JNJ Reports – Tough Times Reach The Top
Looking at the results for the Diabetes Care unit of Johnson and Johnson (NYSE:JNJ) who reported fourth quarter and full year results this morning one gets a deeper understanding of the problems facing all the major blood glucose monitoring companies. It’s well known that LifeScan is one of the few BGM companies with a coherent well thought out strategy focused primarily on penetrating the frequent tester market, namely insulin using patients. While the company continues to gain share, as the results announced today indicate these share gains have come at a cost to the bottom line.
In the fourth quarter of 2008 the diabetes care unit experienced a revenue decline of 18.4% domestically, for the full year domestically the unit grew at an anemic 0.4% rate. According to the company these poor results were related to three major factors, slower market growth, greater rebating and continued price pressure.
Diabetic Investor isn’t surprised by these results as the handwriting has been on the wall for some time. It’s hardly shocking with these tough economic times that patient’s are more cost concise. Although test strips are widely reimbursed consumers are watching every dollar including co-payments. Because the majority of patients do not value the information provided by their glucose monitor testing frequency which is already well below where it should be has fallen further as the economy worsens.
LifeScan is somewhat buffered as they have done a solid job of deeply penetrating the insulin patient market. However, even with this increase in insulin users the company still must deal with pricing pressure. The fact of the matter is insurers, wholesalers and PBM’s are asking for and getting price concessions from all the major BGM companies. While competitive bidding failed to take hold Medicare implemented an across the board reimbursement cut for BGM products.
One bright spot among the dark clouds is the performance of Animas which according to the company experienced a 40% increase in sales. These results track with what Diabetic Investor has been hearing from the field. When it comes to new pump placements, patients not previously on insulin pump therapy, Animas is increasingly becoming the pump of chosen. It’s no secret that when it comes to new pump placements that Medtronic (NYSE:MDT) the insulin pump market leader is losing the battle to Animas and Insulet (NASDAQ:PODD).
The next step for Animas and Insulet is to erode Medtronic’s advantage in the pump upgrade market, when an existing pump patient replaces or upgrades their existing pump to a newer model. The majority of insulin pumps carry a four year warranty. Typically insurers will reimburse for a new pump after the warranty on an existing pump expires. It is here in the pump upgrade market that Medtronic has been able to maintain their market dominance. When the pump upgrade market follows the trend we’re seeing with new pump placements Medtronic will be in serious trouble.
Given the current set of circumstances Diabetic Investor isn’t shocked by these results. However, the issues facing JNJ or Abbott (NYSE:ABT) who reports earnings tomorrow morning cannot just be blamed on the economy. Growth in the BGM market has been slowing for some time. The current economic environment is merely accelerating a trend that began long ago. Diabetic Investor has consistently maintained that as long as companies focus on technological improvements rather than patient education testing frequency would not improve.
During today’s call JNJ spoke frequently of their efforts to improve patient education noting accurately that if nothing is done that today’s problems will pale in comparison to what things will look like in the future. Perhaps this current economic crisis will serve as the catalyst that prompts companies to focus on patient education so they value the information provided by their products, instead of wasting millions on technology that only a handful of patients actually use.
Call Diabetic Investor the ultimate skeptic but we’ve heard this talk about improving patient education before. When it comes to patient education many companies talk a good a game but to date that’s all we’ve heard is talk. And as everyone knows talk is cheap. The ultimate winner in BGM will be the company that turns talk into tangible action.