How Abbott's New Continuous Glucose Monitor Can Change The Company

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About: Abbott Laboratories (ABT)
by: Christiana Friedman
Summary

New data released by Abbott on the FreeStyle Libre Continuous Glucose Monitor shows it lowers blood sugar levels across the board by nearly a full percentage point in diabetics.

The data is consistent for all type II patients regardless of age, sex, or how much insulin they take or for how long they've been taking it.

The monitor is painless and requires no calibration and lasts 14 days, longest on the market.

This could make insulin use much more efficient in the US, a market in dire need lower insulin prices, which more efficient use can help deliver.

Abbott is relatively weak in the U.S. market, and a relatively reasonable 3.5% market penetration for this glucose monitor can increase Abbott's top line by 50%.

In the rush to wow the biotech world with ever more expensive and cutting-edge drugs, the importance of drug efficiency can get lost in the mix. Drug prices can only go so high before economics kicks in and price increases can no longer be supported. Nobody knows exactly where that point is, but it is clear that the trend to find bigger, better, more expensive blockbusters cannot last forever.

Within this biotech backdrop, Abbott Laboratories (ABT) is succeeding by making existing drugs better. And the company may have just hit the proverbial gold mine, this one in diabetes management.

Insulin prices specifically in the United States are way out of control and the government is taking notice, to the detriment of the established diabetes players. While getting insulin prices down directly would of course be desirable, the extremely convoluted United States healthcare system and its vested interests get in the way of accomplishing this with any urgency. Another way to attack the problem of high insulin costs then is to help make insulin use more efficient. In other words, help those who already use insulin to better control their blood sugar levels with it. Over time, this cuts insulin waste and helps manage costs without directly influencing the per-unit price. In standard basic economics parlance, bring down insulin demand.

This past weekend at the annual American Diabetes Association Scientific Sessions, Abbott demonstrated that it can indeed accomplish this mission. The company’s FreeStyle Libre Continuous Glucose Monitoring (CGM) System was able to show that it could help type II diabetes sufferers lower their A1C hemoglobin by nearly a full percentage point on average over a three month period. The data presented was not of insulin naïve patients either, but rather patients that have been using insulin for an average of 8 years. 360 patients were able to lower their A1C levels from 8.9% to 8%, not with new, better, more expensive insulin products, but rather with a new monitor. That’s a 10% improvement with no new medications taken.

Even more encouraging, the data was surprisingly even across all patient subgroups. Meaning, no differences based on age group, gender, weight or even duration of insulin use. There was even improvement in A1C levels across the board, no matter what stage of diabetes the patient had. That translates to better use of existing resources through and through.

Even before the new data was published, the market has already been responding to Abbott’s new CGM system quite enthusiastically. It’s hard to see without looking into filings and the specific minutiae of top line details because the segment that the new glucose monitor is subsumed under is Abbott’s smallest and most unassuming. It’s labeled “Other,” which many investors gloss over and forget to pay attention to. But it’s definitely there.

Take a look at Abbott’s segmental reporting last quarter, and you’ll find that growth is stalling, at least when taking foreign exchange fluctuations into account. Top line sales in total reportable segments is down 0.1% (page 19) year over year, but then “Other” swoops in with a 35.4% year-over-year growth rate, bringing total net sales up 2%. Total sales in “Other” reached $581 million, up from $430 million in Q1 2018. Of that $581 million, $379 million, or 65% was from sales of the FreeStyle Libre CGM. Sales growth for the monitor alone is over 70%. Now that the data is out, we can expect those figures to go much higher over the next few years.

A question of logistics

What is unique about diabetes over almost any other disease is that treatment is not just a question of what drugs to take, but one of constant testing, timing, calibration, finger pricking and injections that never ends. It is a constant war of attrition, and sooner or later, patients get tired and lax. Abbott’s new system is currently the longest lasting wearable glucose sensor on the market and since it takes its readings from the interstitial fluid in the skin, it is painless. It is also the only monitor that does not require any user calibration. It’s essentially a turnkey diabetes solution, and the numbers so far prove it.

The Bottom Line

Bottom line, where can this CGM lead Abbott over time? According to the company, it is now in use by 1.5 million patients globally (see link in paragraph 4), which constitutes just 0.35% of the global diabetes market. Extrapolating this, global market penetration of as little as 3.5% would represent a ten-fold increase in current sales figures, which translates to roughly $3.8 billion in quarterly sales, or roughly $15 billion in annual revenues. Last quarter, Abbott’s net sales were $7.5 billion, so this glucose monitor could increase quarterly sales by 50% with just 3.5% global market penetration.

With the backdrop of the crisis in insulin prices especially in the United States, it is hard to see how Abbott’s new CGM won’t be pushed hard by U.S. diabetes groups. Keep in mind that U.S. sales for Abbott are currently a weak point in its business structure. Total U.S. sales are only $2.75 billion last quarter, less than half of the International segment. The insulin pricing crisis is centered on the U.S. specifically, and therefore there is no other country where Abbott’s new CGM is needed more acutely.

There will be competition for sure, which is why I’m only using a 3.5% market penetration as my initial base case, though it could certainly go higher if Abbott stays ahead of the game and keeps making incremental improvements to the system, not really an outlandish assumption to make.

At bottom, because of a simple continuous glucose monitor, Abbott now has a real possibility of breaking into a gigantic U.S. diabetes market that desperately needs cost-lowering solutions, rather than strictly ever newer and more expensive diabetes drugs, even if they are improvements over the status quo from a medical perspective. This is certainly needed as well, but cannot be the exclusive focus in the diabetes sector.

A quick snapshot of Abbott’s finances shows a company in balance with a conservative and responsible balance sheet. It is leveraged only 11%, with debt down $8 billion since 2017, about a 30% reduction in total debt load.

The biggest near term risk to Abbott’s stock price seems to be beta market volatility, though even from that angle, if we look at Abbott’s price action during last year’s brief bear market, the stock was essentially range bound and never broke through near term support during that time. If general volatility continues due to the ongoing trade war and other destabilizing political factors, the stock has proven that it can withstand this sort of pressure in the past.

In the face of fast rising sales from a product that could broadly influence the diabetes market especially in the lion’s den of runaway insulin prices, the United States, then even at all time highs, the risks surrounding Abbott Labs look fairly low, with potential returns looking quite attractive.

Disclosure: I am/we are long ABT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.