CVS Buys Longs for $2.6 Billion Implications for the diabetes market
This morning CVS/Caremark (NYSE:CVS) announced they are acquiring Longs Drug Stores for $2.6 billion. Once complete this will give CVS 6,800 drugstores in 41 states. This moves puts pressure on Walgreens (NYSE:WAG) who recently announced they would be cutting back on store expansions. Walgreens currently has just under 6,400 drugstores in all states expect Alaska where they plan on opening a store sometime next year.
This move by CVS follows a pattern of consolidation in the industry as drugstore chains pursue a bigger is better strategy. With a store on virtually every corner both CVS and Walgreens seek to combat the growing presence of mail order in the space. With Medco’s (NYSE:MHS) acquisition of PolyMedica and their Liberty Medical Supply unit, the largest mail order diabetes supply company, the company has nearly 4 million patients with diabetes.
Basically what’s shaping up here is what is the most cost effective way to deliver drugs and supplies to the patient with diabetes. But this move goes beyond just acquiring and retaining the diabetic consumer and impacts suppliers. Each of the major players is already lined up with a blood glucose monitoring company that produces their store branded monitor and test strips. Medco has a relationship with privately held AgaMatrix, while CVS and Walgreens use Home Diagnostics (NASDAQ:HDIX). All three companies are more aggressively promoting their store branded products putting even greater pressure on the name brands to lower prices. CVS has gone as far as actively promoting their store brand as an alternative to the more expensive brand products.
To Diabetic Investor it’s only a matter of time before companies like Medco chose their AgaMatrix monitor as the primary choice for all their customers. Medco is basically in a win-win situation as the larger players either cave into their demands for lower prices or risk losing valuable share. CVS and Walgreens could pursue a similar strategy by actively promoting their store brand every time a patient picks up a prescription.
This is why it’s imperative that the major players develop and follow a clear strategy for their product lines. We have reached the point where performance and features are ubiquitous. Basically everyone including the store brands has fast test results, alternate site testing, no-coding and ability to download results to a computer. About the only area where AgaMatrix and HDI cannot compete is formulary placement. Like it or not when it comes to the big four BGM players, formulary placement is the equivalent to location with real estate, it means everything. This is the reason the little two Bayer and Abbott (NYSE:ABT) will come together, scale gives them opportunity to spread their costs over a larger patient base while more effectively competing for formulary placement against LifeScan, a unit of Johnson and Johnson (NYSE:JNJ) and Roche.
Right now neither Abbott or Roche have a clear strategy and likely couldn’t hit water if they fell out of a boat. Abbott really has two choices either throw even more money at their struggling diabetes unit or sell it outright to Bayer. Roche for their part still has the number two position in the market even with their continuing loss of share. Roche could steal Abbott’s unit from Bayer but even with this move they would need to develop a some type of strategy to take on the LifeScan juggernaut.
The clock is ticking for Abbott and Roche and as Napoleon once said; “Strategy is the art of making use of time and space. I am less chary of the later than the former. Space we can recover, lost time never.”