It’s only going to get worse

It’s only going to get worse

Now that Johnson and Johnson (NYSE: JNJ) has reported their results our attention turns to Abbott (NYSE: ABT) who reports tomorrow morning and Roche who reports Thursday. Thursday is also the same day that the FDA is conducting a panel meeting considering Dexcom’s (NASDAQ: DXCM) request for a non-adjunctive claim. A claim that Diabetic Investor believes will be granted. Add it all up and a very bad situation for conventional glucose monitors believe it or not is about to get worse. Here’s why-

As we have noted many times the most frequent testers are insulin pump patients, followed by patients following multiple daily injection (MDI) therapy. Although insulin pump patients make up less than 5% of the diabetes patient population they account for almost 20% of all test strips used. On average insulin pump patients test their glucose levels 6 times each day. Add in MDI patients who test on average four times each day and it’s easy to see why conventional BGM systems are in a death spiral.

The fact is CGM usage is increasing with both insulin pump patients and MDI patients. Let’s look at some quick back of the napkin math. Let’s assume for a moment that there are approximately 1 million patients using an insulin pump of which 30% also use a CGM. With a non-adjunctive claim these patients would no longer have to confirm a CGM reading prior to dosing. Therefore, these patients would go from using 6 strips per day to just two for calibration purposes. That’s 1.2 million test strips PER DAY taken out by CGM.

But the carnage does not stop there. Let’s say there is another million patients following MDI and 20% of these patients use a CGM, that takes another 400,000 test strips PER DAY out of the system.

Had enough yet? Sorry but it gets even worse as think about what happens when Dexcom/Google launches their disposable system. A system which will just increase CGM usage among insulin using patients.

Not to pile on here but some pesky facts aren’t helping any either. As we noted just the other day GLP-1 usage is also increasing a therapy which does not require glucose monitoring.

Are we finished, sorry but no. CGM usage will continue to increase taking even more strips out of the system. GLP-1 usage will continue to increase meaning new strips will not enter the system.

Now just for grins and giggles lets add in some additional pesky facts, prices for test strips continue to contract. Competitive bidding is not going away either.

Ok by now everyone is crying uncle so we’ll spare any further pain that is of course unless your Dexcom or Medtronic (NYSE: MDT) the two leaders in CGM. Oh and did we mention that everyone wants to be in CGM and these systems will just continue to get better.

What’s the fastest way to head down the tubes, gain an increasing share of a declining market that has the added benefit of price contraction. Is it any wonder that Abbott and Roche have tried to follow Bayer’s lead and get out of this market? Is it any wonder why they have not been successful with these efforts? Anyone who enters the conventional BGM market now isn’t just stupid they have gone completely off the reservation and are in serious need of therapy.

But wait what about all those way cool whiz bang cloud enabled systems, won’t they save the day? Not in a million years. Not only is this segment of the BGM market commoditizing and running into the same pricing pressures as old fashioned none cloud enabled systems they too will be replaced by CGM. The fact is CGM is getting cheaper, provides better overall data and when disposable systems get here will be widely adopted.

All these systems have proved so far is that interconnected diabetes management works PROVIDED there is enough data to analyze. Given that the average testing frequency remains less than 2 tests per day, all this whiz bang way cool technology has done nothing to change that. We hate to point out the obvious but it does no good to message a patient when there isn’t enough data to analyze.

It’s also obvious that patients who are not currently testing won’t change their behavior without some additional stimuli and better outcomes is not a stimulus that works. If the majority of patients actually wanted better outcomes we wouldn’t be in this situation in the first place as they would be testing as they should. We hate to be redundant but even with all this way cool whiz bang technology the average patient still does not understand what these numbers mean, have no idea what to do with them and when it comes to non-insulin patients or patients using Lantus plus orals, there is no action step taken because of these readings.

For years conventional BGM manufacturers knew that insulin using patients were the geese laying the golden eggs. They also knew while it would be nice to pick up non-insulin patients chasing them really wasn’t cost effective. Now that CGM has arrived these same insulin using patients who once drove the conventional BGM market are moving more aggressively to CGM. Simply put these geese have flown the coup and landed squarely in the laps of Dexcom and Medtronic.

Although we anticipate some very bad results for Abbott and Roche it will be interesting to see how or even if they will attempt to spin the results. Our guess is Abbott will tout the FreeStyle Libre while Roche will avoid the subject altogether. Unless everyone is dense, and remember this is the wacky world so anything is possible, the Libre isn’t financially viable and is unlikely to receive FDA approval. Even if it did it would come to market well behind the existing systems and even worse will be made obsolete when the disposable systems get here.

In words we never thought we’d be writing we actually feel sorry for Roche. Their US business is a shell of its former self and continues to decline. Yes, they do better internationally but not so much better to make up for their dismal performance in the US. Just as the US market has become more price sensitive so too have the major European markets. Nor are these markets immune to dynamics taking place here in the US. Emerging market growth sounds impressive but the simple facts are, yes those pesky facts again, these markets are too small to make a dent.

We have many friends in the conventional BGM market, yes Diabetic Investor does have friends, so allow us to offer some free advice as only a friend can. Make sure your resumes are up to date. It WAS a great ride while it lasted, one hell of a party but the ride and party are WAY over.