Not so sure

Not so sure

Although we do not have direct knowledge we can’t help but question whether Bayer will actually sell their diabetes unit to Panasonic/KKR. Yes we know reports have been surfacing that this is all but a done deal but we’ve been down this road before. Just when it looked like Bayer had sold this unit to Sanofi (NYSE:SNY) the bottom fell out not once but twice. Could history repeat itself?

It’s important to note that the last time this unit was for sale it was Panasonic who was competing with Sanofi. Sanofi made a higher offer, Panasonic was given a chance to raise their bid but decided the price was just too steep. Only problem for Bayer was Sanofi got cold feet and walked away.

Could it be that it is Panasonic/KKR who gets cold feet? Honestly we have no idea but given the amount of due diligence Panasonic has done on Bayer, not once but twice, one just might believe they know the maximum they are willing to pay. That Bayer may be playing with fire again waiting for additional bids to come in. Heck if Bayer really does have a firm offer from Panasonic/KKR they should take the deal, run to the bank and hope the check doesn’t bounce. If this offer is legit Bayer is getting a second chance to turn sand into gold and rarely does any company get one chance.

Diabetic Investor can think of a thousand reasons for Panasonic/KKR not to do this deal and perhaps only one or two why they should. And by our way of thinking just because Panasonic already makes the strips for Bayer isn’t a good enough reason to spend a billion dollars or more to have full control over the meter business. This is especially true since both Roche and Abbott (NYSE:ABT) would happily sell their diabetes units which have better prospects than Bayer’s. Heck we’d even bet that Roche would throw in their insulin pump business for free. Quite honestly the only thing Bayer has in its favor and this is a very small advantage is their deal with Medtronic (NYSE:MDT) providing meters for the 530G and upcoming 640G insulin pumps.

Bayer has already, excuse the expression, stripped the costs out of this unit and while additional cuts could be done honestly there isn’t much left to cut. The only way Panasonic can make money here is by raising prices – which isn’t going to happen- or selling more systems – which will require more aggressive sales efforts that will only be matched by the competition. That is of course if they, again excuse the expression, stick with the old way of doing business.

It would be fascinating if a company with Bayer’s scale converted to what we like to call the Shave Club for Men pricing model. A model where patients or payors are charged a monthly fee which includes an unlimited amount of test strips. A fee which allows the patient free upgrades when a new system comes out. They could easily cut out the middle man and ship strips directly to the patient and with some minor adjustments all this can be done automatically. Why not by pass up payors entirely and go direct to corporations with the same proposal – why not do both.

Think about this for a moment at time when outcomes are supposed to matter reimbursement methods are counterintuitive to making this happen as they limit how many strips a patient is reimbursed for each month. Let’s be honest the majority of patients just won’t pay out of packet for additional strips unless they absolutely have to.  Take away this restriction and see where the chips fall but when a company has steady income stream coming from monthly fees they are no longer dependent on strip usage or subject to reimbursement restrictions.

Although the situations are not directly similar think about why ESPN is so valuable, it’s not just the large audience but the monthly fee they collect from television providers, advertising revenue is just gravy on top of a tasty turckey. Should a meter company adopt this monthly model nothing says they cannot also remain part of existing payor infrastructure.

Just as we’re not sure that Lilly’s (NYSE:LLY) strategy in diabetes drugs will work, we’re not sure this model works for BGM. Yet what we do know is that old model no longer works and by doing more of the same the majors are doomed to fail. Their competitors may not have the scale or capital the majors have but they are more nimble and can more easily adapt to the changes taking place in the BGM market.

The question is does Panasonic/KKR, assuming they do buy this unit, have the vision to mix it up a little, to dare to be different.  Or will they just follow the same old same old. Let’ first see if they actually do this deal for as we noted before we can think of a thousand reasons not do it, not the least of which being they could buy a better mouse trap elsewhere.