Let’s play spin the BGM company

Let’s play spin the BGM company

Just yesterday another player was added to the roster of glucose monitoring companies as we learned that the FDA approved the iBGStar from Sanofi (NYSE:SNY). Unlike many of the smaller, less well-resourced companies getting set to enter the market, Sanofi is well-resourced and has a large and established presence in the diabetes. We also know that GE (NYSE:GE) another well-resourced company is entering the market although they lack an established presence in diabetes. With all this activity and interest in the space rumors are swirling as to what the established players in the space plan to do, if anything.

Let’s start with what we already know before speculating on what might happen next. Even with all this activity in BGM four players continue to own nearly 90% of the market- LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), Roche, Bayer and Abbott (NYSE:ABT). The Big Four, as we like to call them, have all followed similar strategies cutting costs wherever they can in an effort to maintain their hefty profit margins. All four have made only minor changes to their product line-ups as they no longer can afford to continually launch new products. All four have basically out-sourced new product development as here too they don’t want to spend the money. Simply put the name of the game today for the Big Four is market share, how to get it and how to keep it.

This battle for market share is largely fought on one battlefield, getting prime formulary placement. Given that the cash paying segment of the market is small and owned by Nipro Diagnostics, the Big Four understand that in order to survive they must secure the best possible formulary placement; this is what happens when you compete in a commodity market where price not performance is the primary driver. All four have attempt to offset formulary placement with co-payment equalization programs but these programs are merely rebate programs in disguise and detract from and do not enhance margins.

All four also realize that market growth has basically stalled and that key segment of this market is patients following some sort of insulin therapy. Or put another way, they are all fighting over a finite set of patients. While it’s true that insulin usage has increased over the years the BGM players are not seeing a corresponding uptick in strip sales as a result. The main reason for this is how the insulin using market is divided, with the majority of insulin users following an insulin plus orals therapy regimen, a group which is told to test but rarely does. It’s also well known that insulin pump patients, the most frequent testers, are adopting continuous glucose monitoring technology in greater numbers which allows the patient to use a conventional monitor less frequently. That leaves patients following a multiple daily injection (MDI) as the most coveted patients for BGM companies. While these patients are also beginning to adopt CGM technology it has yet to catch on with the majority in this group, it will but that day is not yet here.

So the Big Four are basically watching all this and thinking one of two things – do we stay in the business or do we sell and get out while we can. The harsh reality for any of the Big Four is the only way they can effectively capture more market share is through an acquisition; and the only real addition of market share will come from acquiring one of their main competitors. While it’s true they could capture some share if they bought Nipro but Nipro isn’t for sale and the Nipro business model does not fit within their existing corporate strategies. As they sit around and contemplate how to move forward they also are worried that a player like Sanofi or GE might come in and buy one of their competitors giving them instant scale. Should GE or Sanofi buy one of the Big Four nothing much really changes for the players that don’t do anything other than their primary competition will have a different name attached to it. Looked at realistically this is quite the conundrum for JNJ, Bayer, Roche and Abbott – do they risk allowing GE or Sanofi to become a member of the Big Four or do they make an acquisition as a defensive move basically preventing GE or Sanofi from getting the scale they both need to be serious players in the market. No matter how good the product line is for either GE or Sanofi both know just how difficult it will be for them to build share from scratch, while it’s true that Sanofi has a slight advantage over GE given their established presence in diabetes, this presence in insulin does not necessarily make their BGM road any easier. As we noted yesterday scale is everything in the BGM market and without it, it’s difficult if not impossible to make any money in the market.

Diabetic Investor suspects it’s just a matter of time before one or possibly two members of the current Big Four decides to take the money and run. That it’s just not worth the capital that it would take to remain competitive and better to sell while there are still interested buyers available. When it’s all said and done nothing much will have really changed other than that the Big Four will have a different set of members. The more things change, the more they stay the same.