Abbott capitulates
Diabetic Investor has learned that Abbott (NYSE:ABT) has capitulated to the demands made by Cardinal Health who will once again distribute Abbott diabetes devices. Some may recall that Cardinal made the decision to stop carrying any Abbott products when Abbott would not meet their pricing demands. This move by Cardinal was just one more example of how the tables have turned for glucose monitoring companies.
At the time Diabetic Investor speculated that Abbott would be forced to meet Cardinals demands as they just couldn’t afford to lose any further market share. This is exactly what happened as Abbott realized that the competition was more than delighted to pick up share. The question is will Abbott be able to regain this lost share?
In the end it really doesn’t matter whether or not Abbott does regain the lost share, the more important point here is BGM companies are no longer in control. The fact is in these tight economic times many patients are cutting back and glucose testing unfortunately is one area that’s getting the ax. Distributors and retailers know they have the upper hand and will use this leverage to demand even greater price concessions.
Even with this issue behind them Abbott isn’t out of the woods, not by a long shot. The company still must figure out a way to reinvigorate this struggling unit. The fact is BGM companies were late to the party falsely believing that advanced technology would keep the category growing at double digit rates. When this didn’t work they took a page out of the consumer product model and started introducing features that had nothing to do with glucose monitoring but were designed to make monitors more consumer friendly. Hence the recent fascination with meter skins and colors. While this strategy worked initially it was quickly copied and now is commonplace throughout the industry.
Based on Abbott’s decision to capitulate to Cardinals demands it appears we have reached a very dangerous point where price is becoming the primary weapon to gain share. Diabetic Investor is hardly surprised that we’ve reached this point as the handwriting has been on the wall for some time. The fact is there are way too many monitors that all do basically the same thing. Given that the majority of patients do not value the information provided by these system it really doesn’t matter much which system they use.
This has been the problem all along for BGM companies who got fat and lazy when the category was growing at double digit rates. Instead of helping patients and healthcare understand the value of what their products provide, namely a glucose reading, they kept introducing ever more features that only a handful of patients actually used. This lead BGM companies to more aggressively pursue insulin using patients who monitor their glucose levels more frequently. Instead of trying to expand the appeal for the products they make they concentrated on a narrow band of patients.
It didn’t take long for patients to figure that it really didn’t matter which system they used. This feeling was further reinforced as insurance companies frequently changed which systems patients should use based on the price they were paying. This constant switching by insurance companies decimated any chance BGM companies had at building brand loyalty.
Realistically one of the more disastrous decision ever made was done long ago when BGM companies decided to give away monitors for free and make their money on the continuing sale of test strips. By following this razor/razor blade business model it was essential to nit just capture the patient but keep them on your system. The only problem here is that consumers never understood that the real technology was not in the monitor but the test strip.
Even worse by giving away the monitor for free BGM companies created the impression that the information provided by these systems wasn’t that important. While properly educated insulin patients knew this information was important, non-insulin patients who make up almost 90% of the market didn’t value the information. This market segment reasoned that the information wasn’t that important as the devices they used to gather it were free.
So here we stand today were the BGM market is now a commodity market model where the only thing that matters is price. As Diabetic Investor pointed out years ago the BGM market would one day look like the personal computer market. At one time there were multiple pc options, today consumers basically have two choices Dell or HP.
We are quickly approaching a similar point when it comes to BGM. The question is no longer if the market will consolidate further but when this will happen. The reality is the days of double digit market growth are gone and cost control is more important than introducing new system. This is the reason nearly every BGM company has made dramatic cuts in R&D or outsourced this entirely. This is also the reason BGM companies have made equally dramatic cuts in SG&A. The bottom line is simple margins are shrinking and will continue to shrink.
Say goodbye to the Big Four and welcome to the soon to be Big Two. You can take this to the bank and there’s nothing that will stop this trend. The wheels were put in motion long ago and are gaining momentum daily. It would be wise if the current members of the Big Four remember the words of Henry Kissinger; “The future must be shaped or it will impose itself as catastrophe.”
