This is so typical

This is so typical

Just a day after rumors were flying that Abbott (NYSE:ABT) is getting set to sell their consumer diabetes business to Bayer, Diabetic Investor is now hearing that Bayer is planning a massive layoff for their diabetes unit. Word is that Bayer will reduce their already diminished sales team by 50%, which actually really isn’t news as nearly every company in the market is getting set or already has made major reductions to head count. These reductions in head count will also be accompanied be further cuts to marketing and R&D budgets. The simple truth is that all the major companies are in full blown panic mode desperately trying to figure out how to deal with the coming impact of competitive bidding.

Given the drastic reduction in Medicare reimbursement it really is no surprise that the majors are considering every option no matter how crazy it is to deal with the situation. The fact is margins which have been shrinking for years are about to shrink even further. While dramatic cost cutting measures will help in the short term, these measures are like putting a band aid on a major laceration and will merely slow down the bleeding but do nothing to stop it.

As we have noted previously even with consolidation whoever is left standing will still need to deal with selling at lower prices into a market where usage is also declining. We’ve said it before and we’ll say it again until someone finds a way to increase testing frequency within their installed user base all the cost cutting in the world won’t change the future. This zest for cost cutting will only delay the day of reckoning from coming not prevent it from coming.

Although this should have been obvious years ago, the truth is the major players who have been hit by a freight train, just aren’t capable of thinking out of the box and doing something different. With all the crazy options being considered, most center not on increasing sales, but cutting costs. This is why every company and we really mean every company in the market is seriously considering throwing in the towel and getting out of the market entirely. The simple truth is all these cost cutting measures besides lessening the short term impact will make their units more attractive from a sales perspective.

Just as Dell is taking itself private, perhaps the best option for the majors is to follow Dell’s lead. Things are bad enough in the BGM market and having to satisfy the demands of investor’s only compounds the problems they are facing. The harsh reality is anyone who has invested in Abbott or Johnson and Johnson (NYSEJNJ) doesn’t care whether they sell glucose monitors or widgets as long these businesses make money. While there may be a small number of investors who have altruistic goals, the majority want to see their investments in these companies increase in value.

Taking a company private or selling to a private equity group won’t solve all the problems but it will buy whoever buys these units time. Just look at what Express Scripts did when they sold their Liberty Medical unit to its management team. Express knew Liberty did not fit into their long term plans and when they couldn’t get the price they wanted they bit the bullet and helped management buy the unit. While this may not have been exactly what they wanted they did at least get Liberty and its issues off their plate so they could concentrate on its core business. Bayer also felt this way but just couldn’t get the deal done. Now whether they have truly switched gears and have gone from being a seller to be being a buyer is anyone’s guess.

Whether part of a publicly traded company or privately held, success will only come when these companies realize that after the cost cutting is over they must find ways to increase average testing frequency among their existing user base. Failure to do so will only push the BGM market further into oblivion, a market dominated by cheap imports with razor thin margins.

Finally it should go without saying that once again it’s the patient who’s getting screwed here, especially those who are Medicare eligible. Sure the government’s intentions were admirable as with trillion dollar budget deficits it’s hard to argue against reasonable cost saving measures. However, like so many government programs they have gone too far and failed to anticipate how in their zest to save money patients would be impacted. Worse still is their focus on the short term and failure to understand that all these promised cost savings may never materialize due to the fact that patients with poorly controlled diabetes will cost Medicare far more than the cost of diabetes testing supplies.