A Tough Quarter

A Tough Quarter

This morning Johnson and Johnson (NYSE:JNJ) announced first quarter results and for their diabetes care unit which includes LifeScan and Animas it was one tough quarter with domestic sales down a whopping 19.6%. According to the company there were several reasons for this decline in sales as they specifically mentioned that last year they experienced major inventory stocking which did not reoccur this year. They also noted continued pricing pressure and of course the coming impact of competitive bidding. Diabetic Investor was somewhat surprised they further noted that sales were adversely impacted by increased competition from private label products.

Traditionally the first quarter is a slow quarter as patient deductibles reset and as noted last year at this time the company was filling the pipeline for the launch of the OneTouch® Verio® IQ.  What’s more relevant here is that no company in the diabetes device market, not even JNJ who holds the number one position in glucose monitoring and number two position in insulin pumps, is immune to changing market dynamics.  Their reference to increased competition from private label products also reinforces a point made by Diabetic Investor in the past, namely with patient co-payments increasing and changes to overall reimbursement policies in some cases it’s actually cheaper for the patient to use a store branded product.

Diabetic Investor also believes that next quarter won’t be much better as its likely sales will take from the recently announced recall of the VerioIQ.

The company also made mention of their recently approved drug for Type 2 patients, INVOKANA™.  It was however rather strange when asked about the future prospects for this new drug the company stated that the “adverse event profile is manageable.” Given the way things are going in the diabetes drug space, where no drug seems safe even after it’s been approved by the FDA, we’re not sure it’s a good idea to highlight a drugs adverse event profile. Why the company did not the differences between Invokana and what’s already on the market is a mystery to Diabetic Investor.

Looking ahead Diabetic Investor suspects JNJ has a broader strategy in mind for their diabetes franchise which with Invokana now expands beyond devices. While this may sound redundant Diabetic Investor believes the company will no longer concentrate on selling the individual pieces used to manage diabetes rather move more towards a system based approach which will include drugs, devices and patient coaching.  While Diabetic Investor questions their recent decision to start selling insulin pen needles, another commodity market, and also isn’t sure why they acquired Calibra Medical, the markers of the Finesse™ insulin patch, these decision are consistent with a systems based approach.

With generic insulin on the horizon the possibility exists that a company like JNJ believes what Diabetic Investor believes, in that, insulin delivery systems will become more important than the actual insulin used by these delivery systems.  Long ago Diabetic Investor felt that JNJ would acquire Novo Nordisk (NYSE:NVO) as this combination of two diabetes powerhouses would move the diabetes market away from selling individual products to selling diabetes management systems.  Now with generic insulin coming they really don’t need Novo and can still pursue a systems based approach. It also wouldn’t shock Diabetic Investor if JNJ partnered with or made a strategic investment in a generic insulin company.

The simple fact is with continued pricing pressure for both devices and drugs, it’s becoming harder and harder to make money selling the individual pieces used to manage diabetes. However by selling diabetes management systems which include some form of patient coaching, the company could be setting themselves for the coming advent of outcomes based reimbursement.  As we have noted previously reimbursement policies are changing and thanks to healthcare reform outcomes will matter. In the future any company who can demonstrate that their diabetes management system produces better patient outcomes will hold the keys to the kingdom.

To Diabetic Investor the future for any company in the diabetes space does not depend on which company can develop the fanciest technology or greatest drug, it will rest on who can produce the best patient outcomes. This is not just good for patients, it’s also good business.