Right to the nuclear option

Right to the nuclear option

When it comes to warfare strategy and tactics you don’t normally see one side skip conventional means and go straight to the nuclear option. But that’s exactly what Abbott (NYSE: ABT) has done as they now offering a FREE FreeStyle Libre to current Dexcom (NASDAQ: DXCM) users. According to the Libre web site;

“If you’re a current Dexcom CGM user, you may be eligible for a FreeStyle Libre system reader and one sensor, free of charge*.

* Full eligibility requirements: While supplies last. Offer for one free FreeStyle Libre reader and one FreeStyle Libre sensor is void where prohibited by law. Only current users of Dexcom continuous glucose monitoring devices who are 18 years of age or older are eligible. Beneficiaries of Medicare, Medicaid, and other federal and state healthcare programs, residents of Massachusetts and US territories, and individuals insured by Kaiser Permanente, are not eligible for this offer. The FreeStyle Libre reader and sensor are only available with a valid prescription. The eSample Voucher must be presented with a valid prescription at a participating pharmacy. Participating pharmacies are subject to change without notice to you. The free reader and sensor are provided as a sample and each participant may only redeem one FreeStyle Libre eSample Voucher for one FreeStyle Libre reader and one FreeStyle Libre sensor. Limit one eSample Voucher per person. The eSample Voucher expires 45 days after issuance. Offer is non-transferrable and cannot be combined with any similar offer. The reader and sensor cannot be sold or submitted to any third party payer for reimbursement. Abbott Diabetes Care Inc. reserves the right to modify, rescind, or cancel this program at any time without notice to you.”

We have long known and predicted there would be a price war in the CGM market, what we did not anticipate is that Abbott would go nuclear. But we should note that this move won’t last forever so Abbott is striking while they can. See payors don’t like it all that much when diabetes device companies give their toys away for free, just ask any insulin pump company. Well since the Libre isn’t covered yet on most plans the time to strike was now and heck why not go nuclear.

This is no different than how conventional meters were marketed back in the day as it’s all about the cost to acquire a patient. Just for grins and giggles let’s say it costs Abbott $50 to make the receiver and another $20 to make the sensor, heck lets even double that number. Then think about the continuing revenue stream from the sale of sensors. So, what if it costs $150 to acquire a patient. And let’s be honest if your going to go nuclear you might as well go for the biggest target which in CGMLand is Dexcom.

Frankly this is just an extension of the strategy Abbott used before Libre was approved by the FDA. Back when Libre was first getting off the ground in Europe the company heavily subsidized the Libre to build market share. So, what’s any different now that the Libre has FDA approval?

Now it should surprise no one that shares of Dexcom fell on the news. While we think its ridiculous Dexcom’s share price has become linked to what Abbott does with Libre. It was not that long ago that shares traded below $45, back on Halloween shares closed at $44.97. Even with the sell off today shares closed at $58.45. Now we don’t want to pull a Momma Kliff and say we told you so, but we did. Back when everyone was reporting that Dexcom was done, that they were finished we noted reports of their death were premature.

Folks we know it’s difficult in todays world to be patient, to understand that the CGM market is developing, that this market is going to change many times and most of all that Dexcom isn’t dead. Quite frankly they are barley wounded. Listen there is no question that the company made several mistakes when it came to Libre. But this doesn’t mean this talented team suddenly has become stupid.

So, let’s just point out a few items;

1. This move by Abbott MAY hurt Dexcom in the short term, the exact extent is difficult to gauge. There may some Dexcom patients who will make the switch, but we just don’t see them doing so in great numbers.

2. Dexcom will fight back but will not do so foolishly or recklessly. They know Abbott has the capital to subsidize Libre, but they also know when Libre gets to payors it will be a much different fight.

3. Both Abbott and Dexcom know that as the CGM market evolves it will include multiple product options with different price points, everything from basic low-cost systems to premium products.

4. Both also know that CGM is becoming the standard for glucose measurement, that this is not just a product for insulin using patients and that both can win. Simply put they see what we do this is one HUGE market and we’ve barely scratched the surface in terms of patient usage.

5. IT WOULD BE A MAJOR MISTAKE TO COUNT OUT DEXCOM JUST AS IT WAS BACK WHEN LIBRE WAS APPROVED BY THE FDA.