The Irony

The Irony

Yesterday we witnessed the end of era when Johnson and Johnson (NYSE: JNJ) released fourth quarter and full year results. Today we witnessed a reemergence of a once dead company when Abbott (NYSE: ABT) released fourth quarter and full year results. The short story here is that Abbott adapted to change while JNJ didn’t. Yes, we know its more complex than that, but Abbott read the tea leaves better than JNJ. Abbott saw the future was CGM, invested heavily and hence is now the leader in CGM.

Let’s take a quick look at the results per the company Libre is adding 50,000 per quarter an astonishing number considering sales in US have just begun. The company also stated they will be investing “several hundred million” in Libre. Bottom line as we anticipated future versions of Libre will look like what Dexcom (NASDAQ: DXCM) is today. We also believe based on this another prediction will come as there will be multiple versions of Libre – the current version along with systems targeted at more intensively managed patients.

This as they say is the good news, now let’s look at the not so good news.

As well as Libre is doing some issues are coming into clearer focus. In particular the Libre sensor has a problem in the lower ranges. Issues which are addressed in the label. Some analysts have examined the MAUDE database and noted adverse event reports directly related to this issue. This has lead many to conclude that Libre is better for non-intensively managed patients, while Dexcom is better for intensively managed patients.

While we agree somewhat with these conclusions it should be noted that this difference between Dexcom and Libre will dissipate over time. With the money Abbott is investing we suspect sensor accuracy will improve. We further suspect future versions of Libre will include greater connectivity options plus alerts and alarms.

The short story with Libre is Abbott made the decision to do CGM on the cheap. They realized they could not compete head to head with Dexcom, but they could beat them when it came to price. With Dexcom doing all the heavy lifting validating CGM technology, Abbott correctly sensed that an opportunity existed for a low-cost system which wasn’t exactly a CGM but could become a CGM.

Based on their comments today we see no reason to change our view that a bloody price war is coming. A price war that no one really wants but will force Dexcom to make some interesting choices. Dexcom is ready for this but unlike Abbott they cannot hide the impact. And let’s not forget that Medtronic (NYSE: MDT) also is getting ready to enter this market and have indicated they aren’t afraid to use price as a weapon.

Looking ahead we see this not as a battle over accuracy or even system features. The real battle is expanding patient access and this battle will be fought with payors. As we consistently note intensively managed patients are the low hanging fruit in this market, but the real money will come from expanding the market to non-intensively managed patients. And the only way this happens is convincing payors to expand coverage for CGM. And the only way this happens is getting the cost of CGM on par with BGM.

Dexcom is preparing for this day and we suspect Abbott is as well. Both companies will talk about improving patient outcomes but they both understand outcomes aren’t important to payors but lowering and/or controlling costs are.

The reality is CGM has the POTENTIAL to change diabetes management for ALL patients not just those using insulin. However, the only way this happens is by expanding access to CGM and that’s not in the hands of Dexcom or Abbott but payors. Once again this isn’t about whiz bang way cool it’s about money.