AgaMatrix – Change in strategy

AgaMatrix – Change in strategy

Yesterday Diabetic Investor learned that AgaMatrix
has terminated 2 National account managers and 4 regional managers. These cuts
we’re part of the company’s efforts to trim $500,000 of expenses as the company
has decided to abandon their efforts compete directly with Big Four. The
company has decided to refocus on building their co-branded business.

The company already supplies Liberty
Medical and has just landed Target as a client. Although Diabetic Investor isn’t
quite sure how a brand that will be called Up and Up will go over with patients.
Apparently the good folks at Target haven’t quite figured out that when it
comes to diabetes it’s not a good thing when things go Up and Up. Based on
several sources the business could have belonged to Home Diagnostics
(NASDAQ:HDIX), who advised Target against the name, but the company decided to
take a pass when the Target marketing people said that Up and Up was a great

Even with the Target win, AgaMatrix is not
out of the woods just yet. The company, whose sales in 2009 will come in under
$35 million, still has a long way to go to compete with HDI. The co-branded
business is extremely price competitive and HDI is already well established
with major retailers like Walgreens (NYSE:WAG) and CVS (NYSE:CVS).

In an attempt to compete with HDI the
company plans on playing up the accuracy of their monitors. As everyone knows
US market leader LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), has made
accuracy the cornerstone of their new marketing strategy. AgaMatrix sees this
as an opportunity as their monitors have proven to be some of the most accurate
on the market. Still this is a risky strategy because HDI has also been touting
a new study that shows their monitors are also very accurate. As Diabetic
Investor said in a previous this whole accuracy issue is much to do about
nothing as accuracy is a measurable metric. Given the tough economy and stagnate
market growth, price wins over accuracy.

It should also be noted that even if
AgaMatrix can prove their monitors are more accurate than HDI’s, they will
still have to beat them on price to have any chance at winning over the major
retailers. Retailers who already have a substantial investment in their established
store branded products. The fact is HDI has the benefit of being the incumbent
and beating them will require more than just a more accurate glucose reading.

When AgaMatrix first came to market many believed
they would follow a path similar to what Therasense experienced. The only
problem is market conditions have changed dramatically since then and it’s
highly unlikely that anyone would acquire AgaMatrix at the multiple Therasense
was able to capture when they we’re acquired by Abbott (NYSE:ABT). At one time
Diabetic Investor felt that JNJ just might come along and acquire the company
as it would fill the one gap in JNJ’s monitor portfolio, a no-coding monitor.
This now appears unlikely as JNJ remains committed to the new monitor being
developed by Universal Biosensors and is more interested in strengthening their
insulin pump unit.

The fact is AgaMatrix has some very good products
but came to market at the wrong time. The company has also learned that it
requires huge amounts of capital to play in the branded space, capital they
just don’t have. They are also learning that being a co-branded partner also
has it’s pitfalls as there is always someone else out there who’s willing to
sell their product at a lower cost. This does not mean AgaMatrix doesn’t stand
a chance in the market rather there are only a few markets they can compete in.

The most likely path for the company now is
to continue to build on small wins, take the company public and build from
there. The fact is the entire glucose monitor business could be about to change.
It is well known that the key to this market is capturing insulin using
patients, something that LifeScan has done very effectively. Insulin companies,
such as Sanofi-Aventis (NYSE:SNY), Novo Nordisk (NYSE:NVO) and Lilly
(NYSE:LLY), also know this and just might enter the BGM arena as a way to sell
more insulin. Based on comments at investor conferences and earnings call
Sanofi appears to be the most serious about following this path. Should Sanofi pull
the trigger and acquire one of the Big Four, no doubt Novo and Lilly would

The insulin companies already have an
established presence in the market, including sales teams that are experienced
in diabetes. Long ago Diabetic Investor predicted that the day would come when
physicians instead of prescribing products one at time, would prescribe diabetes
management systems that included everything the patient needed to manage their
diabetes. The first sign of this came when Novo and JNJ teamed up with now
defunct InDuo device.

Given that insulin patients are the key to
BGM and insulin will soon be facing competition from GLP-1 products, insulin
companies see the huge margins in BGM as a way to strengthen their bottom
lines. They know that insulin sales will slow as GLP-1 gains momentum with Type
2 patients and that insulin patient’s value the information monitors provide. Given
that each insulin company already has their own insulin delivery system adding
a glucose monitor to the mix makes perfect sense.

This is same reason Novo is exploring the possibility
of entering the insulin pump market. They see the day coming when the physician
will prescribe a Novo diabetes management system that includes insulin, the
insulin delivery system and a glucose monitor- all in one nice neat package.

Change is indeed coming to the BGM market
and insulin companies could well be the catalyst for this change. As Alvin
Toffler once wrote; “Change is the process by which the future invades our