Email Issue

Email Issue

Looking at the fourth quarter and full year results for Johnson and Johnson (NYSE:JNJ) and their diabetes care unit one has to wonder if their less than stellular results are a sign of things to come. Typically the fourth quarter is the strongest quarter of the year yet worldwide sales for the diabetes care unit fell by 1.7% when compared to the same period last year. For the full year worldwide sales grew an anemic 1.2%.

While the company is blaming poor economic conditions for the poor performance of the unit, this is a vast over simplification of what’s truly going on in the marketplace. It was also interesting that for the first time in recent memory there was no mention of their insulin pump franchise Animas, which received praise during previous calls.

The reality is the glucose monitoring business will never recover to the levels seen just a few short years ago. While it is true that struggling economy is partially responsible for sales declines, poor economic conditions do not fully explain the decline. The simple fact is the glucose monitoring market has fully transformed itself into a commodity market and players in this market have lost control over pricing. Additionally the major players here have failed to reinvigorate growth relying on introducing new technologies rather than increasing usage through patient education. Finally, it doesn’t help matters any that all the players are targeting exactly the same patient population, insulin using patients, and have not found a way to expand demand beyond this patient population.

The story is slightly different for the insulin pump market but not by much. The reality here is to date no one has found a successful method for prying away customers from the market leader Medtronic (NYSE:MDT). As Diabetic Investor has been saying for years the insulin pump market is not growing fast enough nor is it large enough to support all the existing players in the market or the many who seek to enter the market. Or put even more simply, no company can survive for the long term just by picking up patients new to insulin pump therapy. Until someone figures out a way to take patients away from Medtronic not much will change for the insulin pump market.

The question for JNJ is how long they will remain committed to either market. As we noted previously JNJ is not only very good at knowing when to enter a market they are equally talented at knowing when to exit a market. While the performance of the diabetes care unit continues to disappoint this does not mean this unit could not be sold. With Sanofi-Aventis (NYSE:SNY) seeking to become a force in diabetes beyond their insulin franchise and setting their sights on diabetes devices as well, companies who previously ignored diabetes devices may have no choice but to enter the market.

In previous reports Diabetic Investor has speculated on who just might come in and buy JNJ’s diabetes care unit. Would it be a P&G? Would it be Sanofi? Is it possible that JNJ would spin off the unit in a stock offering? Or will they keep the unit in tact preferring to milk these cash cows until the well runs dry?

Some have speculated that the exact opposite might happen and JNJ could reinvigorate the unit through acquisition. Diabetic Investor sees this as a highly unlikely scenario and frankly JNJ is too smart to throw good money into bad markets.

Watching all this is the current global diabetes leader Novo Nordisk (NYSE:NVO). Given the public statements made by Sanofi, Novo knows that Sanofi’s primary strategic objective is to overtake Novo as the worldwide leader in diabetes. They also are very cognizant of what Sanofi has been doing in the device side of the business. Already a leader in the insulin pen area, Novo has previously avoided glucose monitoring preferring instead to build insulin share with newer insulin’s and patient friendly insulin delivery systems. While this strategy has served them well in the past, the game is changing and this strategy may not work as well in the future.

Slowly but surely a prediction made by Diabetic Investor years ago is becoming fact and it was actually a deal Novo made with JNJ that prompted this prediction. Back when Novo and JNJ teamed up to launch the InDuo device we stated that it was just a matter of time before physicians stopped prescribing individual pieces of the patients diabetes management tools and began prescribing diabetes management systems that included everything the patient needed.

As Sanofi indicated during JPM this year, they see their move into glucose monitoring as way to sell more insulin. JNJ for their part has followed a similar strategy as they have aggressively targeted insulin using patients so they could sell more test strips. However, Sanofi plans to take their strategy one step further and expand into total disease management. Simply put, Sanofi not only wants to sell the patient the drugs they use to treat their diabetes and the devices they use to help manage their diabetes, they want to provide the patient with additional tools that will ultimately help them achieve better outcomes.

The main difference between Novo and Sanofi is Sanofi has begun their move into the device side of the business. Given the resources Sanofi has allocated to their strategy, Novo for competitive reasons might just decide to jump into the device arena and what better way than to acquire JNJ’s diabetes care unit. Such a move would provide Novo with a major leg up on Sanofi who appears to be trying to build their device unit from scratch rather than acquisition. Should this occur Novo would immediately vault themselves into the lead and become the dominate player in diabetes.

As we noted after JPM, 2011 is shaping up as a transformational year in diabetes and although we’re still early in the year it appears we may have underestimated just how transformational the year will be.