No surprises here

No surprises here

Yesterday the wacky world of diabetes devices received confirmation of something that Diabetic Investor has been predicting for some time, the Big Four glucose monitoring companies – LifeScan, Roche, Abbott (NYSE:ABT) and Bayer will soon become the Big Three possibly the Big Two. So it should really surprise no one that yesterday the Financial Times of Germany reported that Bayer has put their glucose monitoring business on block. The article states that the company has had initial discussions with competitors however Diabetic Investor believes it will be unlikely that any current member of the big four will acquire this unit.

While the Bayer line of monitors and existing patient base would be an asset to any of the competition Diabetic Investor does not see LifeScan, a unit of Johnson and Johnson (NYSE:JNJ) throwing good money into a market they already own and a market by all accounts is going to get worse not better. Roche who has been known to make stupid moves is always a possibility but after blowing over a billion dollars to acquire insulin pump maker Disetronic and committing even more capital to modernize the Aviva manufacturing line it’s unlikely another diabetes device acquisition is in the cards. Although it would be great fun to see Abbott acquire the unit and see if they could actually ruin not one, not two but three glucose monitoring companies, Abbott is more likely to be a seller and not a buyer.

Now some may see Sanofi (NYSE:SNY) who finally launched their iBGStar™ glucose monitor this month as a strong contender and there is no question that the company desperately needs scale in this market if they stand a chance of becoming a player however the Bayer patient base is not closely aligned with what the company needs. Strategically Abbott’s beleaguered diabetes device unit is a much better fit given how popular the FreeStyle line is with insulin using patients. Abbott also has a stronger presence in the hospital market and still owns the intellectual property for the now deceased Navigator, a product which Sanofi could revive as they have indicated a desire to play in the continuous glucose monitoring market.

This leaves the field of possible suitor’s barren of the usual suspects until one considers where the BGM is going. As Diabetic Investor has been reporting the BGM market is undergoing a transformation and not just into a commodity market where price is the primary market driver. Looking towards the future glucose monitors will transform themselves into mini-diabetes management tools, tools which when interconnected can help the patient better manage their diabetes. (This is at least the theory.) As we have seen with the TelCare monitor and now the iBGStar the technology now exists allowing monitors to seamlessly transmit data to a third party. It’s also true that many companies not previously in the diabetes device market see this market ripe for new systems and new marketing methods. They see the explosive growth rate in the number of patients with diabetes and reason that if they capture even a small percentage of this growing patient population this is a license to print money.

While Diabetic Investor agrees that the current crop of players in this market have done a great job of screwing things up and therefore making it possible for others to enter the market and we further agree that new marketing methods are desperately needed. (We’re actually thinking of making all of these new players sign an agreement stating they will do more than offer their products in pretty colors.) However, we do not believe they can squeeze blood from a rock. Yes diabetes is growing at epidemic rates and yes the margins in the BGM market, even today, are hefty. Yet, Diabetic Investor does not believe these inexperienced newcomers have some sort of magic potion that will turn this market around, that will convince patients that there is real value in testing their glucose levels regularly or that there really is a difference between systems. Still like many who have not been in the market before they have become intoxicated with the number of patients, the epidemic growth rate of the disease and most importantly very sexy margins.

This is why Diabetic Investor believes that buyer could come from outside the normal names thrown around and be someone like GE (NYSE:GE) who just entered the business or Panasonic who already has a relationship with Bayer and would like to see the meters they already make marketed under their brand name. And let’s not forget about companies like Nestle, Procter & Gamble (NYSE:PG), Phillips all of whom who have at one time or another expressed an interest at entering this market. And did we mention that Alere (NYSE:ALR) is also back in the diabetes market.

No matter who ends owning the Bayer unit one thing is certain as this just the first step towards a dismantling of BGM market as we know it today. Diabetic Investor thinks this move by Bayer could also spur Abbott into action as they too would like to remove this albatross from their necks. Frankly it is not outside the realm of possibility that none of the current Big Four will still be in the market 5 years from today, that a complete transformation will take place. Given the many players who would like to play in this market and their huge resources companies like JNJ and Roche just might be tempted to test the waters depending on how rich these units are valued by prospective buyers. As we noted earlier this move by Bayer could well be the first of a series of dominoes to fall, setting off a chain reaction that could well turn the BGM market upside down.

Keep in mind this is the wacky world of diabetes devices, where anything and we mean anything, can happen and usually does.