A game of musical chairs
We are still trying to figure out the logic behind yesterday’s news that Ascensia has partnered with Senseonics. As we noted yesterday this deal doesn’t seem to have a solid business rational behind it. The best we can figure after giving it more thought is that this deal was driven more by fear than any solid business rational. That the CGM market has become so hot, that the market is growing so fast that those companies not yet in the market are playing the childhood game of musical chairs, afraid that when the music stops they will not have a chair to sit in.
We shouldn’t have to remind everyone that when it comes to CGM Dexcom and Abbott have the two biggest chairs in the game, and they are not giving them up. Medtronic also owns a chair and while not a big chair it’s highly unlikely they will surrender their seat either. The remaining BGM players LifeScan and Roche have either partnered with a Dexcom wannabe or have ventured into CGM without much success. Remember that Roche was partnered with Senseonics before Ascensia came along.
It’s also no secret that there are a host of Dexcom wannabes that continue to garner investor attention. At last count, and there are so many here we might miss a few, there were something like 30 companies in the race to develop a CGM. Some of these companies have a shot but most will fail. It’s difficult to handicap this race as there are so many hurdles these Dexcom wannabes have to overcome before they can realistically be called a CGM company.
Obviously step one is to get the system through the FDA, which as we have seen is not an easy task. Once they jump over that hurdle step two is to get the system into the hands of patients which makes getting through the FDA look like a cakewalk. Getting the system into the hands of patients is actually several hurdles which includes the complex maze of reimbursement, formulary, distribution and the ability to manufacture on a massive scale. But that isn’t the last hurdle next comes supporting the system and of course there is the biggest hurdle of all, competing with Dexcom and Abbott.
It comes as no surprise to us since we are older than dirt that the CGM market has developed along the same lines as the BGM and insulin pump markets. Back in the day LifeScan, Abbott, Roche and Ascensia (then called Bayer) owned 85%+ of the BGM market. The remaining players and there were many were left to fight over the scraps the Big Four left behind. In the insulin pump market Animas, Tandem and Insulet had an uphill fight against Medtronic who back then controlled 75%+ of the market. The fact is had not Medtronic screwed the pooch combined with JNJ’s comedy with Animas Tandem and Insulet would not be enjoying the success they are seeing today.
BGM was destined to fail as CGM is superior technology. Medtronic was not destined to fail even though others had better technology, Medtronic failed thanks to a combination of arrogance and hubris. A lesson that should not get lost on all the Dexcom wannabes and their investors. While it’s possible that Dexcom and/or Abbott will screw up a very good thing it’s highly unlikely. Dexcom has perhaps the best management team in diabetes devices and Abbott isn’t that stupid although they have shown recent signs of lapses in judgement. The point is these wannabes will have to do more, much more than just be as good as Dexcom and Abbott if they are to have any hope at all of being commercially viable.
The fact is what all these wannabes really want is to be one of the chairs in the game and this recent deal just gives them more hope. They see what we see, a hot market getting hotter and more players than there are chairs. They see not just Roche waiting for the music to stop but other non-traditional players who also want a CGM to call their own. This is why they are able to raise even more money as investors have every reason to believe that a greater fool will come along and pay handsomely to have their heads bashed in by Dexcom and Abbott.
In this respect the CGM market is very much like the old days of the insulin pump market, as just as there are a plethora of Dexcom wannabes today back in the day there were an equal number of Medtronic wannabes. Smith’s Medical had the Cozmo, Roche owned Disetronic then bought Medingo and JNJ had Animas. All of these companies and/or systems are now in the insulin pump graveyard. Medtronic crushed the Cozmo using the heavy hammer of IP, Roche proved the best way to create a small fortune is to start with a big one and JNJ never fully embraced Animas and that is an overly kind statement.
We hate to keep saying this, but it is true, any idiot can make an insulin pump it takes real talent to run a commercially viable insulin pump company. That same statement can be revised for CGM the only difference being that developing a CGM is much more difficult than building an insulin pump. Yet it still holds true that it takes real talent to run a commercially viable CGM company and talent is in short supply these days.
The harsh reality here is thanks to Ascensia these wannabes are emboldened. They would like nothing better than some other fool to come along and offer $80 million for their system. Just as all the digital health players are doing the happy dance because of the Livongo Teladoc merger, all the Dexcom wannabes are doing the hippy hippy because of this deal. They know the music will stop, a scramble will ensue for a chair and they hope it’s their chair that gets landed on.
This my friends is how the game is played, enjoy the music and mad scramble.