Disruptive Technology – The Final Nail in the BGM Coffin?
Listen to almost any earnings call these days from a diabetes drug company or any pharmaceutical company for that matter, and you’re sure to hear about which of their drugs are coming of patent and will soon face generic competition. While the threat of a generic is common in the drug world, up until now the same rules have not applied to diabetes devices. As Diabetic Investor has noted previously when it comes to protecting their intellectual property diabetes device companies are like lions protecting their cubs, only more vicious.
Some may recall that Smiths Medical basically had no choice but to exit the insulin pump business after settling an IP lawsuit brought by insulin pump market leader Medtronic (NYSE:MDT). It’s also well known that at one time or another every major BGM company has used IP lawsuits to prevent companies from coming to market or as a way to blunt possible competition. The same is true in the CGM arena where Dexcom (NASDAQ:DXCM) until recently was being pursued by Abbott (NYSE:ABT) over IP issues. The simple fact is IP and diabetes devices go together like peanut butter and jelly.
Think for a moment what would happen if a company found a way to get around all the established IP in the glucose monitoring arena and was able to successfully come up with a generic test strip. Next think of what would happen if a small company had a much larger company backing them financially therefore giving the smaller company the resources necessary to fend off what surly would be an onslaught of lawsuits. Finally think of what would happen if this small company somehow got their generic strips onto the market and sold them for a fraction of the cost the big boys do. Think insurers and Medicare just might be interested in saving a few bucks in what has already become a commodity market?
As crazy as this hypothetical situation may sound; it could actually become a reality and sooner than many think. While Diabetic Investor is not ready yet to release everything we know on this subject, we are willing to speculate a little on how such a scenario would impact the BGM market.
First it’s important to note that the impact of generic test strips would not have a material impact had the current BGM companies not allowed the BGM market to become a commodity market. Or put more bluntly they have no one but themselves to blame for the situation they themselves created.
Next it would be foolish to ignore how well received generic test strips would be received in the marketplace. Since the majority of patients believe that all glucose monitors are basically the same, common sense says they also wouldn’t mind saving a few bucks on an item they use every day. Given that to patients all meters and test strips are ok because they are approved by the FDA, Diabetic Investor does not believe these patients, who are saving money by using these strips, would have any quality concerns with a generic test strip. Keep in mind these patients are being encouraged by their insurers and physicians to use generic drugs, so why would generic test strips be any different?
While it should be rather obvious insurers will embrace generic test strips as well the reasons go beyond the fact that generic test strips cheaper. Just as insurers are now pitting on company against another to squeeze even greater price concessions, think of the stranglehold they could put on the big boys with generics on the scene. Diabetic Investor can only imagine what negotiations between the big boys and insurers would be like if generics were available; our guess is the insurers would use tactics that would make a Chicago ward boss blush.
And did we mention that Medicare would jump on generic test strips faster than a high school boy on a prom date. Our government which just happens to be going broke and sees the coming influx of Baby Boomers becoming Medicare eligible would save millions with generic test strips. Oh, we forgot to mention that these are no ordinary generic test strips as they would work with the majority of existing glucose meters. Simply put the patient would not have to switch meters but would just be using a different and much cheaper test strip with their existing meter. Think that just might make a difference?
Now before all the folks at the major BGM companies start updating their resumes, it’s important to note that as of today this is purely a hypothetical scenario. However, given the cost differential and the fact that everyone but drug and device companies absolutely loves generics; this hypothetical could soon become a reality. Especially when there just might be a very large company out there who is not currently in the diabetes space that has the resources and brass to make this happen; a scenario which becomes more intriguing when this very large company does have diabetes in their DNA and relishes the opportunity at shaking things up.
On second thought, it might not be bad idea for the folks at the major BGM companies to start updating their resumes. Even without the introduction of generic test strips more layoffs are coming; so why not get a jump on everyone else and start looking now.