BD Exits BGM Market
This morning Becton Dickinson (NYSE:BDX) announced plans to exit the blood glucose monitoring (BGM) market. Diabetic Investor applauds this decision and sees BD’s core syringe and needle business as exceptionally strong. As the company stated during their conference call the exit from BGM market will not preclude them from pursuing other diabetes related products. The company does have a continuous glucose monitoring system under development and has expressed interest in entering the insulin pump market. (Rumors circulated late last year that BD was interested in acquiring insulin pump newcomer Insulet, the makers of the OmniPod Insulin Management system.)
Although BD was never a force in the BGM market their exit from the market is a reminder of just how competitive this market has become. Interestingly BD’s exit comes just days after Home Diagnostics, Inc. (NASDAQ:HDIX), another BGM company went public. Oddly back in 2003 when BD first entered the BGM market the company boldly predicted they would gain 10% of the market. At the time Diabetic Investor commented that this was an overly optimistic goal given the changes taking place in the market. As it turned out Diabetic Investor was correct.
The fact that the company tried to sell the business and had no takers speaks volumes about where this market is headed. While it’s no surprise that none of the big four BGM companies (LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), Roche, Abbott (NYSE:ABT) and Bayer (NYSE:BAY), had an interest in buying some additional market share. It is a little surprising that Medtronic (NYSE:MDT) did not pick up the unit on the cheap. According to Medtronic, “Medtronic Diabetes intends to provide Paradigm Link Blood Glucose Monitors to all customers until a replacement meter option is made available. Customers will continue to have access to test strips and related supplies through Medtronic Diabetes, and new customers will receive Paradigm Link Blood Glucose Monitors with their Paradigm insulin pump for the foreseeable future.” These comments are in line with Diabetic Investor’s belief that Medtronic’s future efforts will be concentrated on converting current customers into users of their Paradigm 722 system which combines a Paradigm insulin pump with the company’s continuous glucose monitoring system.
More broadly BD’s exit should serve as a wake up call to anyone who thinks the BGM market will ever return to days of annual double digit growth rates and hefty margins. To many it seems strange that with epidemic growth in the number of people with diabetes and the proven benefits of glucose monitoring, that the BGM market is not growing more rapidly. Over the past several years BGM there have been notable improvements in BGM technology. Smaller blood samples, alternate site testing and faster test times have done little to increase average testing frequency or compel type 2 patients, the largest patient population, to test on a regular basis. The reality of the BGM market is instead of expanding, the big four are fighting over the 4 million or so insulin using patients. Because insulin using patients need to know their glucose levels so they can administer the proper amount of insulin they are test their glucose levels regularly. The most coveted patient of all is the insulin pump patient who on average tests their glucose levels 7 times each day.
One day it is possible we will look back and say the biggest failure of all the BGM companies was their inability to expand the market when the number of people with diabetes was growing at epidemic rates. Instead of spending more on patient education and the benefits of frequent glucose monitoring, these companies instead embarked on a glucose monitoring arms race spending huge sums to develop technologies that the majority of patients never use.
As Diabetic Investor recently stated diabetes is not just a global healthcare crisis but a major economic problem as well. In a report by the Federation of European Nurses in Diabetes and the International Diabetes Federation European Region entitled Diabetes EU Policy Recommendations, “One of the most compelling reasons for Member State governments to take immediate action on the prevention, diagnosis and control of diabetes, is to contain the dramatic rise in the cost of diabetes. These are projected to increase rapidly with growing prevalence rates and the disease’s wide-ranging and invariably costly complications. Diabetes currently accounts for between 2.5-15% of total healthcare spending in Member States, representing up to $50 billion (Euros) in spending per annum.” The American Diabetes Association estimates the total direct and indirect cost of diabetes to exceed $135 billion per year. In 2003 Medicare spent just under $1 billion on glucose monitoring supplies, a staggering sum when you consider that 60% of the patients with diabetes on Medicare are not on insulin.
Just how badly has the industry dropped the ball when it comes to promoting the benefits of frequent glucose monitoring? Back in late August at the Medicare Coverage Advisory Committee (MCAC) meeting on Glycemic Control, Dr. Art Lurvey stated that there is too much testing for stable type 2 patients because testing rarely leads to changes in therapy. While Dr. Lurvey’s statement that testing by type 2 patients rarely leads to therapy changes is correct, this is hardly the point. The benefits of regular glucose monitoring are well documented. Yet Dr. Lurvey was not the only speaker who expressed doubts over the benefits of regular glucose monitoring. At a time when no one should be questioning the value of regular glucose monitoring and be pushing for increased coverage, not less coverage, the government is moving closer to competitive bidding in attempt to control costs.
Instead of an all out effort to increase the awareness of the benefits of regular glucose monitoring members of BGM market are instead lobbying to prevent competitive bidding. During JNJ’s recent investor day Eric Milledge, Company Group Chairman, made highly critical comments on the government’s possible move towards competitive bidding. Frankly Diabetic Investor was surprised by the candor of these comments for as we see it, it’s not a question of if competitive bidding is coming but when it will be here. A move that will surly accelerate private insurer’s efforts to control their increasing costs for glucose testing supplies. Some of whom are already considering NOT covering glucose testing supplies at all. Who could have imagined that in 2006 with overwhelming evidence that regular glucose testing leads to better control and overall lower costs, that anyone would consider not covering glucose monitoring supplies?
Give BD credit for seeing the handwriting on the wall. The company realized that the light at the end of the tunnel wasn’t the sun but a freight train headed squarely at the BGM market.