The Abbott Grinch
Here we are just days away from Christmas and Abbott (NYSE:ABT) is about to play the role of the Grinch or Ebenezer Scrooge, depending on which Christmas tale you prefer. Diabetic Investor has learned the company has scheduled a mandatory conference call for all the Abbott sales reps on Monday and speculation is rampant as to what will be discussed. Will the company announce further layoffs; will it be another executive departure or a combination of the two?
Frankly Diabetic Investor would not be surprised with either move as the company like others in glucose monitoring continues to struggle with adverse market conditions. No matter what is announced on Monday, Diabetic Investor suspects this is the beginning of the end for Abbott Diabetes Care as it’s just a matter of time before the unit is sold and after billions spent Abbott exits the diabetes device business.
The fact is this unit has never recovered from some very bad decisions made by the previous management team and the roots of Abbott’s demise can be traced back to the day they bought Therasense. Back then Diabetic Investor questioned whether Abbott with their conservative culture could successfully integrate the entrepreneurial Therasense into the company. As it turned out, almost from the start this was not a match made in heaven as Therasense employees began leaving the company or were forced out by Abbott.
Perhaps the best example of how badly this acquisition was managed, actually mismanaged is a more accurate statement, came when the company insisted on pursuing a replacement indication for Navigator, their continuous glucose monitoring system. While Medtronic (NYSE:MDT) and Dexcom (NASDAQ:DXCM) followed FDA protocol and understood the agency was not ready to approve any CGM system as a replacement for a conventional glucose monitor, Abbott decided Navigator would be different. Although everyone else understood the FDA was not yet comfortable with CGM technology, Abbott charged ahead insisting they could get the FDA to see the light and approve Navigator as a replacement for not adjunct for a conventional glucose monitor.
This decision was not only foolish from a regulatory perspective; it was equally foolish from a patient perspective, just as the FDA was becoming comfortable with CGM technology, so where patients, physicians and educators, the people who would actually use the product. The central fact is even if Navigator had received a replacement indication; patients would still use their conventional monitors to confirm the Navigator was accurate. There was no way a patient would make a therapy decision based on the Navigator until they became convinced the system was delivering accurate information. This was particularly true given that back then CGM’s were targeted at insulin pump patients and patients following a multiple daily injection therapy regimen. The fact is Abbott believed a replacement indication would provide them with a marketing advantage when in reality that was not the case.
It’s important to note that when CGM technology first hit the market, patients often complained about inaccurate readings, sensors that failed and missed readings. This isn’t all that unusual for new technologies as often times the first generation of any new technology experiences glitches. Even today with the dramatic improvement in CGM technology the FDA has yet to approve any system as a replacement for a conventional glucose monitor.
Abbott compounded their mistake when they had to reverse course at the FDA which further delayed Navigators approval. Although many considered the Navigator to be a superior product, both Dexcom and Medtronic were able to gain traction in the market. This made Abbott’s job even more difficult as when the Navigator finally did receive approval it had to play catch up with two well established systems that were already offering updated versions of their products.
Rather than go to back to the drawing board and improve the Navigator, the company made yet another mistake by pricing the system higher than the already established competition. Abbott somehow believed that patients, who were paying for CGM out of pocket, would pay more for a system that frankly was not as good the competition. The Navigator was not a bad offering, rather Dexcom and Medtronic had the advantage of learning from past mistakes and updating their technologies. Given that insurance companies were just beginning to consider reimbursing for CGM; Abbott had no reason to push Navigator onto the market.
A more appropriate strategy would have been to price the Navigator lower than the competition, while working on improvements to the device. When insurers started reimbursing for CGM, which they did, introduce an improved version of Navigator. Considering that the CGM market was still in its infancy and that this technology was just beginning to gain traction in the marketplace, the company at least had a chance. They may not have been able to switch patients from their existing to the Navigator yet given the small size of the market at that time the company would have been in better position to compete for new patients when the market expanded, which it did.
Although Diabetic Investor would not go so far to state that the issues with the Navigator were the direct cause of Abbott’s current problems, we would use the Navigator disaster as an example of how badly managed the diabetes unit was. Looking back it’s fair to say the conservative nature of Abbott sucked all the spirit and drive from Therasense. Although we’ll never know if things would have turned out differently had the company at minimum listened to the folks at Therasense, the mere fact they believed they knew better and would not listen speaks volumes as to why Abbott has now run two glucose monitoring companies into the ground.
Diabetic Investor cannot blame the current management team one bit for what they now have to do. As we have noted far too often market conditions for glucose monitoring are abysmal and getting worse. All the major BGM companies have instituted dramatic cost cuts in an attempt to prevent further margin erosion. New, well capitalized competition is coming into the market with a serious cost advantage. Strip usage continues to erode and will fall even further as GLP-1 therapy gains traction.
It should go without saying that insulin using patients hold the keys to the glucose monitoring kingdom. It should also be obvious that BGM companies will never regain control over pricing and that advanced technology will not drive market growth. The fact is the BGM market is a fully mature commodity market where costs overrule technology. Give Abbott credit for seeing this and taking whatever steps they deem necessary to remain profitable. Frankly they owe it to their shareholders given the way things have gone and the billions they have already spent, or as some would say- wasted.
This year it looks like Abbott Diabetes Care will find a lump of coal in their Christmas stocking.