Bah Humbug
This isn’t turning into a very good holiday season for folks in the glucose monitoring business as today Abbott (NYSE:ABT) joined the list of companies eliminating positions in attempt to cut costs. Diabetic Investor has also learned that Bayer, who announced their layoffs and restructuring last week, may not be finished in their attempt to cut costs. While there are some delusional folks remaining, these companies have finally awoken to the fact this is a commodity business where costs trumps everything else.
Although it is too early to write the obituary for the glucose monitoring business, it’s not too early to prepare for this moment. After all the millions spent on whiz bang technology that yielded smaller sample sizes and faster test results, after spending more millions dumping monitors on physicians and diabetes educators, after spending even more millions on advertising and promoting monitors that come in pretty colors, after all this it has finally dawned upon these people that the majority of patients could care less and want a monitor that provides them an accurate test result.
These companies made matters worse by buying formulary position, while this strategy help build market share it also further devalued their products. This devaluation occurred when patients were told to switch monitors from their current monitor to another after one company bought their way into the prime formulary position. The basic message sent to the patient was it really doesn’t matter which monitor you use. This message was reinforced when a patient wanted to stay on their old monitor and found out their co-payment would be higher than if they switched to the “preferred monitor”. Given the choice of switching and paying a lower co-pay or staying with their existing system and paying a higher co-pay, the choice was rather obvious.
Simply put, by their actions the industry itself helped transfer the glucose monitoring market from a medical device model to a commodity market where costs trumps everything else.
Coming to grips with this reality the major players follow the standard corporate playbook, rather than look for solutions and try and reinvigorate the market, they slash away cutting costs wherever they can. Diabetic Investor can’t blame them for following the playbook as it does offer a degree a certainty, or put another way they know cutting costs will help preserve margins or at minimum slow margin erosion. If their honest with themselves they also know they aren’t too good at thinking out of the box and developing strategies that could (could, being the operative word here) help reverse current market trends.
Going forward Diabetic Investor sees this new reality benefiting not the major players, rather smaller players like Nipro and AgaMatrix. Companies like Nipro and AgaMatrix have experience living in a world where every dollar counts plus they never reached a level where they needed an army of sales people or huge marketing and managed care departments. Simply put they understand what it’s like to operate a lean and efficient operation. On the flip side companies like Johnson and Johnson (NYSE:JNJ) and Roche are more adapt at throwing money at problems and using their size to crush the competition. Looking into the future these rules won’t apply and Diabetic Investor believes it will be difficult for the major players to adapt. A more likely scenario is they will exit the business entirely selling their units to companies who are better equipped to deal with the new market realities.
While the glucose monitoring is nothing like it was ten or even five years ago, it still generates ample cash. The key going forward is to find new ways to sell and distribute monitors and test strips and do so efficiently. Although we are not there yet the day is coming when a patient will be able to automatically refill their test strip prescription directly from the company and avoid going to pharmacy. The technology already exists where a system would be smart enough to refill a patient’s prescription automatically. The patient won’t even have to logon to a web site or make a phone call, based on usage the system will know when the patient is running low on test strips, send an order automatically to the company, who in turn will send the test strips to the patient, bill their insurer and charge the co-pay to the patients credit card which they have on fill.
For those patients who still want to visit their local pharmacy, look for pharmacy retailers to aggressively promote their store branded monitors in an attempt to more closely bind the customer to their brand. Once they secure a patient to their store branded system, they can actively solicit them with special programs and/or offers that keep them on the system and coming back into the store. For the retailer the goal is not just to get them on the system but to keep the customer coming into the store where they will buy other non-prescription products. As we have noted previously patients with diabetes are high coveted by pharmacy retailers as they generate high revenues through frequent store visits.
Under either system there is no need for an army of sales people or huge marketing budgets. Nor will there be a need to have internal research and development departments as this function can be more efficiently performed through out-sourcing and partnerships. In some respects this not unlike what’s already happened in the pharmaceutical world where large companies partner with smaller companies who essential serve as the larger companies development arm. Should the smaller come up with a real winner the larger partner still has the option of buying them at a later date. No need to invest billions immediately when a smaller investment yields the same results and preserves valuable capital.
This is scenario Diabetic Investor expects to play out with the Sanofi-Aventis (NYSE:SNY) and AgaMatrix partnership. AgaMatrix provides Sanofi an inexpensive entry into the glucose monitoring market allowing Sanofi to test the waters. Starting from ground zero Sanofi does not enter the market with the baggage carried by the major players who are already entrenched in old worn out strategies. They can start with fresh ideas and offer a new way of doing business. Sanofi has the scale to become a player and AgaMatrix has the products, design and manufacturing expertise. Should the partnership succeed look for Sanofi to buy AgaMatrix, if not they can walk away and find another partner.
For their part Diabetic Investor also believes Nipro will prosper as they already are entrenched in the major pharmacy retail chains. Chains that have become more deeply committed to developing and promoting their store brands, brands that save their customers money and yield higher margins for the retailers. While many have tried, the simple fact is it’s not easy to replace Nipro which further strengthens their position moving into the future. Retailers like Walgreens and CVS do not want to repeat the mistakes made by the major glucose monitoring companies by constantly switching their customers from one monitor platform to another. Simply put as much as Nipro needs these retailers these same retailers need Nipro, it may not be a perfect marriage but it’s better than the alternative as divorce is a messy and costly experience for both sides.
While it’s not time to say goodbye to LifeScan, Roche, Bayer and Bayer that day is closer than many believe. The fat lady isn’t singing just yet but she is warming up for what will be one final swan song. Or as the late great Dandy Don Meredith used to sing; “Turn out the lights the party is over.”
