When all else fails
This morning Roche announced significant price reductions for their ACCU-CHEK® Aviva and ACCU-CHEK® Compact Plus Meter Care kits effective immediately. According to a company issued press release; “Effective immediately, customers will see an everyday shelf price of about $20 for each of the two ACCU-CHEK(R) blood glucose meter care kits wherever ACCU-CHEK(R) products are sold.”
According to Dan Kane, Vice President of Marketing for Roche,” We’re all feeling the pinch of these current economic times, but there are just some things we shouldn’t skimp on-our health is one of those things. By offering people with diabetes new and innovative technology at affordable prices, we hope to encourage them to begin and continue to effectively manage their disease and achieve positive outcomes."
Earlier this week Roche reported positively awful results for their diabetes care unit with sales declining 12% in the fourth quarter of 2008. Diabetic Investor speculated that it may be time for Roche to abandon the blood glucose monitoring business given their lack of a coherent strategy. During their conference call the company indicating they we’re taking several steps in an attempt to revive this struggling unit. Given this announcement Roche appears to have chosen price as their strategy option.
For those with short memories this is not the first time a BGM company has chosen to use price as weapon to gain market share. A few short years ago Abbott (NYSE:ABT) began offering huge rebates to managed care in attempt to gain share. While this strategy worked initially, competitors quickly fought back with price cuts of their own. This is the problem with this strategy, just as technological advances are quickly copied by competitors so are price cuts.
This attempt by Roche to spin this price reduction as a way to help patients with diabetes during economic times is a shallow attempt to cover up a much bigger problem with the Accu-Chek franchise. Given that most patients can get a new meter for free lowering the shelf price of a meter kit will do little to increase share. As Diabetic Investor has said too many times BGM companies could give away meters and test strips for free and this would do little to increase average testing frequency.
The real problem for Roche is that don’t even know who their target consumer is. As a way of comparison look at LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), who has made clear they want to penetrate the frequent tester market, namely patients taking insulin. Bayer has also been successful by making no-coding the centerpiece of their strategy. The problem for both Roche and Abbott is they have no target market and no brand identity. It’s awfully difficult to gain or keep share when you don’t know who your customers are.
This strategy also has another major pitfall, just as before when Abbott pursued this strategy, competitors won’t sit ideally by and will likely match any price cuts. This is particularly problematic given that BGM companies are already under intense pricing pressure. Add in the fact that growth in the overall BGM market is flat and you have a very dangerous combination. Diabetic Investor is not aware of any business that thrives when the products they sell are getting cheaper by the day and the market the sell these products in isn’t growing.
The BGM market has been changing dramatically over the past few years and we are quickly approaching the point where meters companies will have to make some very serious decisions. Already we’ve seen all the major BGM companies taking steps to lower their costs. Sales forces have been trimmed and marketing budgets cut. Compounding the problem is the growing belief that regular glucose monitoring does not improve outcomes for the largest market segment, patients with type 2 diabetes.
Looking towards the future it’s highly unlikely things will get any better. The growing usage of GLP-1’s as a treatment for type 2 diabetes makes glucose monitoring even less important. Unlike patients taking insulin who use their glucose readings to properly dose their insulin, drugs such as Byetta are dosed at the same amount regardless of what a patient’s glucose readings are. This is why LifeScan made the wise choice of targeting insulin using patients. They see what’s coming and want to have a dominate position in a market that uses their products on a regular basis. This is also the reason they acquired insulin pump marker Animas and signed a deal with insulin pump market leader Medtronic (NYSE:MDT). For LifeScan it’s all about selling test strips to insulin using patients.
What Roche and Abbott ultimately have to decide is whether to stay and fight or sell out. Some may recall the early days of personal computers when there were 10 or 15 manufacturers all basically selling the same thing. Each time one company came out with something new it was quickly copied by a competitor. When technological innovation wasn’t enough to generate new sales, these companies started lowering their prices. At that point it became a battle over efficiency.
This is what happens when you’re dealing with a consumer commodity market, which is what the BGM market has become. The fact is we really don’t need 50 different glucose meters especially when they all do basically the same thing the same way. By focusing on technological innovation and price rather than creating a need for your product in the eyes of patients BGM companies are doomed to see their once hefty margins collapse.
Frankly Diabetic Investor isn’t surprised by what’s going here and has seen it coming for some time. BGM companies had every opportunity to prevent this from happening. Instead of trying to expand the market and aggressively promote the benefits of regular glucose monitoring they became fat and happy when the market was growing at double digit rates believing falsely that technological innovation was the key to market growth. When the studies began to show that type 2 patients weren’t experiencing better outcomes even when they tested, they sat back on their heels.
To their credit at least LifeScan and Bayer recognized what was occurring and took steps to deal with these changing market dynamics. Roche and Abbott however are now facing the consequences of not having a clear strategy. As Robert Kennedy said; “Great change dominates the world; and unless we move with change we will become its victims.”