Roche and PolyMedica Report – What the results mean for the bloodglucose monitoring market

Roche and PolyMedica Report – What the results mean for the bloodglucose monitoring market

This morning Roche reported results for 2006 and as expected their blood glucose monitoring business, once a star business unit, has fallen on hard times. For the full year 2006 diabetes care sales grew just 3% from 2005. These results are hardly surprising as the entire blood glucose monitoring segment, with the notable exception of LifeScan, has seen growth dwindle over the past few years.

Like others in this segment and Roche is no different, they continue to believe that introducing new products will reinvigorate growth. While technological innovation is important to the BGM market, there is little evidence to suggest that sales increases generated from the introduction of new products lasts over the long term. LifeScan is the only company who appears to understand that the BGM market is making the transition from a medical device market to a consumer product market. Something Diabetic Investor has been writing about for some time.

The fact of the matter is the majority of patients see little difference between glucose monitors and more often than not will choose the monitor that comes with the lowest co-payment. Just as the majority of computer users use a fraction of the features available to them on their computers, the same is true of glucose monitors. Monitor companies have added all sorts of advanced features that allow users to download readings to their computers and have provided excellent software packages that allow users to gain a better understanding of their readings. However, even with this advanced technology most patients want the monitor to do just one thing; deliver an accurate reading. For all the talk about supposed brand loyalty the real fact in this market is the consumer really doesn’t care which meter they use.

By outspending their rivals on marketing, in particular television advertising, LifeScan understands that in order to succeed in this market it has to get the consumer to ask for their product. In an increasingly crowded market with little product differentiation brand name awareness is critical. This will become even more important in the future as there are several companies marketing co-branded monitors that come with lower price points.

The perfect example of how this strategy can be successful came when PolyMedica (NASDAQ:PLMD) announced their fiscal 2007 Third Quarter on Monday evening. In the press release issued by the company it stated, “Diabetes gross margin was 56.5% in the third quarter compared with 55.2% last year and 57.3% in the second quarter. The increase in Diabetes gross margin from last year was primarily attributable to a decrease in diabetes strip pricing and related product costs. The reduction in Diabetes gross margin from the second quarter was due to an increase in the Diabetes commercial business and insulin pump supply business, which generate lower gross margins.”

During the company’s conference call Tuesday morning it was obvious the deal with privately held AgaMatrix is paying big dividends. PolyMedica understands their customers and their views on blood glucose monitors, or put another way the Liberty Medical patient is loyal to Liberty and not any particular brand of glucose monitor. Therefore when a Liberty customer service representative recommends the Liberty monitor, made by AgaMatrix, there is strong chance the patient will take the reps advice and switch to the AgaMatrix monitor. As Diabetic Investor pointed out when the PolyMedica AgaMatrix deal was announced this puts PolyMedica is the ultimate win win situation. Besides making greater margins on the AgaMatrix monitor and test strips, the company can use the presence of AgaMatrix to extract better terms from the big four monitor companies who are desperate for market share. PolyMedica is executing this strategy to perfection as evidence by their comments that members of the big four have approached them about developing similar co-branded products.

This strategy will also help PolyMedica when competitive bidding becomes a reality. Diabetic Investor found it strange when the company came out against competitive bidding. While it is true that competitive would change the business and possibly hurt margins in the short term, with their huge scale and brand name awareness Diabetic Investor sees competitive bidding as a major plus for the company. As the company correctly pointed out during their call should competitive bidding take hold few of their competitors could profit in this new environment and it is likely many would exit the business. This would allow PolyMedica to come in and buy these companies at discounted prices further increasing their patient population and enhancing their already dominate leverage with monitor companies.

PolyMedica other smart move is their agreement with Medco (NYSE:MHS) for pharmacy fulfillment. In essence this agreement allows PolyMedica to concentrate on what they do best, namely dealing patients, while lowering their overall costs. According to company they expect the transition to Medco to be complete by March 31st of this year.

The Medco deal could also help the company make further inroads into the disease management segment of diabetes. While Diabetic Investor was initially against the company’s possible move into this area as we viewed it as a distraction from their core competencies the reimbursement environment favors a move into this segment. Diabetic Investor never doubted the companies ability to help patients mange their diabetes better, the real question was could they make money doing it. As the diabetic population continues to soar and greater emphasis is placed on controlling the cost of treating diabetes related complications, many are looking towards disease management as the answer.

The key with diabetes disease management has always been proving that disease management actually works for non-insulin using patients. In the past when disease management companies spoke of diabetes they focused on near term cost savings which came primarily from keep patients out of the hospital or decreasing the number of days a patient spent in the hospital. The only problem with that approach was that most hospital visits came from a small percentage of patients, poorly controlled type 1’s. Why then would a company pay for diabetes disease management for their entire diabetes patient population when they could achieve the same amount of cost reduction by focusing on a smaller group of patients? Now that several studies have proven the benefits of disease management across the entire diabetes patient population, companies desperate to control costs are taking a closer look.

All in all things are looking up for PolyMedica and those worried about the changing reimbursement environment and competitive bidding should sleep easy. PolyMedica is the complete package. With their scale and experience it’s difficult to imagine anyone in a better position to take advantage of the changing diabetes market.

Finally Diabetic Investor would like to congratulate the Indianapolis Colts on their victory over our beloved Chicago Bears. There was no question the better team came away with the victory. As disappointed as we were with the outcome the fact that the Colts are such a class organization took some sting out of the loss. The game also proved that Diabetic Investor should stick to our core competencies and leave forecasting football games to the experts.

David Kliff
Diabetic Investor
847-634-4646 fax
224-715-3761 mobile