All part of the long term strategy

All part of the long term strategy

This past Friday Liberty Medical Supply which just completed a management buyout from Express Scripts back in December filed for Chapter 11 bankruptcy protection. According to various news reports the company listed assets and debts of between $100 million and $500 million each. Although never confirmed publicly many including Diabetic Investor noted that the management buyout was financed by Alere (NYSE:ALR) who planned on using Liberty as a part of their broader strategy in the diabetes space. Back on February 8th, we published a piece entitled “Last Man Standing” where we outlined what this strategy may look like and why it just might work.

Before we speculate a little on how this filing is part of Alere’s longer term strategy, it should be noted that the filing will immediately impact another player in glucose monitoring, Abbott (NYSE:ABT). According to story in the Chicago Tribune; “Abbott Laboratories of Abbott Park is owed more than $5 million” and is one Liberty’s largest creditors. The story goes onto to state; “Liberty Medical listed CGS Administrators as its largest unsecured creditor, with a disputed claim of $137.2 million. Express Scripts Holding Co unit Medco Health Solutions Inc was next with a disputed claim of $14.2 million. Abbott was fifth.” The fact is Abbott needs this like the Titanic needs another iceberg and while this event may not be the catalyst that pushes the company to finally sell this troubled unit, it should provide a moment of pause of management as they try and decide what to do next.

What this filing does provide Alere is a vehicle from which they can drive costs out of the business. As we noted on many occasions Ron Zwanziger, CEO of Alere understands the diabetes testing supply business and did not go into the Liberty deal without thinking things through. He also understands that if the Alere strategy has any chance at all they must be ultra-cost sensitive as margins in the Medicare diabetes testing supply business, thanks to competitive bidding, are now razor thin. Just as the larger players who make the systems are doing whatever they can to cut costs, so too are the DME’s who cater to Medicare patients.

It shouldn’t go unnoticed that on the same day when Liberty filed, Cardinal Health announced they would be acquiring AssuraMed for $2.1 billion, AssuraMed who owns home health care supplier Edgepark Medical Supplies. The fact is everyone who plans on playing in the home health/Medicare arena needs to two main components; massive scale and low cost operating costs. Many including Diabetic Investor believe that the impact of competitive bidding will extend beyond just diabetes testing supplies as the government will look to ring even more cost savings out of other Medicare programs as Baby Boomers continue to increase the Medicare patient population. Massive scale, along with multiple revenue streams combined with the efficiencies that scale brings makes it possible for companies to make some money.

Diabetic Investor suspects when Liberty emerges from bankruptcy, it will be a leaner, meaner company unburdened by huge debts that can more effectively compete in a marketplace that will be dominated but a few very large players.  As we noted before Alere won’t stop with the Liberty deal and will likely acquire many of the smaller DME’s as they begin to realize they are just too small to make any money. We further believe Alere will attempt to become virtually integrated and also acquire a glucose monitoring company.

Looking into the future the Medicare/Home Health Care market could come down to two different approaches based on the same theory. The theory being that massive scale leads to greater cost efficiencies which make it possible for a company to make money. The difference in approaches centers around whether a company will attempt to control all the elements as Alere is attempting, or whether they will use this massive scale as a sledgehammer to drive greater price concessions from their vendors.

No matter which approach is used this is one more reason we’ll soon see even further consolidation in the BGM space.  These companies who’ve already cut costs to the bones are quickly realizing that they either must get larger or sell when they still can.  Frankly it’s not in their DNA to try anything else and right now we’re not sure even if they tried to change they could pull it off. For all practical purposes the horse left the barn a long time ago for BGM and that horse is riding off into the sunset.