Bid program shakes up diabetes market

YARMOUTH, Maine - With bidding for national mail order contracts for diabetes supplies underway, expect to see further consolidation in the market, as big players look to get bigger, say industry analysts.

"It's all about scale and that's what buyers are looking for," said Jonathan Sadock, partner and CEO of Philadelphia-based Paragon Ventures.

Most recently, Arriva Medical acquired Sunrise, Fla.-based Direct Diabetic Source for $5 million in January. It acquired Nashville, Tenn.-based AmMed Direct in February.

Analysts believe Arriva Medical has set its sights on becoming the dominant player in the diabetes testing marketplace.

"With significant capital resources behind them, Arriva could become one of--if not the largest--player in the sector in short order through strategic acquisitions and continued organic growth," said Kevin Palamara, a managing director with Provident Healthcare Partners.

The Coral Springs, Fla.-based Arriva itself was bought and sold in 2011: Palm Beach Capital, a private equity firm, acquired it in May, then sold it to Alere, a disease management and diagnostics company, in November.

That kind of cross-pollination is very attractive to buyers, say analysts. Another example: In June, Insulet, an insulin pump manufacturer, acquired Neighborhood Diabetes, a Woburn, Mass.-based provider, for $63 million, bringing together about 85,000 patients.

"That was a unique deal," said Palamara. "Neighborhood was a very strong regional player focused on not only product supply but also diabetes education and support for its patient population. This creates greater patient loyalty, and Insulet is hoping to supply the insulin dependent patients at Neighborhood with their OmniPod product."

Other deals in the past year include BrightSky's acquisitions in April 2011 of Miami-based Doctor Diabetic Supply and Warren, Mich.-based Great Lakes Medical Supply, for a total of 160,000 patients. In July 2011, NationsHealth acquired Chattanooga, Tenn.-based Care 1st Medical Solutions, which had 13,000 Medicare patients.

That last deal highlights the difficulties smaller diabetes providers face with steep cuts under competitive bidding. In Round 1 areas, reimbursement was reduced, on average, 56%.

"People on the smaller side are struggling--it's hard to have the buying power to make up for the margins they are losing on the reimbursement side," said Bob Leonard, an analyst with The Braff Group in Pittsburgh.

Does that mean when the dust settles from competitive bidding there will only be a handful of massive-sized players left standing? Not necessarily, says Palamara.

"The companies with 25,000 to 50,000 patients that have focused their efforts on the non-Medicare population will continue to do well," he said. "We are seeing more of these groups focused on alternative payer populations, including Medicare Advantage, Medicaid and private pay, and we are seeing some companies focus on a younger demographic."