The technology has changed the dynamics haven’t

The technology has changed the dynamics haven’t

Before we begin our analysis of the Abbott earnings and call a word on the music selected as we waited for the call to begin. Now we know it’s typical to hear this boring classical stuff but being a Chicago based company, the headquarters are actually located in Libertyville, but hey close enough, why not get with the spirt using the theme song for our beloved first place 5-1 Chicago Bears. Just saying.

Now another first place team is the FreeStyle Libre which continues its strong performance internationally while improving domestically. Yes sales growth in both markets is impressive yet the actual numbers tell more of the real CGM story. In the first nine months of 2020 diabetes sales totaled $2.35 Billion with 74% or $1.73 Billion coming from International markets. By comparison Dexcom sales are almost the exact opposite with the bulk coming domestically with international lagging.

It’s no accident Abbott launched their new FreeStyle Sport Biosensor and received a CE mark for the Libre 3 in Europe. No disrespect to our European friends but getting a CE is nothing compared to receiving FDA approval. Something Abbott found out with the Libre 2 which did get iCGM but cannot be used with automated insulin dosing (AID). And not to get off topic does anyone else believe that a little horse trading was done between Abbott and the FDA, with the FDA getting a COVID test and Abbott getting iCGM for Libre 2.

The simple fact is this Abbott kicked Dexcom’s butt overseas, Dexcom compounded this butt kicking by making mistakes and has been playing catch up overseas ever since. Domestically the opposite is true Dexcom is kicking Abbott’s butt with Libre lagging behind but improving.

While this dynamic is obvious it does have real implications on future sales numbers and growth rates.

1. Abbott is committed to their value strategy for Libre noting that Libre 3 in Europe will carry the same price point as previous versions. The company knows the G7 from Dexcom is coming and wisely has chosen not to provide any opportunity for Dexcom to undercut when it comes to price.

2. The company is also aware that domestically Dexcom has a stronger position with payors and while Libre might be cheaper than Dexcom it is not taking away Dexcom’s formulary advantage.

3. Now it would be possible for this to change IF Libre 3 was here in the USA or would be coming soon but it isn’t. First the company must solve the AID issue for Libre 2 before having any chance whatsoever for Libre 3. Based on the comments made by the company today and the AID issues surrounding Libre 2 our educated guess is that Libre 3 is a year or more away from being here in the USA.

4. This creates the following scenario with Dexcom launching their G7 in the USA well before the Libre 3 even gets submitted to the FDA. Besides being more advanced than the G6 the G7 also comes with much lower COGS allowing Dexcom to fend off any possible price competition.

5. The fact is the domestic market here in the USA is vastly different than the European market and not just in terms of the regulatory path. These differences extend to reimbursement, distribution and patient usage. These differences favor Abbott internationally and hold them back domestically.

As we have said continuously, and yes this play on words is intentional, Abbott and Dexcom OWN the CGM universe. Both companies are doing quite well and will continue to do quite well. CGM usage continues to increase becoming the standard for glucose measurement while at the same time usage outside of diabetes is showing signs of life which will only throw gas on an already raging fire.

What won’t happen is a major price war which would begin a race to the bottom decimating what is a very good thing. Abbott has the resources to pursue this option but won’t for several reasons. First there really is no reason to go nuclear as the franchise is doing fine and the outlook is very bright. Second, the FDA is standing in the way which prevents Abbott going head to head against Dexcom. As much as Abbott tries to downplay the AID issue with Libre 2, the AID market is important here in the USA and will become even more important when Tyler gets here, and Tyler is almost here.

We don’t think Abbott will make the same mistake with Libre 3 that they did with Libre 2 in that they will not submit it to the FDA if they aren’t 100% sure there will be no AID issues. They cannot suffer another embarrassment as they have with Libre 2 and Libre 3 MUST have this capability if it is to compete here in the USA. Yes CGM usage is expanding beyond insulin using patients but the fact is insulin using patients are driving growth just as they did when conventional BGM was all the rage. The technology is different now, but the market dynamics are not.

It would be a MAJOR mistake to believe that either Abbott or Dexcom would do anything to kill the golden geese who are laying all the golden eggs. Yes there is some serious competition between the two players, but this competition is very healthy. Neither management team is stupid nor wants to venture down a path which lead only to disaster. Both companies know competition is coming and this competition will use price as a weapon to compete and gain share. This happened in BGM and will happen in CGM.

Right now Abbott and Dexcom are both playing Pac Man gobbling up patients at an incredibly rapid rate. For the moment they are like Google and Apple peacefully coexisting with each staking out their own territory and in their own way helping each other by doing so. They know the clock is ticking, that competition will eventually get here but until then it’s all about patients and as we’ve said over and over the company with the most patients wins the game. Right now both Abbott and Dexcom are winning.