Finally, Roche pulls the trigger

Finally, Roche pulls the trigger

Well at long last Roche has finally decided it’s time to leave this wacky world. As we reported some time ago, actually over a year ago, the company will be spinning off their diabetes unit. This unit which once was the pride of the company generating huge profits will now be a stand-alone company. A move which will not just free the parent company from throwing good money into a bad business but also free the new stand-alone unit from the encumbrances of the mothership.

There is no need to chronicle how Roche arrived at this decision or the many mistakes made by management that transformed a multi-billion-dollar unit into a multi-million-dollar unit.  The question now becomes will this new company now free from the mothership operate any different. Now free will they become a takeover target? Will this move, which we think is a smart one, force Abbott (NYSE: ABT) or Johnson and Johnson (NYSE: JNJ) to rethink their strategy?

One thing is becoming increasingly clear another Diabetic Investor prediction is going to happen, that in five years likely less, there will only be one or two major players in conventional glucose monitoring. That BGM sales will fall from $4 billion globally to $1 billion in five years. That this business which has been circling the bowl will finally be flushed down the toilet into oblivion.

Given this move is just in its earlier stages we don’t expect anything happening quickly. However, we would not discount the possibility that it won’t remain independent for too long. Even with the many mistakes made by management the company still has value. The Accu-Chek brand name is well recognized, they do have an insulin pump, an installed user base and a CGM under development. In the hands of the right company willing to invest some money this unit has many of the pieces needed for a comprehensive diabetes management system.

The way we see it a company like Apple for example has a choice to make. They can either buy all the individual pieces of the system or big chunks of the system. They could go out and buy a conventional glucose monitor, a pump company, a CGM company and an alternate insulin delivery company. Or they could buy a company like this now stand-alone company and fill several of those pieces at once.

We also see this move putting additional pressure on Abbott and JNJ. Abbott is under more pressure as they lack the resources and share JNJ currently has. However, they do have something JNJ doesn’t their very own CGM or whatever people want to call the Libre.  As we’ve been noting CGM is the hottest thing going and is a must have for a comprehensive diabetes management system. JNJ may have greater share and more pieces to the puzzle but the company just can’t make up their minds whether to go big or go home. If and this is a huge if, JNJ did what Roche is doing that unit would not just operate more efficiently but would become very attractive to our friends in the Valley.

This move also confirms a trend we’ve been writing about that the wacky world of diabetes is going though yet another major, more like seismic transformation. That companies with deep roots in diabetes, legacy companies are now becoming just pieces to a puzzle. A puzzle being put together in the Valley. Roche may be the first of these legacy companies to say goodbye to the wackiness but they certainly won’t be the last.