JNJ Reports – The Fall Continues
While many will blame the lousy economy for the continued poor performance of the blood glucose monitoring market that explanation fails to take a realistic view of the fundamental changes taking place in the market. As the market has shifted from a medical device market to a commodity market where price is the driving factor LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), stood out as one of the few companies in the sector that understood how the market was changing and developed a strategy to deal with the new market realities.
LifeScan correctly understood that under the new market dynamics it was best to focus on frequent testers, namely insulin using patients. While the company did not ignore non-insulin using type 2 patients they understood these patients while great in number failed to monitor their glucose levels on a regular basis. They also understood that it would costs millions to educate these patients on the benefits of regular monitoring, millions that would not necessarily come back to LifeScan in increased sales of test strips.
This focus on insulin using patients helped LifeScan become the market leader in the United States and was the main reason they acquired insulin pump maker Animas. As it turns out Animas was one of the few bright spots in the JNJ diabetes care unit which according to the company grew by nearly 30% in the quarter. Diabetic Investor isn’t surprised by this performance as it falls in line with reports from the field. Animas continues to gain share from market leader Medtronic (NYSE:MDT) who is losing the battle when it comes to adding patients new to insulin pump therapy. The company is also making inroads in the upgrade market getting patients to switch to an Animas pump when the warranty on their existing pump expires, not surprisingly the majority of these upgrades came at the expense of market leader Medtronic.
Still the goose that lays the golden eggs, LifeScan cannot escape the continued downward spiral of the BGM market. Facing continued and intensifying pricing pressure the company has aggressively moved to cut costs. As Diabetic Investor has already reported the situation has become so bad that the company is no longer following the time tested strategy of giving away free monitors to gain share. This move follows other cuts in marketing and a reduction in their field sales force. Simply put, LifeScan has accepted the realities of the market and is taking every step necessary to maintain margins which continue to shrink.
Looking towards the future it’s difficult to imagine any scenario where growth will return to this market. This problem goes much deeper than the lousy economy and it would be foolish to believe that as the economy improves so will the sales of test strips. An improving economy will not change the continued pricing pressure facing the market, nor will it stop the coming increase in the GLP-1 therapy. Diabetic Investor believes that as GLP-1 therapy becomes more prevalent with type 2 patients test strip usage could fall another 20 to 30%. The fact is we are moving towards a BGM market that focuses almost exclusively on the insulin using patient.
The final nail in the coffin is likely to come from renewed efforts at healthcare reform. For all the talk about improving care and focusing on prevention rather than treatment, healthcare reform really boils down to one issue, cost control. As everyone knows with its epidemic growth rate diabetes is not just a major healthcare crisis it’s an economic crisis too. Although Diabetic Investor and many experts believe that regular glucose monitoring can lead to better overall outcomes, the government in their attempt to control costs will likely move towards lowering reimbursement for test strips. As Diabetic Investor predicted long ago the government will use data from several studies that have shown that regular testing by type 2 patients does not lead to better outcomes as their rational for these coming cuts. It is not outside the realm of possibility that we could go back to days when only insulin using patients receive reimbursement for their blood glucose testing supplies.
Given these realities another Diabetic Investor prediction is likely to come true in the very near future as industry consolidation is coming. Tomorrow Abbott (NYSE:ABT) will announce their earnings for their struggling diabetes care unit. Barring a major miracle it’s unlikely that Abbott’s results will be much different than JNJ’s. A week from Thursday Roche will report followed by Bayer reporting the last week of the month. Again based on field reports Diabetic Investor is expecting everyone to report sales decreases. This being the case it’s just a matter of time before one or more of the Big Four cries uncle and throws in the towel on BGM.