It’s about time.

It’s about time.

Last week Diabetic Investor noted that the one thing you can count on from Roche is to do the absolutely wrong thing at the worst possible time. We were reminded of this fact when the company announced they have received FDA clearance for their new Accu-Chek Aviva Plus test strip. According to a company issued press release; “The new maltose-independent test strip is designed to prevent the interference of maltose on blood sugar readings which can occur in rare cases when drugs containing or metabolizing to maltose are parenterally administered. The Accu-Chek Aviva Plus test strip is cleared for patient self-monitoring of blood glucose and can be used with the proven Accu-Chek Aviva system.”

Now before everyone starts thinking that Diabetic Investor is being overly cynical as getting away from the maltose interference issue is in actuality a good thing, one has to ask why this process took so long. Just as a reminder back when this issue first came to light Roche was the ONLY glucose monitoring company that stood by their strips which used the PQQ enzyme and actually handed out marketing material defending their PQQ test strips. Although Diabetic Investor felt the issue was somewhat overblown, the fact remains it gained traction in the marketplace and became a much bigger issue than it really was. Other companies which also used the PQQ enzyme understood this and instead of defending their test strips took steps to rectify the issue.

Although the company already had a host of issues their defense of their test strips disturbed physicians and patients creating the impression that Roche was out of touch with the diabetes community. It also created another opportunity for their competitors who quickly jumped on the fact their test strips did not have this issue. Simply put Roche misread what was going on and rather than make quick and decisive changes they created yet another problem for themselves.

The fact that they have finally dealt with this issue, years after everyone else, is just another example of how badly this unit is being managed. The reality is the company cannot undo the damage that has been done to their reputation and this new test strip will do nothing to improve sales or stop further share erosion.

This announcement is also notable for another reason as no mention was made of the other Roche monitors which still use test strips with the PQQ enzyme. To Diabetic Investor this confirms something we have long suspected in that Roche will soon discontinue these monitors and place all their eggs in the Aviva basket. As noted previously the company is building additional manufacturing capacity for the Aviva test strip and will eventually phase out their manufacturing facility in Puerto Rico. This move falls in line with what others are doing as it is primarily designed to lower costs.

As pricing pressure continues to intensify all the major glucose monitors are doing whatever they can to lower their cost in a desperate attempt to maintain margins. The one problem with this emphasis on becoming a low cost entity is the glucose monitoring model as to how test strips are sold is beginning to change. Today nearly 30% of patients receive their test strips via the mail; a number everyone believes will increase in the future. It’s just a matter of time before glucose monitoring companies will follow the example set by BGM newcomer TelCare and give their patients the ability to re-order test strips right from their meter or in some cases their mobile apps which works with the meter, test strips which will come from DME’s owned by the meter companies. Basically in the future, which is quickly approaching, BGM companies will cut out the middle man and sell test strips directly to the consumer. This is not only cost effective but practical and very patient friendly.

Looking ahead Diabetic Investor see the day when the patient’s monitor reminds the patient it’s time to re-order test strips or even better lets the company know the patient is running low and the new supply of test strips is sent out automatically. This is not unlike what insulin pump companies do with their patients, as we have noted before nearly 75% of Medtronic (NYSE:MDT) patients are set up for automatic supply replenishment and it’s well known that pump supplies are hugely profitable for the company not just because supplies are cheap to make but also because Medtronic is vertically integrated and does not have to deal with any middlemen.

Selling test strips direct to the consumer also has another advantage as companies who are successful at this model will no longer be subject to the demands of managed care companies and wholesalers who are continually playing one meter company off another to get the lowest possible price. Diabetic Investor has noted before that BGM companies have lost control over pricing and now must capitulate to the demands of managed care or risk losing valuable market share. The most recent example of this came when Bayer announced that patients would no longer be able to order test strips from Liberty Medical Supply. Rather than meet Liberty’s demands for even more price concessions and see margins erode even further Bayer said enough is enough. Better to sell fewer strips at higher margins than sell lots of strips with no margin.

Just in case anyone doubts this direct to consumer model won’t work for BGM take a look at what happened with personal computers. At one time mail order computer makers such as Dell were considered inferior and many consumers felt that if they did not buy their computer from a retail outlet it couldn’t be that good. Once computers became a commodity mail order makers such as Dell became THE consumer preference forcing the competition who sold through retailers to match Dell’s lower prices and accept lower margins.

Given that test strips are widely reimbursed the difference in the BGM market is convenience, making the patient’s life easier. While there will always be a percentage of patients who will continue to pick up their test strips at their local pharmacy, the fact is more and more patients will prefer the convenience of having their test strips shipped to them directly. As noted earlier this model has worked very well with insulin pump supplies and Diabetic Investor sees no reason why it won’t work with BGM supplies. This direct to consumer model also happens to be working for continuous glucose monitoring companies.

Just as the BGM is set to make another change the folks at Roche are behind the curve being reactive instead of proactive. Sadly this has become standard operating procedure at the company as they just can’t come to grips with what’s truly happening in the marketplace. But this fact in a nutshell is the true problem at Roche as they are incapable of taking realistic view of not only where the market is today but where it’s going in the future. As Charles Merriam wrote; “The future belongs to those who fuse intelligence with faith, and who with courage and determination grope their way forward from chance to choice, from blind adaptation to creative evolution.” Roche unfortunately continues to live in the past and continues to demonstrate their inability to grasp the change that’s going on before their very eyes.