A tough question

A tough question

As often happens in this wacky world subscribers reach out to Diabetic Investor with questions on a wide variety of subjects. Last week we got one of the tougher questions; could we say anything positive about the future of the conventional glucose market. The honest is answer is no, this market has gone from $6 billion in worldwide revenue, to $4 billion and by our estimates within 5 years likely sooner it will shrink to just $1 billion. This revenue shrinkage is not just tied to the impact of competitive bidding although that has played a large role.

What gets lost in this discussion is besides price contraction usage is also decreasing. Back in the day before continuous monitoring arrived insulin pump patients while just 5% of the total patient population accounted for almost 20% of all test strips sold. Patients following multiple daily injection (MDI) on average tested four times per day. Needless to say, patients following intensive diabetes management used the majority of test strips sold. Take away these patients from the calculation and average testing frequency drops from less than 2 strips per day to less than 1 strip per day.

However, CGM is not the only reason usage is dropping, greater usage of GLP-1 therapy is also contributing to the problem. Unlike patients who use insulin patients using a GLP-1 don’t need to measure their glucose levels prior to dosing. These are fixed dose drugs.

To Diabetic Investor it is no longer a question of if payors will stop reimbursing for patients who don’t use insulin but when they do this. Besides cutting costs this move will be reinforced by the many studies that show no correlation between these patients testing and improved outcomes.

Basically, the legs are being cut from under the conventional glucose monitoring stool. And no all these way cool whiz bang cloud enabled conventional monitors won’t change any of this. Systems which will be replaced by cheaper more patient friendly CGM’s. The Libre from Abbott (NYSE: ABT) and the coming Band-Aid sensor from Google/Dexcom (NASDAQ: DXCM) will be the final nail in the conventional BGM coffin.

This is not to say conventional BGM will go away completely rather they will be used sparingly and mostly limited to non-developed markets.

Why then did TelCare get acquired for $7 million? Why then was Intuity able to raise another $40 million after blowing through $200 million? If as we believe disposable CGM systems are the future of glucose monitoring why is money being wasted in conventional BGM systems? The honest answer is we haven’t a clue.

Think for a moment about Livongo or iHealth, why would anyone want to acquire these companies. Do they really have a better mouse trap? The honest answer is no. Even if outcomes based reimbursement becomes reality does not a CGM provide more useful data. Does it not make sense that a low-cost CGM system fits better into any diabetes management eco-system?

Abbott seems to have gotten this message which is why they are betting the ranch on Libre. But what about Roche or LifeScan, a unit of Johnson and Johnson (NYSE: JNJ)? Yes, Roche has jumped into the CGM race but they are well behind Dexcom, Abbott and Medtronic (NYSE: MDT). JNJ is the most dumbfounding here. While it’s true they have done a great job of locking up contracts and aligning costs with prices this will only delay the inevitable. Yes, they are still making money but the surest way to oblivion is to gain an increasing share of a shrinking market.

The worst part is that unlike other markets that have commoditized, a roll up strategy doesn’t work. Simply put JNJ cannot buy their way out of the problem as a Roche test strip does not work in a LifeScan monitor. Sure, JNJ could convert Roche patients to their system but the price is steep given the cost of a monitor. Still even if they spent the money it wouldn’t change the future and the future is CGM.

Now JNJ could buy Dexcom but JNJ has decided that when it comes to diabetes devices, CGM or insulin pumps they aren’t interested. Quite frankly we just don’t understand JNJ’s strategy in diabetes devices anymore. The company talks about their diabetes management eco-system but so far, it’s been all talk and no action. It’s as if they can’t decide whether they are committed to diabetes devices or not, something unlike the past. In the past JNJ was very good about not just knowing which markets to enter but when to get out of markets.

This lack of commitment is having serious consequences particularly with Animas their insulin pump unit. Should Tandem (NASDAQ: TNDM) implode as we suspect and Medtronic pick up the lion’s share of these patients Animas will be in serious trouble. Medtronic is already aggressively pursuing Animas patients offering them two pumps for the price of one. As we noted any patient who selects the 630G will get the 670G should they want it. Frankly Medtronic could care less if they upgrade as long as they are on one of their systems. This only increases the payout from the supply annuity.

Crazier still is the company’s love affair with their patch pen, a product which does not have a place.

Perhaps the company has resigned themselves to the fact that they cannot sell the diabetes device unit. That while the greater fool theory is alive and well, the ultimate stupid lets totally leave the reservation theory is not.  This seems to be the strategy, strip out as much cost as possible, lock up as many contracts as possible, make no major investments and milk the cow until there is no more milk.

There was a point where we thought might spin off the diabetes device unit but unlike Roche they have decided against that too.

Ok then since this is the holiday season and we don’t want to be the Grinch that stole Christmas here are two things positive about the conventional glucose monitoring market. It WAS a great ride while it lasted, one hell of a party. And thankfully for those left in the market companies like JNJ and Roche offer some very nice severance packages, well to management anyway. Hey we know it’s not much but as Momma Kliff used to say; “It’s better than a sharp stick in the eye.”