Wise Investments?

Wise Investments?

It seems as if almost every day there is announcement from one or more companies who have received fresh capital. Just last week we learned that CeQur one of many patch pump companies raised another $100 million. This followed news that Unilife (NASDAQ:UNIS) who also has a patch pump is exploring a sale of the company. Now word comes that LabStyle Innovations (OTCQB: DRIO), the makers of the Dario glucose monitor has raised another $2.5 million.

According to a press release issued by the company back on August 31;

“LabStyle Innovations Corp. (OTCQB: DRIO), developer of the Dario™ Diabetes Management Solution, today announced it recently closed a round of funding totaling approximately $2.5 million. Funds will be used to support the global rollout and initial U.S. commercial launch of the Dario, a mobile, cloud-based, diabetes management solution that includes novel software applications combined with a stylish, ‘all-in-one,’ pocket-sized, blood glucose monitoring device, and for working capital purposes. The Dario recently launched in Canada with reimbursement through a majority of medical plans and the U.S. Food and Drug Administration’s clearance is anticipated in the coming months.”

To date the company has raised over $23 million and has a current market cap of $12.7 million.

As it notes in the press release the Dario monitor is yet another glucose monitor that attaches to a patients smartphone and sends readings to the cloud. More information on the system can be found at the company’s web site www.mydario.com.

Now Diabetic Investor has nothing against this device just as we have nothing against similar devices from iHealth, TelCare and Livongo. Nor do we have anything against devices from the old guard, Johnson and Johnson (NYSE:JNJ), Roche or Abbott (NYSE:ABT) which also send readings to the cloud. Same goes for the good folk at Glooko who help patients with non-cloud enabled monitors become cloud enabled. As we noted in the past thank goodness there is lots of room in the cloud with all this data flowing there.

Yet as the cloud becomes crowded with data some very old problems remain in the glucose monitoring market. This is still a commodity market where price trumps performance. This is still a market that has far too many products that do exactly the same thing the same way. This is still a market where scale is critical, where achieving scale isn’t easy and is also very costly. This is still a market that is barley growing, where usage is actually declining and likely to decline further in the future. This is a market that will not only be adversely impacted by new technologies i.e. the Dexcom (NASDAQ:DXCM)/Google Band-Aid like patch but also new drugs i.e. the growing usage of GLP-1’s, a class of drugs which do not require a patient to monitor their glucose readings. And should we mention that the threat of generic test strips is very real.

Yet money continues to flow into the BGM market, which begs the question are these investments actually wise. Or put another way what do these investors see that we do not see. Perhaps we’re missing something here and this market which by all accounts seems to be circling the bowl isn’t as bad as it looks. Listen Diabetic Investor as right as we have been on this market may be losing it, and if you follow us on Twitter there are many who share this sentiment.

Given that there has not been a major acquisition in this space since Abbott acquired Therasense back in 2004 these investors can’t be thinking that a big player will come along and buy a small one. Yes we know that Panasonic/KKR just bought Bayer’s diabetes device unit but as we noted there was already a connection here and this move was not offensive. Simply put had Panasonic/KKR not come along it was quite possible that Bayer would have shut down this struggling unit. The reality is Panasonic was already bound to Bayer and risked losing everything if they did nothing. Yet even if this deal was made for other reasons Bayer has something these smaller players don’t; an installed user base. True it’s not what it once was but Bayer as bad as they’ve been managed holds the fourth position in terms of market share. Plus the Bayer brand name although not as valuable as it once was remains well recognized.

So if selling to a bigger player is not an option, or at least not a realistic option, why are these investments being made? It can’t be because one company has something no one else has. Even with all these new whiz bang way cool monitors that send readings to that crowded cloud. Even these new whiz band way cool systems do the same thing the same way. They all have fancy apps, they can interact with a patient, and they all can refill test strips automatically. Go ahead and visit the web site for iHealth, Livongo or TelCare we dare you, in fact we’ll double dare you. Then tell us why one is so much different than the other.

Ok so a buyout doesn’t seem possible, nor does it appear that any of these systems are unique – why then are investments being made? Could it be that these systems fit perfectly into the coming wide spread adoption of interconnected diabetes management (IDM)? Could it be that using such a system actually does produce better patient outcomes?

The answer to the first question is yes these systems do fit perfectly into the coming of IDM. However this reason by itself does not justify the investments being made, here’s why.  As the answer to second question is more important and very unclear at the moment. We say this as to date no company has been able to draw a straight line between the use of their system and better patient outcomes. There is no question these systems impact outcomes but to the extent they are THE reason for better outcomes is unclear.

Unlike a drug it’s very difficult to prove that a device impacts outcomes, this is possible when looking at insulin injections versus an insulin pump, but not so easy with a glucose monitor. The reason IDM works is not because the meter obtains a reading, the reason it works is because a series of readings are transmitted to the cloud where along with additional pieces of information this data is analyzed, and then recommendations are transmitted back to the patient. As we have stated all along it’s not getting data that matters its turning all this data into patient relevant actionable information that counts. Getting the data is the easy part knowing what to do with it all is the hard part. The reality is all these new way cool whiz bang systems have proven to date is they can get data to the cloud and then communicate back to the patient. They have yet to prove that THEIR system results in better patient outcomes.

Diabetic Investor has seen the PowerPoints these companies use with investors and just as all the products are the same so too are the presentations. They all talk about the worldwide epidemic growth rate of diabetes. They all talk about the size of the BGM market. They all claim to have a system which will produce better patient outcomes. Most claim to have multiple revenue streams combined with low COGS. Yet they all offer little if any data to back up these claims, like Donald Trump there’s lots of rhetoric but little substance.

Listen it’s commendable many have been able to get their system through the FDA onto the market and in the hands of actual patients. However this fact alone does not justify the money being thrown into these systems. Until someone comes along and actually proves their system produces better outcomes, and does so with real hard data, then all we have is conjuncture- one big fat maybe. Yet even this may not be enough as it remains an open question just how much payors will pay for all this way cool whiz bang technology.

In a world where there is lots of talk about outcomes and how in the future reimbursement will be tied to outcomes, that day is still not here and quite frankly no one is quite sure what it will look like when it does get here. The harsh reality is payors are still looking for the cheapest method for managing their patients with diabetes. There also aware that just as they have pricing power and control market share with conventional systems, the same situation is developing with these new systems. The fact is just as payors pit one company against another they will do the same with these new way cool whiz bang systems.

We have said many times when it comes to this wacky world of diabetes companies can steal more money with a good PowerPoint presentation than they could with a gun. We’ll now add a new statement as there are only two things that might be infinite: the universe, and human stupidity–and we’re not sure about the universe.