It’s all about …..

It’s all about …..

There is no question the folks at Abbott (NYSE: ABT) feel good about the FreeStyle Libre. There is also no question that the Street likes the product and there is no question at all that the analysts haven’t a clue about the CGM market. Now before we go any further it’s time to get something straight from a technical definition the Libre is NOT as it is configured a continuous glucose monitor. It does not deliver readings continuously as the patient MUST interact with the device to see a reading. This is a critical difference that all the analysts miss.

Yes, as we have been writing there will be a brutal price war between Abbott, Dexcom (NASDAQ: DXCM) and Medtronic (NYSE: MDT). We are also going to here a lot about the “total” cost of a system, not just what a sensor costs. None of this matters much as we see the CGM market headed down the same path as the insulin pump market which could give payors hope and trepidation.

The hope is obvious, to drive costs lower payors can play each company off each other. This is turn will lead to “value-based” exclusive deals which are supposed to be based on patient outcomes but really are just ways to extort lower prices. We see Medtronic being the last major player to enter the stand alone CGM market going down this road as they have done this with pumps.

The trepidation comes as the last thing payors want is to create another Frankenstein as they did with Medtronic. Payors don’t want to see any of these CGM players end up as the only player or as one dominant player and two also rans. The best of all worlds for payors is having two main players fighting it out and one minor player looking to be a major player. This keeps everyone honest and prices reasonable.

What everyone keeps missing is that each CGM offering will be attractive to different and large patient segments. Believe it or not we see intensively managed multiple daily injection (MDI) patients favoring the Libre given they only need to know what their levels are when they dose. Whereas insulin pump patients will prefer Dexcom for it’s accuracy and connectivity. We also see a strange dynamic developing were each system will help sell the other. Some patients will start with Libre and want to know more and want smartphone connectivity. While others will start on Dexcom and realize hey we don’t need all the bells and whistles and move to Libre.

Initially and this will be driven by payors, insulin using patients will have the easiest path getting reimbursement. Payors don’t care about outcomes all they care about is a CGM that achieves price parity or lower than 4 tests strips per day which is what insulin using patients are supposed to use. The larger market of non-intensively managed patients will be a tougher nut to crack as the burden on the CGM is not just low costs but value. Payors bought a bill of goods from BMG companies years ago that testing would benefit ALL patients not just insulin using patients, this as they learned later was a crock of bull.

However CGM for all patients does have a place just in a different path, as all the system developers need this data to determine whether or not patients are compliant with their therapy regimen. The burden on the CGM players with payors is to show them that their costs for non-intensively managed patients will not change as CGM will just be used differently with these patients then with intensively managed patients. Rather than using the device all the time as an intensively managed patient would, the non-intensively managed patient will use it once in a while.

Perhaps the best way to think about this is for a non-intensively managed patient and their diabetes team a CGM is a discovery and than maintenance tool. First used to discover whether the therapy regimen this patient is on is working and then as check every so often to see of changes are needed. To the payor the cost overall for glucose management won’t change.

Yet before we get to this level the initial stages of this battle are going to be brutal. Abbott has already made it clear price is their weapon of choice, Medtronic has made it clear that price is their weapon of choice and Dexcom will respond. However over time no one wants an extended fight as even Abbott acknowledged that they can’t run a viable business unit when that unit doesn’t make money.

Our thought process is this market is like a cross country flight with some turbulence during the middle of the flight. This turbulence will give way to a smoother path with all the passengers arriving safely. This market is large enough and growing fast enough to support Abbott and Dexcom with Medtronic regulated mostly to tying their sensor to their insulin pump customer base. The only way this doesn’t happen is if everyone leaves the reservation and goes completely nuclear. If this just becomes a race to the bottom, the lowest cost possible no one wins, not the companies, not the payors and for sure not the patients.