Going through the motions
Next week both Abbott (NYSE:ABT) and Roche will report earnings and quite frankly for their respective diabetes franchises we’re not expected much. As we noted after Johnson and Johnson (NYSE:JNJ) reported earnings things in the glucose monitoring space are bad and getting worse. Yet of the three remaining major players JNJ is the only company that has positioned themselves to survive over the long term.
Now we’re pretty sure that management at Abbott and Roche will do their best to put a positive spin on what likely will be more bad news. Abbott will continue to promote the Libre as the answer which is ironic as they did the exact same thing when the Navigator was around. And as we all know things didn’t turn out so well for the Navigator and frankly we see Libre suffering a similar fate.
Roche may take a somewhat different approach as recently they have publicly acknowledged things aren’t so good they just aren’t sure what to do about it. Whether they spin off this unit as was widely anticipated is anyone’s guess.
Yet a bigger problem facing both companies is these franchises from top to bottom seem resigned to their fate and are just going through the motions. Management knows they cannot compete with JNJ, that new products will not drive growth and it’s just a matter of time before there is even more cost cutting. The sales teams are basically sitting around awaiting the next round of layoffs speculating on just how many will be let go.
As bad as things are there just might be a silver lining here. As we’ve been stating scale is critical in the BGM space and it’s far easier to acquire scale than to build scale. It’s also well known that private equity is sniffing around this space as are all the high tech companies. To Diabetic Investor the question isn’t whether these people will make their moves but when they will make their moves.
Here is how we see this playing out. As it stands today both Abbott and Roche would be thrilled to sell, the problem is they haven’t suffered enough. They still believe these units are more valuable than they really are. They look at the Bayer deal and basically believe their franchise should command a higher multiple than what Panasonic/KKR paid. On the flip side neither private equity nor high tech is in a hurry to do deal. They can wait it out. They know at some point Abbott or Roche will cry uncle and lower their asking price to a more reasonable level. Then and only then will serious negotiations begin.
Now just in case there is anyone who feels sorry for Abbott or Roche, don’t. As poorly as these franchises have been managed at one time they were cash cows generating enormous profits. The fact is neither Abbott nor Roche transformed as the market began to change.
Long ago Diabetic Investor predicted that consolidation in BGM was inevitable, that the Big Four would become the Big One and little three. Well for all practical purposes that is where we are today. The only question now is when Abbott and Roche will officially throw in the towel. When will they stop going through the motions and get down to the serious business of selling their franchises even if it’s not at the multiples they had hoped for.
The party ended long ago and it’s time for Abbott and Roche to go home.
