What’s next for Bayer?

What’s next for Bayer?

Although the two events are not necessarily connected, Bayer might just learn a lesson from Express Scripts (NASDAQ:ESRX) willingness to dump Liberty Medical and move on. As we learned last week Express Scripts after shopping Liberty around decided not to overplay a bad hand and sold Liberty to its existing management team. Although terms of the deal were not made public Diabetic Investor has learned the asking price was in the $400 million neighborhood and many believe that to get this sale done before the end of the year that Express Scripts actually provided the financing. Simply put, Express cried uncle and was willing to do whatever was needed to get Liberty off their books.

Bayer, who also had been shopping their diabetes unit, is now in a similar situation and may have no other choice but to dump this unit at fire sale prices. As previously reported at one time it appeared Bayer was playing their hand to perfection as potential suitors seemed to be lining up to buy their troubled unit. Panasonic, Sanofi (NYSE:SNY) and an unnamed private equity group all took a look and made their respective bids.  For a moment it seemed as though Sanofi would end up the winner yet for reasons only know to Sanofi what at one time looked like a great deal all of sudden went south and they too pulled their bid and walked away. So what once looked like a winning hand turned completely around and Bayer was left holding the bag.

Now Bayer has a choice to make; stay in the game or do whatever is necessary to get out of the game. Both choices come with their respective set of issues, still there is no middle ground which Bayer can fall back on.  The bottom line here is that both options will cost the company money, just for different reasons. Should the company choose to stay in the game they must rebuild the unit that at one time was being prepared for sale. If, on the other hand, they decided to sell at a lower price they must remain committed to this approach and not let a respective buyer slip through their fingers, again.

Should the company take a realistic view of the glucose monitoring marketplace, the choice to Diabetic Investor is obvious – sell and sell now. The fact is even if they decided to try and rebuild this troubled unit; it’s highly unlikely the investment needed, which is huge, would pay off in the long run.  Frankly the reasons Bayer wanted to sell to begin with have only gotten worse and not better.  The reality is no amount of money can change what’s happening in the glucose monitoring market.  Issues like competitive bidding, declining usage and increasing pressure from private payors will not go away.

The day is quickly approaching when another Diabetic Investor prediction will come true, in that, soon the BGM market will be the domain of two, possibly three major players and plethora of smaller companies.  These smaller less well-known companies will basically fight for the scraps left behind by the major players. The Medicare market, a market that accounts for nearly a third of all strips sold, will be fought over by bunch of cheap imports. The remaining major players will survive thanks to their scale and their ability to transform themselves into more than just peddlers of devices but seller of services which help improve patient outcomes.

The future of diabetes devices, not just glucose monitoring devices but insulin pumps, alternate insulin delivery systems and continuous glucose monitoring systems, is they must evolve into what we are now calling integrated diabetes management system; systems which do more than deliver a test result or drug.  Just as the computer industry evolved from value being placed on the makers of hardware to the makers of software, so too will the diabetes device industry evolve.  The truth is Sanofi was on the right track with their attempt to become the first seller of diabetes management systems but they just couldn’t execute.  However, Sanofi’s failure will not deter others from trying as they, like Diabetic Investor, understand that in order to survive they must evolve from being the makers of hardware to the sellers of systems.

The harsh reality for Bayer is they are ill-equipped to become part of the future and would be better off getting out of the market entirely even if that means selling at fire sale prices.  It is also true that while they sale did not finalize the last time; there are still several potential suitors who would be willing to take another look provided the price is right. The key here isn’t whether they should sell or not but what price will they accept to get this deal done.