All dressed up but nowhere to go

All dressed up but nowhere to go

This morning Abbott (NYSE:ABT) announced first quarter results and as expected sales for their diabetes unit were basically flat down just under 4%. According to this morning’s press release; “Worldwide Diabetes Care sales were relatively flat on an operational and reported basis, in line with Abbott’s expectations. Outside of the U.S., sales growth was driven by share gains in key emerging markets and continued uptake of our FreeStyle InsuLinx® meter. U.S. sales were impacted by market pricing pressures as well as lower Medicare mail order purchases. This was partially offset by continued share gains in the U.S. hospital and retail segments. “

The real issue not just for Abbott but everyone in glucose monitoring is not whether this category will ever return to its former glory, rather how much contraction there will be in the market. Secondarily, with this market contracting how long will the large one, Johnson and Johnson (NYSE:JNJ) and little three, Abbott, Bayer and Roche, remain in the market. The harsh reality for management at all these companies is that this business once a cash cow is now a cash drain. Margins are razor thin, competition continues to increase and prices continue to contract.

For the moment these larger branded companies continue to cut costs yet we are quickly reaching the point of diminishing returns as quite frankly costs cannot be cut to zero and too much cost cutting will likely adversely impact performance. As we have noted previously these companies must either find a new lower cost operating model or exit the market. There really is no third option.

Setting aside what a new operating model might look like for a moment, exiting the business is not as easy as it seems. For any market to operate efficiently there must be not only willing sellers but also willing buyers. In the glucose monitoring market there are several companies who would like nothing better than to sell IF and this is a huge IF they could find someone willing to pay a decent multiple. Bayer was the first company to experience just how difficult it is to find a buyer. At one point it seemed all but certain that Sanofi (NYSE:SNY) would buy this troubled unit but as so often happens, especially when dealing with Sanofi, the deal was never consummated which left Bayer with no plan B.

This begs the question, is there anyone who would be willing to buy any of these units and just as important what multiple if any would they be willing to pay. Looked at from a strict operating model Diabetic Investor believes these companies could be run more efficiently as private not public entities. As all four of the major branded companies are finding out, stakeholders aren’t that thrilled to see these units dragging down the performance and share price of the mother ship. Additionally as a private entity these units would not be focused on quarterly performance and could focus instead on the longer term view.

Diabetic Investor suspects as well that as a private entity these units would be able to purse an operating model that has chance to be profitable. A model which already exists at Nipro Diagnostics, the company which makes meters for major retailers like Walgreens, CVS and Rite Aid. Unburdened with a large field sales team, Nipro can operate more efficiently with a handful of key account managers. It also helps that unlike the major branded companies who must spend millions marketing their products, marketing for Nipro products is paid for by the retailer.

While the branded companies could not directly copy this model, it can be modified to work with a branded product. As we have pointed out previously field sales teams are very costly and quite frankly no longer necessary. The branded companies in their zest to cut costs are no longer flooding the market with monitors which are then given away for free. It’s also true that most physicians really don’t care which meter a patient uses and in most cases recommends any meter which is covered by the patients’ health insurance.  These physicians also know that if they really need information on a system it can found on the internet. The fact is in the internet era the role of the sales rep has changed dramatically as they are no longer the primary source of information. Therefore the branded companies could drastically slash their field sales teams, instead employee a handful of key account managers whose primary responsibility would be to manage the larger accounts.

The major departure from the Nipro model comes in marketing; since the branded companies don’t have someone else paying for marketing they must find a more cost effective marketing strategy.  While this may seem drastic Diabetic Investor believes that branded companies should completely abandon expensive television commercials and drastically cut print advertising. Additionally we believe it would be a mistake to rely solely on internet ads as the diabetes web world is highly fragmented. The truth is while there several excellent web sites and blogs that focus on diabetes, these web sites and blogs tend to attract the same group of patients who are already engaged with their diabetes management.

The key becomes how do these branded companies hold on to their existing customers and attract new ones.  Given that the meters have transformed from a medical device to a consumer device it’s time to copy how makers of other consumer products market their products.  Loyalty programs, incentivizes and special pricing all fall into this mix. The fact is the vast majority of patients, like their physicians, really don’t care which meter they use as long as their insurance covers it. Yes there is a minority of patients who do care, but even in this group there is little brand loyalty. Rather than try and impress these patients with more whiz bang technology or pretty colors why not impress them where it counts most; their wallet.

Keep in mind a glucose meter is something these patients use each day of their lives, yet to date not one meter company has rewarded their customers for being loyal to their brand nor have they incentivized them in any way to keep using their product. Studies have shown that consumers respond to loyalty/reward programs so much so that nearly everywhere a consumer shops offers such a program, all that is expect for glucose meters. It stands to reason that patients if given the choice would prefer to use a meter which rewards them in some way rather than one that does not. This is not unlike a consumer choosing a particular credit card or frequent flyer program because they can build miles faster.

The harsh reality is even with the epidemic growth of diabetes, the market for meters is showing signs of contraction. As we have noted previously there are several reasons for this which is why the branded companies must remain laser focused on attracting and retaining patients who use insulin. It is a complete waste of money to target any program at patients who do not use insulin, they just don’t use enough test strips to justify the cost of any program. Given that this group of patients is being courted by every branded company it makes even more sense to differentiate the brand not by technology, which has how it’s been done in the past, but by offering something that’s never been done before.

Any company whose bold enough to attempt this new approach will likely receive another benefit, given this approach has never even been tried before it will make news and there is nothing better in today’s interconnected world than free publicity.

Lastly these reward/loyalty programs can be easily accessed on a patient’s smartphone. It’s time for these branded companies to acknowledge that a smartphone and/or tablet are the best places to reach customers. Up to this point the efforts have been what one would expect, trying to connect the meter to the smartphone as diabetes management tool. Yet the branded companies haven’t considered that apps don’t have to work with a meter to be an effective marketing tool. An app tied into a loyalty/reward program is an excellent way to deliver offers and messages as if there is one thing no one is without these days it’s their mobile phone or tablet.

The real question isn’t whether this new operating will work, the real question is what other options are realistic. Looked at honestly Diabetic Investor cannot find too many entities who would willingly spend billions to enter this market; quite frankly the return on investment just isn’t there. Therefore the branded companies, in the absence of finding willing buyers, must dramatically overhaul how they operate. It’s a new world and a new world requires a new way of thinking. Let’s see if there are any visionaries out there willing to break from the past.