TheraSense Business Model Sets Example For Small Firms – VP Huffman

Leveraging core competencies and disciplined outsourcing allowed TheraSense to reach profitability rapidly, paving the way for its $1.2 bil. acquisition by Abbott, according to Larry Huffman, VP-international business development.

Speaking at the DeviceCon 2004 meeting in Las Vegas Feb. 19, Huffman described how, drawing from in-house experience, his firm took on established glucose monitor manufacturers.

"We wanted to look and act like a big company right from the get-go," Huffman explained. That meant "focusing on our internal core competencies...and strictly, with a lot of rigor, outsource the rest."

"One of the core competencies we had is high-volume automated manufacturing," Huffman noted, citing contributions from R&D and manufacturing personnel previously involved in the development of competing systems, such as Johnson & Johnson/Lifescan's One Touch and Abbott/MediSense's Precision QID . Huffman formerly was a MediSense exec.

After eight months of manufacturing, TheraSense's FreeStyle had matched glucose monitor market leaders J&J and Roche ( Accu-Chek ) on test strip production costs and economies, while producing one-twelfth of their volume, according to Huffman.

In addition to the lower cost base created by using 90 people to do what required 600 at other firms, TheraSense's manufacturing and development acuity led to intellectual property benefits. "We have 90-some patents [that protected] us against the big guys...when they did come after us," Huffman recounted.

The exec believes that lessons from TheraSense's initial production strategy could benefit existing firms as well as start-ups. For established firms entering new product areas, by gaining these "production economies, you can be blocking your competition," who will have to compete with your advantageous cost base from the start, Huffman advised.

While TheraSense did not initially count sales and marketing among its strengths, the firm decided early on to develop that area internally.

"We had concluded that manufacturing a product and then selling it via somebody else, at least in the U.S. and Canada, does not work," Huffman explained.

The exec characterized competitor BD's January 2003 marketing pacts with Medtronic and Lilly for glucose meters as "not a successful thing." BD discontinued U.S. sales of the BD Latitude diabetes management system, co-marketed by Lilly, in January (¹ (Also see "BD, Lilly To Continue Canadian Distribution Of Latitude" - Medtech Insight, 2 Feb, 2004.), p. 10).

By contrast, TheraSense hired experts with whom they had prior experience - eventually building a U.S. marketing team of over 200. TheraSense's "high-risk" strategy included becoming the first glucose monitor firm to launch a TV ad campaign.

Other business areas were outsourced, including remaining product manufacturing, customer service, delivery and IT. However, "all the external partners with the exception of one...we knew before," Huffman said.

Meter manufacturing and quality testing is handled by Flextronics, whose president originally held a seat on TheraSense's board. Production costs for the meters have dropped from $90 to $13, according to Huffman, who noted that the meters are often given away.

Lancet development and production is handled by a separate firm, which was able to obtain FDA clearance for the component nine months after the initiation of development - in contrast to the two years that has been required at other firms, Huffman claims.

The TheraSense exec attributed successful outsourcing experiences to "pre-planning of phase-defined programs" that incorporated economic motivation, in addition to empowerment of the outside firms. Outsourcing is likely to continue after the Abbott merger, announced in January, Huffman indicated (² (Also see "Abbott Acquires A Future For Its Diabetes Care Business; Where’s Bayer?" - Medtech Insight, 19 Jan, 2004.), p. 3).

"Sticking to your knitting, sticking to your core competency, disciplined and contractually-based and prepared-in-advance outsourcing, with long-term partners of key business areas, to leverage human and capital resources" helped the firm increase sales from $15 mil. in 2000 to over $200 mil. in 2003, achieving profitability in the third quarter, Huffman determined.