Going, going,……

Going, going,……

No matter how many times we write about the demise of the conventional blood glucose monitoring market it still shocking to see the impact of commodization. This morning Johnson and Johnson (NYSE: JNJ) released second quarter results which included a DECLINE of 17.3% for the US Diabetes Care unit, on a year to date basis this unit is DOWN 16.2%. There is no way to sugar coat these numbers as they signal what we have known for some time, when it comes to BGM the party is way over.

Even more stunning is the shift within JNJ. In the “good” old days when LifeScan was just killing it these earnings calls and accompanying presentations were filled with pictures of new meters. The lone diabetes product pictured today – the Animas Vibe insulin pump. A product which owes its success not to JNJ but to Dexcom (NASDAQ: DXCM) whose sensor works with the Vibe.

But let’s not stop there and check out another major change in thinking, posted on one slide is the following;

“Our holistic approach to innovation goes beyond products and solutions to drive better outcomes and deliver long -term value”

Now Diabetic Investor isn’t quite certain when the term holistic became the latest corporate buzz word but it seems like every company is pursuing a holistic approach.

Here in a nutshell is the problem as we see it:

JNJ is caught between two worlds. They see the world changing and are doing their best to adapt to this change. During the company’s medical device day, they outlined their diabetes echo system or what commonly call interconnected diabetes management (IDM). The company clearly understands where the market is going and is actively dealing with this change. This as they say is the good news.

Yet as much as they want to change they must deal with the realities of today. A reality which according to their presentation includes a 20% PRICE DECLINE IN SMBG. Think about that for just a moment, their legacy franchise which has been battered by competitive bidding, increased competition and declining usage is then hit with a 20% decline in prices. But that’s only part of the reality of today, for as well as the Animas Vibe is doing it has not yet cut deeply into Medtronic’s (NYSE: MDT) share. The lone bright spot in diabetes, Invokana which grew by over 15% in the quarter, has been hit by an adverse label change and is facing Jardiance from Lilly (NYSE: LLY) which as we all know is just killing it.

Unlike Google or Apple who does not have to deal with these issues and can concentrate solely on the future, JNJ must deal with the harsh realities of today. They cannot like Google or Apple start with a fresh slate, they must balance the market dynamics of today versus where the market will be 10 years from today. Google and Apple have the luxury of living for the future, they have no baggage from the past. This puts JNJ in a delicate position of properly balancing the needs of today versus the needs of the future. As much as they might like too they cannot simply abandon their legacy franchises.

Just as an FYI JNJ is not the lone diabetes company who must live in this schizophrenic world. Medtronic, Lilly, Novo Nordisk (NYSE: NVO) and Sanofi (NYSE: SNY) have the same issues. It’s not just that diabetes management is changing becoming more interconnected and data driven, that’s just half the issue. The other half are the changes in reimbursement which includes outcomes based reimbursement and risk sharing arrangements. These leaders in diabetes who have been around the block more than once are now faced with the quandary of how to adapt to change which is happening more rapidly than ever while protecting their legacy franchises.

The key as we see it is clarity of purpose, understanding what the unit will look like after this change is complete. This unfortunately is also a problem for many of these experienced diabetes companies as rapid change is not part of their DNA. Unlike a Google or Apple who live in world with 6-month product cycles and constant change, these experienced diabetes players live in a world of long clinical trials and FDA regulation. Where data analytics is second nature to Google and Apple, it’s new territory for the diabetes group.

Before we move on there is an important point to be made here. Many of the players in diabetes have partnered with companies in the data analytic area. This is a good first step but it is only a first step. The real test will be when their partners present solutions, will they listen. Having been around this wacky world for a few years we have seen too many examples of companies that fail to listen to their partners.

Another very important point needs to be made, can these legacy franchises deal with the consumerization of diabetes management. Do they understand that the role of the physician is changing, that the word of the physician is no longer taken at face value, that consumers of health care today are not reactive they are proactive? That consumers feel more comfortable with Facebook, Instagram, Twitter and other forms of social media then they do in a physician’s office. The central fact is Google, Apple, Amazon and the like live in this world, heck they helped create this world.

The future of diabetes management is empowering patients through data analytics. Transforming data into patient relevant, patient actionable information. The ability to communicate with the patient so that the message is not just received but actually resonates with the patient is also critical. This is NOT the world JNJ and others grew up in. They are NOT experts at consumer engagement in the digital age. They also carry the additional burden of dealing with the harsh realities of today while planning for the future.

This does not mean they cannot make this transition, we just see it as much tougher task.  It doesn’t help any that their new competitors are not just well funded but also help create the world these old line diabetes companies must live in.