The Chinese Connection

The Chinese Connection

There’s a Chinese saying “May you live in interesting times”, while we doubt this saying had anything to do with the wacky world of diabetes but it sure does apply. Check out this out.;

“Sinocare Inc. (San Nuo Sheng Wu) (SHE:300298), announced today it has signed a definitive purchase agreement with privately-held PTS Diagnostics, under which Sinocare will acquire PTS Diagnostics for up to $200 million in cash including contingent considerations of up to $90 million for the successful accomplishment of certain milestones.  PTS Diagnostics is a U.S.-based manufacturer of point-of-care biometric testing devices, including the CardioChek® family of analyzers, A1CNow® systems, and PTS Detect™ cotinine systems. The company’s manufacturing facilities are principally located in Indianapolis, IN and Sunnyvale, CA.”

If this sounds familiar check this out;

“Diabetes testing company Nipro Diagnostics is selling out to China’s Sinocare for $273 million, cashing in on a rapidly growing Chinese diagnostics market while charting plans for international expansion.”

With the PTS deal being announced today and the Nipro deal being done last October, Sinocare in the space of 7 months has established a presence in the US diabetes device market. Yet we have this sinking suspicion that Sinocare isn’t done just yet and that more US based acquisitions are in the pipeline.

Given how we are moving towards a systems based diabetes management platform it would not surprise Diabetic Investor should Sinocare target insulin delivery companies next. Also given their history for acquiring smaller less well-known companies it would also come as no surprise if they started not with an insulin pump company like Tandem (NASDAQ: TNDM) rather one of the many patch pump companies.

Although Diabetic Investor has never been a big fan of these “dumb” patch pumps companies, they have attracted their fair share of capital. Many seem to be under the impression that when combined with a way cool whiz bang cloud enabled glucose monitor which has a way cool whiz bang app which has a way cool bolus calculator that insulin using Type 2 patients would rather wear one of these “dumb” pumps rather than use an insulin pen or syringe. The theory basically being the fewer times a patient must inject themselves the more likely they will be compliant with their therapy regimen.

The theory also is that these insulin using Type 2 patients don’t want to use a real insulin pump as this is both too expensive and requires too much patient education. Again we don’t necessarily buy these arguments and believe that these patients when properly trained would benefit for using a real insulin pump, we certainly understand the cost concerns. Something not lost on these “dumb” patch pump companies who are positioning themselves as cheaper than a real insulin pump and on par with insulin pen pricing. Their claim is basically they will achieve outcomes on par with a real insulin pump for a fraction of the cost.

Yet given Sinocare resources and their push further into diabetes devices such a move makes perfect sense. It would also set the table for acquiring a real insulin pump company in the future and perhaps a “smart” insulin pen company too. The reality is when it comes to diabetes management particularly for insulin using Type 2 patients, cost control is the order of the day and the equally harsh reality is real insulin pumps as effective as they can be, are also damn expensive.  For all the talk about driving better patient outcomes when it comes to insulin using Type 2 patients all payors really care about is managing these patients as cheaply as possible until they either go to a different plan or become eligible for Medicare.

This is another reason the Sinocare strategy makes sense as they are not acquiring brand name labels but a collection of lesser known labels. Companies that are used to working in a world of competitive bidding and intense focus on price. Nipro is the perfect example of this as back when competitive bidding reared its ugly head we wrote that Nipro would not have a tough time adapting that they were well prepared for this environment as this is the environment they had been operating in for years. Unlike the major branded companies in the space they did not have a huge sales force, nor did they huge marketing budgets nor did they have millions invested in research and development.

Sinocare is also used to working in price sensitive markets which makes the Nipro and now PTS acquisitions even more logical. We can also see Sinocare doing something Metrika and then Bayer couldn’t do, namely increase the adoption of the A1CNow® disposable test. From the moment we started covering Metrika we saw the potential of this test. Unfortunately for the many good people at Metrika who built this company issues beyond their control forced them to sell to Bayer who never quite understood what they bought or what to do with it. And as so often happens PTS picked up the test for a fraction of its former value, not for what the product would add in the short term but rather how it rounded out their overall portfolio of products which made the entire company more attractive.

Frankly back when PTS acquired the test we thought they overpaid as we just felt there were issues with getting the A1CNow back in circulation. We did not see the bigger picture emerging, so kudos to PTS for having vision.

One last thing here as we doubt that Sinocare will be the only Chinese company making a splash in the diabetes device market. That with the dynamic growth of diabetes in China and the continued global growth of diabetes, these cash rich companies will dive into the deep end of the pool. They are also well aware that nearly every diabetes device company would be eager to sell. They are also cognizant that if they fail to act soon they will likely have to compete with Apple, Google, Samsung and the rest of tech land for these diabetes device assets. For just as Chinese companies see this market from a different perspective the same goes for these high tech also very cash rich companies.

Diabetic Investor has long suspected the diabetes device landscape would change dramatically in the next few years. We have known that there will be a changing of the guard, a kind of out with the old in with the new approach. A transition from the companies that built these markets to companies who can operate effectively given current market dynamics.

Yes, we do live in interesting times indeed.