Separation?

Separation?

Yesterday Abbott (NYSE: ABT) reported fourth quarter and full year results and of course the FreeStyle Libre continues to exceed expectations. The company noted they are adding 50,000 patients per quarter which as we noted yesterday is an accomplishment as they have just begun selling the Libre in the US and Canada. The company also noted they would be investing heavily in Libre coming out with updated versions in the future.

What didn’t happen yesterday was Dexcom (NASDAQ: DXCM) getting crushed. Shares closed up for the day and continue to show gains today. This is in stark contrast to previous moves downward whenever Abbott released any positive news regrading Libre. It was almost like clockwork, good news for Libre was bad news for Dexcom stakeholders. So, to see this trend break yesterday was refreshing a sign of hope not just for Dexcom but for the entire CGM market.

Yes, the coming price war which was initiated by Abbott will be brutal for as we also noted yesterday Medtronic (NYSE: MDT) is moving into the stand-alone CGM market and they too will use price as a weapon. Although we wouldn’t say that everyone is beginning to wake up and see what we have been saying all along, namely that both Dexcom and Abbott can win, yesterday’s results and reactions offer hope.

The reality is Abbott even with their perceived price advantage still has lots of heavy lifting to do here in the US. The company is getting some attention they didn’t want as physicians are beginning to understand the limitations of the Libre. This is not to say they are not recommending the Libre, rather they have a much better understanding of which patient should be using which system. They tend to see the Dexcom system as better suited for insulin using patients while the Libre fits better with less intensively managed patients. This view is great news for Dexcom and not so good news for Abbott.

First, from a reimbursement perspective payors are more liberal reimbursing for CGM when the patient uses insulin. Second, intensively managed use more sensors.

From our perspective it will be easier for Dexcom to move down in price then it will be for Abbott to add more features to Libre making a true CGM. That the real battle in CGM isn’t being fought now but more like two years from now when the Dexcom/Google slap it on turn it on sensor gets here. As we have stated consistently the real money in CGM isn’t from penetrating the insulin using patient population rather the much larger group of patients who do not manage their diabetes intensively. For this to happen payors will have to make a reversal from current trends of limiting and/or denying reimbursement for glucose monitoring when the patient does not use insulin.

This will only happen when a CGM systems is as cheap or cheaper than conventional finger stick monitoring combined with data that proves CGM for these patients make them cheaper to manage. Notice we didn’t mention better outcomes because outcomes don’t matter but saving money does. Here too we see Dexcom having an advantage given their work with UnitedHealthCare which specifically targets patients with Type 2 diabetes.

The reality is when the new G6 system arrives from Dexcom, likely in the second half of this year, Libre will have an even greater fight. The G6 as the company noted at JPM will be factory calibrated and come with new more patient friendly insertion device. This will take away two advantages patients note with Libre no calibration and easy insertion. Our guess is, and we think it’s a very good guess, Dexcom is already talking to payors about the G6 and will compete on price taking away another advantage. All things being equal combined with what we are hearing from physicians Dexcom will be favored system.

This then places Abbott in an interesting position as they then must match the performance of the G6 while adding several enhancements to make the Libre a true CGM. Whereas for Dexcom it’s much easier to dumb down the system if they choose to do so and we don’t think they will. Rather the slap it on turn it on sensor will have all the features of the current system but will come with a much lower price point, in essence it will be just as “easy” to use as the Libre is today just cheaper.

Perhaps the best way to think about this is look at a company like Nordstrom. Nordstrom would have an easier time moving down-scale than say a Target moving upscale. Like it or not the Libre could soon have a perception problem being seen as a “cheap” system which really isn’t a true CGM. They would then have the burden of not just matching Dexcom’s performance but doing so with added features that would make the Libre a true CGM.

One last note on the sales numbers that are coming in from Europe, the fact is Dexcom blew this one and seriously underestimated Abbott’s commitment to Libre. Simply put they are playing catch up overseas. So yes, Libre is doing well overseas, but this success has as much to do with Dexcom’s mistakes than Libre performance. The real test is just now coming for Libre when it competes here in the US and no disrespect to our friends overseas but that’s the minor leagues compared to the US.

Game on!