Will Bayer make major news soon?
The demise of the glucose monitoring market has been well documented on the pages of Diabetic Investor. Today the market has fully transformed itself into a commodity market where price is the overriding factor determining market share. Try as they might the major glucose monitoring companies cannot change this dynamic and some remain oblivious to what’s really going on in the market.
On common strategy employed by the major players has been cost cutting. Diabetic Investor cannot find a budget line item that hasn’t been cut. Yet, even with all this cots cutting companies are still looking for more and creative ways to cut costs in a desperate attempt to maintain their fat margins.
One company looking at creative ways to cut costs even further is Bayer, who reports earnings on Thursday. Unlike LifeScan, Roche and Abbott (NYSE:ABT), Bayer does not completely control their manufacturing costs as they outsource a major portion of the manufacturing. This is one reason why the company cannot sell the unit. Realizing that their options are limited some believe the company will take the drastic step of eliminating their field sales force.
At first glance such a move may seem drastic but given market conditions this move may not be as drastic as some believe. Consider that sales reps, commonly called meter maids in the trade, responsibilities have changed over the years as market conditions have deteriorated, the question becomes are field reps still necessary? Back in the day reps carried a greater responsibility which went beyond just dropping of boxes of free monitors that physicians could hand out to their patients. With technology changing rapidly reps played the role of educator explain to physicians and their staffs how all this technology worked and why it was important to the patient.
All this has changed as today most monitors do exactly the same and there really isn’t much difference between brands. While formulary placement has always played an important role in determining market share, today formulary placement is critical. The reality is formulary placement is now more important than monitor technology. In the real world physicians do not tell patients which monitor to use, as they also know most monitors are basically the same. Instead they simply ask the patient which monitor their insurance plan covers and then writes a script for that particular brand. Add in the fact that many physicians’ offices no longer see sales reps and in their zest to cut costs many companies have cut back on or eliminated sampling, the role of the field sales rep has been greatly diminished.
Considering all this Diabetic Investor cannot think of a reason why a company like Bayer could not handle questions and inquiries internally or through a dedicated website or both. It’s not like the physicians or more realistically the physician’s staff doesn’t know how to use the internet or pick up the phone. Rather than spend all that money on keeping reps in the field, Bayer could save a boat load of capital by concentrating their sales efforts on distributors and insurers. While this may not be comforting news to reps in the field the fact is their role is no longer essential.
This is also one reason a company like Sanofi-Aventis (NYSE:SNY), who also reports earnings on Thursday, may have a strategic advantage as they enter the market. Sanofi already has an army of insulin reps calling on physicians who could easily be trained to push Sanofi monitors. It is also well known that insulin users dominate the monitoring market, so for Sanofi this move makes even more sense. Such a move also plays well into Sanofi’s longer term strategy of selling diabetes management systems rather than individual products. Finally it also helps Sanofi when looking at potential acquisition targets.
Let’s say that Diabetic Investor is correct, something that’s happened once or twice, and they do acquire Abbott’s diabetes device unit. As we have reported on several occasions this move makes perfect sense from many perspectives. Yet the move makes even more sense when one considers that Sanofi could basically eliminate the majority of the Abbott field sales force, therefore making the capital cost of such an acquisition more palatable.
Just in case there is anyone who still believes that a large and expensive field force is a must have, take a look at Nipro Diagnostics, formerly called Home Diagnostics. Nipro has been able to build a nice and stable market share by basically outsourcing their sales and marketing costs to their customers. Rather than flood the market with free monitors, the company’s nimble sales team calls on the key decision makers and leaves the direct to consumer marketing up to their true customers, retailers like Walgreens, CVS and Rite-Aid.
There is no reason a name brand company cannot follow a similar strategy. All one has to do is take a look at the monitor display in a retailer. Retailers, realizing the value of shelf space, have dramatically altered their displays downplaying the major brands and playing up their store branded offerings. Should this trend continue, and we think it will, it won’t be long before patients will be basically choosing between the store brand and one or two branded products. The reality is the days of retailers offering every monitor available are over. Shelf space is just too valuable and retailers, who make more money selling their store branded offerings, want to push a greater percentage of their customers into their offering.
Retailers aren’t the only companies limiting options, as insurers are also following this strategy as they too realize there is no need to cover every monitor on the market. Here they are taking a page from the playbook of Liberty Medical, now owned my Medco. Back in the day Liberty understood that they had a tremendous amount of influence over their customer’s choice in glucose monitors. Using their huge installed customer base as a heavy hammer the company could demand and receive substantial price concessions from the major players who were desperate for share.
Insurers realizing the importance of formulary placement are beginning to follow the Liberty strategy. As Diabetic Investor has reported in the past, monitor manufacturers have lost all control over pricing and now are basically at the mercy of insurers who have the power to demand and receive price concessions. In their own way an insurer is not that different than a retailer rather than having valuable shelf space to sell, they have the equally valuable formulary placement to sell and the reality is the major brands cannot survive or maintain share without access to formulary placement.
Given this set of market dynamics eliminating an expensive field force that is solely dedicated to pushing monitors isn’t that dramatic as it may first seem and quite honestly could become commonplace in the not so distant future. The real question isn’t whether this will happen but which of the major players will be the first to make this transition. Will it be Bayer, we just might find out this week.