The first domino

The first domino

Recently Diabetic Investor has come across a series of companies who are developing new blood glucose monitors (yes there are still people crazy enough to enter this space) or apps to help patients better manage their diabetes.  To listen to these newbie’s one just might get the impression there is no such thing as competitive bidding, intellectual property issues, declining usage, continued pricing pressure and competition. It also seems these newbie’s think the FDA is a sweetheart of an agency that’s easy to work with. Yet the biggest issue these companies have whether they have a device or an app is they believe patients actually test their glucose levels on a regular basis.

In fact the foundation on which these companies are built presumes that patients test on a regular basis. The reason for this is actually pretty simple if the patient doesn’t test there is no reason for these companies to exist. BGM companies being in the razor/razor blade business only make money when patients test. Diabetes apps need this information so they can help patients better manage their diabetes, no glucose data no reason to use the app.

It’s actually pretty interesting to listen to these companies talk about how they can make it cheaper, how they will navigate the FDA, get on formulary, build a sales organization and get people to download their app. They have some truly terrific PowerPoint presentations with some way cool graphics and lots of study data that supports there particular endeavor. They acknowledge that market dynamics are less than ideal but they are going to change all that because what they have is so damn good everyone will want it.

Yet these very smart people, many of whom who have experience in BGM or diabetes in general become tongue tied when asked a simple question; “How are you going to get patients to test on a regular basis?” It’s as if we asked them to explain the theory of relativity or the Cover-2 defense? These very smart people become blithering idiots when asked this simple question.

The truth is getting patients to test on a regular basis is the first domino that must fall. That without this act BGM companies can’t make money and apps can’t do all the way cool stuff patients want. Yet it continues to amaze Diabetic Investor that we are the only ones who ask the question. That none of the people who have invested in these companies seem to understand that the money their investing is riding on the hope that patients actually test their glucose levels on a regular basis. These people the companies and their investors just seem to assume that patients will actually test on a regular basis.

Well folks we hate to break the news but the vast majority of patients DON’T test on regular basis and likely never will. Average daily testing frequency for patients with diabetes is 1.7 tests per day. The most frequent testers are insulin pump patients who test on average 6+ times per day. Amazingly although there are only about 500,000 insulin pump patients they account for nearly 20% of all test strips sold. Next up are patients following multiple daily injection therapy (MDI) who on average test 3 to 4 times per day. Next up are patients using an insulin blend or Lantus plus orals.

Knowing this it’s easy to understand why an insulin using patient are so coveted by BGM companies and app designers. These people actually test as they need this information to properly dose their insulin. Put more simply they value this information as it is actionable. Yet these are the same people who are gravitating towards continuous glucose monitoring (CGM).  Anyone who thinks that LifeScan, Roche and Abbott (NYSE:ABT) are happy about Dexcom (NASDAQ:DXCM) working with every insulin pump company other than Medtronic (NYSE:MDT), who has their own CGM, think again. They know that insulin pump patients because of CGM will use far fewer test strips.

This is why all the major BGM companies aggressively target MDI patients as this is about the only patient group that still favors conventional BGM and uses enough test strips so the BGM company can make some money.

Quite frankly it’s not just bad business to target non-insulin using patients, it’s just plain foolish.  The fact is while this information is valuable to these patients, it’s rarely actionable. Think of it this way, when an insulin using patient tests and has a higher than normal reading they can do something. Take that same higher than normal reading for a patient who’s not using insulin or is using Lantus, and there is really nothing they can do about it. Truth is CGM would be more valuable for non-insulin patients as it would let a physician know sooner whether the patient’s therapy regimen was actually working. Given the treatment to failure mentality of physicians better to know the patient is failing sooner than waiting three to six months for the next HbA1c test.

This is why Diabetic Investor has been somewhat skeptical of all these new whiz bang ideas. Yes these devices are way cool and the apps when used as intended can help a patient better manage their diabetes. Yet all these way cool devices and super-duper apps are built on the foundation that patients actually test their glucose levels on a regular basis and this is clearly not the case. It’s not that these are bad ideas, actually they are excellent ideas. The problem is there isn’t a sustainable business model here.

Years ago Diabetic Investor had a heated discussion with a respected group of diabetes industry veterans. Our belief was that if patients were incentivized for testing they would test more, they would get in the habit of testing. Our belief was that once these patients, who were in effect being bribed to test, were able to see why this data was so valuable they would continue testing on regular basis. Based on hundreds of studies we knew that whenever education was married with data, patients better managed their diabetes.

Given this was way back in the day when the BGM industry was fat and happy, no one seemed to care as they felt the good times would last forever. Never mind that Diabetic Investor warned these people the good times wouldn’t last forever and they better plan for the coming change. Nope money was falling from the sky why worry. Now the sky is falling and they are just beginning to test the idea of incentivizing patients for monitoring their glucose levels. The question is whether this effort is too little and too late.

To Diabetic Investor what makes this situation even worse is that these newbies to BGM or the diabetes app world don’t have a problem raising money. Investors continue to be deluded into believing that just because diabetes continues to grow at epidemic rates that they can make money. That even a small share of this huge market translates into a nice profit. Well the truth is this is just not the case.

For over 20 years Diabetic Investor has seen this happen, this belief that a company can build a better mouse trap. Investors buy into the idea believing that the diabetes market is so big and growing that this new mouse trap will succeed. Yet for all these years no one has been able to knock over that first domino, the domino which would start that chain reaction that leads to success.

Back in the day when BGM was growing by double digits, reimbursement allowed for huge margins and the FDA was somewhat cooperative no one cared. Well today BGM is barley growing and there is strong evidence the market is actually contracting. Reimbursement flat out sucks which has set up a situation where either a company has huge scale or forget about making even the slightest profit. The FDA unfortunately has become regulatory not less which only adds to the cost.

The harsh reality is that today getting that first domino to fall is essential, that without this action a BGM company can’t make money and an app no matter how cool can’t do much good without data to analyze.  Until someone figures out how to knock down that first domino all this talk about the good they can do is just that talk. And from what we’ve heard lately most of this talk is just plain hot air, again nothing new here either.

We’ve said it before and we’ll say it again a company can steal more money with a good PowerPoint than they can with a gun. Well what’s going on today is highway robbery or stupidity, take your pick.