JNJ and Roche Report
This morning Johnson and Johnson (NYSE:JNJ) and Roche reported third quarter results. Currently JNJ’s Lifescan unit and Roche’s Accu-Chek unit are fighting for market share in the increasingly competitive blood glucose monitoring market. Depending on which set of numbers you want to believe Roche is currently number one worldwide with Lifescan a close second. Number three in the category is Abbott (NYSE:ABT) who reports results on Wednesday morning.
Based on the announcements made today neither Roche nor Lifescan are knocking the cover off the ball. On a year to date basis Lifescan has seen a 7% growth rate worldwide, while Roche’s diabetes care unit has grown an anemic 2% year to date worldwide. It appears after an awful start to the year Roche has at least stopped the bleeding but still is struggling to find a way to regain lost share. Lifescan has fared slightly better than Roche in protecting their market share but faces the same issue in regards to regaining lost share.
Interestingly both companies pointed to their insulin pump franchises as future growth drivers. During the JNJ conference the company specifically stated the majority of Lifescan’s growth in the third quarter came from Animas, their insulin pump unit. During Roche’s presentation the company claimed to hold a 15% share of the global insulin pump market and stated that outside the US the insulin delivery unit grew by 15%. Roche just received approval from the FDA to launch their Accu-Chek Spirit insulin pump in the US.
While both companies tried to put a brave face on their BGM units and provide an area of hope with the insulin pump business, the fact remains that in the BGM market pricing pressure is pushing the market further into a commodity market where price is the driving factor. This is not good news for any of the big four BGM players, Roche and Lifescan in particular companies with large and expensive infrastructures.
To expect that their insulin pump units will pick up the slack is almost a laughable concept. The insulin pump market is not large enough nor is it growing fast enough to support all the current and many future players set to enter the market. A market in transition as Insulet’s OmniPod and its unique pricing structure puts Roche and Lifescan in the unenviable position of entering another market where pricing pressure is increasing. Currently Insulet is the lone player in the disposable pump arena but that will soon change as several companies are set to come out with their versions of a disposable pump. With Medtronic (NYSE:MDT) holding a dominate share of the conventional pump market and Abbott set to enter this market with their Aviator insulin pump, the players in this market have a tough decision to make. Besides a dominate market share Medtronic also has state of the art technology and holds the majority of intellectual property. Given the large investments made by Roche, Lifescan and Abbott to enter this market they may have no choice but to initiate a price war in an attempt to hold off Insulet and keep Medtronic in check.
Diabetic Investor suspects that when Abbott reports results tomorrow morning their BGM growth will be greater than both Roche and Lifescan. What the company won’t report is what they had to do to get this growth. Taking a growth at all cost approach Abbott has offered managed care providers rebates in the 60% range to gain preferential formulary placement. While this strategy has paid off in terms of increasing market share it has also dampened margins in what once was a huge profit center. As Diabetic Investor reported previously Lifescan or Roche had no choice but to fight back and respond with their own price reductions. In the end, Abbott’s strategy may well backfire as they too have large and expensive infrastructures to support. While Diabetic Investor has long predicted that the BGM market would face pricing pressure, we did not expect one company to take such an aggressive and in our opinion careless approach.
Looking towards the future companies such as privately held AgaMatrix stand to reap the lions share of benefit from Abbott’s decision. Without huge infrastructures to support, low cost manufacturing, a technologically advanced product and partnership with PolyMedica’s (NASDAQ:PLMD) Liberty unit the company now has the means and money to become a dominate force in the BGM market. Seeking a low cost offering it would come as no surprise to see the major players pursue the company aggressively. Diabetic Investor sees the company following the path set by Therasense, going public then being acquired by a larger rival. Unlike Therasense which had a technological advantage when they went public, AgaMatrix has a cost advantage.
It may well turn out that the smartest decision was made by Becton Dickinson (NYSE:BDX) who saw the handwriting on the wall and decided to exit the BGM market. They correctly looked at the market and realized with price becoming the dominate force there was no way to make money here. Just as Bayer (NYSE:BAY) forever changed the BGM market with their decision to give meters away for free, Abbott’s decision to use price as a weapon has opened a Pandora’s box.