Joined at the sensor
This morning Abbott (NYSE: ABT) issued a press release which stated;
“Abbott (ABT) today announced that the FreeStyle® Libre System, the company’s revolutionary new continuous glucose monitoring (CGM) system, is now available to Medicare patients, having met the codes for therapeutic CGM systems used for coverage by the U.S. Centers for Medicare & Medicaid Services (CMS). Coverage includes all Medicare patients with diabetes who use insulin and who meet the eligibility criteria.”
Naturally in response Dexcom (NASDAQ: DXCM) shares are falling, more like getting hammered. In early trading shares are down almost 10%.
To be honest Diabetic Investor hasn’t quite figured out why analysts and the Street have fallen in love with Libre and out of love with Dexcom. Having researched both systems extensively we see Libre having two SHORT term advantages; no calibration and a “lower” price. Both “advantages” will go away as the FDA will approve the Dexcom system for factory calibration and Dexcom will fight back on price.
In the real world what is becoming increasingly apparent, that is to anyone who bothers to listen to patients, is both systems can coexist quite nicely as each appeals to a different patient. Also lost on analysts and the Street is that neither Dexcom nor Abbott have aggressively targeted non-intensively managed patients and so far, have battled for intensively managed patients. A smart move for the time being as intensively managed patients are the low hanging fruit when it comes to CGM adoption. However, the real money will come from successfully penetrating the non-intensively managed market.
Just as they did when they first launched in Europe Abbott is heavily subsidizing the Libre as it gets off the ground here in the US. Abbott has made the decision they are willing to lose money to gain share, the old razor/razor blade model. Scale is critical in this market as greater scale drives COGS lower while increasing margins. CGM isn’t that much different than BGM in that the more of these things you make the cheaper it is to make them.
The real battle here has yet to be fought and given how aggressive Abbott has been we suspect it will be bloody. The battle to be fought is over patient access i.e. formulary position which means whoever wins with payors wins in the market. Now this is where things will get really interesting as payors aren’t too thrilled when a company gives away for free something they reimburse for. Something Abbott is doing now with Libre and something we see them discontinuing once they start getting on formularies.
In their zest to control costs we suspect payors will NOT reimburse for either system if the patient does not use insulin. While we see the potential for CGM in the non-intensive market payors only care about costs and will limit access to contain costs. Which begs the question if payors are blocking access to non-insulin using patients and this is the biggest market how can either Dexcom or Abbott get to this market.
This is where partnerships and the move to diabetes management systems come into play. Here Dexcom has the clear advantage as they are partnered with cash rich Google and Abbott is partnered with Bigfoot. While the Abbott/Bigfoot collaboration is clearly targeted at insulin using patients the Dexcom/Google partnership is going after ALL patients. We should also note that Dexcom and Lilly (NYSE: LLY) are working together and while this collaboration will begin with insulin using patients Lilly does have the most complete diabetes drug portfolio and would definitely benefit from greater patient adherence to these drugs, something CGM can definitely help with.
The reality here is the Street is once again over reacting and taking a very short term narrow view – shocking we know. This battle between Abbott and Dexcom has just begun and we are nowhere near finished. It’s unfortunate that Abbott has decided to initiate a price war as they know not what they do. If this becomes a race to the bottom no one wins, not Dexcom, not Abbott and certainly not the patient. Should CGM commoditize as BGM did say goodbye to customer support and hello to quality concerns.
Dexcom may have been slow to react to Libre and misread some signals sent by Libre patients but they are fully engaged and are preparing for battle. They may not have deep pockets of Abbott, but the fact is Abbott will not continue to lose money over an extended period. Both companies are cognizant that this really isn’t a battle over accuracy, calibration, alarms, etc. For the near term this is all about patient access i.e. formulary position.
So, fasten your seat belts, put your tray tables in the upright position and get ready for takeoff. We suspect this will be a turbulent flight with lots of bumps along the way. It will take an experienced and talented flight crew to navigate this rocky flight and it would be a major mistake to discount that.