Half way to their goal

Half way to their goal

This morning Roche outlined their vision of the future holding their annual investor day and based on the presentation by Daniel O’Day, his last as the head of Roche Diagnostics (he’s moving to pharma), that future does not include a place for diabetes care. Consider this in 2005 total sales for diabetes care were 2.9 billion Swiss francs and the unit accounted for 35% of diagnostics sales, sales in North America were slightly north of $900 million Swiss francs. Now compare that to the 2011 full year results total sales 2.7 billion Swiss francs with just under $600 million coming from North America and according to a slide used today this unit now accounts for just under 25% of total diagnostic sales.

It should also be noted that of the 25 slides used by Mr. O’Day there was just one mention of the unit and not one word was uttered about the unit during his presentation which lasted about 30 minutes.

The fact is Roche management has no idea what to do with this unit and continues to fumble about like a drunken sailor who’s just had one heck of a shore leave. Actually when one looks at the numbers, this isn’t a weekend binge but one hell of a bender as sales in the largest, most profitable part of the world, North America, have been cut by almost 50% and that my friends takes true talent. The only real question is will the new guy come in and finish what Mr. O’Day started and drive sales to zero here in the US and Canada.

Now if management was smart, and they aren’t, they would take a page from the Bayer playbook and put this unit up for sale before it’s too late. Speaking of which Diabetic Investor is now hearing that since Sanofi (NYSE:SNY) management continues to play pin the tail on the donkey and can’t make a final decision, a new buyer has emerged and this time it Siemens (NYSE:SI). Just as inertia came over Sanofi when they had a chance to buy Amylin, the company has once again gotten cold feet when it comes time to actually close a deal. Now we would like to believe that management has realized this really isn’t a good deal after all and spending over $1.5 billion euros on this unit is not wise allocation of resources but we’re more inclined to believe that the Sanofi process has once again gotten in the way the same as it did when they could have owned Amylin.

The real winner here continues to be Bayer, not only were they smart enough to get out of this market when they still could, they have created a bidding war for a unit which has no managed care presence, has fallen to fourth position behind Abbott (NYSE:ABT) and a patient base of mostly non-insulin using patients. The unit does have some nice products but Diabetic Investor isn’t convinced that anyone and we mean anyone, can turn this unit around. Bayer has already brought this unit back from the dead once.

Given how this deal is progressing and the amount of interest in this unit one just might think that management at Roche or Abbott would also see the handwriting on the wall.  That they too would wise up and sell while there is still interest and momentum. Panasonic, Sanofi (assuming they can actually pull the trigger on a deal), Nestle, P&G, GE and Alere are just a few of the companies who actually want to be in this market and will pay handsomely to get in and proving beyond a shadow of a doubt that the greater fool theory is alive and well.

Looking at the respective management teams and understanding each company’s situation, Diabetic Investor believes Abbott is more likely to pull the trigger than Roche for the simple reason that Roche is only half way to their ultimate goal. Given the way things are going Diabetic Investor thinks it should take a few more years, perhaps three, to see sales in North America fall all the way to zero. Now think of what an accomplishment that will be; a franchise which was once number one in the world, had some of the most innovative products and outstanding brand recognition goes to one which is now a very distant number two in market share here in the US, is seeing their ex-US business erode as well, has few innovative products and whose reputation has fallen behind that of used-car salesmen and politicians.

Erica Jong once noted; “Everyone has talent. What is rare is the courage to follow the talent to the dark place where it leads.” Considering the way things are going at Roche they have the courage and nothing will stand in their way as they strive to accomplish what has never been done before. Way to go guys.