Interesting Move by JNJ – What it might mean.
This morning according to an
Associated Press report Johnson and Johnson (NYSE:JNJ) is eliminated their comprehensive
care business unit. The comprehensive care unit includes vision care, diabetes
products, heart stents and diagnostic tests.
Just a few months ago the company
was talking up this unit stating that it would benefit from health care reform
and the increasing burden patients with chronic disease states place on the health
care system.
Now that these units will operate
separately this opens the door for some interesting possibilities for the
diabetes products unit which includes LifeScan and Animas. Given the changing
market dynamics for both blood glucose monitoring and insulin pumps this move
could signal a shift in how JNJ plans on moving forward.
Already we
have seen a shift in how LifeScan is dealing with the changing dynamics of the
BGM market. With margins tightening and competition for the insulin using
patient increasing the company has abandoned the standard marketing practice of
giving away free monitors. This move comes on the heels of cuts to the
marketing budget and a corresponding reduction in the number of sales reps. These
moves make perfect sense given that the company has been extremely successful
establishing a strong presence with insulin using patients. Simply put it’s the
competition that must play catch up and it doesn’t make much sense to spend
more money in area where the gains made would be incremental.
The story
for Animas is different. While they are making solid gains in the insulin pump market
and have firmly established themselves as Medtronic’s (NYSE:MDT) main
competitor, Medtronic still holds a commanding lead in the insulin pump market.
Given that JNJ wants to be number one or a very close number two in every
market they play in Animas still has some work to do.
The real intriguing
possibility is scenario that was almost unthinkable a few years ago, besides
being known for buying companies JNJ is also known to exit businesses where the
market conditions have turned unfavorable. By disbanding the comprehensive care
unit each of the units can now be sold. Looking ahead with health care reform
coming and the outlook for diabetes devices less than favorable the company
could well sell the diabetes unit while it still has value.
The fact is
both the BGM and insulin pump markets are moving in similar directions. The BGM
market has already transformed itself into a commodity/consumer product model
where price is the driving factor. The insulin pump market is moving in a
similar direction although not as quickly as the BGM market has. The fact is
the days of huge margins and aggressive market expansion have come to an end.
Competition and pricing pressure is intensifying. Add in the coming changes to
healthcare where cost is the primary concern, JNJ just may feel it’s time to
get out while they can still get a decent multiple.
For years it
has been rumored that consumer product giant Procter and Gamble (NYSE:PG) is
interested in entering the BGM market. With their marketing expertise and experience
in commodity markets P&G could alter the landscape for BGM and insulin
pumps.
Strange
thing about rumors in the diabetes market, they have an uncanny ability of becoming
fact.
