LifeScan: Too Hard to Turn Around

Welcome to the 188th Pari Passu newsletter.  

This year, software investors are grappling with the concept of terminal value and the challenge of investing in businesses that may face eventual obsolescence. While this represents a novel concern for a sector long regarded as home to the highest-quality businesses, technological disruption itself is hardly new, as industries have been upended by innovation for centuries.

Today, we present an analysis of LifeScan, the maker of the well-known OneTouch blood glucose monitoring (BGM) devices. Its story is a textbook example of what happens when a market leader fails to adapt to a disruptive technology before it is too late, and what happens when private equity tries to make a profit, drawn in by an apparently attractive valuation.

LifeScan was founded in 1981 and remained under Johnson & Johnson's ownership for over three decades, growing into the global leader in blood glucose monitoring and serving over 20 million patients across more than 50 countries. In the 2010s, the business began to underperform due to the ongoing commoditization of the BGM market and rising competition from the disruptive continuous glucose monitoring (CGM) technology, which rendered LifeScan’s devices essentially outdated. Despite the initial warning signs, in 2018, Platinum Equity acquired LifeScan from J&J for $2.1bn, loading it with $1.9bn in debt and betting that the business could withstand the headwinds and eventually pivot into the continuous glucose monitoring market and catch up with the competition. 

Things didn’t play out anywhere close to what was intended, as the company experienced years of delays in developing its proprietary CGM device. While the company was stumbling, competitors were taking LifeScan’s market share faster than expected, resulting in continuous year-over-year revenue declines. The company eventually began burning cash, and in 2024, it was unable to make a principal maturity payment. Intense negotiations would follow, in which the sponsor first sought to retain ownership of the business through a consensual out-of-court reorganization but failed, leading to a pre-pack Chapter 11 filing in July 2025. 

With that said, let’s dive in!

LifeScan is a global diabetes management company specializing in blood glucose monitoring products, primarily serving patients living with diabetes across more than 50 countries. The company manufactures a portfolio of blood glucose monitoring (BGM) devices, which it markets under the well-known global OneTouch brand. LifeScan's foundational products include traditional finger-stick metering devices, such as the OneTouch Verio Reflect and OneTouch Verio Flex smart meters, as well as lancets and test strips. 

The blood glucose testing procedure is rather simple: you use a special lancet to prick your finger, collect a very small blood sample, and place it on a single-use reagent strip that is inserted into the meter. After that, the results are displayed in about 10 seconds. More than 20 million people globally use OneTouch products to track and manage their blood sugar levels and diabetes [1]. The company held a 30% share of the BGM market and generated $786mm in revenue in 2024. 

Let’s understand the story behind the business, as it was an important constituent in shaping how people with diabetes manage their lives. LifeScan was founded in 1981 in California by a group of entrepreneurs who had acquired US marketing rights to an early British-made blood glucose meter. In 1983 and 1986, LifeScan introduced the GlucoScan II and GlucoScan 2000, two successive improvements over earlier devices. These devices were among the first portable glucose monitoring devices to come to market, but they still weren’t the most convenient. They required a few manual steps, such as washing, collecting blood, and waiting a precise amount of time for testing.

Portable glucose monitoring was still the next era of diabetes management, as it allowed people to manage their blood sugar levels anywhere, at any time. This is why in 1986, LifeScan was acquired by Johnson & Johnson for $100mm, marking the beginning of the company’s rise. 

In 1987, the company released the first OneTouch glucose meter, which was regarded as a second-generation BGM device due to its simplified testing procedure. The patient would place a small blood sample on a single-use reagent strip and insert it into the meter, after which timing began automatically, with results displayed 45 seconds later. OneTouch introduced single-use strips that could be discarded after use, eliminating the need to wash or wipe the device. 

In 1993, The New York Times published an article describing a recent report showing that diabetes-related complications can be prevented or delayed through active blood glucose monitoring and management [3]. This was also in the clear interest of the healthcare system, as costs associated with active diabetes management were much lower than dealing with the complications. As a result, the market for these devices took off in the 1990s and 2000s. 

By the early 2010s, LifeScan was one of four companies alongside Roche Diagnostics, Bayer Healthcare, and Abbott Laboratories that collectively controlled approximately 90% of the global BGM market. This is where we can talk about the company in more depth to understand how it actually generated revenue.

As with most healthcare companies, the business model becomes complicated because most revenue doesn’t come directly from customers’ pockets but rather from their insurance plans. Before we get into that, let’s understand the range of products that LifeScan sells.

We briefly mentioned that LifeScan sells a portfolio of three key products: test strips, lancets, and the meter itself. The company essentially has a razor-blade business model, as the majority of revenue comes not from meter sales but from testing strips and lancets. In the US, a meter like the OneTouch Verio Flex could be bought at a pharmacy for $27. An average patient monitoring their blood sugar will perform 1 to 4 tests daily, meaning they will use 30 to 120 test strips and lancets per month. A 30-count test strip pack costs around $20, meaning that every patient spends $20–$80 per month on test strips. If we include lancets, that adds another $10 per month, bringing each patient's spending to $30–$90 per month just to keep testing. As a result, lancets and test strips accounted for an overwhelming majority of the revenue [14]. 

These products are sold globally; however, the distribution channels in the US and internationally differ significantly, resulting in entirely different outcomes for the company’s profitability. Let’s look at how they differ. 

United States Business

In the US, LifeScan sells primarily over the counter at pharmacies and other stores. However, the majority of purchases are not made out of pocket but are covered by various insurance plans, which is where we need to understand how the healthcare system works. 

When a person with diabetes is diagnosed, their doctor prescribes a plan that includes a blood glucose meter, and that plan is essentially covered by the patient’s insurance. The insurance plan partners with a pharmacy benefit manager (PBM), an intermediary between patients, insurance plans, and pharmacies. PBMs facilitate the prescription drug portion of healthcare benefits on behalf of health insurance companies by creating formularies, which are lists of drugs and devices covered by the insurance, and processing claims [1]. If PBMs include LifeScan’s products on their formulary lists, patients will have part of the cost covered by insurance, which increases the demand for their products. In fact, out of ~70 PBMs in the US, the trio of CVS Caremark, Express Scripts, and Optum Rx controls around 80% of the market. This means that being on these PBMs' formulary lists determines whether LifeScan’s products reach millions of patients. 

Now, many factors determine which drugs and medical devices are on the formulary lists for specific PBMs. The essence of answering this question lies in understanding the purpose of PBMs: to manage insurance plan costs by ensuring that patients use the most effective and safest drugs, ideally, those that cost less. The PBM will try to give preference to generic, effective drugs over more expensive, specialized drugs that may be less effective. The same applies to medical devices like LifeScan’s, as brands with the strongest reputation and efficacy are given priority. However, when multiple brands offer similar products that are all good in their own ways, rebates become another deciding factor. Rebates are negotiated payments that manufacturers like LifeScan pay back to PBMs in exchange for preferred formulary placement. In simple terms, a manufacturer agrees to return a percentage of its list price to the PBM for every unit sold through that plan as a retrospective discount, and in return, the PBM continues to steer patients toward its product rather than a competitor's. PBMs usually retain 10-20% of the rebates and pass the rest to the insurance program. 

It makes logical sense for LifeScan to pay these rebates, as, while they are losing margin, the company generates significant sales and, overall, more money than if it decided to pull out of its rebate agreements. Depending on the market and competition, rebates as a percentage of the weighted average cost (WAC, the manufacturer’s list price for the product) are usually around 20-30%. However, in highly competitive markets, such as BGM, rebates can reach 60-70%, sometimes even higher. This percentage was deducted from gross revenue to obtain net revenue and therefore directly affects the profit margin. This will be very important when we look into the competitive dynamics the business faced. For a more detailed overview of the pharmacies and PBMs, check out our dedicated writeup article. 

International Business

LifeScan's international business is primarily based in Europe and Asia, where the company maintains direct operations in key markets, including Germany, Japan, China, and India. Beyond those markets, LifeScan relies on third-party distributors across approximately 31 markets in South America, the Middle East, Africa, and the Asia-Pacific region to supply its products to hospitals, pharmacies, and clinics. 

International sales consist primarily of direct sales to hospitals, governments, and retail pharmacies, as well as sales to third-party distributors. Distributor relationships account for 17% of international sales and mostly come from smaller or less-developed markets where the company doesn't have complete operations [5]. The fact that all of this revenue comes from direct sales results in LifeScan keeping a much larger margin. The only similarity to the US system was that LifeScan often made promotional payments to pharmacies and distributors, which ate into margins but were much smaller than rebates, at 20-30% of the listing price. 

All in, in 2024, approximately 45% of net sales were generated in the US, 34% in EMEA, and 21% in APAC and LATAM [6].

Going back to our timeline, around 2015, the company began struggling with competition due to the commoditization of routine BGM testing and the entry of continuous glucose monitoring (CGM) into the market. CGM uses a different method to collect blood glucose data: a small sensor is inserted just under the skin, usually on the abdomen or arm, and it wirelessly transmits real-time glucose readings to a smartphone or smartwatch. 

This technology was superior to standard testing, as it provided patients with continuous data on their blood glucose levels without requiring multiple daily tests. The technology was introduced in 1999, but it required a separate receiver to display information, which made it less popular at the start. The first two companies to truly make this technology mainstream were Abbott and Dexcom. Abbott introduced the FreeStyle Libre in Europe in 2014 and in the US in 2017, while Dexcom introduced the G5 system in 2014, the first to connect to a phone to display information. At the same time, Johnson & Johnson was seeing declining sales in its diabetes care segment, which included LifeScan, with a 10% decline in 2016 and an 8% decline in 2017. Because the diabetes segment struggled, Johnson & Johnson wanted to sell LifeScan as part of its broader efforts to sell off businesses in industries where it wasn’t a leader. 

This is where Platinum Equity came into play, as in 2018, the sponsor bought LifeScan from Johnson & Johnson for $2.1bn, or 4.6x EBITDA multiple. To purchase the business, Platinum issued a $125mm revolver, a $1,475mm term loan, and a $275mm 2L term loan, resulting in ~83% LTV and 3.5x net leverage. Although leverage was moderately low, it still left a very small equity cushion. As a result, interest rates were very high, with the 1L term loan at L+6.00% and the 2L term loan at L+9.00%. Additionally, lenders were certainly worried about the business's terminal value due to declining performance, which is why the 1L term loan had a high 7% ($103mm) annual amortization requirement to ensure creditors were paid until the business's value declined. S&P reported that LifeScan had $1,350mm in revenue and ~$460mm in EBITDA at 34% margin [12]. 

A natural question that may emerge is why did Platinum buy a declining business that was on the verge of being disrupted by new CGM technology? There are multiple reasons why Platinum decided to take this business on its shoulders. To start off, the sponsor was able to purchase the business at a very low 4.6x adjusted EBITDA multiple, which gave them confidence that they had sufficient cushion against the expected decline. The sponsor also likely believed CGM technology would not penetrate the market quickly enough to meaningfully disrupt LifeScan's business, giving it time to generate cash flow until a proprietary CGM device could be released and the business repositioned as a solid competitor. At the time, CGM was rather new and only covered by insurance for Type 1 diabetics or Type 2 diabetics on intensive insulin therapy, representing a narrow subset of the overall diabetic population. Around 40 million Americans have diabetes, but only 5% of the cases are type 1 diabetes, with the rest being type 2 [7]. Platinum likely viewed this coverage dynamic as a natural buffer, giving the company enough time to collect cash flows and develop its own technology. Even though breaking into CGM would be the key factor in materially increasing the business's value and allowing Platinum to sell it, a possible thesis could have been extracting enough cash flow to amortize the debt over time and generate an attractive rate of return on the equity.  

Additionally, Platinum likely had a few basic value-creation levers available, such as streamlining the business and cutting costs; after all, the business was carved out of a conglomerate, and the sponsor sought many operating improvements. LifeScan was still generating significant cash flow at the time, which is why the term loan had a 7% amortization, indicating a rush to repay the debt while the business remained profitable despite a worsening market. Despite the $103mm amortization, the business was set to generate positive cash flow in the first years. 

Finally, like we already alluded to, the most important part of Platinum’s value-creation plan was investing in its own CGM technology [1]. In 2019, LifeScan partnered with Sanvita Medical, a subsidiary of Nova Biomedical Corporation, a developer of blood testing devices and diagnostic products, to develop and market CGM sensors that would integrate with LifeScan's existing OneTouch Reveal digital platform. Under that agreement, Sanvita would be responsible for the development, testing, and manufacturing of the CGM product, while LifeScan would be responsible for the launch and selling the product. Interestingly, the 2019 press release announcing the deal promised that the “companies plan to launch CGM systems in North America and select countries in Europe as early as mid-next year.” As we are about to discover, that would prove too optimistic. 

Despite the initial comfort around the business's position and promising initiatives to break into CGM, LifeScan encountered a combination of company-specific and broader market headwinds to a degree that Platinum Equity might not have fully anticipated.

CGM Expansion & BGM Commoditization

The business faced two key headwinds that drove consistent year-over-year revenue declines. First, the BGM market was maturing and commoditizing, as multiple brands flooded the market with cheaper devices and test strips, eroding LifeScan's pricing power and making it increasingly difficult to justify a premium. Since technology from other brands still served its purpose but was cheaper, these brands slowly began to eat into LifeScan' share as brand image became less important for PBM formulary lists [8]. 

Second, CGM technology was gaining rapid adoption, with patients switching away from finger-stick testing entirely, directly shrinking the pool of customers LifeScan depended on. For example, Dexcom, a CGM competitor, saw its sales skyrocket with the release of Dexcom G5, with 2018 sales rising 42% to $1,025mm from $715mm in 2017. At that same time, Moody's reported that Abbott achieved "more than 60% organic growth rate in sales of its FreeStyle Libre CGM product" in Q3 2019 [8].

The CGM success could also be attributed to the expanding insurance coverage. Starting in 2017, many insurance companies started approving CGM coverage for people with Type 1 diabetes who were on active insulin therapy, and thereafter, Type 2 diabetes was slowly starting to get approved as well. The chart below shows how the number of CGM users covered by insurance began to grow rapidly right as Platinum acquired LifeScan in 2018. 

While these companies were disrupting the current BGM market, LifeScan was on the receiving end, with 2018 revenue declining 10% to ~$1,350mm and 2019 revenue declining 11% to $1,200mm, compared with $1,500mm in 2017 [8]. S&P reported that these numbers were already much worse than projected and downgraded the company from B+ to B in September 2019, noting that adjusted EBITDA margins had fallen below 30% compared to 34% in 2018 and a previously projected 32% [12]. In 2019, EBITDA fell to ~$350mm, resulting in the business generating only slightly positive cash flow. At that point, the margin for error was already thin.

CGM Partner Delay

While Dexcom and Abbott were thriving in the CGM market, LifeScan was relegated to just watching: the 2020/2021 initial CGM release date was delayed by the partner, as COVID-19 swept the world and disrupted medical trials. As a result, the new release date was delayed to the end of 2023/early 2024. 

This was painful, as every year that LifeScan delayed the release of its own device, it was losing hundreds of millions in missed revenue. Revenue continued to decline by an average of 10% per year, from $1,200mm in 2019 to $909mm in 2022. Despite declining revenue, LifeScan maintained liquidity between $200mm and $250mm, as cash generation was essentially neutral due to cost-saving initiatives, allowing the EBITDA margin to remain in the 30% range. As S&P reported, in 2020, LifeScan reduced $115mm in costs related to distribution and supply chain, administration, and commercial and marketing [11]. At the end of 2021, the company had a $76mm cash balance and an undrawn $125mm RCF, resulting in $201mm in liquidity.

However, the declining EBITDA was obviously unsustainable, as it would eventually fall below the company's financing and investment needs. That happened in 2022, when the company incurred significant expenses related to the CGM transition, resulting in ~$60mm cash flow burn and marking the first year in which EBITDA reached unsustainable levels. 

According to reports, the company was spending more on capex in an effort to release the CGM device on time. As EBITDA continued to decline, interest rates coincidentally began to rise in 2022, putting additional pressure on cash flow. A successful release of CGM was the only thing that could change LifeScan’s trajectory at that point.

2023 Amend & Extend

As LifeScan entered the “do or die period,” it also had to deal with upcoming maturities, specifically the RCF July 2024 maturity and the 1L term loan October 2024 maturity. To address them, the company performed a comprehensive amend-and-extend transaction, extending maturities to 2026 and 2027 in exchange for lenders receiving a 0.5% consent fee and increased interest payments on the new debt. The transaction can be broken down as follows.