Earning Season Begins

Earning Season Begins

This morning Johnson and Johnson (NYSE:JNJ) reported fourth quarter and full year results which for their diabetes care unit were less than impressive. For the quarter US sales declined 5.9% while international sales fell by 10.5%, for the full year US sales were down 13.4%, International sales down 2.5%. Frankly Diabetic Investor is not surprised by these numbers as we all know just how tough the glucose monitoring and insulin pump markets have become. As with most things in this wacky world the numbers only tell part of the story, the rest of the story is much more interesting as no one knows, not even JNJ, what happens next.

To fully grasp the conundrum facing JNJ we suggest not just listening to today’s presentation but paying close attention to what’s not shown or said, diabetes. On the slide entitled “Medical Devices Extending Our Market Leadership” there is no mention of diabetes, nothing, nada, zilch. Later on in the presentation the big diabetes product mentioned (perhaps because it was the only diabetes product mentioned) was …wait for it …the Calibra insulin patch pump. Now we hate to overstate the obvious but if our friends in New Brunswick believe that the Calibra patch pump is the answer to what ill’s their diabetes care unit, the problems at the unit are worse than we thought.

As we stated during the J P Morgan conference JNJ is still trying to figure out first, do they want to stay in diabetes and second if they do stay what the company will look like. We further believe that outside factors will play a major role in this decision making process. First the company wants to see if Bayer can actually sell their struggling diabetes device unit, for if there is someone dumb enough to buy this dog of a unit, JNJ might actually fetch a decent multiple for their unit which is actually worth buying. Next they want to see if the Animas Vibe will continue to gain share in the insulin pump market as it did when internationally, continued success for the Vibe combined with Bayer actually selling their BGM unit, might push JNJ over the edge and out of diabetes.

The fact is while things aren’t great in either market, BGM or insulin pumps, JNJ has something most companies lack; scale in both markets. Given the continued pricing pressure in both markets scale is critical to maintaining reasonable margins. Add in the fact the units have already built the infrastructure and distribution channels for both markets, they are ready made to be spun off or sold.

The flip side of course is what happens if they decide to stay in diabetes, what would diabetes look like at JNJ. Here the picture isn’t as clear as it really depends on how they see the future of diabetes management. Even with the newer products like the VerioIQ Sync and Animas Vibe, the company is still not ready for the world of interconnected diabetes management (IDM). They are still a seller of products and not a seller of diabetes management solutions. Basically what this means is that should they decide to stay in diabetes more capital must be invested to align the unit with the future of diabetes management and more importantly how this management will be reimbursed.

Now it’s quite possible that as they watch their competitors fumble about the company could well decide to double down, wait for these companies to become even more desperate and buy what they need on the cheap. Diabetic Investor has long believed that should JNJ buy Insulet (NASDAQ:PODD) as they could give Medtronic (NYSE:MDT) a serious run for their money in the insulin pump market especially if they can think out of the box and change the pricing structure for pumps. Given the problems at Insulet the company just became much cheaper and more receptive to an offer. As we have noted on many occasions one thing JNJ is very good at is buying and selling units.

It also wouldn’t require a huge investment to restructure the BGM portfolio so it’s aligned and ready for IDM.

The honest truth is the way things are going JNJ just may be the last major company standing in diabetes devices. Abbott (NYSE:ABT) and Roche, both of whom report results next week, are going nowhere in a hurry. None of the newcomers to this wacky world are ready for prime time yet and Medtronic while a competitor in the insulin pump is in the midst of a restructuring which may or may not work.

If they truly wanted to go big they would also go after the best run diabetes device company on the planet; Dexcom (NASDAQ:DXCM) not only would this be a game changer. This would be an even bigger deal if they could retain the Dexcom management team as they could turn things around in a hurry.

Still Diabetic Investor doesn’t see the company being in any hurry to make a final decision. Nor should they be. The fact is the wacky world both drugs and devices will undergo some major changes this year. Frankly the best thing JNJ can do is keep all their options open while this most recent wackiness sorts itself out.