More wackiness

More wackiness

It’s not like we needed any more examples of why Diabetic Investor calls this the wacky world of diabetes but the latest series of rumors coming out of the glucose monitoring sector are conclusive proof. As we noted just last week the impact of competitive bidding is finally dawning on the companies in BGM as they are beginning to understand what Diabetic Investor and everyone else for that matter have known for years, the BGM market is a commodity market where price means everything.

Given the new reimbursement rates for Medicare patients, which will impact not just the Medicare business but eventually spread to private payors as well, about the only way these companies can make any money at all is too cut costs even more than they have already while getting bigger at the same time. We’ve said it before and we’ll say it again, in this new world order where margins continue to shrink scale is critical. The BGM market can no longer support four major branded players and consolidation is inevitable.

Now considering their respective market shares it’s difficult for the LifeScan, a unit of Johnson and Johnson (NYSE:JNJ) to buy any one. Diabetic Investor also thinks JNJ, who did take a look at Bayer’s business when it was for sale, would spend the billions required for an acquisition. The fact is under today’s regulatory environment it’s equally unlikely the government would allow JNJ, who now holds over 40% of the BGM to get much bigger. This is not to say JNJ would not benefit from getting even bigger but the scenario just isn’t right.

Roche, thanks to years of ineptitude where their market share has fallen nearly 50%, could more easily acquire a smaller rival. However, Diabetic Investor isn’t quite sure they would spend the billions needed to get bigger considering they have already blown over a billion to acquire Disetronic and another $200 million to acquire Medingo. Two acquisitions which really haven’t worked out all that well and had we had them at time would have earned the company a Wacky Wabbit award.

Yet the possibility exists that Bayer, who at one time wanted to sell their unit, seemed to have a deal but couldn’t consummate it, could switch gears and acquire Abbott’s (NYSE:ABT) diabetes device unit; a move which could become a real possibility now that we are hearing that Abbott has decided to close their hospital business and sell the consumer side. As crazy as this may sound, which is getting to be redundant these days, it would be much easier for the two bottom players to combine than for either JNJ or Roche to buy one these smaller rivals.

Now keep in mind Diabetic Investor has no direct knowledge this is going to happen and that it’s not April Fool’s Day either. However, this is one rumor that actually makes sense and could be pulled off without too much trouble or government interference. Whether it would accomplish much in the long run is another story entirely. As we have also heard that Abbott could be selling their Navigator unit independently from their conventional glucose monitoring unit, a move which also makes senses. Navigator is going nowhere in a hurry but does bring with it some very valuable intellectual property and fits nicely with an insulin pump company. Add in the fact that Bayer does not have a pump and likely doesn’t want one, this rumors becomes even more intriguing.

Say for example that Insulet (NASDAQ:PODD) buys the rights to Navigator, which given the fact they have terminated their partnership with Dexcom (NASDAQ:DXCM) combined with their public comments that have already found a replacement, seems plausible. It all really depends on how much Abbott wants for Navigator and whether or not Insulet can come up with the bucks. We’d say this isn’t likely but Insulet has surprised us before when they bought a DME and  have proved with regularity that they can go back time and time again to raise even more money from the capital markets.

Although Abbott has consistently denied they would ever sell the diabetes unit, it would be a nice change of pace from their history as the company which holds the unique distinction in BGM of buying not one but two BGM companies and running both into the ground.  Perhaps Abbott’s CEO Miles White has finally learned that the company just doesn’t have what it takes to be successful in BGM and better to get some other sucker to take this unit off their hands. While this would be admission that acquiring MediSense and then Therasense were colossal blunders, the sting would be offset nicely by the fact that they would be pocketing over a billion bucks which could be out to better use at units they actually know something about.

Whatever the outcome one thing is certain, in that the diabetes device business has a well-earned reputation as the most wacky of all the diabetes markets. Where else will companies willingly blow billions to enter a market with less than favorable future prospects? As a wise executive once told Diabetic Investor the best way to get a small fortune is to start with a big one. RIBIT!!!!