Abbott Diabetes – Has anything really changed?
This morning Abbott (NYSE:ABT) gave the investment a more detailed explanation of their new corporate structure and strategies for what will be two new companies. As we noted when Abbott reported earnings earlier in the week for their diabetes care unit the main focus, like everyone else in glucose monitoring, will be capturing high frequency testers, i.e. insulin using patients. Also like everyone else in BGM they are developing systems that do more than deliver a test result and actually try and help these patients dose their insulin more effectively. Unfortunately the company did not expand on this today nor did they reveal how the plan on dealing with the many issues facing the BGM market.
About the only thing we know for sure is that with this new corporate structure it’s highly unlikely the company would sell this unit. However, even this is speculation. Diabetic Investor looks at it this way; while the company may want to hold onto to diabetes care, conditions beyond their control could force the company to consider selling the unit. Diabetic Investor will not review the many issues that have plagued this unit in the past, nor will we review the many issues facing the BGM market in general. Instead we’ll have a little fun and speculate as what the company could do if they are truly serious about capturing insulin using patients.
During the Q&A segment of today’s meeting several analysts noted that both the device and pharma companies would be throwing off tons of cash and asked just what the companies planned to do with all this cash; give it back to shareholders, acquisitions, etc. Although it does not appear the companies have an appetite for acquisitions, this would be one way for Abbott diabetes to insure they at minimum prevent the loss of insulin using patients. As everyone knows the FreeStyle meter is embedded in the OmniPod personal diabetes manager (PDM) and it is also know that Insulet (NASDAQ:PODD) the makers of the OmniPod is considering replacing the FreeStyle meter when their new PDM comes out.
To illustrate just how important the OmniPod is to Abbott consider that the average OmniPod patients monitors their glucose six times each day. Diabetic Investor estimates that there are 35,000 patients using the OmniPod which translates into nearly 80 million FreeStyle test strips used each year by OmniPod patients. It’s also known that Abbott pays Insulet $500 for each PDM placed into the market and that the relationship between the two companies isn’t the best.
Abbott, like Diabetic Investor, is aware of the many problems Insulet is having adding new patients and is acutely aware of their other problem of keeping their existing patients on the system. Although Diabetic Investor does not believe Insulet is in danger of completely imploding, the situation isn’t good and something needs to be done.
Bottom line, Abbott cannot afford to lose the Insulet account or see the company implode. While they may not want to spend their cash and buy the company, they may have no choice. This is exactly what Johnson and Johnson (NYSE:JNJ) was forced to do when they bought Animas. Like Abbott, JNJ was heavily invested with Animas and the company was having some major issues. JNJ basically had a choice, bite the bullet and buy the company or risk seeing their investment totally implode. Also just like Abbott, JNJ’s target market was insulin using patients. The final similarity between the two situations is that JNJ knew that while they could have waited and bought Animas at a cheaper price, they did not want to wait too long and appear to be buying a company on the verge of extinction.
While JNJ’s acquisition has not exactly turned out as planned, the fact is Abbott actually needs Insulet more than Insulet needs Abbott. Insulet may have done several things wrong but they do have a very valuable asset that everyone in BGM covets, a large group of insulin using patients. Insulet knows this which is why they playing hardball with Abbott and actively considering replacing the FreeStyle meter when the new PDM comes out.
Keep in mind this just speculation however given that it appears Abbott wants to stay in BGM and that they want to capture insulin using patients, this deal makes sense. This is after all the wacky world of diabetes devices where anything can and usually does happen.