How low can they go?

How low can they go?

“Diabetes Care sales were affected by further reimbursement cuts and intensified pricing pressure.” This quote comes from Roche who announced earnings this morning which noted that sales for this unit declined yet again another 5% in the first quarter. While it’s refreshing that the company is finally acknowledging that this unit is having its share of issues, the company like so many others really isn’t sure what if anything they can do to correct these problems. Also like everyone else about the only strategy that seems to be considered are further cost cuts.

We’ve said it before and we’ll say it again companies in the glucose monitoring market basically have two choices, cut costs or try and increase sales.  Based on what’s been going on it seems as though everyone has given up on the idea of trying to increase sales and focuses solely on cutting costs. The problem here is costs cannot be cut to zero and based on what we’ve seen so far we’re not sure how much more cost cutting can be implemented.

The fact that nearly everyone has given up on the concept of increasing sales should send a clear message that it’s just a matter of time before these units are sold, spun off as private entities or allowed to die a slow and very painful death. The harsh reality is with the possible exception of market leader LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), Abbott (NYSE:ABT), Bayer and Roche would love nothing better than to unload their diabetes device units and reinvest the proceeds in units that actually have a future.

Yet as we witnessed when Bayer tried to sell their unit, this process isn’t as easy as it appears. Bayer thought they had a deal with Sanofi (NYSE:SNY) only to see the deal fall apart at the last minute. With no plan B the company is now stuck with a unit they don’t want and has surprise, surprise instituted further cost cuts. Not a day goes by without Diabetic Investor hearing a rumor that this company or that company is selling yet so far no one has found a dance partner.

We are quickly reaching the point where Roche, Bayer or Abbott will basically surrender and sell at a hugely discounted price just to be done with it. Diabetic Investor suspects given the dismal market conditions that no option, however far-fetched is off the table. With margins shrinking by the day, growth virtually nonexistent and little prospect that anything will change anytime soon the larger companies who must satisfy the demands of the stakeholders are feeling the heat. As noted earlier cutting costs is just a short-term solution, like using a Band-Aid for a knife wound.  Soon these stakeholders will demand something, anything be done as diabetes devices are quickly turning into an endless money pit.

Considering how bad things are one has to wonder who would be crazy enough to buy one of these units. Diabetic Investor actually sees several possibilities here. First, it would not be out of line to believe that a private equity group would pursue a roll-up strategy and try and make the market a two-horse race between the rolled up unit and LifeScan. Second, an insulin company might just try and do what Sanofi wanted to do but couldn’t execute, that is start selling diabetes management systems rather the individual pieces of the system. Third, one of the little three (it used to be the Big Four but given the way things are going it’s now the Big One – LifeScan and the little three Roche, Bayer and Abbott) could buy the other two, not unlike option one the main difference being that unlike a private equity group they would at least have knowledge of the industry, then again maybe this isn’t a good idea.

To Diabetic Investor the question isn’t when something will happen but how much pain the little three needs to experience before they cry uncle. It’s obvious from what’s going on they are ill-equipped to deal with what’s going on as they just can’t get beyond using cost cutting as their lone strategic option. They continue to live under the delusion that somehow magically competitive bidding will go away and that the market will return to the glory days of long ago.  Keep in mind these are the same people who knew competitive bidding was coming, knew it had the potential to devastate the market and what did they do, nothing, nada, zilch.  All of sudden they took their heads out of the sand and noticed that Rome was burning. Diabetic Investor wonders will they sit and watch Rome burn to the ground or actually do something other than yell fire.