Is there a model that works?

Is there a model that works?

With all the turmoil in the conventional glucose monitoring market one question keeps getting asked over and over- “Is there a BGM model that works?”  Can a BGM company still make a reasonable profit in this new environment? Can any of the existing players adapt to this environment or is a completely new approach needed? Ok – so that’s more like three questions and truth be told Diabetic Investor isn’t sure we have the right answers or perhaps more realistically whether there are any right answers.  The simple fact is the market is changing, will continue to change and there are just too many variables to state with any degree of certainty what the future will look like.

Yet in our never ending quest to look into the future and predict how it will play out, Diabetic Investor will do our best to provide some answers. First off, yes we do believe there is a business model that works PROVIDED a company has realistic expectations. Everyone must acknowledge a few structural facts about the BGM market; first this is no longer a medical device market and is now a commodity market where price trumps performance. Second, the days of obscene margins are gone for good. Third, the market is likely to remain stagnated with little real growth. Fourth, whiz bang technology means NOTHING and is not the road to riches. Fifth and finally, healthcare reform is still in its infancy and will greatly impact the market as this dynamic continues to play out. Or put another way, even the best laid plans can turn into garbage as there are just some things that can’t be controlled and healthcare reform is one of those things.

Given these market dynamics it should be obvious that company expenses must be in line with expected profit margins. However, and this is critical, it will take more than a lean and mean operation to be successful. This is one reason Diabetic Investor isn’t sure that any of the current BGM players will remain in the market. These companies understand the need to control costs but have forgotten that cost containment is just half of what’s needed to be successful. Demand generation should not be ignored and yes Diabetic Investor believes it is possible to generate greater demand. Interestingly one big player is already experimenting with demand generation as LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), is currently testing a program which incentivizes patients to monitor their glucose on a regular basis. Although the test is in the early stages this is a very positive step forward.

In the future Diabetic Investor believes that physicians will also be incentivized based on patient outcomes. Already we are seeing programs which either pay physicians a bonus based on outcomes or provide physicians with a specific dollar amount for each diabetic patient they treat. In the straight bonus approach the physician is paid directly, i.e. $500 for each patient whose A1C is under 7. In the specific dollar approach a physician is paid a set amount for each patient they manage, say $3,000, that amount can be allocated anyway the physician sees fit. Should it cost the physician less than the specific dollar amount to manage the patient they keep the difference, if they go over that amount it becomes the physicians responsibility. Now we have no idea which system will become the standard but one thing is pretty much certain in the future payors will incentivize physicians for better outcomes.

In this new world Diabetic Investor sees glucose monitoring as critical as it is the first indicator of how the patient is doing. Companies would be wise to continue their development of integrated monitors that allow the patient to share their readings with their physician. The problem with most of the systems which have been developed to date, with the possible exception of the TelCare monitor, is it’s just too damn complicated to get the readings from the monitor to the physicians. Most of today’s systems involve the patient who must first download their readings from their meter to their computer or smartphone which then in turn delivers the readings to a software package or app which then transmits the readings to the physician. Even some of the newer systems which transmit readings directly from the meter to an app are flawed as companies seem to believe that the way cool iPhone is the only smartphone on the market. For any integrated system to work it MUST be smartphone neutral, remember Android is now the dominate smartphone platform, and it must be automatic meaning all the patient has to do is test.  While it seems foreign to major players there is something called cloud computing and it is in the cloud where the future resides.

Just so we’re clear on this point integrated systems are NOT whiz bang technology it’s just the natural evolution of glucose monitoring. Really no different than alternate site testing, small blood samples and fast test results which are now standard throughout the industry.

For BGM to survive as a profitable business it MUST become part of the patient’s diabetes management system. This means that patient’s MUST be educated as to not just what these numbers mean but how they can use them to better their diabetes. This has always been the fundamental flaw with the current crop of BGM companies. Back in the old days when there was double digit market growth combined with truly obscene margins and BGM was the ultimate cash cow nobody cared all that much about patient education. Today when every share point counts, margins are shrinking combined with little or no market growth let’s face facts every test strip used is important. As we have noted on numerous occasions any company that increased average testing frequency by just ONE test per today in their existing patient population would reap millions in additional profit and this is without adding a single new user.

Although it should go without saying because we’ve said it so many times everyone needs to forget about pretty colors, way cool technology and greater accuracy as none of things will sell one more test strip. Other than a patient friendly easy to use integrated system the majority of patients could care less that their meter also can do bolus calculations or calculates average mean glucose. Frankly even integrated systems aren’t what most patients want, the reason Diabetic Investor sees them as critical is healthcare reform will drive their adoption or perhaps more accurately changes to how physicians are reimbursed will drive their adoption.

Now keep in mind we are looking into the future today and as we all know the future is never what we imagine it to be. Who could have anticipated when the market was fat and happy the possibility of competitive bidding and what that would do to the market. Who could have foreseen the very real possibility that with the exception of LifeScan, that Bayer, Abbott (NYSE:ABT) and Roche would be delighted to sell their BGM units if they could get anywhere close to a decent multiple. About all we know for certain is what we see today and that what is certain today will become different in the future. Yet we do know that if the companies in this business don’t do anything other than cut costs they won’t be in the business much longer and that’s not speculation that’s a fact.