JNJ Reports – Time to move on?

JNJ Reports – Time to move on?

The best thing that can be said about the results of the diabetes care unit for Johnson and Johnson (NYSE:JNJ) is the company doesn’t spend too much time explaining their lackluster results and does not add insult to injury by coming up with some crazy explanation for their rather dull performance. Given that sales grew by just 4.4% worldwide for the quarter and are up just 5.2% for the first nine months of the year, the unit’s performance was in line with expectations.

While these results come as no surprise Diabetic Investor is curious as to why the company has yet to launch their newest product, the OneTouch® Verio™ in the US. According to the documents which accompanied today’s results two versions of the Verio have received FDA approval.  Given that the Verio has been available overseas for over a year it seems somewhat odd that the company has not launched here in the US.

Traditionally JNJ loves to launch new meters and typically spares no expense promoting them. Given that sales here in the US were flat for the third quarter and are up just 4.4% year to date, one just might think that the company would launch this new meter to jump start sales.

Diabetic Investor sees two reasons why the company has been somewhat reluctant to launch the Verio. Back in June the Australian government issued a recall for the Verio, according to the recall announcement; “The Therapeutic Goods Administration (TGA) has been advised that some LifeScan OneTouch Verio Blood Glucose Monitoring Systems are giving repeated ‘error 2’ warning messages when used in conditions of high temperature and/or humidity. In these conditions the patient may not get a blood glucose result.

The units affected were manufactured during August 2010 to December 2010 and are being recalled.”

The last thing the company needs, especially in this environment, is to spend the money to launch Verio and then have customers experience problems with the unit. Diabetes may be big business but it’s also a very vocal community, where patients are not shy when it comes to expressing their displeasure when something goes wrong with their devices.

Besides quality issues, it’s quite possible that the company just doesn’t want to throw good money into a bad market.  As we have stated repeatedly the domestic glucose monitoring market is plagued by a host of problems and growth in the market is anemic. Prices are under constant pressure and the reimbursement environment is less than favorable. Given these facts combined with the huge cost of filling the pipeline and equally high cost of marketing a new meter, JNJ could well have decided that it’s just not worth it to spend a dollar to get back 50 cents.  JNJ is many things but stupid is not one of them.

It’s well known that JNJ corporate is not exactly thrilled with the way things have been going at their diabetes unit which besides LifeScan includes insulin pump maker Animas. While LifeScan continues to hold the top spot here in the US for glucose monitoring, Animas while holding the number two position in insulin pumps continues to struggle financially.  As Diabetic Investor has reported the combination of LifeScan and Animas into one cohesive unit hasn’t gone that well either. While it seems logical to combine BGM with insulin pumps, logical does not always apply when it comes to the wacky world of diabetes devices.

Although it would have seemed unthinkable only a few short years ago many are speculating that JNJ is positioning their diabetes unit for a future sale or spinoff. JNJ is not just well known for buying companies they are also very smart when it comes time to leave a market. The company, like everyone else in BGM has cut expenses to the bone to improve margins. They see the handwriting on the wall and could well believe that the best days for BGM have passed and it’s time to move on. Given that Animas has never turned a profit and that the unit cannot come within shouting distance of market leader Medtronic (NYSE:MDT), it just might be time to take the money and run.

When corporate finally decided to put these two diabetes devices under one roof, many took this move as the first step towards a future sale or spinoff. Considering that this move hasn’t gone well and that both the BGM and insulin pump markets face rough waters ahead, corporate might have concluded better to sell now while the units still have value rather than spend even more money trying to reinvigorate them.  The worst possible scenario for any company is to gain a greater share of a declining market.

Looking over the competitive landscape, corporate knows there are a host of companies who have the means to take this unit off their hands, companies who would value the scale and brand name awareness their diabetes unit would bring. There is no question of the four major BGM companies JNJ has had the most cohesive strategy and unlike everyone else they have not run their unit into the ground.  While the unit is not perfect, it has shown a keen understanding of where the market is today and where it is going.

Keep in mind this is the wacky world of diabetes devices where anything can, and usually does happen no matter how crazy it seems. The BGM market is underdoing yet another transformation and the insulin pump market appears to have plateaued. Given this set of dynamics JNJ may well have decided that rather than throw more money into these markets the time has come to say goodbye. Given the way things are going in both markets Diabetic Investor actually thinks this might just be the best strategy of all.