live happily ever after. This is one time it doesn’t matter how many frogs are kissed as all anyone will see when the kiss is over is one very ugly frog. RIBIT!!!