Welcome to the BGM Death Spiral
Way back in May 2000, so far back that Diabetic Investor was a printed publication, we wrote about how the glucose monitoring market was transforming itself from a medical device market to a commodity style market where price was the driving force behind a consumer’s decision when selecting a glucose monitor.
We asked our readers to perform a simple experiment, we asked them to walk into their local pharmacy tell the pharmacist that they were a newly diagnosed patient and ask which monitor they would recommend. Then ask the pharmacist why they selected that particular monitor. Next chose any other monitor and ask the pharmacist the difference between the two options.
Diabetic Investor actually conducted this exact experiment with several different pharmacies and it should surprise no one that each pharmacist had his or her preference of monitors. It should also surprise no one that when asked to explain the difference between their preference and another option, the common answer was while there are some differences between monitors it really doesn’t matter which monitor was used as they all do basically the same thing.
Diabetic Investor reasoned that if all these monitors do basically the same thing the next logical question from the consumer would be which monitor is cheaper. Now back in May 2000 co-branded monitors were a relatively new idea and co-pay equalization plans which are common today were nonexistent. Yet the consumer still chose the cheapest option as every pharmacist noted that the consumer should go with whatever monitor was reimbursed by their insurance company.
This set off a fierce bidding war between monitor companies as the battled for prime formulary placement. Back in 2000 with the market growing at double digit rates companies could afford this battle. This was also the time when companies would dump monitors on the market giving them away with reckless abandon realizing that they would make up the cost of the monitor through the continual sale of test strips.
Fast forward to late February 2011 and the monitor market has been fully transformed into a commodity style market. But just when you thought things couldn’t get any worse for the Big Four, once again they have become their own worst enemy and have embarked on another reckless strategy that will complete this cycle and sow the seeds of their own demise. In a desperate attempt to keep the cash coming in and maintain lofty profit margins, members of the Big Four are cutting costs with the zeal they once had for giving away free monitors.
Yet even with this slash and burn approach to cost cutting nothing can stop the chain of events set in place years ago. The simple fact is after all this cost cutting their costs are still too high and even worse they are playing into the hands of lower cost manufactures like Nipro Diagnostics. Unlike the Big Four who have spent millions on building brand identity, Nipro doesn’t need brand identity as they make the store branded offerings for all the major pharmacy chains.
For years the Big Four have tried to fend off companies like Nipro and AgaMatrix, another company that makes co-branded monitors, claiming that these co-branded offerings were inferior to their branded products. While this may have been the case back in 2000, this is no longer true. Today a Nipro or AgaMatrix monitor is as good as or better than the branded product.
So in a last ditch attempt to save their franchises the Big Four have decided to play the game on unfamiliar turf as they too now want to be the low cost option. The Big Four validation for this death spiral strategy is now that they have cut costs to the bone they can use their huge volumes to lower costs even further and beat these experienced low cost producers at their own game. There’s just one problem with this strategy – it won’t work.
The simple fact is the Big Four have lost all control over pricing and now must capitulate to the demands of the people who control access to their products- insurers, wholesalers and retailers. The day is fast approaching when these gatekeepers will only offer two options- one branded line and their own co-branded line. Just take a look at what Walgreens is doing with their monitor displays. At one time the company offered every monitor available, today rather than give up valuable shelf space the monitor display is mere shell of what it used to be. But this is just the beginning it won’t be long before Walgreens, who is already giving their store branded products made by Nipro greater visibility, tells the Big Four that if they want to remain in the game it will cost them, making them pay even more for this valuable shelf space.
The Big Four are also at another disadvantage with retailers who actually make more money selling their store branded offerings. Retailers like Walgreens, Rite-Aid, CVS and Wal Mart are also waking up to the fact that the consumer is actually more loyal to their brand. Unlike a LifeScan or Roche monitor who’s test strip refills can be picked up anywhere, in the consumers mind the only place they can pick up test strips for a store branded product is that store. Given the critical importance of the diabetic consumer, a consumer who on average generates $4,500 per year in store revenue, retailers want to bind the diabetic consumer to their pharmacy.
Also looming on the horizon for the Big Four is another threat, competition. As everyone knows Sanofi-Aventis (NYSE:SNY) is getting set to enter the BGM business and it’s possible since Sanofi sees BGM as a way to sell more insulin they could turn the BGM world upside down by eliminating the middleman entirely. Rather than have test strip refills picked up at the pharmacy, Sanofi could ship refills directly to the patient. While Diabetic Investor is not a huge fan of mobile apps, they do allow a company the luxury of knowing how many test strips a patient uses each day.
Look at Sanofi and their iBGStar monitor which attaches to the very popular iPhone. Like everything iPhone the iBGStar has its very own app an app that can count test strips used and can be modified so that the patient can automatically order test strip refills right from their phone.
Sanofi also has the luxury of not needing to add any sales people to promote their iBGStar or BGStar monitors as they already have reps selling Lantus. Given the company is moving towards a system based approach to diabetes management where all the patients’ needs are provided by one company, eliminating the middleman is not just cost effective but good business.
The stark reality here is the Big Four are not equipped to deal with these changes and even if they wanted to they cannot compete in a low cost world. This mistaken belief that they can compete on price will only hasten their demise and make for a more violent death spiral. The smart move would be to get out while they still can, sell their units and use the capital for growing markets. However, as we have seen far too many times in the diabetes device world, a world where egos get in the way of smart business decisions, rarely will companies make the smart move.