More evidence as if we needed more

More evidence as if we needed more

Yesterday we wrote about what was once an unthinkable scenario the prospect that conventional glucose monitors which use test strips could become obsolete. Not like we needed even more evidence that this once unthinkable scenario could be a reality we got some this morning. According to post on the Mass Device website GlySens, the makers of an implantable continuous glucose sensor have raised another $20 million. The post states;

“Implantable continuous glucose monitor developer GlySens raised $20 million in a Series D round, led by backers from its Series C round and “significant participation from new investors,” the company said today.”

Now before we go any further we should note that GlySens is not the only company working on an implantable sensor, far from it. Nor will we comment on the long term outlook for the GlySens project or any of the other efforts underway. What we will say that like so many other projects underway we believe it is no longer a question of whether we will see an implantable sensor in the future but when we will see one. To Diabetic Investor this is just one more reason the fat lady is warming up and getting ready to sing the conventional BGM swan song.

We should also note that we don’t see any of these projects having a material impact on the existing CGM market for a few years. For the moment this market dominated by Dexcom (NASDAQ: DXCM) and Medtronic (NYSE: MDT) will remain dominated by these two companies. Nor do we see these projects impacting the Dexcom/Google project which is targeting CGM at a much broader segment of the patient population.

What this news says is that when it comes to glucose monitoring CGM is where it’s at. That the days of single point systems which require a patient to prick their fingers are coming to an end. Yes, they will still have a place in diabetes management but a very limited role. This new reality begs the question what will the current conventional BGM players do next. Or looked at another way have these players waited too long to dump their units.

As we noted yesterday LifeScan, a unit of Johnson and Johnson (NYSE: JNJ), is in the strongest position given their scale. Additionally, LifeScan has rightsized their unit to match existing market dynamics. For the moment LifeScan is ok and will survive. The same however, cannot be said for either Abbott (NYSE: ABT) or Roche. Believe it or not Abbott may actually be in a somewhat better position than Roche even though they have less market share. Although we aren’t overly impressed with the FreeStyle Libre nor do we see this product being approved in the US, Abbott has a presence in CGM. One could argue this fact by itself makes the Abbott unit more valuable than the Roche unit.

Unfortunately, Roche must now swim upstream as they lack any presence in the CGM market. Now this could be easily rectified with an acquisition however given the statements made by the company we doubt they have the appetite for such a deal. The simple fact is they are caught between a rock and hard place.

Since test strips between competing systems are not compatible, you can’t use an Abbott strip in a Roche meter, there is no hope of a rollup strategy. If Abbott say would buy Roche’s unit, there would be no synergies nor would there be much in the way of cost savings. In fact, we would argue costs would increase as Abbott would have to replace Roche’s systems with systems of their own, systems that used an Abbott strip.

So how does this all play out? We’ll that’s a little unclear as looked at realistically there really aren’t that many options, at least not many positive options. It’s possible that Roche could proceed with their plan to spin off the unit into a privately held company. This would lower costs somewhat and get this dog of a unit off their books.

Another possibility is that a private equity group could come along and buy up both the Abbott and Roche units. Yet instead of converting patients from one system to another drive efficiency by combining back office and sales functions. Under such a scenario this group could reposition each brand for a specific market playing to existing strengths. Allow Roche to play in international markets with Abbott becoming the predominate North American brand. In effect they would be content to play second fiddle to LifeScan. This scenario would be even more exciting if they went whole hog and bought the co-branded monitor business from Nipro.

While we do see the conventional BGM market dying a slow and painful death this will not happen overnight and with the right structure there is still money to be made in this market. Heck if private equity wanted to go completely off the deep end they should also buy a company like TelCare or Livongo as this would give them a presence in the growing IDM area. To Diabetic Investor the conventional BGM market is all about having the right structure in place.

What everyone should realize is that while this market continues to shrink and that at some point will cease to exist money can still be made. This is all about having the proper strategic perspective combined with the right cost structure. To be honest this is just another evolution of the market. It may be the final evolution before extinction but the fat lady isn’t singing just yet, she’s warming up but not quite ready to take the stage.