We knew it would be bad

We knew it would be bad

As much as Diabetic Investor anticipated more bad news from the blood glucose monitoring market sometimes it still stuns us to see just how bad things have gotten. While weren’t sure this market could get any worse todays results released by Abbott (NYSE:ABT) shows they have. More importantly they also point to a much a larger problem as with the exception of Johnson and Johnson (NYSE:JNJ) who already released results which were less than impressive, without massive scale it’s next to impossible to make money selling just test strips.

First let’s take a look at the results released by Abbott for their diabetes care unit – US sales down 16.4% for the quarter and down 24% for the first nine months of 2014. According to a company issued press release; “In the U.S., the impact of CMS reimbursement reductions and market dynamics moderated in the quarter, in line with expectations.”  That sentence is actually quite remarkable especially the last part “in line with expectations”.  That statement basically says hey folks we know results suck but they ain’t getting any better so you might as well get used to it.  The fact is no one wants to buy this unit; they can’t really run it effectively and frankly have no clue what to do next.

Now for those who believe the new Libre Flash will come in and save the day, think again. This product hasn’t even been submitted to the FDA and many industry observers doubt it would gain approval if was submitted. Yes it’s a neat little product with some neat little features but when it comes to continuous glucose monitoring and Abbott the story hasn’t changed since they screwed up the now dead Navigator. The fact that anyone would take Abbott seriously in the CGM space conclusively proves that there is no cure for stupid.

But let’s go beyond todays very bad although not shocking results and look into the future with the question being what options are realistically available to Abbott, Roche and Bayer all of whom are struggling, all of whom who would like nothing better than to get these infected monkey’s off their backs. Roche for once has a viable strategy when thy spin off their diabetes device unit into a privately heled company, a great move for the mother ship but that still doesn’t solve the problem for the unit itself.

The honest answer for the three blind mice is without a complete transformation they will die a very slow and very painful death. They will see their market share fall further behind JNJ while newcomers slowly nibble away at the remainder of their installed users. They will look for additional cost savings anywhere they can perhaps even attempt to eliminate the middle man and sell strips directly to patients, a move that will only delay but not prevent the inevitable. We hate to say it but when it comes to BGM in the future there will one major brand JNJ and a bunch of minor ones.

As we noted just yesterday the newcomers to the BGM space are a true threat to the three blind mice. Think of it this way it wasn’t that long ago when the US Armed Forces were structured to fight what we would now call a conventional war, a war fought on battlefields likely in Europe with tanks, troops and planes. Today the army faces a new different threat as terrorist don’t have defined borders, there aren’t clearly defined battlefields and the weapons used to fight have also changed. In the BGM world the three blind mice are built for an old-fashioned ground war, while the newcomers are built to fight a modern day battle.  The three blind mice also mimic the army in another way in that they are big bloated organizations resistant to change and extraordinarily slow at adopting new methods even when it’s obvious the world around them is changing.

JNJ has some of these same issues but they also have the benefit of scale and when it comes to branded BGM scale is critical. JNJ also has something the three blind mice lack as they have an actual strategy which goes beyond just cutting costs. They have already right-sized their diabetes unit and realize that it must be run differently than it was in the past. We’re not sure if the strategy will work over the long term or whether it will yield the desired result but we can see JNJ in the diabetes market five years from today while we can’t say the same for the three blind mice.

We’d like to offer some ray of sunshine, some hope that perhaps one of three blind mice might survive but that would be foolish. And to be completely honest we don’t see their demise as a bad thing, and in many respects it’s a net positive for the space. It seems like every day we write about how the diabetes market is transforming, how in the device arena it’s not a bad thing to have Apple, Google, Facebook and the like coming into this market, that excuse the expression this market needs new blood.

It’s about time that everyone understands that when it comes to diabetes management we are no longer fighting a ground war that the battlefield and weapons used in this fight have changed. That new technologies and new ways of thinking are emerging and it’s time for the old guards to either adapt to these changes or slowly fade away. Thank you for your service but the time has come to step aside.