Another nail in the BGM coffin
The blood glucose monitoring market hasn’t had much good news these past few years as the industry has experienced a series of setbacks. Yesterday the news went from bad to worse when the Centers for Medicare and Medicaid Services has released new payment rates for the Round 1 rebid. The reimbursement reductions average 32 percent across all product categories. For Diabetic supplies the current allowable averages is now $75.32 per month but will be lowered to $33.44 under the new payment.
These new lower rates will hit all BGM companies hard and are just part of a continuing trend towards lower prices. Also hit particularly hard will be MedcoHealth Solutions (NYSE:MHS), who owns Liberty Medical the largest provider of diabetes testing supplies to Medicare patients.
Yet in the midst of all this bad news there are some companies who are better prepared to deal with lower prices than others. Unlike the big four – LifeScan – Roche – Abbott (NYSE:ABT) and Bayer – who must deal with large sales forces and marketing budgets, companies like Home Diagnostics and AgaMatrix have lower overall cost structures and can more easily adapt to these new reimbursement rates.
It will also be interesting to see if these new rates will accelerate industry consolidation. As Diabetic Investor has been reporting the Big Four have already taken steps to lower their overall cost structures slashing marketing spend, eliminating sales positions and outsourcing research and development. Given the depth of these cuts the question becomes what next. Looking over the competitive landscape and current dismal market dynamics members of the Big Four are basically facing two choices; either buy someone and benefit from economies of scale or sell their BGM units while they still can.
Watching all this with some amusement must be the folks at Sanofi-Aventis (NYSE:SNY) who already has an alliance with AgaMatrix and has made no secret of their desire to move further into the diabetes device arena. To their credit Sanofi is moving methodically into the device arena understanding there is no rush to make a deal. They see what’s going on not just with glucose monitoring but insulin pumps and realize the longer they wait to make a move the cheaper their acquisition will be. With Sanofi taking a wait and see attitude there are fewer options for companies like Abbott who has been actively shopping their BGM unit.
Diabetic Investor also believes it’s becoming less likely there will be consolidation among the Big Four. The most likely combinations between members of the Big Four all come with their own unique set of problems and quite frankly at this point aren’t worth the money. The most likely scenario is that Sanofi will eventually make a move acquiring either Abbott or Roche. With the possible exception of LifeScan, the remaining players will then have to look outside traditional areas to unload their units.
Until that time look for more cost cutting as BGM companies desperately try to uphold their once lofty profit margins. As bad as things are in BGM the fact is these units remain vastly profitable and throw off tons of cash. Yet the die was cast for BGM long ago and it’s just a matter of when, not if, the Big Four will be the Big Two or Three.