Walgreens Earnings – Changes to the competitive landscape

Walgreens Earnings – Changes to the competitive landscape

Yesterday Walgreens (NYSE:WAG) released their fiscal third quarter earnings and announced a new initiative to help patients with type 2 diabetes achieve better outcomes. The company also indicated the due to the tough economy consumers are shifting away from brand name products and moving greater share of their purchases to private label products.  Chief Executive Gregory Wasson said Walgreen has seen a double-digit increase in sales of its private-label brands. "Today’s consumer is more value driven than in the past and this may be a permanent shift," Mr. Wasson said.

Before we address the new diabetes initiative, this shift in consumer behavior towards less costly private label products has broad implications for the blood glucose monitoring market. Back in the day branded BGM products were considered superior to their private label competitors. While this may have been true a few years ago, companies such as Home Diagnostics (NASDAQ:HDIX) and AgaMatrix have done an outstanding job of producing products that are as good, some would even claim, better than their branded competitors. Consumers no longer have to sacrifice features or quality when using a non-branded monitor.

With the explosion of meter offerings over the past few years consumers can now choose from over 40 different monitors. Still in the eyes of consumers there really isn’t much difference between the products as most patients don’t use many of the advanced features these monitors offer. To the majority of patients they want a monitor that’s easy to use. With little product differentiation and industry consolidation retailers have begun to offer fewer monitors. There was a time when you would walk into a Walgreens or CVS (NYSE:CVS) and a consumer would find a wide selection of monitors. This is no longer the cases as retailers have sharply cut back the number of meters displayed.

Branded companies have long assumed they would maintain their market dominance given that their products are widely reimbursed by insurers. While this is true a change is underway as co-payments for BGM supplies, namely test strips, have been rising as insurers and employers are passing along a greater share of health care cost to the consumer.

Branded companies also face another problem as several studies have indicated that testing by type 2 patients does not lead to improved outcomes. Adding to this problem is the newer therapies options for type 2 patients. As more physicians move their type 2 patients to GLP-1 therapy which is delivered in a set dose regardless of glucose levels there is little need for a type 2 patient to regularly monitor their glucose levels.

Finally with retailers placing greater emphasis on their private label products, products that come with higher margins than branded offerings, we will soon see the day when retailers offer even fewer monitors. Diabetic Investor can see the day coming when retailers will offer just one branded monitor along with their private label offering. This is good news for companies like HDI and LifeScan but very bad news for Abbott (NYSE:ABT), Bayer and Roche.

As we noted before LifeScan’s strategy of targeting insulin using patients has been particularly effective. To their credit LifeScan correctly anticipated the changes coming to the BGM market and designed their entire strategy around capturing insulin users who test on a regular basis. Bayer has done an effective job of focusing on no-coding but this feature is now becoming standard throughout the industry and is no longer the advantage it once was. It’s also well known that neither Abbott nor Roche has been able to develop an effective strategy that separates their products from the competition.

HDI has the edge in the private label segment as they are already well established here. AgaMatrix has a fine set of products but has limited market potential. As good as their monitors are retailers aren’t anxious to switch their customers out of their existing private label customers primarily made by HDI. The saving grace for AgaMatrix could be LifeScan’s lack of a no-coding monitor. LifeScan really has no interest in playing in the private label arena but does have a hole in their product line. With the addition of a no-coding monitor LifeScan would have a complete product line and have the ability to blunt any further advances by Bayer. LifeScan does have a no-coding monitor under development but AgaMatrix would be cheap fix that would quickly fill the hole in their product line.

The BGM market has undergone several transformations over the past several years. With retailers following the lead of their mail-order counterparts who long ago embraced private label monitors, the industry is getting set for another round of consolidation. The fact is there are just too many monitors that do basically the exact same thing. Branded companies are no longer in control of their own destiny as market dynamics are forcing change upon them.

Turing our attention to the new program for type 2 patients Walgreens offered few details as to just how they hope to accomplish their goal of improving patient outcomes. According to Wasson; “In coming quarters, we’ll pilot a chronic care management service in four markets, focused initially on Type 2 diabetes. The service will integrate capabilities across all of our platforms, including pharmacies, retail clinics, call centers and mail service, to enable patients to better control their conditions.”

Given this statement Diabetic Investor isn’t quite sure if this will be just another attempt at disease management or something truly unique that actually involves something more than just calling up the patient to remind them to check their glucose levels. The fact is patients with type 2 diabetes, adults in particular, don’t respond well to disease management. This is not an indictment of disease management rather this has to do with the nature of diabetes. Diabetes is not a disease state where the patient can follow a few simple steps and see immediate results.

As we have said often diabetes is 24x7x365 job with no days off. To achieve better outcomes the patient must consider a wide range of issues. Complicating matters even further is the fact the patient rarely sees tangible results which provide the positive reinforcement necessary to continue with the program. For any program to succeed it must involve more than a patient being reminded by their pharmacist or call center to take their medications, eat properly and monitor your glucose levels. This has always been the downfall of disease management and diabetes, the patient rarely, if ever, receives the positive reinforcement they need to continue with the program.

It should not be lost that Walgreens isn’t initiating this program out of their concern over the dismal state of diabetes in this country where nearly two-thirds of patients are not properly controlling their diabetes. The patient with diabetes is the golden child for retail pharmacies such as Walgreens generating nearly $4,500 in sales each year. Patients with diabetes also visit the pharmacy more frequently than patients without diabetes providing the retailer with the opportunity to sell even more non-pharmacy related items.

While Diabetic Investor applauds Walgreens for this initiative as always the devil will be in the details. All too often these initiatives end up being nothing more than thinly disguised attempts at selling more items. Diabetic Investor has no problem with Walgreens selling more items however this will only happen if the patient fully understands why they should following the messages that are being sent to them. If this sounds familiar it should as patient education is the key to driving sales. Walgreens can talk all they want about using call centers, clinics and the pharmacist to engage the patient but when the rubber meets the road the patient still needs to understand why they are doing all this.

This is not unlike the problem that has plagued the BGM market where the majority of patients fail to monitor their glucose levels on a regular basis. BGM companies have falsely believed that advanced technology would remedy this problem. Yet with all the advancements that have made monitoring more patient friendly the fact is average testing frequency remains where it was ten years ago. If patients do not value the information provided it really doesn’t matter how easy it is to get this information.

The simple fact is patients with diabetes don’t live their lives for their diabetes they live their lives with diabetes. For reasons unknown to Diabetic Investor companies have never seemed to grasp this fact when designing their various initiatives. For the sake of the millions of patients with type 2 diabetes let’s hope that this initiative by Walgreens is not just another lame attempt at disease management and goes beyond reminders and actually provides patients with the education they desperately need. Given what we’ve seen with past initiatives Diabetic Investor isn’t optimistic.