If this wasn’t sad it would be funny

If this wasn’t sad it would be funny

Diabetic Investor has learned that Abbott (NYSE:ABT) will join the growing list of diabetes device who’ve been on a recall rampage. According to sources inside the company Abbott will announce a recall of their brand spanking new FreeStyle® InsuLinx glucose monitor early next week. Apparently the reason for the recall is similar to what made LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), recall their brand spanking new OneTouch® Verio®IQ which had issues with ultra-high glucose measurements. The good news for Abbott, or bad news depending on perspective, is that the Abbott recall will impact around 750,000 units, while the LifeScan recall impacted almost 2 million units.

Besides the hit both companies will take to their reputations, these recalls will definitely hit their bottom lines too. Based on Diabetic Investor’s knowledge of the business we’re estimating that each meter cost approximately $15 to manufacturer, which means for Abbott if all the units are replaced it’s an $11 million problem and for JNJ a whopping $28.5 million problem. Now it would be foolish and unrealistic to believe that both companies will replace all of their outstanding units but looking at the numbers it’s easy to understand why they are concerned.

As bad as the financial hit could be add in the hit to reputation and the problem becomes even larger. Think for a moment what must be going on at JNJ as they recently received approval for the OneTouch® Verio® Sync, which as we noted previously communicates with the way cool and way popular (although not as popular as it was) iPhone. Or think what must be going at Abbott, as the company still hasn’t come to grips with the reality of competitive bidding and is considering selling their diabetes device unit which now is likely on the back burner as who in their right mind would buy a unit which just announced a recall. Granted this is the wacky world of diabetes where anything can and usually does happen but even in this wacky world no entity could be that stupid, unless of course Abbott is dumb enough to sell the company for a fraction of its value thus making a deal somewhat irresistible to a possible buyer.

Yet lost in all these recalls is a bigger question as why did they happen in the first place. Granted ultra-high glucose readings are a rarity but as these recalls make clear they do happen and therefore one just might think that the companies would have tested their systems for this possibility no matter how remote it might be.  To Diabetic Investor this situation takes us back to the days when everyone was going crazy over which enzymes were used on test strips as certain enzymes lead to inaccurate readings for patients who were undergoing a rare form of kidney treatment. While this was a relatively rare occurrence, it did happen and forced all the major players with the exception of LifeScan to change the enzymes they used.

Although there is no way of knowing for certain, Diabetic Investor suspects Roche and Bayer are taking particular delight in the Verio® recall as it was LifeScan who was behind the enzyme issue and made a major deal about test strip accuracy. In what was a brilliant move at the time, LifeScan took an issue that really didn’t mean all that much expect to a very minor portion of the population and turned into a huge marketing advantage. LifeScan was able to place their competition on the defensive basically forcing them to prove their test strips were just as accurate as the LifeScan test strip. As has been said by many, payback is a bitch.

Looking longer term Diabetic Investor believes with their huge market share advantage LifeScan will weather this storm better than Abbott. Unlike Abbott who’s battling Bayer for third position, LifeScan is the clear market share leader here in the US and is almost even with Roche for global supremacy. While they will take a hit for sure, it won’t be a knockout blow although we suspect the folks at Universal Biosensor who make the Verio® for LifeScan are getting a good talking too right about now.

It should also go without saying that this series of recalls continues to prove our point on the state of the artificial pancreas project. Honestly if companies can’t even get a simple glucose monitor to work properly how the heck can they get a system which is delivering insulin, a lethal drug when administered improperly, to work properly.  Or how can the continuous monitor work well when the device that’s used to calibrate the CGM isn’t working correctly; as our old computer professor used to say and he’s been quoted widely; garbage in leads to garbage out.

This recall rampage also makes Diabetic Investor wonder what we can expect from the coming flood of cheap imports. Everyone assumes that just because these systems receive FDA approval that they are ok to use and on par with systems made by the larger players. One could argue that if the bigger players can’t get it right how it can be expected that these smaller, less well capitalized companies to get it right. Think of the uproar this could create with patients who besides being told they can no longer use their preferred meter due to costs are then forced to use some no name import which ultimately is recalled because it doesn’t work right.

This whole situation would be funny except for the fact, that as usual it’s the patient who’s getting the shaft. It’s no accident that recalls are occurring with greater frequency at the same time prices paid for these devices continue to decline.  As we have indicated on numerous occasions this pricing pressure has led to device companies implementing drastic cost cuts and there is only so much that can be cut from sales and marketing. This is not unlike what’s happened in the airline or cruise industry, two industries which have also had to deal with declining margins and have had their share of maintenance issues.

The fact is the device companies whose mistakes created these recalls will survive them; unfortunately the same cannot be said for the patients who were impacted by these mistakes. People can talk all they want that these patients do have the option of suing these companies yet no amount of money can make up for the loss of a loved one or pain inflicted to a patient who through no fault of their own suffered because some device company wanted to save a few bucks.