How low can they go?

How low can they go?

This morning the Kroger, a grocer with more than 2,400 located in 31 states, announced a new program where patients would pay just $4 for their glucose test strips. According to a company issued release: “The Kroger Co. (NYSE: KR) Family of Pharmacies now offers a program that will help diabetes patients with private insurance save with a $4 co-pay on Kroger Premium test strips. For example, if an insured patient is paying a $40 co-pay for 200 strips each month, the Kroger Premium $4 co-pay program will continue to provide that customer with 200 strips and offer a savings of $36 a month.”

Kroger is just the latest retailer to play the co-pay limbo game, seeing just how low they can go, a game which began years ago when co-branded glucose monitors began appearing on the scene. A move which Diabetic Investor predicted, with great accuracy, would be the beginning of the end for the glucose monitoring market. Kroger now joins the world’s largest retailer Wal Mart who’s also gone to cheap test strips in an attempt to attract and retain customers with diabetes. These moves came about largely to combat the war between glucose monitoring companies each of whom has come out with their own co-pay equalization program. Programs  that were launched to provide a level playing field for patients making it so that any patient could use any system regardless of whether that particular system has favorable formulary position.

Now Diabetic Investor does not like to gloat, but if this isn’t proof that meters have gone from medical devices to mere commodities, we don’t know what is. The truth is retailers like Kroger and Wal Mart now see glucose test strips not as profit centers but as loss leaders designed to bring more people into their stores. They know that only about 10% of all patients actually pay cash for their diabetes testing supplies and that majority of patients with private insurance are seeing their co-payments increase. They also know that the majority of patients could care less about which brand they use and with increasingly tight pocketbooks they know consumers are looking everywhere they can to save money.

What’s more important to retailers is not how much they make on the sale of test strips rather capturing the consumer with diabetes, a consumer who on average is worth $5,000 per year to the retailer. Consumers with diabetes are like gold to retailers as not only do they spend more than non-diabetics, they visit the store more frequently and tend to buy products that carry higher margins.  This is the reason both Walgreens, CVS and Rite-Aid are all restructuring the way they do business, trying to transform themselves from merely providing the patient a place to pick up their prescriptions to a become part of the patients diabetes management team.

Considering the way things are going Diabetic Investor sees it only as a matter of time before one of these retailers decides to provide test strips for free. The hook likely being that the consumer must refill all their prescriptions at the retailer, use their store branded product or both. The goal remains the same; capture the consumer with diabetes and do whatever is necessary to bind them to the retailer.

It goes without saying here that the big losers here are the branded BGM companies, who must feel like they are under constant attack.  The simple fact is the branded companies have a choice to make, either accept that the fact that prices will continue to erode or try and reinvent themselves into a provider of diabetes management systems not diabetes hardware. If, and this is a huge if, a company can show a retailer like Walgreens or CVS that they have a system which helps bind the consumer with diabetes to their retail brand and added value to the retailer, these retailers would jump on this brand faster than a cheetah casing its prey.

Perhaps more amazing here is that companies like Sanofi (NYSE:SNY) are living under the delusion that they can build a better mouse trap, or put more accurately they believe they can buy someone else’s mouse trap, rebrand it and all of sudden it will magically capture share. As Diabetic Investor has been reporting, while it boggles the mind, Sanofi is still interested in buying Bayer’s dysfunctional diabetes device unit. Now Diabetic Investor has no idea what’s going through the heads of the folks in France but whatever it is, they just might want to take a step back and actually think about what they are about to do. If that doesn’t work, and to paraphrase the words of Pluto from the Delta house, it’s time to start drinking heavily.

Now before everyone starts jumping up and down, screaming that this is why all this whiz bang advanced technology is the savior for the BGM market, stop right there and get real. The fact is while this technology can be helpful and could possibly improve patient outcomes, it comes at a time when no one and we mean no one wants to pay for it.  The only way these systems move from theory into reality is for one of two things to happen. Either we go from a healthcare system that reimburses for outcomes rather than procedures and treatments or these systems prove they can generate revenue for retailers or savings for insurance companies. Unless these changes come about the diabetes device world, conventional glucose monitoring in particular, will continue to see more price erosion.

Frankly Diabetic Investor isn’t sure the current crop of branded companies can make this transition from selling hardware (meters and strips) to selling software based solutions. We’re even less convinced that newcomers like Sanofi have the imagination needed to think way out of the box and offer something completely different.  The harshest reality of all and most likely the most difficult to accept is the fact that even if major changes are made there is no guarantee they will be anything more than window dressing.  About the only thing that anyone knows with any certainty is that the old way of doing business doesn’t work and that market conditions will not improve.  Unfortunately for most BGM companies it’s another lump of coal in their Christmas stocking, bah humbug.