History Repeats Itself

History Repeats Itself

At first glance the results released from Abbott (NYSE: ABT) this morning are almost scary – US Diabetes Care sales DOWN 21.6% for the second quarter and DOWN 26.8% for the first half of the year. Perhaps in a signal that the company is basically abandoning the US market the company’s press release states;

“Worldwide Diabetes Care sales increased 1.7 percent on a reported basis in the second quarter, including an unfavorable 1.1 percent effect of foreign exchange, and increased 2.8 percent on an operational basis. International sales growth was driven by continued consumer uptake of FreeStyle® Libre, Abbott’s revolutionary Flash Glucose Monitoring System that eliminates routine finger sticks and finger-stick calibration. In the U.S., sales were impacted by competitive and market dynamics.”

As we expected the company continues to bet the ranch on the FreeStyle Libre, noting that there are now 125,000 patients using the system in Europe. Now before we go on here it’s important we clear something up as many in the diabetes community believe it’s a misnomer to call the Libre a continuous glucose monitor as it does not automatically deliver readings to either a receiver or smartphone. Patients using a Libre must scan the sensor with either the reader or smartphone. Although this is an additional step for the patient to Diabetic Investor it’s the information that matters and when it comes to information the Libre is a CGM.

Perhaps because the company has been talking up the Libre every chance they can combined with the success of Dexcom (NASDAQ: DXCM) and the growing CGM market analysts are starting to buy into the Libre story. A story which looks pretty good at the 10,000-foot level. As the company noted today the growth in Europe has basically been consumer driven and reimbursement is only now improving. Based on our research consumers using the system like it. It seems the company has gotten over some initial issues with the system when it first launched. All in all, the system works and consumers like it.

Yet as everyone knows the big test will come when Libre is available here in the US. The company has already submitted the Libre Pro system to the FDA and based on comments today they see the system being available within 6 to 9 months. It’s unclear when the company will submit the consumer version of Libre to the FDA.  And we should note there are some who have looked at the Libre data set and believe the consumer version will have a difficult time at the FDA due to accuracy issues.

But let’s put these concerns in the rearview mirror and assume that Abbott actually submits the consumer version to the FDA and the FDA approves it, what will market dynamics look like when it finally arrives.  Given that the Pro version likely won’t be here for at least another 6 months we would estimate the earliest the consumer version could be here would be at least a year away likely longer. This gives Dexcom and Medtronic (NYSE:MDT) even more time to capture customers, customers who likely won’t switch systems when Libre is ready for prime time.

The real question is when Libre does get here how does the company position and price the product. Do they like Dexcom and Medtronic target insulin using patients and then fight it out on price/formulary access? If they do this is a major uphill fight and given the company has been financially subsidizing the product in Europe, any discounts given to gain access will just cut into profits. We should also note by the time Libre does get here Dexcom patients who have an Android phone will finally have an app that eliminates the need for a receiver.

In our eyes we don’t see Libre competing with either the Dexcom or Medtronic system. The Libre given timing issues biggest competitor will be the Dexcom/Google disposable system, a system which based on comments made by this partnership will be priced on par with conventional test strips. Unlike the Libre this disposable system will send readings directly to a smartphone – and given that Google is involved we would suspect Android users will actually come first – while Libre users unless some major changes are made would still have to scan the sensor to get readings.

We also suspect Dexcom will have a major advantage when the FDA panel votes tomorrow to allow a non-adjunctive claim. While this will not lock up the insulin using market for Dexcom it does give them a major marketing advantage and makes everyone else meet their threshold.

The simple fact is history is repeating itself here and for Abbott and CGM that is not a good thing. Remember the way cool now way dead Navigator, a product which could have owned the market had the company not mismanaged the FDA filing and then compounded this mistake with a terrible launch strategy when the product was finally approved. By all accounts history is repeating itself – the Libre is a good product just as the Navigator was a good product – yet in true Abbott fashion they are very late getting the consumer version to the FDA a disaster as once again like the Navigator the consumer version of Libre will come to market well behind two established competitors. The company will have little choice but to offer steep price discounts/higher rebates just to get the system on formulary.

In other words, it really doesn’t matter how well the damn product performs, this is exactly what happened to Navigator. Go back in the archives and check it out back in the day almost every expert believed the Navigator was superior to any system available and had Abbott not screwed up the Navigator would be the market leader.

Once again Abbott has developed a very good system which has no chance at becoming profitable.