Changes coming at Roche

Changes coming at Roche

Diabetic Investor has learned that Roche is seeking candidates to head up their US diabetes operations. According to well-placed sources this search includes an interesting twist as potential candidates are being told they would not be required to move to Indianapolis where US diabetes operations are based. Diabetic Investor finds this significant as it has been rumored for some time that Roche has been looking at spinning off this unit as separate privately held company.

The real question is just how much latitude the mothership would give this unit under new leadership. As we have noted previously after years of sticking their heads in the sand the company has finally publically acknowledged what everyone in diabetes already knew; namely this unit is in deep trouble.

Other sources have noted that the company has become more aggressive in their dealings with payors. Or put more simply in an attempt to regain lost share and boost volume the company is using the only weapon they left in their arsenal; price. Another notable development which to Diabetic Investor signals that some major changes are coming.

The reality of the situation is this; when it comes to conventional glucose monitoring LifeScan, a unit of Johnson and Johnson (NYSE: JNJ) has been kicking Roche’s backside. The US unit which at one time dominated has become a shell of its former self. Since Diabetic Investor has chronicled the many missteps made by the company there is no need to open old wounds. The question is what now?

Here is the harsh reality when looking at the long term outlook for conventional glucose monitoring, a market which has fully transformed itself into a commodity market. It’s no secret that every company in this space is facing intense pricing pressure. It’s also true that this market which was once growing at double-digit rates is barley growing at all and there is evidence strip usage is declining. The simple truth is the die has been cast for conventional BGM and it’s just a matter of time before this market will become irrelevant.

While this won’t happen overnight this march towards obscurity has begun. Here’s why. Continuous glucose monitoring is eating away at strip usage as the most frequent testers, insulin using patients, are moving towards CGM in greater numbers. Although insulin pump patients make up only a small percentage of the insulin using population they account for nearly 20% of all test strips used. On average insulin pump patients test their glucose 7 times each day. An increasing number of pump patients are using CGM a move that will continue given the increasing popularity of sensor augmented systems.

Patients following multiple daily injection (MDI) therapy are also adopting CGM in greater numbers which is also eating away at strip usage.

The news is not good at the bottom of the BGM food chain either as it’s just a matter of time before payors stop reimbursing for non-insulin using patients. This move is already underway as payors have been increasing patient co-payments and limiting the amount of strips they will reimburse for. It’s no longer a question of if payors will stop reimbursing for non-insulin patients but when. The reality is for non-insulin using patients this will become a cash market.

New therapies like GLP-1’s will also hurt strip usage as dosing is fixed and not dependent on a patient’s glucose level. Simply put there is no reason for a GLP-1 patient to regularly monitoring their glucose levels.

It also won’t help any when Dexcom (NASDAQ: DXCM) and Google launch their disposable CGM. Should Dexcom/Google succeed in getting this system to market and get the price point on par with conventional test strips it will be another nail in the conventional BGM coffin.

Looked at realistically about the only place conventional BGM companies can count on are patients who for whatever reason don’t want to convert to CGM or those who test infrequently. The problem with these legacy customers is their declining numbers.

Now there are those who point to emerging markets as the savior for BGM. There are several problems with this belief. While it is true that markets such as China and India are growing dramatically, it is also true these markets have structural issues. Besides not having an existing infrastructure for getting strips to the patient, most of these markets have government single payor systems which compress prices. Add in the lack of intellectual property protection in these markets and one can see that while these very large markets look attractive at first glance upon further examination they are markets which come with low margins.

The reality is when it comes to conventional BGM the US WAS about the only market that had all the pieces in place so that companies could make a reasonable margin. Today this is no longer the case which is the reason every major BGM company has cut costs any way they could.

Roche seeing that Bayer was able to sell their diabetes device unit held out hope they too could find a buyer for their unit. A unit which in addition to BGM also includes insulin pumps, which in theory would make it more attractive to a potential buyer. And as we have stated in the past as bad as this unit has been managed the Accu-Chek brand still has some value. Yet at least so far no buyer has emerged which puts Roche at the crossroads.

The see that the market is imploding. They realize that after all the cost cutting there just aren’t that many options left. They also know that this once high profitable unit has transformed from a cash cow to a cash drain. Running out of options spinning off the unit into a separate privately held company makes perfect sense. Not only would it get this unit off their books it would allow this new entity more latitude in dealing with the future. Given that it’s likely the mothership would retain some sort of ownership stake in the new entity the possibility also exists that should a buyer come along the mothership would get something out of the deal.

As bad as things are in BGM as private company this unit could survive and make a nice profit. Margins may not be what they were but even with compressed prices margins are decent. Assuming of course this new entity is run efficiently.

Still we aren’t sure even with all these changes that the end game will be any different. As the surest path to obscurity is gaining an increasing share of a declining market. Consider that it wasn’t that long ago that every household had a VCR. Yes, although it seems like distant memory VCR’s were all the rage. Today just as records where replace by CD’s which in turn have been replaced by streaming music services so too have VCR’s have been replaced. This is the path conventional glucose monitors are on and there isn’t much anyone can do about it.