The Future for BGM

The Future for BGM

Diabetic Investor believes the blood glucose monitoring (BGM) market has reached a critical juncture. As everyone knows the government has announced the results for competitive bidding which resulted in a stunning 43% cut in reimbursement for test strips. Although it is unclear at this point as to how many of the winning bidders will actually opt to participate the long term outlook for pricing is not favorable. Should insurers pattern their reimbursement rates on what the government has done this could turn the BGM market upside down.

We are already seeing signs that the market is changing as the each member of the Big Four, LifeScan, Roche, Bayer and Abbott (NYSE:ABT) is in the midst of developing a strategy to deal with this new pricing environment. The company with the clearest strategy is LifeScan. Understanding that the market dynamics are changing LifeScan has decided to set their sights on the frequent tester, namely insulin using patients. First the company went out and acquired insulin pump maker Animas, next they signed a deal with Medtronic (NYSE:MDT) to become the exclusive monitor for Medtronic’s line of insulin pumps and most recently the company acquired the Children With Diabetes (CWD) web site. LifeScan knows that insulin pump patients monitor their levels more frequently than any other patient and account for nearly 25% of all test strips sold. They also know that insulin using patients account for over 75% of all test strips sold. This clear focus on the insulin using patient should help the company weather the coming changes to the market and increasing pressure to lower strip costs.

Bayer has done a fabulous job of exploiting their no-coding monitors. Stressing ease of use over fancy technology, the company has set their sights on adult patients. It was only a few years ago that everyone, including Diabetic Investor, had given up on Bayer. Still as successful as their turnaround has been the company is about to run into a marketing issue. While they did sign a deal with Medtronic to be the exclusive monitor for Medtronic line of insulin pumps outside the US, they don’t have any other connections to pump companies domestically.

Abbott just signed a deal with Insulet (NASDAQ:PODD) which compliments their existing relationship with Deltec. Although Roche’s insulin pump unit has yet to show signs of life after spending over a billion dollars to acquire Disetronic it’s doubtful they would abandon the pump market without a fight. As mentioned earlier LifeScan not only owns Animas, the number two player in the insulin pump market but has a deal with market leader Medtronic. This leaves Bayer in a rather precarious situation, can they continue to grow share without an insulin pump relationship?

Looming on the horizon is the once-a-week version of Byetta, by far the most widely anticipated drug in the diabetes market. Byetta LAR is game changing technology that will not only affect insulin sales but test strip usage. Unlike insulin Byetta is not dose dependent or put another way patients using Byetta don’t need to check their glucose levels prior to administering the drug. Whereas insulin patients must not only know what their glucose levels are, they must also take into account their carb intake, insulin on board and activity level when calculating how much insulin to take. A patient on Byetta simply dials out a dose and shots.

LifeScan knows that they have a limited amount of time before LAR hits the market and is doing everything they can to capture the insulin using patient prior to LAR arriving. By squarely positioning themselves as the monitor for insulin using patients the company is protecting their test strip franchise. While there may be some patients who switch from insulin to Byetta therapy, the market is large enough and growing fast enough to support this commitment.

This commitment to the insulin patients serves another purpose as it protects the company from the coming changes to reimbursement for the non-insulin using patient. Already we have seen insures increase co-payments for test strips and with government’s recent actions more pricing pressure is on the way. Diabetic Investor believes it’s only a matter of time before insurers change reimbursement entirely for non-insulin patients as there is little hard evidence that testing in this large group of patients improves outcomes. It is not outside the realm of possibility that insurers would stop reimbursing for non-insulin using patients altogether. While this may seem like a drastic step, healthcare cost are rising and the body of scientific evidence that testing in this group improves outcomes is thin at best.

These changes have opened the way for low cost producers such as Home Diagnostics (NASDAQ:HDIX) and AgaMatrix. Without huge and costly infrastructures both companies have the ability to produce a good product at a low cost. Realizing that consumers of test strips see all products as basically the same insurers, mail order companies and retailers are likely to expand their presence in co-branded monitors. Liberty Medical which was recently acquired by Medco (NYSE:MHS) was the first to pioneer the use of co-branded monitors and is the model for why co-branding works. The bottom line is Liberty customers have a greater affinity for the Liberty brand name then they do for LifeScan, Accu-Chek, Bayer or Abbott.

While retailers such as Walgreens (NYSE:WAG), CVS (NYSE:CVS) and Rite-Aid (NYSE:RAD) have long had co-branded monitors Diabetic Investor suspects they will place increased emphasis on their own products as their many customers seek low cost testing supplies. As with the Liberty brand name the consumer more closely identifies with the Walgreens, CVS or Rite-Aid brand than they do with branded products.

A little further down the road is the threat of generic test strips. Once again rising healthcare costs and patent expirations will drive prices down even further. Just as the government, pharmacy benefit managers and insurers push their patients to use generic medications the same will occur when generic test strips arrive on the scene.

At the moment it appears that LifeScan has the most coherent strategy to deal with the changing dynamics of the BGM market. While Diabetic Investor is impressed with what Bayer has accomplished these past few years it’s unclear if they can maintain their momentum. A task which is becoming more difficult as their competitors continue to roll out monitors that do not require coding. For Abbott and Roche, Diabetic Investor isn’t quite sure they have a strategy. Roche does have the advantage when it comes to market share but as we have seen in the past what the market gives the market can take away. Abbott has a host of issues and their track record in this area is less than impressive.

Diabetic Investor wonders if just a few years from now if the Big Four will become the Big Three or Big Two. The changes taking place are already underway and the very survival of some companies are at stake. This could get quite interesting.

David Kliff
Diabetic Investor
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