A Race to the bottom

A Race to the bottom

This morning LabStyle Innovations (NASDAQ: DIRO) the makers of the MyDario glucose monitoring system announced this system is now available in the United States. According to a company issued press release;

“Direct-to-consumer sales through LabStyle’s U.S. website at usa.mydario.com/shop are now available and supported through a U.S. based customer service center and hotline. LabStyle’s membership-based pricing for direct-to-consumer test strip sales offers users a very cost-effective and convenient solution. The Dario App is now also available through the App Store and ready for download by users across the U.S. Sales through various non-exclusive third party distributors and medical equipment suppliers are anticipated over the first half of 2016.”

According to their site the meter can be purchased for $19.99 with monthly plans for 150 strips per month starting at $60 per month for a month to month plan, $52.50 per month for a 3-month plan and $37.50 per month for a 12-month plan.

Just by way of comparison a patient can purchase an iHealth Align meter for $7.99 with a box of 50 test strips at $12.50 or $37.50 for 150 test strips. A patient can also purchase a Walgreens TrueMetrix Bluetooth Blood Glucose Meter for $24.99 with boxes of 50 test strips at $39.99 or $119.97 for 150 strips.

Now it should be noted that all of these meters are cloud enabled and interact with way cool whiz bang apps. It also should be noted that all of these meters do basically the same thing the same way. Yes, there are some minor differences between the systems but nothing so spectacular that a patient would jump at one over another. Simply put the commodization of these newer way cool whiz bang cloud enabled meters has begun, something we predicted long ago. Yes, my friends it’s now a race to the bottom, a race that has no winners.

Let’s assume for moment that patient commits to any of the three systems for one year the total costs would be:

MyDario $469.99

iHealth $457.99

TrueMetrix $1,464.63

OneTouch Verio IQ  $3,017.63  – according to the Walgreens web site the OneTouch Verio IQ retails for $29.99 with boxes of 50 test strips at $82.99

Right now we’re sure some are saying wait a minute these are unfair comparisons as only 10% of patients actually pay cash for their diabetes testing supplies. Would it not be a better comparison to compare true out of pocket costs as the majority of patients have health insurance and their cost is limited to co-payments. That’s easier said than done as co-payments have been rising at the same time payors are reimbursing for fewer test strips but to keep the comparison somewhat fair let’s just assume that a patient’s co-payment for 150 test strips per month is $30 which makes their yearly cost $360. Add in the cost of a meter and the patient’s out of pocket is right around $400 per year.

Granted this is not a true comparison however even with these less than perfect assumptions, the cash cost of the MyDario and iHealth systems are pretty damn close to what a patient with insurance would pay. Which begs the question with all these way cool whiz bang cloud enabled systems reaching price parity who wins? Since price is no longer a factor what is the value each system brings to the patient?

Now each of these companies will claim their system is different in one way or another, that it’s easier to use or has a better app. But is this really true? To be fair we have not looked at each app that works with these way cool whiz bang cloud enabled systems. Yet, we have seen enough apps to know that like the meters they interface with they all do basically the same thing the same way. That just as the meters have become a commodity so to are the apps they work with.

Given this lack of real differences it’s logical to assume that its just a matter of time before these way cool whiz band cloud enabled systems are given away for free, that’s right free. That these companies will have to find another way to generate revenue, as for the last time we looked this is the only way they can offer these way cool whiz band cloud enabled systems, if they make money. Does this mean it’s a race to have the largest installed user base enabling these companies to monetize their users by selling ad space, ads which show up whenever the patient use the way cool app.  Or do the sell the data generated by their users? Or do they wait until reimbursement is tied to outcomes and go that route?

No matter which way they decide to monetize their installed user base one thing hasn’t changed, the winner will be a company like LifeScan, a unit of Johnson and Johnson (NYSE: JNJ), as they have the largest installed base and the most users to monetize. That the conventional blood glucose monitoring market really hasn’t changed at all, that even with these way cool whiz bang cloud enabled systems this market is all about scale. The fact is scale is critical and without it there is no way all these companies can survive.

Just in case anyone thinks this can’t happen that patients will always pay something for test strips think again. While it seems like ages ago there was a time when everyone paid a monthly fee to AOL, yes people paid to use what was basically a well-organized web site. Heck look at all the web sites that are free yet make millions from advertisers. My goodness look at Google, now one of the wealthiest corporations on the planet. What all these situations have in common is they were able to monetize the people who use their services for free.

This is the next step in the evolution of glucose monitoring the monetization of users. We actually see this as more important than outcomes based reimbursement. The reality is it’s not the hardware that produces better outcomes, it’s how the data gathered by the hardware is turned into patient relevant patient actionable information. Or out simply it’s the system not that the hardware that leads to better outcomes and quite frankly all of these systems work about the same way. This is not to say companies should ignore this move towards outcomes based reimbursement rather they should view this as just another way to build their installed user base.

Yes, it’s a race to the bottom in terms of what if anything a patient actually pays for diabetes testing supplies. The winner will be any company that can break from the past and learn how to monetize their installed user base. This is the future and it will get here sooner than most think.