Is there any hope?
After seeing the results released by Abbott (NYSE:ABT) this morning, where sales for the diabetes unit decreased 7.1% for the quarter and are only up an anemic 2.6% year to date, one has to wonder is there any hope at all for the glucose monitoring business at all. To put Abbott’s results in perspective yesterday Johnson and Johnson announced sales of their diabetes care unit decreased 5.3% for the quarter and is down 0.5% year to date. Roche who also announced yesterday saw sales fall 5% for the quarter while sale year to date have also fallen 5%.
Now it would be easy to take these results and gloat a little as Diabetic Investor has been warning for years that unless these companies got away from their fascination with technology and started educating patients about the value of testing, they would see sales decline. We’ve been saying for years that monitors had become a commodity and that reimbursement trends were unfavorable. Finally we noted that the future isn’t getting any better and if these companies do not make a dramatic departure from the past their very existence is at stake.
The real question is can any of the major BGM players survive long term and adapt to the new world of glucose monitoring. So far all the major players have followed the standard corporate playbook and are cutting costs wherever they can. However, as we noted yesterday while cost cuts will improve margins in the short term, cost cutting is not a long term solution. We further believe that there is no amount of cost cutting that can offset the impact of competitive bidding.
Next we suspect we will see further consolidation in the industry, already Bayer has thrown in the towel and based on what we heard yesterday we suspect that Roche will be the next company put up for sale. The issue here isn’t if consolidation will occur but who the players will be. In fact we really shouldn’t call it consolidation as that term implies that existing players in the market will buy up their competition, something we believe is unlikely for a wide variety of reasons. What’s happening in BGM is more like rearranging the deck chairs on the Titanic after the ship has hit the iceberg. Diabetic Investor could care less who wants into this market or how much money they have; no one and we mean no one can change where this market is and where it’s going.
Looking ahead we see a scenario where the major players, whoever they are, will be forced to accept lower margins and growth will be flat for the foreseeable future. About the only way there would be any impactful growth it will come from their existing customer base, basically getting existing patients to test more frequently. We further suspect that majors will decided they don’t want to play in the Medicare market and will basically surrender this market to low cost imports. It’s not that this market isn’t large or important; rather the majors just can’t afford to compete. This is why non-Medicare insulin using patients will be the most coveted patient of all.
As we move toward the future many of the companies will remain in the past as Abbott was today. When asked about their diabetes unit Miles White, Abbott’s Chairman and CEO, feel into this trap and noted somewhat surprisingly that he believed new technology would get this unit growing again. Like so many of the old guard he just can’t come to grips with what’s really going on in the marketplace and can’t or won’t open his eyes to the new realities of the market.
With Abbott splitting into two companies and Miles running the one which has the diabetes unit perhaps he’ll go for the BGM trifecta and actually go out and acquire a competitor. Having already acquired MediSense and Therasense and effectively ruining both companies, maybe the third time will be a charm. And considering Diabetic Investor is not aware of any BGM companies on the market which have Sense in their names, Miles just might get it right this time. Maybe that was the problem all along, maybe it wasn’t poor management but these companies were actually somehow cursed because of their names.
Yes we know that sounds crazy but keep in mind this is the wacky world of diabetes devices and from what we’ve seen over the years management isn’t necessarily living in the real world. Rather than acknowledge that mistakes have been made and that money has been misspent, it’s easier to blame a unit’s poor performance on some crazy factor. Looking at his history Mr. White seems to believe that acquiring BGM companies are like eating peanuts where one just isn’t enough. The real problem is acquiring a BGM company is more like drinking martini’s, where one isn’t enough, two are just about right while three more makes one hit the floor.
Given his delusional belief that the diabetes unit can somehow turn back the hands of time and grow again, nothing Miles does when Abbott finally splits into two companies would surprise Diabetic Investor. We’ve known the diabetes device world is wacky, given his comments today we’re seeing evidence that some executives are wacky too.
