Bayer Reports – What is the next step?

Bayer Reports – What is the next step?

Yesterday Bayer reported results for the first half of 2008 and sales of the Contour glucose monitor continue to grow at above market rates. Interestingly sales of the Breeze monitor actually declined 10.5% for the period and this points to the main issue facing the company. Unlike other companies in the BGM market, Bayer does not offer a broad range of monitors using the same strip technology. Nor does the company control manufacturing of their monitors.

While the company has done an outstanding job of turning this unit around the real question is how they can grow from here. Their two main competitors LifeScan and Roche both offer a broad range of products. Additionally LifeScan also has a relationship with Medtronic (NYSE:MDT) and Animas allowing their monitors to communicate with insulin pumps. As Diabetic Investor has pointed out on several occasions insulin pump patients are the most frequent users of test strips averaging 7 tests per day. Although there are less than 500,000 insulin pump patients worldwide, they account for nearly 25% of all test strips sold.

Roche also has an insulin pump however sales of the Accu-Chek Spirit have failed to live up to expectations and have done little to help test strip sales.

Bayer also has relationship with Medtronic but this is for pumps outside the US. With the US pump placements making up nearly two-thirds of all pump sales the international market offers only a limited opportunity. Looking forward Diabetic Investor sees only two options for the company to keep growing. Either buy an insulin pump company or buy more market share. Rumors have been circulating that the company might make a play for Medtronic’s MiniMed unit but Diabetic Investor sees this as unlikely. More likely is the rumor Diabetic Investor first reported back in June with company going after Abbott’s (NYSE:ABT) diabetes unit.

Acquiring Abbott’s unit fills several needs for Bayer. First and foremost they would immediately gain economies of scale holding a market share on par with LifeScan and Roche. Second it would provide them with greater control over manufacturing costs. Third, they would gain access to insulin using patients who are the most frequent users of test strips. Finally they would gain access to two insulin pump companies, Deltec and Insulet (NASDAQ:PODD).

The reality is with the changing market dynamics no glucose monitoring company can survive and grow without a connection to a insulin pump and insulin users in general. For all the advancements in monitor technology strip usage has barely grown over the years. The fact is the majority of non-insulin patients rarely check their glucose levels and too many fail to check at all. It’s also known that the growing usage of drugs like Byetta will stunt any possible growth in the type 2 market. Finally pricing pressure continues making it imperative that the company be able to control costs.

This deal also makes sense for Abbott. Try as they might to put a good face on a very bad situation things are going from bad to worse for the diabetes unit. The company continues to lose share in glucose monitoring and sales of the Navigator continuous glucose monitoring system have been dismal. The few Navigator users there are have begun to complain about numerous sensor failures. It’s bad enough they to wait 10 hours before any data appears, it’s even worse when after 10 hours the sensor fails to calibrate and they have to start the process all over.

It makes absolutely no sense for Abbott to throw more money at this unit or make an acquisition of their own. It’s fair to say after both the Medisense and Therasense acquisitions, the company knows how to turn gold into sand. The fact is it’s better to sell the unit today while there is still something to sell. The sales force, what’s left of them, is unhappy. Several quality managers have also left and for all intensive purposes the unit has no clear strategy.

Bayer for their part has proven they can turn a loser into a winner. All in all this is a win-win situation for both companies and makes so much sense it probably won’t happen.

David Kliff
Diabetic Investor
847-634-4646 fax
224-715-3761 mobile