Between a rock and a hard place

Between a rock and a hard place

Yesterday’s news from Johnson and Johnson (NYSE:JNJ) continues to reverberate throughout the glucose monitoring and insulin pump world. Now that JNJ has begun implementing their new strategy, the question being asked is how the competition will respond. While we covered some of this yesterday this question and possible answers deserves a closer examination. Is this the end of the BGM world as we know it, as many believe, or is a new modal developing for how diabetes devices are sold and supported?

Candidly Diabetic Investor believes that answer to both questions is actually a resounding yes. Without being overly redundant the end of the BGM as we knew it has been coming for a long time. Well before competitive bidding put the final nail in the coffin. Margins have been shrinking for years as payors realized they held the upper hand when it came to controlling which company gained or lost market share. As we noted several times in the past the BGM business is really all about scale, scale drives efficiencies while maximizing margins. This is why it is so difficult for the smaller players to survive, these companies may have innovative products yet they cannot compete when it comes to price.

Pricing pressure basically forced the major branded companies to dramatically alter their business models. Gone are the days when they would launch a new system, have their reps drop off boxes of free meters at physicians’ offices and then watch as sales of test strips rolled in. Battle for formulary placement always intense became an all-out war as companies were given the unpleasant choice of capitulating to the demands of payors or risk losing valuable market share. This in turn forced the losers to resort to co-payment augmentation programs which only added to their costs.

Simply put the BGM business as we knew it was turned upside down, as the BGM companies had lost all control over price. Even worse the cost of doing business was increasing, as noted above co-payment adjustment programs, increased demands from the FDA and marketing costs were going up. The major companies really had no other choice than to cut costs if they were to have any hope at all maintaining a decent margin.

This is why competitive bidding was not the root cause of the demise of the BGM world as we know it. Looked at realistically all competitive bidding did was make the inevitable happen sooner. Diabetic Investor is firm in our belief that even had the cuts in Medicare reimbursement been less dramatic it was just a matter of time before the BGM business would implode.

Looking ahead we also see a new modal developing one which is actually long overdue. The fact is companies no longer need an army of expensive sales reps pitching their offerings to physicians. The truth is nearly every function of a device sale rep can and should be replaced by technology. Let’s face facts here meters aren’t complex devices which require hours of training. It’s also well known that physicians could care less which meter a patient uses, they just want their patients to use the damn thing.

Diabetic Investor would even go as far and state that cost can be driven out of insulin pump sales, training and support using technology. Although we don’t see the human element being entirely replaced, technology can enhance the human element while at the same time driving down costs. The insulin pump world has hopefully learned a valuable lesson from the many mistakes made by their BGM counterparts, who didn’t adapt to changing market dynamics quickly enough. They would be equally mistaken to believe that they will not face pricing pressure from Medicare and private payors. While all the pump companies will beg to differ there really isn’t that much difference between systems. As Diabetic Investor has said for years the insulin pump market is not large enough, nor is it growing fast enough to support all the companies in the market.  It’s just a matter of time before one of the major pump companies throws in the towel using price as their primary weapon to gain share, once this happens, and it will happen, this will be the beginning of the end for the insulin pump world as we now know it.

This is why the use of technology is not just important; it’s a matter of survival. The irony here is that patients, physicians and Certified Diabetes Educators are not just ready for using more technology they are already using it.  As we have noted many times when these people have a question on a new product or need a manual the first place they turn to is the internet. Diabetic Investor would go even further and state these people prefer the internet over the human option.

The fact is using what Diabetic Investor calls a hybrid or enhanced human option is ready today. Anyone who’s shopped on the web is familiar with live chat and has likely used Skype or something like it. This is where device companies have missed the boat; far too many see this as an all or nothing proposition. Rather than enhancing their existing personal with technology they instead have gone for the nuclear option trying to element every human interaction between a patient, physician and CDE.

Perhaps a better way to look at this is; is whether or not companies like Roche, Bayer and Abbott (NYSE:ABT) will be bold enough to follow JNJ’s lead and take it one step further. Will Medtronic (NYSE:MDT) and Insulet (NASDAQ:PODD) correctly respond to the changes that are about to take place in the insulin pump market. Frankly Diabetic Investor isn’t optimistic as this would require foresight and some true out of the box thinking, not exactly something any of these companies are known for. Based on history it looks as if these companies will practice more of the same old, same old putting themselves firmly between the preverbal rock and hard place.