What’s the over/under?

What’s the over/under?

While it would have been unthinkable to even write about this 5 or 10 years ago, the day has arrived when the question needs to be asked. How many more years until glucose test strips become obsolete? Has continuous glucose monitoring combined with new drugs made a conventional finger stick monitor obsolete? Will this obsolescence occur before we see the arrival of a generic test strip?

Let’s attempt to answer these questions by looking at who still uses test strips. It should surprise no one that insulin pump patients even with the advent of CGM still are the most frequent users on average testing 8 times per day. Pumpers are followed by patients following multiple daily injection (MDI) therapy, who are in turn followed by patients following insulin plus oral(s) therapy and of course followed by those patients just on orals. It just so happens that the least frequent users also happen to be the largest group of patients.

Considering the increasing popularity of sensor augmented insulin pumps Diabetic Investor suspects that in 4 years over 80% of insulin pumpers will be using this type of system.  This will dramatically alter the test strip landscape as insulin pump patients which make up less than 3% of the patient population account for nearly 25% of test strip usage. We also believe that once Dexcom (NASDAQ: DXCM) and Google launch their new CGM platform greater than 50% of MDI patients will adopt it. Take away insulin pump combined with a significant share of MDI patients and it easy to see why sales of test strips will fall even further in the future.

This creates an interesting conundrum for companies like Johnson and Johnson (NYSE: JNJ), Roche and Abbott (NYSE: ABT). Although JNJ has become the market leader they also are aware that the bottom is about to drop out. Yes, they have rightsized their unit but in just a few years even this rightsized unit will find it difficult to make money.  Roche and Abbott have bigger problems as even with cost cutting neither company has significant share to survive over the longer term.

Yet this is just the tip of the iceberg. Think about all the new cloud enabled monitors, companies like Livongo, TelCare and iHealth. The question needs to be asked once the Dexcom/Google system becomes available, or something like it, are these systems needed. Does it not make sense that cloud enabled CGM is better for the patient then systems which collect data a single point at a time. The question is can these companies transform themselves from providers of hardware/software to just providers of systems? Where sales of hardware, i.e. test strips are not essential to making a profit.

What was once unthinkable has now become not only thinkable but a very distinct possibility. Now Diabetic Investor does not envision the complete disappearance of conventional monitors, yet when was the last time anyone used a rotary telephone? Having followed the CGM path since its inception it’s just a matter of time before CGM sensors are not just more patient friendly but as cheap as test strips are today. Once price parity is reached with test strips why would any patient use a conventional monitor other than to calibrate their CGM? Take away the need for calibration, no longer a question of if but when, and it’s difficult to find reason for hope.

But this is just half the story as new drugs will also exacerbate the problem and it’s not just increasing GLP-1 usage that will hasten the demise of test strips. Newer, smarter and longer acting insulins are on the way. As are oral GLP-1’s. The simple fact is as drugs get smarter testing is less and less essential for Type 2 patients.

Even before these new drugs hit the market test strip usage among Type 2 patients has been declining.  Given that numerous studies have failed to show a correlation between glucose testing and improved outcomes for Type 2 patients we see this decline continuing. To Diabetic Investor it is no longer a question of if but when payors will stop reimbursing for test strips for their Type 2 patients. This will just add one more nail in the test strip coffin.

No matter which way conventional BGM companies turn there is little reason for optimism. The pie which used to be big and fat has shrunk. What once was a growing thriving market has transformed into a shrinking commodity market. This situation reminds Diabetic Investor of a funny movie starring Danny DeVito called “Others People Money”.  In the movie DeVito states that at one time there must have been hundreds of companies that made buggy whips but over time as the horse and buggy was replaced by the automobile so went companies that made buggy whips.

He concludes his speech by stating that the very last buggy whip maker was the best damn buggy whip maker there ever was. But what was once a thriving growing industry has become nothing more than a niche product used by a handful of people.

Looking at the conventional BGM market it looks like life is imitating art.  The fat lady is warming up and getting set to sing the conventional BGM market swan song. What was once unthinkable has become very real.