The other side of the coin

The other side of the coin

Yesterday there where two major announcements which seem to indicate that interconnected diabetes management (IDM) has officially arrived. Walgreens expanded access to MDLIVE while at the same time launching a new app which collects and incentivizes glucose readings. Later in the day we learned that BGM newcomer Livongo had hooked up with Express Scripts.  These deals seem to confirm something we’ve been stating for some time when it comes to BGM the old guard is history. That unless they adapt and do so quickly these once dominate franchises will fade away.

As we noted yesterday this fall into the abyss will not occur overnight which gives the old a chance to adapt. That is should they want to do so. The reality is given where this market is going it just might time for Abbott (NYSE: ABT) and Roche to throw in the towel. Johnson and Johnson (NYSE: JNJ) is about the only company in the conventional BGM market that can possibly survive given their scale. However, it’s only a matter of time before even JNJ is impacted by slow and steady share erosion.

Now some would say these deals would also adversely impact Dexcom (NASDAQ: DXCM) we don’t think so. As everyone knows Dexcom is partnered with Google and they two companies are developing a low cost easy to use continuous system. Should the two companies be successful, and we suspect they will be, such a device would become widely used given the value of the information it provides. Given that G5 system already sends readings to an iPhone, we don’t see the Dexcom/Google device going backwards as it too will send readings to a smartphone.

One company that could be caught in the cross hairs is Medtronic (NYSE: MDT). The company has made it very clear that they want to expand beyond their core insulin pump business. That if the unit is to grow it must expand into the larger more complex Type 2 market. Logic dictates that this move into the Type 2 market will begin with insulin using Type 2’s before moving into non-insulin patients. Well this is exactly the same market Walgreens and Express Scripts are targeting.

Yes, IDM has the potential to impact all patients with diabetes no matter what their therapy regimen its insulin using patients which will see the most immediate impact. As we have noted in the past insulin using patients can take immediate action based on the information they receive. This is not the case for non-insulin using patients who require a physician’s intervention before changes can be implemented. Using IDM these patients may discover their current therapy regimen isn’t working but unlike insulin using patients they cannot take immediate action to remedy this situation.

This fact also brings up another issue with IDM as the vast majority of non-insulin patients are not as engaged in their diabetes management as insulin using patients. While these patients may enjoy being incentivized for collecting glucose data the allure of incentivizes losses its luster over time. The reason being they are unable without a physician’s intervention unable to do anything with all the advice IDM is giving them. One could also argue that these patients even when incentivized would turn away from monitoring their glucose levels as it really isn’t making their lives any easier, that it is actually adding work to their already busy lives.

This is the reason Diabetic Investor has always felt IDM had a finite market, limited to insulin using patients as non-insulin using patients even when they have help just don’t value the data. There is no action step taken once they have data. A problem that has existed since the advent of glucose monitoring. Hence the reason the most frequent testers are insulin pump patients followed by patients following multiple daily injection therapy, these data value data as they need it to properly dose their insulin.

But this is just the tip of the iceberg given the growing usage of GLP-1 therapy. Besides offering solid control with the additional benefit of weight loss, GLP-1 therapy has the additional benefit of fixed dosing. There is no need for a patient to monitor their glucose as they inject the same amount either once daily or once weekly. In that respect it’s not unlike a patient taking multiple oral medications as regardless of their levels they take the same number of pills.

These facts do not diminish the importance of what happened yesterday however it does point to another fact the IDM market has a limited patient base. That just as the conventional BGM market has become a battle for insulin using patients so too has the IDM market. Although we do not know the details of the Livongo Express Scripts deal we suspect that Livongo was not the only option for Express Scripts for as we noted the TelCare system does basically the same thing as the Livongo system. Or put more bluntly just as the conventional BGM market has commoditized so too the IDM market is commoditizing.

This fact won’t change even when outcomes based reimbursement becomes commonplace. The fact is it’s not the hardware which generates better outcomes, it’s the system/platform that this hardware is connected to which matters. Yet even here there are limitations.  As we noted yesterday diabetes management isn’t that complex, that once the data is gathered and analyzed there are only so many actions that can be taken by a patient. Frankly it doesn’t a take a genius to identify issues nor does it require advanced training to recommend an action step.

So just as the conventional BGM market has come down to battle over share so too the IDM market is following this same path. Share leads to scale and scale is critical to achieve profitability. Something even more true in the IDM market as there are more humans involved. The patient interaction may be virtual, the data may be analyzed using sophisticated data analytics and the message may be sent to the patient electronically but all these systems cost money. The difficulty we see is how does a company like Livongo differentiate their system when Walgreens, TelCare, iHealth and others do exactly the same thing. Does it not then come down to cost, is this not just another commodity?

We suspect given the direction the IDM market is headed each player will attempt to differentiate their system. However, these differences will be slight which basically means it will come down to cost. And as we have seen in the conventional BGM market there is always someone willing to sacrifice margin for share. IDM may the newest thing in diabetes management but it faces many of the same issues as old fashioned glucose monitoring.