And the hits just keep on coming

And the hits just keep on coming

It’s bad enough that companies in the glucose monitoring space are dealing with the impact of competitive bidding, commodization of the market, continued pricing pressure and the very real possibility that the FDA will require greater accuracy which will only add to their costs. Nope just when it looked like things couldn’t get any worse along comes a company called UniStrip™ Technologies who according to a company issued press release; “UniStrip Technologies introduces its first generic blood glucose test strip for use in LifeScan’s® OneTouch® Ultra family of meters.

Developed and tested over a period of years, and recently cleared by the FDA for use with four OneTouch® Ultra meters, the UniStrip1™ Test Strips provide retailers with an opportunity to expand their product line to people with diabetes who want a highly accurate test strip at an affordable price. Additionally, the new product offers retailers the ability to increase their margin in a product category while saving money for their patients.”

To say that Johnson and Johnson (NYSE:JNJ) who manufacturers OneTouch products needs this news is like saying the Titanic needs to take on more water. As previously reported the company is already involved in patent litigation with Shasta Technologies, who also has a generic test strip; litigation which hasn’t exactly gone well for JNJ and is becoming one huge pain in the rear for the company.

Now before we go any further about the only thing one can say with any degree of certainty is that JNJ will likely sue UniStrip. As we have noted far too often patent litigation in the diabetes device space is a full contact sport with a take no prisoner’s attitude. Just as lions protect their cubs, diabetes device companies will do whatever it takes to protect their intellectual property.

It’s also safe to assume that while the legal process will likely take years to play out and cost millions of dollars, the tide is not in favor of the branded BGM companies. The harsh reality is that it’s only a matter of time before generic test strips become a reality and put even greater pressure on the branded manufacturers. This at time when they are already seeing prices cut not just by Medicare but by private payors. Private payors who are increasingly toughing their reimbursement policies for test strips and are passing on a greater share of the cost onto patients through higher co-payments. To Diabetic Investor it’s just a matter of time before payors stop reimbursing for test strips for non-insulin using patients.

Earlier this week three of the four major BGM companies reported earnings, two of three JNJ and Abbott (NYSE:ABT) reported substantial decreases in diabetes device revenue. Roche was the notable exception, not because they are somehow immune from the carnage that’s going on in BGM rather because they are phasing out their older products and inventories are being built for their newer products. Diabetic Investor suspects that once this inventory build is complete Roche will experience the same pain and suffering as JNJ and Abbott.

To fully appreciate just how bad things will get not just for JNJ but all the major brands consider that even if JNJ wins in court they could still lose. The mere threat of a generic test strip will provide payors with even greater power to demand and likely receive even greater price concessions. Payors know that the major branded companies really don’t have much of a choice as if they don’t capitulate to these demands they will likely lose valuable market share. Market share they can no longer afford to lose as unlike the old days margins are no longer large enough that would allow them to offset the loss of share. Looked at realistically the test strip business is really not that different than any other commodity market as the more of the more strips that are made the cheaper the per unit cost is. Or put more simply volume is everything. Making matters worse for the major companies the barriers to entry in the market as seen by the many companies who continue to enter this already overcrowded market aren’t substantial.

To draw a very real illustration of what the future will likely look like for the major BGM companies, take a walk into any grocery store and walk down the soda or snack aisles. In the soda aisle there are two major brands Coke and Pepsi supplemented by the low cost store brand. The snack aisle is even worse as Pepsi snacks dominate with some higher priced premium products and of course the cheaper store brand. The only major difference with the future of BGM is that the branded products as we know them today OneTouch, FreeStyle and Accu-Chek will likely no longer exist. The simple fact is the margins just aren’t high enough to support these business units inside of major companies like JNJ, Abbott and Roche.

As we have noted with regularity all the major branded companies have cut costs to the bone in what’s becoming a last ditch effort to save a barn that’s burning down to the ground. JNJ has been the most aggressive with their efforts as LifeScan once a premier operating unit inside of the company has basically ceased to exist. Who would have thought that JNJ’s fortune in diabetes would rest not with devices but Invokana®. Who would have thought that Roche who at one time had a billion dollar franchise in the US would see this franchise shrink by 50%. Who would have thought that Abbott would spend billions to buy not just one but two BGM companies; companies which are now worth a fraction of what they paid.

Given that JNJ, neither Abbott nor Roche can unload their BGM units, at least not at the multiple they want, one has to wonder which company will be the first to totally throw in the towel and start pricing their products at vastly discounted prices. Moves which will surly initiate a very ugly price war and likely mark the beginning of the end of the BGM world as we now know it. A move which will likely be accelerated should the FDA require test strips to be more accurate. At some point JNJ, Abbott and Roche will cry uncle and say enough is enough.

At one point Diabetic Investor believed that more consolidation would take place and the very real possibility existed that the three and half major players (Bayer is the half) would do some sort of a deal. Not that such a move would help all that much given the fact that there aren’t any major savings other than combining back office and sales functions. Still in the wacky world of diabetes these type of deals are commonplace, never it let it said that the management at these companies are the brightest blubs on the marquee.

The other scenario to consider is Roche, Abbott and Bayer having a fire sale. Given the moves already made by JNJ, moves made after they also tried unsuccessfully to sell their unit, we don’t see JNJ completely out of BGM, insulin pumps yes, BGM no.

The truly amusing part here is that companies still want to enter the BGM market. Now if this doesn’t conclusively prove the greater fool theory we don’t know what does. This space is littered with companies who have tried and failed, the most recent failure coming from Sanofi. Yep that whiz bang way cool iBGStar that worked with the way cool whiz bang vastly popular iPhone is sitting alongside of the Titanic at the bottom of the ocean.

Regular readers of Diabetic Investor know that we have been predicting this demise of the BGM market for some time and to be honest we don’t relish in the fact that we’ve been right. Still the major players bear much of the blame for how things have turned out as the handwriting has been on the wall for some time. This is not to say they could have completely avoided the nuclear missile that is headed their way but they could have been much better prepared for the nuclear winter that will follow the blast.