More carnage in BGM

More carnage in BGM

While we really didn’t need even more evidence that things are going from bad to worse in the glucose monitoring market, yesterday market leader LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), realigned their diabetes unit once again and once again this meant people got the ax. Now Diabetic Investor was not shocked by this news, nor should anyone else who’s been following the BGM market. Yet it still amazes Diabetic Investor that as bad as things have become in the BGM market there are companies out there who think they can build a better mouse trap.

Normally when these BGM neophytes look at the market they believe the better mouse trap is tied to more sophisticated technology. This is the approach being followed by Sanofi (NYSE:SNY), GE (NYSE:GE) and host of other companies who are trying to turn a glucose monitor into a more sophisticated device which will interconnect with a mobile device which in turn will help the patient better manage their diabetes. The general theory is patients will monitor their glucose more frequently as the monitor is no longer a dumb device which just tells the patient their levels; rather the monitor is part of an interconnected diabetes management system which helps the patient more effectively manage their diabetes.

The main problem with this approach is the target market, insulin using patients, is shrinking.  There is no reason to restate the many reasons why this is happening as Diabetic Investor has covered this issue extensively.  The main takeaway here should be the lack of innovative thinking by the many companies who are willing entering this market. Rather than develop ever greater technology  that only a handful of patients will actually use, assuming that these expensive systems will actually be reimbursed, why not beat the big boys at their own game and develop a cheaper test strip that can be used in almost any monitor which is already on the market, that’s right a generic test strip.

Now we know what everyone is thinking, while the technology may exist, when it comes to generic test strips the real hurdle is intellectual property. As we have noted before IP and diabetes devices is a high contact sport that makes football look like a walk in the park. Yet when looked at realistically it’s far easier to make inroads in glucose monitoring by giving people what they want, i.e. cheaper test strips rather than making them change the system they are currently using and very happy with.  Given the battles fought over formulary placement it may surprise many to know that when it comes to turnover, patient’s actually changing one system for another, is relatively low.  In fact, other than buying up formulary position, the most difficult task any meter company has is converting a patient who is happy with their system to another system. Given this set of circumstances better not to fight city hall and give this people what they want, cheaper test strips.

One company who appears ready to do battle is Decision Diagnostics, makers of the Shasta Genstrip® which according to the company’s web site “will cost 50% less than the Branded product without any sacrifice on quality.” Now the Shasta is not yet approved by the FDA but Diabetic Investor has learned that retail titian Wal Mart will be carrying the strip which just so happens works with LifeScan meters. This should come as no surprise given that LifeScan holds the number one market position in the US and is a close second to Roche on a global basis.

Diabetic Investor has also learned and this should surprise no one that LifeScan has already begun legal action against the company. According to the publicly available documents;

“On September 9, 2011 LifeScan Scotland, Ltd. brought suit against Shasta Technologies, LLC (Shasta), InstaCare Corp. (now known as Decision Diagnostics Corp.), Pharma Tech Solutions, Inc. et al in the United States District Court, Northern District of California, San Jose Division, Case # CV11-04494-MEJ, alleging patent infringement, seeking injunctive relief and damages as a result of an alleged nfringement on Patents 5,708,247 and 6,241,862. InstaCare Corp. (now known as Decision Diagnostics Corp.) and Pharma Tech Solutions have answered the complaint, denying all of its material allegations and asserting a number of affirmative defenses. Decision Diagnostics Corp. and Pharma Tech Solutions, Inc. are entitled to be indemnified by Shasta Technologies LLC. The companies also carry insurance and have demanded a defense from its own carriers. Since the suit remains in its early stages it is too
soon to determine the course of the litigation. Management intends to continue to vigorously defend this lawsuit, which it believes is without merit. The company intends to file its own counter-claims.”

Now no one knows how this legal battle will turn out however the fact that the company is working with Wal Mart and has begun marketing efforts – – tells Diabetic Investor they are ready to fight and think they can win.

Win or lose, the fact this fight is even taking place should send a clear message not just to the existing players in the market but to all the BGM wannabes that fancy technology means nothing and cost is everything. Does anyone in their right mind think that with competitive bidding now a reality that payors will actually pay more for a fancy system, which while way cool, just does not fit within todays diabetes cost structure? Keep in mind that Wal Mart even before the Shasta was pushing the low cost envelope with their ultra-cheap ReliOn system made by Arkray. While this new system has had only minimal success so far, the message is clear; when it comes to glucose monitoring the cheaper the better.

Is it any wonder Sanofi finally woke up and decided not to buy Bayer diabetes device unit? Can you blame LifeScan for seeing the handwriting on the wall and taking proactive steps to ensure the unit continues to make money? While no one likes to see anyone lose their job, the harsh reality is diabetes is big business and companies like JNJ have an obligation to their stakeholders to maximize return on investment. The same is true for Abbott (NYSE:ABT) and Roche. Like it or not this is the new world order when it comes to BGM and there really isn’t much the major players can do about it.