Has Bayer overplayed their hand?

Has Bayer overplayed their hand?

Anyone who has watched the World Series of Poker has heard the commenters talk about maximizing the value of a less than great hand. With thousand participating in this tournament it’s not unusual to see an experienced poker pro win big pots off lesser experienced amateurs, even when the amateur has better cards.  These pros that literally play thousands of hands per year are well versed in how to maximize the value of every hand they play.

There was a time Diabetic Investor believed that Bayer was about to earn a seat at the final table as up to this point they have handled the sale of their diabetes device unit like an experienced poker pro. Bayer knew they didn’t have that great of a hand as this unit has once again fallen to fourth place, has virtually no managed care presence and a user base of older non-insulin using patients. They did have some nice products like the ContourUSB but overall the unit had more problems than solutions. Yet Bayer knew this being the wacky world of diabetes there were plenty of potential buyers who would look past all this and believe (foolishly) they could turn things around.

As it turns out many of these companies aren’t all that different from a person with a gambling problem, as no matter how much they win or how many times they get burned at the table, they come back for more abuse. It’s no accident that Siemens (NYSE:SI) has emerged as the leading candidate to buy this beleaguered unit and that Panasonic, a company with years of diabetes device experience was the first to officially drop out of the process. Sanofi (NYSE:SNY) remains a possibility but the company is still reeling from Apple’s decision to change the adaptor on the iPhone 5 which will basically end any chance their iBGStar had to gain traction in the marketplace.

Basically Sanofi has a decision to make; do they remain committed to their current diabetes strategy which means they must have a device unit or do they step away from devices (beyond insulin pens). Now the fact that Sanofi has to make a decision is a problem as this is one thing the company isn’t very good at. For a company that has publicly stated they want to become the dominate player in diabetes, they sure have a strange way of going about it. With the Lantus patent expiring in less than two years and a generic on its way, the company is about to learn that payback is a bitch.

For years the company has pushed through price increases for Lantus as they knew that they were in the catbird seat. While Novo Nordisk (NYSE:NVO) tried to steal share with Levemir, Lantus has remained king of the insulin world. A fact which will change when the Lantus patent expires and a generic version becomes available. Now to be clear here Diabetic Investor does not expect a generic Lantus to appear the day after the patent expires nor do we believe it will cost 80% less than Lantus. However, a generic is coming and when it gets here it will cost 30 to 40% less than Lantus which will give payors incredible leverage, in effect the table will turned and it will Sanofi’s turn to roll back prices or lose valuable market share. As we noted before payback is a bitch.

Now getting back to Bayer, who should send a thank you note to the folks at Sanofi for helping drive up the price for their diabetes device unit, the question is with Sanofi unable to make a decision did they overplay their once strong hand. Is it possible that Siemens knows that Sanofi is wavering and is basically telling Bayer take it or leave it?  The reality for Siemens is if they really are committed to owning a glucose monitoring company, and some would say this fact alone means they should be committed,  there are others, i.e. Abbott (NYSE:ABT), who would be delighted to sell their units at the right multiple. And let’s not forget about Roche, a company that can’t seem to cross the street without one problem or another. Even with their mismanagement the unit still is a cash cow and does have all the necessary elements that a buyer would need, i.e. global scale, managed care presence and brand name awareness. While the unit is shadow of its former self and the brand has been tainted, Roche could reap a tidy little profit and get rid of one huge headache by selling this troubled unit.

Considering the cards their holding, the amount of money on the table and the cards on the table it might be time for Bayer to cash in and not risk getting burned by the turn or river cards. A real poker pro knows when it’s time to take their money and not overplay a less than great hand. They know when they have a sucker sitting across the table but even suckers get lucky once in a while. Given this possibility Bayer should follow the advice of Canada Bill Jones, a famous poker player who said; “It’s immoral to let a sucker keep his money.”