A Tale of Two Outlooks
This morning Roche and Abbott (NYSE:ABT) reported first quarter results and as expected results for their respective diabetes device units weren’t good. This is hardly news. What is newsworthy is how the outlooks of these two companies differ.
Let’s take a look at Roche first who continues to see share erosion and whose US sales for the quarter have fallen below the $100 million level. According to the presentation given by the company sales in the US fell 11%. Listening to the call it seems Roche is resigned to the fact that this unit will never return to its former glory and there really isn’t much they can do to turn things around.
This outlook reinforces Diabetic Investor’s belief that it’s just a matter of time before the unit is spun off into a privately held company. A move which has been rumored for months now but likely accelerated now that the company has seen how Panasonic/KKR valued Bayer’s diabetes device unit. Although we can’t say for certain our belief is that Roche held out hope that Bayer’s unit would have fetched a higher multiple. That this deal would prompt interest in their unit from other private equity firms how are looking to enter this space.
As we have noted in the past as bad as things are for Roche, as bad as this unit has performed, it still has value. While they may not have the scale they once had, particularly in the US market, internationally the unit is holding its own. They also have an insulin pump and some new glucose monitors designed for the coming of interconnected diabetes management (IDM). Add in the fact like everyone else in glucose monitoring they have cut costs to the bone and the unit was ripe to be sold.
Yet the low multiple seen with the Bayer deal and they lack of interest from other private equity firms likely will prompt the company to proceed with the spin off. Based on our knowledge of the situation the company will retain a stake in the unit after it is spun off allowing them to benefit should the unit be sold at a later date.
Abbott on the flip side seems to believe that their struggling unit is worth keeping and continues to believe that the Libre and the new FreeStyle Precision Neo will somehow drive growth. Although the Libre has experienced two different recalls and according to many experts is not accurate enough to gain approval here in the US, the company remains optimistic the Libre will be a hit.
Diabetic Investor believes that even if the Libre does gain US approval, the product will face multiple hurdles. Reimbursement will likely be an issue plus and in typical Abbott fashion is a very late entrant into the US market.
We also remain skeptical over exactly who would use this product and why they would use it. It’s well known that Dexcom (NASDAQ:DXCM) is the leader in continuous glucose monitoring as their growing share shows. Medtronic (NYSE:MDT) also has built a solid user base, thanks mostly to their huge installed base of insulin pump patients. So the question is just where does the Libre fit in? Why a patient would chose a Libre over Dexcom or Medtronic?
Diabetic Investor has read many user reviews for the Libre which basically state that when the device works it gets the job done, however that’s been a problem as sensor performance has been very inconsistent. Add in the fact that the Dexcom system will soon deliver readings to a smartphone and the way cool Apple Watch one has to question why anyone would use a system which requires a patient to wave a receiver over the sensor to see their readings. And let’s not forget that Dexcom has the most accurate system on the market, years of experience in CGM and an outstanding, proven management team and it’s difficult seeing the Libre becoming a hit.
The new value oriented Neo also faces tough sledding. As we noted when this system was approved the value segment of the BGM market is just as crowded as the rest of the BGM market. Additionally Abbott, although much leaner due to cost cutting, isn’t experienced in this market. Even worse what’s supposed to be a value offering is really not a value at all when compared to the other players already in this segment. Players who were built for this market.
Perhaps Abbott is merely positioning the unit for a future sale as they like the other branded players see what’s going on with Bayer and like Roche believe that it’s just a matter of time before other private equity firms play follow the leader. This makes perfect sense to Diabetic Investor which means it’s not what Abbott is thinking at all. We suspect based on their track record the company honestly believes they can remain in the space making decent margins.
Based on what we read and heard this morning this is one time, and we cannot believe we’re even writing this, that Roche gets it. That after years of sticking their head in the sand they have found religion. Unlike Abbott they are not foolish enough to believe that this market has a future, or at least a future in its present form. They may not have issued a public mea culpa admitting they screwed up a very good thing but at least privately they are acknowledging what we have known for some time. When it comes to conventional branded BGM it’s time to turn out the lights the party is over.