JPM Day Three – Why Experience Matters

JPM Day Three – Why Experience Matters

Although they did not present on day three a simple statement made by GE Healthcare explains why everyone and we mean everyone wants to be in the diabetes business. According to GE Healthcare chronic disease is up 80% over the past 20 years while spending on chronic diseases has increased 260% over that same time frame, yet GE believes that this spending will increase 2.5X by 2023. Add that you can’t swing a dead cat without someone mentioning that diabetes is growing at epidemic rates, there are 300 million patients with diabetes, another 100 million with pre-diabetes, and on and on. Basically everyone who isn’t in diabetes or about to enter diabetes believes they can build a better mouse trap and they don’t see any of the established players as unbeatable- so much for barriers to entry.

While Diabetic Investor does not dispute the fact that the diabetes market will continue to grow, nor would we dispute that the current companies in the business are doing a pretty good job of screwing things up, we’re not quite sure these newbies understand what lies ahead or the heavy lifting that will need to done to achieve success. Diabetes is not like other chronic disease states as diabetes is not just a chronic disease but a lifestyle. Many of these newbies have not yet come to grips with all things a patient must do each and every day of their lives, and hold the foolish belief that patients want to live their lives for their diabetes and not with their diabetes. When in reality patients want to live their lives with diabetes not for their diabetes.

This is one reason Diabetic Investor believes experience in the diabetes market enhances the possibility for success, it does not guarantee success but it sure does help and when it comes to experience Alere (NYSE:ALR) has it in spades. Although the company did not go into great detail regarding its diabetes strategy it’s pretty obvious what they are going to do.  Simply put the company will go out and buy all the pieces they need, then make all these pieces work together and once again force the rest of the industry to match what they are doing.

Given their stated intention to head out on the M&A trail on the lookout for diabetes companies is it any surprise that the Alere presentation was attended by as many diabetes companies who hope to be acquired as there we analysts.  Although the company would not discuss their M&A strategy or give any hints as to what size company they are looking or what pieces to the puzzle they want, Diabetic Investor believes it will soup to nuts approach from glucose monitoring to insulin delivery.

Frankly every diabetes company should send Alere a thank you note as their value has just increased, Alere isn’t the only company on the acquisition trail but they will be the most aggressive.  While these other companies have been more discreet and methodical in their quest, Alere won’t be, once they identify a target they will act fast and pay whatever is necessary. This is the difference between Alere and everyone else; they see that everyone else is dragging their feet, missing out on a great opportunity so they will move quickly and not waste time. This is the benefit of having been there before; this is why experience in the diabetes market is critical.

During the conference Diabetic Investor was approached by several companies who at first glance would seem to have no possible connection to diabetes. Yet like everyone else they see the growth rate and believe using their considerable resources they can become a player.   Some prefer to build, others buy and others a buy plus build formula. The universal theme being that the future of diabetes management is a series of vertically integrated pieces all interconnected which ultimately will produce better patient outcomes. That patient’s actually want all this help and will accept this help without reservation or question. These newbies are convinced they can succeed where so many others have failed, that they somehow have the magic formula for success, that because they have experience and/or success in one area it will seamlessly translate into success in the diabetes market.

Yet, it’s not just these newbies who are in for a rude awakening some old pros are once again showing that the best way to get a small fortune is to start with a big one. The latest example comes from our friends at LifeScan, who as everyone knows has just launched their new Verio glucose monitor. One of the supposed benefits of the Verio is that it helps insulin using patients better manage their diabetes by providing glucose trend data and cute little messages to the patient letting them know when something might need further investigation.

Now it’s important to keep in mind that LifeScan has undergone a series of changes and cutbacks over the years, simply put the experienced diabetes team has been let go only to be replaced by younger, cheaper management who knows nothing about diabetes. This is not all that unusual for a large company like Johnson and Johnson (NYSE:JNJ) who owns LifeScan, as they like to rotate managers and promote from within. Still, there was a reason LifeScan became the number one player in the US BGM market and number two globally; reasons which go beyond the competition screwing up.

Back in the day LifeScan was the first company to correctly identify that capturing insulin using patients was critical to their future success as they needed the information provided by the products they made. From that point forward LifeScan structured their entire business around the insulin using patient. The company also knew if they were going to overtake Roche, who was number one back then, they would also need to do whatever it took to become the preferred meter of every insurance plan.  Simply put, they bought their way into the number one formulary position and low and behold market share grew.

This strategy also had another positive impact as it forced to Roche to make a choice, either pay up to remain on formulary or risk losing valuable market share. For reasons Diabetic Investor still does not understand Roche decided not play and the rest as we say is history.

Well today it’s a much different story at LifeScan as the team that put together this strategy that vaulted LifeScan to the number one position domestically and give Roche a serious run for their money globally is now gone.

To be fair JNJ is only doing what they need do as the BGM market is dramatically different today than it was back when this team was in place. It should also be noted that the others players in the market are doing exactly the same thing. The simple fact is these established players in BGM have basically decided to milk these units for all their worth until the well runs dry or someone else comes along who is willing to plunk down a huge pile of cash. Keep in mind that even with lower reimbursement rates the BGM business is highly lucrative and throws of tons of cash, after all this is business where the product is made for pennies and sold for dollars.

Yet one just might think while these companies makes these changes they would at minimum have someone with diabetes knowledge around to educate these newbies about the diabetes market. That someone might explain to these newbies what a diabetic goes through and how patients feel about glucose monitoring. This brings us back to the launch of the new Verio meter. A meter which is supposed to help insulin using patients better manage their diabetes.

The day the announcement was made, a day by the way that could have happened many years earlier but that is a story for another day, Diabetic Investor went to the LifeScan web site to check it out and what did we see – “Heads Up Your before meal glucose has been running HIGH around this time.” No we are not making this up this is word for word the message that appears on the Verio display. Now Diabetic Investor does not know which genius in the LifeScan marketing department thought it was good idea to tell prospective customers that if you use this new fancy meter it will tell you that your sugars are high – basically a negative message – but whoever thought this up should be fired and sent to work for Roche.

Only an idiot would post a negative message rather than a positive one, and it’s a perfect example of what happens when you have someone who knows nothing about diabetes working at a diabetes company.  This would be a like an executive jumping up and down with excitement while witnessing their first glucose test, only someone who is absolutely clueless would do this.  The message also shows a lack of understanding as the patient frankly could care less about happened in the past and if they are truly interested in glucose trend data they are likely using a continuous glucose monitoring system.

In the real world there are basically two types of insulin using patients, those who are highly engaged with their diabetes and those who do what their doctor tells them to do – there is no middle ground. The highly engaged patient will be insulted by a meter telling them what to do, the others simply wouldn’t care. Had the marketing geniuses at LifeScan bothered to do a little market research and talk to someone other than their friend who just so happens is a diabetic, likely a Type 2, they would have realized that patients are bombarded by negative messages and constant positive reinforcement works better.

Yet then again these geniuses likely thought they were doing the patient a favor, a patient who really should be grateful that LifeScan is looking out for their well-being, that LifeScan out of the goodness of their heart is bringing such a valuable tool to the market. When in reality this meter should have been here years ago and only because little Telcare got the jump them did they even consider launching the Verio.

How could be it that a start up like Telcare, a company that had practically no money, a mere handful of employees could design, build and get their meter through the wicked FDA – receive great press coverage (and not just from Diabetic Investor) – while LifeScan this BGM goliath with billions of dollars and thousands of employees – couldn’t get the Verio to market on time and when they finally did get it market screw up the message- the answer is simple – Telcare listened to what real patients wanted and is run by team with diabetes experience – while LifeScan has become a shining example of what happens when a diabetes company is run by people who know nothing about diabetes. Keep in mind this is the same company who put a bean counter in charge of Animas, a company who is now under FDA scrutiny for selling defective insulin pumps.

It’s unfortunate that many of the major diabetes companies could not find a better way to balance their need to downsize with the need to make sure these newbies understand the market. The same can also be said for companies who have recently entered the space and should serve as a warning to all of the companies who want to enter this market. Diabetes may be a large and growing market however the formula for success in this market hasn’t changed – put the needs of patients first, listen to patients and most importantly remember what these people are going through each and every day of their lives – this will not guarantee success but it has worked well in the past.

Finally for every company, new or old, there is a load of experienced diabetes talent available and ready to work. Experience in the diabetes market is not a negative; on the contrary it’s a huge plus and will help companies avoid stupid mistakes like the ones being made at LifeScan and Animas.