The death march continues

The death march continues

Let’s get right to the numbers as just like yesterday the numbers tell the story very clearly – Abbott (NYSE: ABT) Diabetes Care – US DOWN 31.6% International sales UP 11% on an operational basis and 4.8% on a reported basis – here is what the earnings press release has to say;

“Worldwide Diabetes Care sales decreased 5.2 percent in the quarter on an operational basis and 9.1 percent on a reported basis, including an unfavorable 3.9 percent effect of foreign exchange. Strong international sales growth was driven by continued consumer uptake of FreeStyle Libre, Abbott’s revolutionary Flash Glucose Monitoring System that eliminates routine finger sticks and finger-stick calibration. During the quarter, Abbott received European approval for use of FreeStyle Libre in children and teens. In the U.S., sales were impacted by competitive and market dynamics.”

Ok now that numbers are out of the way and we now have seen the results for Johnson and Johnson (NYSE: JNJ), Roche and today Abbott what does it all mean for the future of conventional glucose monitoring or perhaps looked at from another perspective when will the end actually come.

Now before we get too maudlin Diabetic Investor can not yet imagine a world devoid of conventional finger stick point to point glucose meters. As valuable as we know continuous glucose monitoring data to be, we are not yet at the stage where those who do monitor their glucose levels only use a CGM. The simple fact is there will always be subset of patients who ae actually better off with a conventional meter and don’t really need a CGM.

And before we move on here there seems to be a debate raging in the diabetes community on whether or not it’s appropriate to call the FreeStyle Libre a CGM. Frankly it should be called the last desperate attempt to remain relevant in diabetes by a company that has screwed up not one but two diabetes device acquisitions. Just for good measure they also screwed up a pretty good CGM, paid to have an insulin pump developed, approved by FDA yet never launched. Listen we really don’t want to dump on our good friends in Libertyville, but the facts are what they are.

The reality with the Libre is the company is still heavily subsidizing the product and is NOT making any money on it. Yes, the Libre has some nice features and the fact that it does not require calibration is a plus.  But the fact is Dexcom (NASDAQ: DXCM) and Medtronic (NYSE:MDT) both have actual CGMs which are far superior to the Libre, systems they don’t have to subsidize.  Abbott seems to believe that by constantly touting the Libre it will cause people to overlook the deficiencies in their core BGM unit. As they say you can put lipstick on a pig but it’s still a pig.

Now that we cleared that up – let’s take a look at the future for the conventional BGM market. Yesterday the question was posed to Diabetic Investor given the dismal market dynamics for BGM is it possible that a company like Roche for example would just say the hell with it and walk away. While BGM companies have done some incredibly stupid things we cannot imagine any company just saying the hell with it and walking away. As we noted previously we can see a scenario when a company like Roche spins off their unit into a separate privately held company.

Another possibility for all the players is to sell to a private equity group or throw themselves at Google, Apple, Samsung or any of the other high tech cash rich companies looking to dive even deeper into diabetes.  Basically they all want out but they don’t want to get out without getting something in return.

The real question is how much pain must they endure before they realize that these once cash rich units are worth a mere fraction of what they think they are worth. We like to call this the ouch factor. This is like someone with back pain who is considering surgery. As much as this person may not want to go under the knife they will eventually capitulate when they can no longer tolerate the pain and all other treatment options have failed. This is exactly what’s happening in BGM land.

Given that all the major players have already cut costs to the bone, there is nowhere left to cut. It’s finally dawning on these people that strip usage is actually declining and will only get worse going forward. Oh and did we mention that prices continue to fall. These folks may not be the sharpest knives in the drawer but even a broken clock is right twice a day.

This is why it’s not a question of if but when and to some extent who will be the first to cry uncle. JNJ continues to be the most valuable of the major players and would be a good fit with a high tech cash rich player. Believe it or not Roche is also valuable as they have a strong international presence. Abbott brings up the rear and no the Libre does not add that much value.

Yet the question is why would any high tech cash rich buy any of the major players other than the fact they have scale. They could easily buy any one of the many high tech whiz bang cloud enabled way cool meters and using their size build scale. Let’s be honest here is there anything really that special about any of the LifeScan, Accu-Chek or FreeStyle meters. Are they really that different from what Livongo, TelCare or iHealth has?

Heck if they want both metes and insulin pumps, something that JNJ and Roche have, both Insulet (NASDAQ: PODD) and Tandem (NASDAQ: TNDM) would jump at the chance to be acquired.

The problem with the majors is they believe a company like Google will pay a premium for scale, when this just isn’t the case. Google could easily build scale given their reach and superior analytical tools. The reality is while these franchises do have value, even Abbott’s, it’s not what they think it is. The question is how more pain must these companies endure before they come to this realization.

Right now the way we see it 5 years from today the strong possibility exists that NONE of the majors, as we know them today, will still be in diabetes devices. Yes, patients, the few left that actually use a conventional glucose meter will have no problem getting one. No CGM will not entirely replace conventional glucose meters but they will become the preferred and likely dominate device used to measure glucose.

Basically right now it’s slow death march for conventional glucose monitors. We all know what’s coming, we’re just not exactly sure when it will get here.