JNJ Reports – Tough Times
Third quarter results reported today by Johnson and Johnson (NYSE:JNJ) remind Diabetic Investor of what happened to the Stanley Cup Champion Chicago Blackhawks. After winning the cup for the first time in 49 years, the Hawks facing salary cap issues had to trade away key members of their team. This is not unlike what’s happening with JNJ’s diabetes care unit.
After years of building this unit and becoming number one in the key glucose monitoring market, the company is facing some strong headwinds. As the company noted today during their call pricing pressure continues to intensify, co-pays are rising and consumers are cutting back in test strip usage. Simply put, like the Blackhawks JNJ is finding out that it’s just as difficult to stay a champion as it is to win the championship. The major difference being the Blackhawks have a better chance of adapting to changing market conditions than JNJ does.
The reality is the BGM market continues to deteriorate and this decline is made worse by the poor economy. As insurers attempt to deal with healthcare reform and maintain margins they continue to transfer costs to the patient in terms of rising co-pays. Additionally they are becoming even more aggressive in their contracts negotiations with BGM companies asking for even greater price concessions. Finally they are seeing price sensitive consumer’s move to cheaper value priced systems.
As Diabetic Investor noted with our Walgreens example, retailers understanding how cost sensitive consumers have become are making a major effort to promote their store branded products. Given that the majority of consumers view monitors as a commodity, price is becoming a factor when selecting which meter they use. With co-pays rising it is not all that uncommon for the store branded system to be cheaper than using the name branded product which is reimbursed. For patients who value testing moving towards a store branded system allows them to manage their diabetes while limiting their out of pocket expense.
The news isn’t much better for their insulin pump unit Animas. While the unit has firmly established itself as the number two player in the market, they are not even within shouting distance of market leader Medtronic (NYSE:MDT). Just like glucose monitoring, consumers who are watching every dollar are delaying pump purchases or switching from one system to another. While most insurers reimburse for insulin pumps and pump supplies, it is not unusual for the consumer to pay $2,000 or more when starting pump therapy or moving to a different pump.
Also impacting this decline is the FDA. LifeScan continues to await approval for their no-coding test strip while Animas continues to await approval for their new pump system. For companies who rely on new systems to drive sales these delays are just one more issue they must deal with.
It baffles Diabetic Investor that a company as smart as LifeScan continues to rely on worn out strategies promoting new patient ads rather than trying to get their existing customer base to use more of the products they make. The stark reality is buying share has become prohibitively expensive and for LifeScan who already has prime formulary placement increasingly difficult. We also doubt JNJ would add share through acquisition given the difficult market dynamics.
Like everyone else in diabetes JNJ also knows that Sanofi-Aventis (NYSE:SNY) will soon be entering the BGM market and will also be entering the insulin pump market. Unlike the current players in both markets Sanofi is allocating more resources to these units. As Diabetic Investor has noted previously Sanofi also has a much different view of the diabetes patient than their competitors. Simply put Sanofi sees the diabetes patient as a lifecycle patient besides wanting to sell this patient their drugs and devices, Sanofi wants to help them better manage their diabetes. Or out more simply they want to become a key component in the patient’s life.
Looking ahead JNJ is facing some tough choices; they can if they chose to continue to follow old worn out strategies that will yield more of the same. They could buy share via acquisition. Or they could realize that the days of stealing share are over and begin to transform themselves into helping their existing customers use more of the products they make.
Years ago the company correctly read market dynamics as they focused squarely on capturing insulin using patients. They knew these patients tested their glucose more frequently and valued accurate information. They designed systems that made testing patient friendly and marketed these systems aggressively. However, market conditions have changed dramatically and it’s time once again for a shift in tactics.
Like all the players in BGM, JNJ has cut costs to such a point that there isn’t much left to cut. Without a change that would grow the top line they will continue to see an increasing share of a declining market plus new and formidable competition.
The last time JNJ was facing a similar decision was about ten years ago when Roche was the market leader largely due to what was back then better technology. Realizing their systems were fast becoming obsolete they turned to Inverness Medical who with their advanced technology helped LifeScan capture the top spot. JNJ eventually bought Inverness, expanded their lead and watched Roche suffer major share erosion.
Diabetic Investor does not see JNJ buying their way out of this problem as the market conditions don’t favor acquisitions. This time around if they hope to survive they will need to make a major change in tactics not unlike what Sandra Peterson did when she overhauled a dying Bayer franchise and made the company relevant again. The only other sensible option, once unthinkable, would be to exit the diabetes device market and sell the unit to someone else.
Granted this sounds crazy for such a cash cow but JNJ is not only expert at knowing when to enter a market they are equally skilled at knowing when to leave a market. Considering the wacky world of diabetes, this isn’t as crazy it seems and could well be the only option acceptable. Given the engrained culture at this unit, a major overhaul would be needed for a new strategy to be successful. No matter which direction they chose the one thing that is crystal clear is change is desperately needed.