This one hurts

This one hurts

Diabetic Investor was aware that things weren’t
going well for the blood glucose monitoring market and yesterday’s results from
Johnson and Johnson (NYSE:JNJ) we’re the first indication that the market
conditions could be worsening. Today Abbott (NYSE:ABT) reported their third
quarter results and for the diabetes care unit the results were flat out
terrible. For the quarter sales domestically were off 14.1%, internationally
sales were up 2.4% but reported an 8.2% decline due to the impact of foreign
exchange. For the first none months of the year to date basis us sales are down
10.5% domestically and up 3.6 internationally but reported a 10.5% decline due
to the impact of foreign exchange.

Tomorrow we’ll hear from Roche and from
what Diabetic Investor has been hearing their results could be even worse than
both JNJ and Abbott and that just boggles the mind.

Looking at the results from JNJ and Abbott
and adding in the expected results from Roche tomorrow it’s about to time to
start speculating who will cry uncle first and do a deal. As Diabetic Investor
has previously report the deal that makes the most strategic sense is a
Bayer/Abbott combination. Although Abbott’s results have been less than
spectacular they do have a strong presence in the insulin using patient
population. With the introduction of new Bayer ContourUSB monitor it appears
Bayer has now set their sights on the insulin using patient as well.

Still the most compelling driver for this
deal would be cost savings. With the BGM market contracting and cost pressure
intensifying lowering costs is critical for long term survival. Besides the
obvious savings from the elimination of duplicate operations, a Bayer/Abbott
combination would provide the new company with the leverage they need to
compete for managed care contracts. Should such a deal take place it would make
the BGM market a three horse race with one horse, Roche, running backwards.

Bayer has proven their metal by reviving a
once dead franchise and could use this experience to reinvigorate the FreeStyle
brand which was popular with insulin using patients.

The reality of the situation in BGM is
there are too many companies selling exactly the same thing. It’s also obvious
that JNJ is about the only BGM company that has a solid grasp on the realities of
the market and has taken steps to deal with these new realities. An
Abbott/Bayer combo would also have a window of opportunity to steal share from
Roche as they continue to operate without a strategy. Even with all its
problems the BGM market is still a $9 billion market.

The key to winning in BGM isn’t product innovation
but strong operational efficiencies. The added scale of a Bayer/Abbott combo
would go a long way towards achieving the necessary efficiencies. As Diabetic
Investor has said before this deal makes so much sense that it probably won’t
ever happen.