Whatever happened to ……
As we noted recently the wacky world of diabetes has a long and distinguished history of wacky deals. Deals which for one reason or another never resulted in the desired outcome. Yet for each deal that hasn’t worked out there is another that never materialized, deals that everyone thought would get done but never happened. Diabetic Investor mentions this given all the attention surrounding the many newcomers entering the blood glucose monitoring market.
On the surface it would seem strange that anyone in their right mind would want to be in this market. Strip usage isn’t growing, prices continue to contract and competition is fierce. Frankly there is a reason that Bayer is desperately trying to sell their BGM unit to Panasonic/KKR, Roche is taking their diabetes device unit private and Abbott (NYSE:ABT) is struggling to develop a strategy. About the only company that seems to be here for the long term is Johnson and Johnson (NYSE:JNJ) but even JNJ would exit this market if the right offer came along.
The simple fact is the days when strip volume drove profits are coming to an end and these companies know that. They see the handwriting on the wall, they know that in the future outcomes are what matter and quite frankly these companies were not built for this environment. This is also why all the major players have instituted dramatic cost cutting programs, rightsizing their units so they can make a reasonable margin while this market transitions yet again.
Sensing an opportunity companies like TelCare, iHealth, Livongo and OneDrop are stepping in. What all these newcomers have in common is their belief that interconnected diabetes management (IDM) will become the standard of care. That in the future outcomes will truly matter, that reimbursement will be tied to outcomes. They also realize that the old model of driving greater strip volume is not the path to profits that revenue growth will be tied to the number of patients on their platform not how many strips these patients use.
Perhaps the best way to think about this is examine how the mobile phone market evolved over the years. Way back in the day when mobile phones were in their infancy things like unlimited calling packages, unlimited texting and data packages did not exist. There was no such thing as bundled pricing. Today bundling services – voice – text and data are commonplace, revenue isn’t tied to usage but how many subscribers a company has. Subscribers who are paying a monthly fee. Yes there are still a minority of users under the old model but they are few and far between.
Given the number people who are cutting the cord many suspect that cable TV is about to undergo a similar transformation. That the days of subscribers being forced to pay for channels they don’t watch are coming to an end. That in the future these subscribers will only pay for the channels they actually watch.
As we have noted many times it’s difficult picking winners among the many newcomers to BGM. This has much to do with the state of the market as the companies themselves. Yet we can’t help but suspect that many of these newcomers believe they really don’t have to execute, that eventually a larger player will come along and buy them. The main difference is the larger player won’t be a company currently in the diabetes device space, rather it will be someone like Google, Apple or Facebook. That these cash rich tech companies, all of whom have diabetes projects underway, will do what they done in the past – pay huge multiples for whiz bang way cool technology.
Listen when Facebook pays almost $20 billion for WhatsApp it’s hard to argue with these newcomers. They see Google and their way cool glucose measuring contact lenses or the way cool now way dead iBGStar which worked with the equally way cool iPhone.
What they don’t see and likely never heard of are companies like AgaMatrix or Intuity Medical, two companies who at one time or another were thought to be sure fire takeover candidates. Two companies that everyone thought would follow the path set by many before them- raise a ton of venture money – go public raising even more money and then get acquired. A path followed by Medisense, Inverness Medical and Therasense just to name a few.
The only problem was AgaMatrix and Intuity for all their way cool technology and buzz failed to follow this path. Instead of reaping major profits for their investors they created major headaches. AgaMatrix in particular is an interesting story as they seemed to have everything going for them. Great products, plenty of money, solid management and an experienced board of directors. Many, including Diabetic Investor, believed that it was just a matter time before someone would come along and buy the company.
Well needless to say that didn’t happen and not necessarily because of any major mistakes made by the company. Unfortunately for the good people at AgaMatrix they came in at the tail end of BGM expansion right as the BGM market was transforming into a full blown commodity market. For all the positives this company had they could not outweigh the fundamental changes that were going on in the BGM market. Put simply timing is everything and AgaMatrix missed their window of opportunity.
Intuity is a different story as it’s not so much about missing their window of opportunity rather failure to execute. The company had a neat little product with the Pogo all in one device, no it wasn’t revolutionary but it was nice improvement over existing systems. The simple fact is most people who don’t have diabetes fail to realize all the stuff a patient has to carry with them each day. That the simple act of performing a glucose test really isn’t that simple and that the less stuff a patient needs to carry around the better. While Diabetic Investor never expected the Pogo to be major hit we did see a need for it and believed that it would make a nice addition to an existing portfolio of meters.
While timing wasn’t great what really killed Intuity was their failure to execute. Heck they couldn’t even get the Pogo through the FDA a critical step if they were ever to achieve their ultimate goal which of course was to be acquired.
The question Diabetic Investor has for the many newcomers in BGM is have they learned anything at all from history. Heck are they even aware of this history. Being successful in this market isn’t about whiz bang way cool technology, AgaMatrix, Intuity and the iBGStar are perfect examples of this. Being successful in BGM is about understanding not just where the market is today but where it’s going. Today more than ever it’s about the ability to execute to prove that their way cool whiz bang technology actually produces better patient outcomes.
Like we said before we don’t know who the winners and losers will be but there is one thing we do know that it would be wise for these newcomers to brush up on the history of this market. For as it’s been said many times best to learn from history as it’s destine to repeat itself.
