Roche Reports – The news isn’t good

Roche Reports – The news isn’t good

This morning Roche reported results for the first half of 2007 and the news isn’t good for their diabetes care division. Blood glucose monitoring grew at just 6% compared to the first half of 2006. Looking over the last 5 quarters you get a clear picture of just how bad things have become for this entire market. The table below tracks the growth rate of the diabetes care unit. While the company is reporting a 6% increase for the first half of 2007, second quarter results showed a disappointing 3% growth rate.

Q2 06 Q3 06 Q4 06 Q1 07 Q2 07
6% 5% 6% 11% 3%

Like Abbott (NYSE:ABT) who reported poor results for their diabetes care unit yesterday, Roche has also undergone a management change in their diabetes care unit. The question is can new management at either company do anything to stop the bleeding or has growth in market slowed to the point where it really doesn’t matter what is done?

Long ago Diabetic Investor pointed out that the blood glucose monitoring market was making the transition from a medical device market to a consumer product market. This transition appears to be complete as BGM companies can no longer drive share growth by introducing new technologies, cost has now become the key driver in gaining share. Making matters worse is a problem largely created by the BGM industry is coming home to roost, Diabetic Investor warned that this fascination with technology would end up hurting the entire market. None of the major BGM players have done much in the way of trying to expand the market beyond the 4.5 million insulin using patients. Now there are many “experts” who are questioning the value of regular glucose monitoring for non-insulin patients. This created a major problem for the entire industry which could have been avoided had they stressed education over technology.

Two companies, Bayer (NYSE:BAY) and LifeScan, have at awakened to the fact that when it comes to glucose monitoring the majority of patients want simplicity not fancy technology. It’s no accident that both Bayer and LifeScan are the only two players who are growing at above market rates. LifeScan has done the best job of realizing this is now a consumer market as their newest meter the OneTouch UltraMini™ comes in a variety colors and their ad campaign stresses just how simple the meter is to use. Although the color of the meter has nothing to do with increasing test frequency or accuracy of the meter it does help the consumer identify with their meter. This is consumer marketing 101.

Bayer has done an equally fine job of promoting no coding. For those unfamiliar with glucose monitoring most test strips come in vial with a number on it, prior to checking their glucose levels the patient needs to make sure the code on the vial matches the code on the meter. Some systems come with a chip that the consumer places in the meter whenever they open a new vial of test strips; this chip serves as a key. While this may not seem like a difficult task studies have shown improper coding is big problem. If the codes are not entered properly the test results is worthless. Consumers using a Bayer Contour or Breeze2 meter don’t have to worry about coding. With the Contour they simple insert a test strip and test. The Breeze2 is even easier as the consumer simply places a disc that contains 10 test strips into the meter, pulls on tab which delivers a test strip and tests.

The fact of the matter is only a small minority of patients use the advanced technology available on meters. As Diabetic Investor has said for years the majority of patients just want to know what their levels are and could care less about the ability to download readings to their computer or how much memory a meter has.

Looking towards the future Diabetic Investor sees both Abbott and Roche using price as their primary weapon to regain lost share. A decision which could have disastrous consequences as both companies would need to radically restructure their business units to maintain the margins they have become accustomed too. With margins shrinking the companies would have no choice but to drastically cut their huge SG&A budgets. This move will also play into the hands of companies like AgaMatrix and Home Diagnostics (NASDAQ:HDIX) two smaller companies that already have lower cost structures. Neither AgaMatrix nor HDI are burdened with having to pay an army of sales reps or spend millions on direct to consumer advertising. It is not difficult to see the day when a major insurer selects AgaMatrix or HDI as their primary meter providers. Using the power of co-pay the insurer would still offer meters from the major players only with higher co-payments. Given that the majority of consumers see no difference between meters the one with lower co-payment wins.

Just as PolyMedica (NASDAQ:PLMD) used their deal with AgaMatrix to extract better terms from the major players, insurers could do the same. The fact is the major players would have no choice but to lower their costs or face losing market share. The BGM market is really no different than any other commodity type business where greater volume leads to lower production costs.

A few months ago Diabetic Investor reported on rumors that Roche was considering selling their diabetes unit possibly to a private equity group. Based on where the market is going this might just be the best thing they can do.

David Kliff
Diabetic Investor
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224-715-3761 mobile