Like Sand Through an Hour Glass

Like Sand Through an Hour Glass

It’s is becoming increasingly difficult for Diabetic Investor to find new ways to say the same old thing, the glucose monitoring market continues to go nowhere. Another example came today when Abbott (NYSE:ABT) reported 2010 fourth quarter and full year results. Worldwide full year sales for the diabetes care unit grew, if you can call it growth, by just 2.7%.

In some respects this anemic growth for Abbott is a welcome change from their past where sales declines and share erosion had become the norm. Diabetic Investor would not hail this a victory for the company however the silver lining among the dark clouds might be at minimum they have stopped the bleeding and from all appearances the patient is still alive. The main problem however remains given the amount of blood lost; the patient will never fully recover and will forever be crippled from past injuries.

Abbott also continued another trend as the diabetes care unit has become persona non grata and was barely mentioned during today’s call. This is a sharp departure from previous calls where the company insisted the unit was doing just fine and growth would return. Diabetic Investor actually welcomes this silence as frankly it was getting pretty embarrassing for the company as they continually ended up with egg on their faces. There are times, and this is one of them, when it’s better to say nothing and be thought a fool than to open your mouth and remove all doubt.

Looking towards the future Diabetic Investor sees the glucose monitoring market like sand moving through an hour glass. It’s just a matter of time before all the sand is gone, the hour glass turned over and this cycle continues. Just as no new sand is added to the hour glass, the glucose monitoring market is now fully mature. While the sand may shift between the players in the market, someone gaining and another losing, the market itself won’t get much bigger.

Given this set of dynamics the rule of the day for players in this market also remains the same, operational efficiency. Here too, Abbott is no different than their competitors as like all the others they too have cut costs to the bone seeking to milk the business for all it’s worth. Growth in this market may be anemic but BGM remains a cash cow generating huge margins even under these difficult market conditions. It doesn’t hurt when you make something for pennies and sell them for dollars.

Still one has to wonder what management is thinking as they look ahead and see for BGM they are the smallest of the Big Four. Given the cost cutting already implemented and the additional costs necessary to move share, money they don’t want to spend, when will they get off this treadmill which is going nowhere. Do they at some point switch strategy and realize as bad as market conditions are, there are others willing to take this struggling unit off their hands and will pay handsomely to do so.

Here’s the problem if the wait too long to make this move. Looking ahead Diabetic Investor sees wholesale prices under continued pressure. Additionally the reimbursement environment continues to deteriorate with rising co-payments. Insurers continue to cover testing supplies yet they continue to shift a greater share of this cost to the patient through higher co-payments.   This cost shifting is continually cited by BGM companies as a major reason why patients are not buying more test strips. The question is what happens when insurers take the next step and limit reimbursement to just insulin using patients. With all the studies that have shown no correlation between glucose monitoring and improved outcomes for non-insulin using patients, insurers could easily justify such a move.

Abbott also faces another problem in that what happens if someone comes along and buys Insulet (NASDAQ:PODD) and decides to swap out the FreeStyle meter that is currently embedded in the OmniPod PDM. Additionally, given the recent recall what happens if Wal Mart, the world’s largest retailer, decides to drop their ReliOn monitor currently made by Abbott and switches to another supplier. According to sources in the industry Wal Mart is less than pleased with how Abbott handled the recall and this could be the beginning of the end for the Wal Mart/Abbott relationship. Take away the sales generated by OmniPod users and the Wal Mart business – what’s left?

The stark reality for Abbott is they cannot afford these types of loses as they don’t have the market presence to offset them. Any major lose could effectively cripple the unit and force Abbott into panic mode. Yet the recent recall illustrates the biggest problem of all for the company, where they can’t get out of their own way. For some time now Diabetic Investor has been hearing that Abbott wants to sell the diabetes unit and was actually positioning the unit for a “clean sale”.  They have reached out to others in the industry to put some intellectual property issues behind them and the cost cutting actions taken where made more to fatten the bottom line increasing the multiple someone else would pay.

Instead of increasing the value of the unit, these missteps have had the exact opposite effect.  Companies aren’t opposed to buying a troubled unit when they understand the extent of the problems, however with Abbott the problems appear to be growing exponentially instead of dissipating. Diabetic Investor suspects this is one reason previous discussions with possible suitors for the unit have stalled. We further suspect that Abbott has not fully come to grips with what would be a reasonable valuation for this unit. Finally we’re not completely sure the company has come to the conclusion that selling the unit is the answer to its problems and could be operating under the illusion that somehow they can still turn things around – all factual evidence to the contrary.

This continual back and forth on whether to sell or not to sell is costing the company dearly as with each recall or misstep the value of the unit shrinks. Diabetic Investor thinks it’s time for the company to stop worrying about what color to paint the washrooms at Abbott Park and get on with the task at hand. Like the sand in the hour glass, time is not on their side.