Abbott – GE and what it says about the future of the BGM market
The big news today is the rumored deal between Abbott (NYSE:ABT) and GE (NYSE:GE). According to a variety of reports GE would purchase Abbott’s diagnostics division for $5 billion. These same reports state that this reported sale does not include Abbott’s diabetes business. The Chicago Tribune, Abbott’s home town paper, stated the diabetes business was among Abbott’s fastest growing business segments.
Diabetic Investor thinks the Tribune should stick to covering the Bears upcoming game against the New Orleans Saints and leave the diabetes segment where it belongs. All four of the major players in the blood glucose monitoring market, including Abbott, have acknowledged publicly that the market is growing in the low single digits, well below the double digit growth rates of the past. These same companies have also publicly stated that margins are under pressure and with the prospect of competitive bidding on the horizon; margins will be pressured even more.
Perhaps this is why over the past 12 months all four of the major players in this market. LifeScan (a unit of Johnson and Johnson NYSE:JNJ), Roche (makers of the Accu-Chek line of products), Abbott and Bayer (NYSE:BAY), have all made changes to upper level management in their diabetes units. The fact of the matter is all four companies are in the midst of restructuring their BGM business units to deal with slower market growth and pricing pressure. Some like LifeScan have already begun laying off sales reps and as sure as night follows day the others will do the same.
Some believe that Abbott’s Navigator continuous glucose monitoring system which is still awaiting FDA approval will reinvigorate growth in this category. As we have seen with the troubles at Dexcom (NASDAQ:DXCM), who already has a CGM system on the market, this market segment has its own set of problems. Besides lack of reimbursement, the people in the CGM market are finding that patients just aren’t using the device as frequently as they had anticipated. For a business built on the razor/razor blade model it hurts when customers don’t use the number of razor blades projected. While most agree that Navigator is the best CGM system, it is unlikely if approved it will have much of an impact.
Earlier this month Abbott surprised the investment community when they indicated that they have not reached a decision on their Aviator insulin pump. Many, including Diabetic Investor, believed once Navigator gained approval the company would combine the Navigator with the Aviator to compete with Medtronic’s (NYSE:MDT) Paradigm 722, which combines their Paradigm insulin pump with the Guardian RT continuous glucose monitor. During the JP Morgan Healthcare Conference the company stated they may not proceed with Aviator and could instead look for a strategic alliance with an existing insulin pump company. With Roche back in the insulin pump market and the OmniPod from Insulet gaining market share, the insulin pump market is more competitive than ever. Diabetic Investor has stated many times and it’s worth repeating that the insulin pump market is not large enough nor is it growing fast enough to support all the current and many new companies getting set to enter the market. Medtronic currently owns this market with approximately a 70% market share and while it is unrealistic to think they can maintain this share with all the competition, it’s equally unrealistic to believe they will surrender their market dominance without a fight.
The real battle in the insulin pump market is for second place which is currently occupied by Animas, a unit of JNJ. Looking over this crowded field Diabetic Investor sees Insulet coming out on top as their OmniPod is truly innovative technology which has the potential to actually expand the market. Although everyone, including Medtronic, has a wireless pump under development Insulet has the advantage of being first to market. It could be Abbott does not want to waste resources to enter an already over-crowded field.
Abbott also has two new BGM systems under development, the Titan and a new version of the Soft-Tac. According to the company the Titan will be smaller than their FreeStyle Flash, currently the smallest monitor on the market, have a faster test time than the Flash and require a smaller blood sample. While details on the new version of the Soft-Tac are sketchy, Diabetic Investor has learned the new version will be smaller than the original and could contain multiple test strips. Since the original Soft-Tac was a major commercial failure some may not remember this system. The Soft-Tac was Abbott’s attempt at an all-in-one device, which many believe is the next major advancement in glucose monitoring.
Even if Titan and this new version of Soft-Tac make it to the market, which based on Abbott’s track record is not a sure thing; neither system will have the ability to change market dynamics. Over the past few years as growth in the BGM market began to slowdown the major players made the decision to focus their efforts on insulin using patients. It’s well known that insulin using patients check their glucose levels more frequently than non-insulin patients and although there are only 4 million or so insulin using patients compared to nearly 12 million non-insulin patients, they account for almost 80% of all test strips sold. The most coveted of insulin using patients are patients who use an insulin pump, while there are less than 300,000 patients domestically using an insulin pump they account for almost 25% of all test strips sold. To reach this group BGM companies embarked on a technological arms race in an effort to make checking glucose less painful. Faster test times and alternate site testing were hailed as major advancements however average testing frequency barley budged.
The real truth about the BGM market is that the only proven method to increase testing frequency is patient education. Study after study has shown that even with minimal education patients will check their glucose levels more frequently. While BGM companies were aware of this, they made the decision to spend their resources on new technology rather than patient education. The fact of the matter is the majority of patients don’t care how accurate a meter is, whether test results come in 5 or 15 seconds or if they can draw blood from their fingertips or forearm. Yes, like any market there are patients who care about such things but this is only a minority. Just as Diabetic Investor predicted several years ago, the BGM market has become a commodity market. Patients see little difference between meters and will use whichever meter comes with the lowest co-pay.
While many in the diabetes world are in a state of shock over recent comments made at various conferences around the world questioning whether type 2 patients should check their glucose levels at all, this sentiment is a direct result over the industry’s failure to push for greater patient education. Diabetic Investor has said it many times the reason patients do not check their glucose levels on a regular basis has nothing to do with the so-called pain of testing. Patients don’t check glucose levels because they don’t understand what the test results mean and for the majority of patients no action step is taken based on the results of the test. These facts will not change with better technology they will only change when patients receive the education they desperately need.
Now will someone please explain to Diabetic Investor how anyone could characterize the BGM market as a growing market with a bright future?
