Why BGM is between a rock and hard place
Recently Diabetic Investor has been testing some of the new glucose meters that have come to market. Included in this group have been the OneTouch VerioIQ from LifeScan, a unit of Johnson and Johnson (NYSE:JNJ) and the InsuLinx from Abbott (NYSE:ABT). While Diabetic Investor found both systems to be acceptable, their introduction into the marketplace brought to mind a larger issue glucose monitoring companies must deal with and illustrates why these companies are between a rock and a hard place.
Back in the day the introduction of a new meter was akin to winning the lottery, as the new systems typically came with better, more advanced technology. Since meters were given away for free, there was no cost to the patient to convert to the new system and meter companies would recoup the cost of the meter through the continual sale of test strips. This is also why meter companies aggressively pursued insulin using patients as they knew these patients tested more frequently which meant they could more quickly recoup the cost of providing the meter. In the past the glucose monitoring business used to follow the classic razor/razor blade business model.
Today market conditions have changed dramatically as meter companies are no longer providing free meters to anyone who wants one. While free systems are still available the patient must jump through more hoops to get one as meter companies have become more selective on which type of patient gets a free meter. In an attempt to cut patient acquisition costs companies are also using mail-in rebates or coupons, as they know that only a small percentage of patients will actually redeem the coupon or mail in the rebate.
This is one reason companies new to the meter business have such a hard time gaining market share. While most payors will cover new systems, it’s difficult if not impossible for these new systems to gain preferred formulary placement which basically means that patients who choose these systems pay a greater share of the cost through higher co-pays. Even when a company uses a co-pay equalization program, which lowers the patients out of pocket expense, the portion of the co-pay not being paid by the patient is being paid by the meter company which adds to their costs, which is exactly the opposite of what they want.
To illustrate the depth of this problem consider the iBGStar from Sanofi (NYSE:SNY). According to the Walgreens web site patients can purchase the iBGStar for $74.99 and save $25 using a promotional code. Sanofi is also offering a co-pay equalization program which limits the patients out of pocket cost to $20. According to the company’s web site; “With Star Savings you’ll pay the first $20 of your co-pay. Star Savings pays up to $25 on a strip count of 50 or up to $45 on a strip count of 100.” Like so many newcomers to the market Sanofi is subsidizing the cost of their system and further subsidizing its continual use.
By way of contrast consider the OneTouch VerioIQ which according to the Walgreens web site carries an initial cost of $69.99 with JNJ offering a $25 co-pay equalization program. According to the JNJ site; “OneTouch® will contribute up to $25 a month on your private insurance co-pay for OneTouch® Verio™ Gold Test Strips.”
While it seems as though JNJ is asking Verio patients to carry a greater share of the cost – $69.99 versus $49.99 for the meter and $25 versus $20 maximum out of pocket for test strips, these costs fail to take into account several factors that favor JNJ, hurt Sanofi and formulary is just one. As we noted many times scale means everything in the BGM business. Not only does scale allow for lower cost of goods sold, it’s a huge advantage when a company is not dependent on just one platform and can spread their costs across multiple platforms. Put more bluntly with the iBGStar a patient is basically in a take or leave it situation as this is the only system Sanofi offers; compared to LifeScan which offers multiple meter options.
Now Sanofi isn’t the only company facing this issue as any meter company with just one platform will face similar issues. Although a strong argument can made that Sanofi made their life even more difficult as not only did they not launch the BGStar in the US but the iBGStar was designed to be used with the iPhone, or it was at least until Apple decided to change the connector port on the new iPhone 5 which has effectively killed what little chance Sanofi had to gain any measurable share.
Even if Sanofi compounds their mistake and acquires the diabetes device unit from Bayer, the same problems will exist only this time on a bigger scale. With the iBGStar basically dead in the water, the company would then have to shift gears and spend greater sums reinvigorating the Bayer line of products. It’s not as if the Bayer product line is anything special or does not face the same abysmal market conditions everyone else does. What Sanofi should wake up to is the fact that while Bayer currently holds the number four market position; they aren’t even close to the top spot. The fact is when we scale is critical we’re talking major scale.
This is why the entire BGM market is between a rock and a hard place, patient acquisition costs are increasing, while patient revenues are decreasing and that in a nutshell is why further consolidation is on the way. This is also why more advanced technology isn’t the answer and as the iBGStar clearly shows advanced technology does have its pitfalls. Yet this being the wacky world of diabetes devices that won’t stop companies from thinking they are somehow immune to these facts or deluding themselves into thinking they have built a better mousetrap. The one undeniable fact when it comes to diabetes devices is there is no cure for stupid.