Does it really matter who buys Bayer?
It seems that once again Diabetic Investor has people talking and all aghast over who is buying Bayer diabetes and for how much. During the ADA conference in Philly Diabetic Investor was told by several well-placed sources that the deal was consummated with the winning company being Panasonic who was willing to fork over $1 billion plus Euros, or about one time sales. Now there are some who seem to believe that a large well known private equity firm is actually going to acquire Bayer diabetes and Panasonic. There are still others who believe it will be neither Panasonic nor a private equity group.
While Diabetic Investor remains confident we were given accurate information, the real question should be does it really matter who acquires this unit. Or perhaps another way to look at this is not what the winner bidder gets but what are their expectations and plans for the future. The reality is this becomes a pretty ugly picture if one only looks at where Bayer stands today. They fallen to fourth place behind Abbott (NYSE:ABT), they have no visible presence in the managed care arena, their Medicare business will likely never recover from their decision not to do business with Liberty Medical Supply and their existing patient population is void of the users everyone covets, patients following insulin therapy.
In a strange way whoever buys this unit must do what Sandra Peterson did when she was running it, throw out the old, innovative and push the edge of the envelope. Even with drastic changes this may not be enough to overcome the dismal dynamics of the glucose monitoring market; a market which continues to see single digit growth rates and declining prices. It should send a very strong message that Bayer’s three main competitors, LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), Roche and Abbott have all taken a look and said thanks but no thanks, and these are companies who would benefit immensely from greater scale.
When it comes to BGM there are basically three ways to grow; get your installed user base to test more frequently, expand the market or buy another BGM company. Now we suppose it’s possible that once someone buys Bayer they could go after Abbott but this seems a huge stretch, so we can basically rule out growth via acquisition. It’s also equally unlikely this new owner will be able to expand the market for the simple reason no one else has been able to do it and unless these people have some sort of magic potion we doubt they know something that everyone does not. Therefore growth comes to down to getting the installed base of patients to test more frequently which could be a huge problem as the existing Bayer patient base is unfavorably skewed towards non-insulin using patients.
Now we suppose there is a fourth possibility in that the new owners could see glucose monitoring as just one piece of a much bigger puzzle in the coming world of interconnected diabetes management. However, spending over a billion dollars is a pretty expensive bet on an unproven new frontier that may or may not even come to pass.
Years ago Bayer changed the face of glucose monitoring forever when they made the then innovative decision to follow the razor/razor blade business model and began giving away monitors for free; a move that was hugely successful, quickly copied and ultimately the beginning of the end for the entire market. Like so many decisions that work out initially what Bayer and their competitors failed to realize was consumers believed it was the monitor and not the test strip used with that monitor that contained all the whiz bang technology. And let’s be honest about it when the market was growing at mid-double digit rates and money is basically falling from the sky why would anyone question this strategy. But as the old saying goes all good things come to an end and when the gravy train of easy growth ended, the damage was already done.
As the glucose monitoring market moved closer and closer to becoming a commodity market, the major players then flush with cash did what all big companies do; they go out and buy more share. Abbott bought Therasense, LifeScan bought Inverness and Nipro bought Home Diagnostics. Then when there was no one left to buy who had enough market share to make an impact on earnings, these now larger companies battled over formulary placement. The big winner here being LifeScan who correctly read where the market was going and used JNJ’s money to secure prime positioning.
Realizing they could either allow LifeScan to dominate the market and keep taking share away or fight back Abbott, Roche and Bayer all began offering co-pay equalization programs in a desperate attempt to offset LifeScan formulary placement advantage but also increasing their cost of patient acquisition. As all this was going on all the players where feeling the heat as after years of price increases payors and the government began fighting back. A fight that was increasingly won by payors who knew that they basically controlled the keys to the kingdom and that if one company who did not meet their demands there was another waiting in the wings happy to take share away from a rival.
This began what basically became a death spiral and led the major players to do what major players do best when a market goes sour; they cut costs and BGM companies did that with a vengeance. Now with cost cut to the bone, no one left to buy and nowhere else to go Bayer could well be on the cutting edge once again only this time in being the first of the major players to take the money and run. As Diabetic Investor has noted on numerous occasions the BGM market will never return to the glory days of double digit growth, nor will pricing pressure ease anytime in the near or even distant future, that horse has left the barn and ain’t coming back.
The simple fact is the BGM market is now a battle for the insulin using patient. Take a look at every new system whether it be the iBGStar from Sanofi (NYSE:SNY), the Verio from LifeScan or the InsuLinx from Abbott all of these monitors are directly targeted at the insulin using patient. Now this is hardly a surprise as insulin using patients test more frequently as they actually need the information a monitor provides to properly dose their insulin. But just as the overall BGM market consolidated so will the quest to capture insulin using patients for the simple reason there is finite number of insulin users, the market is not growing all that fast and the increasing usage of continuous glucose monitoring systems.
Looking at where the market has been and more importantly where the market is headed the executives at Bayer had two options sell now while there is still something to sell or throw good money into a bad market. No matter who the winning bidder is, the real winner here is Bayer.
