JNJ Reports – Surprising Results

JNJ Reports – Surprising Results

This morning Johnson and Johnson (NYSE:JNJ) announced first quarter results and surprisingly their diabetes unit which includes glucose monitoring company LifeScan and insulin pump maker Animas showed stronger than expected growth. Unlike Roche which released their results back on April 14 which showed anemic growth overall and a major decline in US sales, JNJ sales increased 7.2% domestically and 6.2% internationally.

While Roche continues to outperform JNJ overseas, the gap in sales is narrowing. Based on announced results Roche overseas sales amounted to $509 million, while JNJ international sales for the quarter came in at $326 million. However, the gap here in the US continues to widen with JNJ sales hitting $311 million while Roche’s sales have fallen to $134 million. It is this last number that truly tells the story of both companies as at one time Roche and JNJ were almost dead even in sales here in the US. The stark reality is JNJ continues to gain and hold share while Roche has done nothing but lose share.

Perhaps these results explain why Diabetic Investor continues to hear that Roche is desperately trying to unload their diabetes care unit. Although Diabetic Investor would not say that JNJ has been overly effective at integrating LifeScan and Animas, they have done a far better job than Roche who continues to wonder aimlessly through the desert in search of an insulin pump strategy. The reality is JNJ is strengthening their presence in the US market while gaining share overseas. If this trend continues, Roche already in trouble would see even more problems as their one lone bright spot for diabetes care has been their international presence.

Given what Diabetic Investor has been hearing on the street it will be interesting to see how Abbott (NYSE:ABT), who reports tomorrow morning, performed in the quarter; a call that has become more intriguing given that just yesterday they fired their national sales director. If the talk on the street is correct JNJ looks to be the only major player who is actually growing in the diabetes device segment.

Today’s results also speak volumes to just how far the diabetes device market has fallen. Back in the day a 7.2% growth rate would have been considered well below market averages, today it’s considered well above market averages. It also points to why Diabetic Investor continues to believe we will see further consolidation in the industry with the wild card here being what Sanofi-Aventis (NYSE:SNY) decides to do. Although Sanofi already has an agreement with privately held AgaMatrix and will soon be launching their iBGStar and BGStar glucose monitors, the company cannot build share with these two offerings alone. As Diabetic Investor has been stating for some time in order for Sanofi to become a real player in glucose monitoring they will need to greater scale. Frankly it’s just too costly to try and build share from scratch.

The question becomes who Sanofi will acquire to achieve the scale they need. Although Bayer would like to sell off their unit the structure of the unit makes a sale highly unlikely. That leaves Abbott and Roche as the most likely targets for Sanofi. While Roche has greater presence worldwide, Diabetic Investor sees Abbott as a better fit for Sanofi given Abbott has a stronger presence with insulin using patients and as we noted previously insulin users are critical in the glucose monitoring market.

Should things play out as Diabetic Investor anticipates this will set up a battle between JNJ and Sanofi, with everyone else scrambling to hold onto the share they have. This situation would also be intriguing given how the two companies view their respective diabetes units. While JNJ sees the insulin pump unit helping to drive the sales of test strips, Sanofi sees diabetes devices as a vehicle to sell more insulin. Although at one time JNJ had dreams of providing diabetes management solutions these plans have fallen by the wayside. Sanofi on the other hand appears intent on venturing beyond drugs and devices and into patient management.

Whatever events transpire the central fact is the diabetes device sector is headed for another round of consolidation and transformation. As Diabetic Investor has been saying it’s just a matter of time before we go from the big four in glucose monitoring to the big two and everyone else. While we’re not quite sure who will buy whom we’re fairly confident that JNJ will remain a key player. The company isn’t perfect but at least they had the good sense to understand where the market was going and made the appropriate strategy adjustments. This is in sharp contrast to their competition that seems incapable of following a well thought out sustainable strategy.