More on the Animas/LifeScan “Displacement”

More on the Animas/LifeScan “Displacement”

Not like we needed even more examples of just wacky the diabetes device world has become but the latest examples comes from the folks at Johnson and Johnson (NYSE:JNJ) and their two diabetes units LifeScan and Animas. As Diabetic Investor reported these two diabetes devices who are now supposed to be working together announced a series of lay-offs, or as they call them some of the personal has been “displaced”. According to an Animas representative these employees were not laid-off but “displaced” and free to apply for another position in the restructured diabetes unit.

Given that Diabetic Investor does not speak corporate, we’re weren’t actually sure what the difference was between a “displaced” employee and one who has been axed and offered a severance package. Granted Diabetic Investor is not the brightest blub on the tree but we’re not dim either, in our simple way of thinking when an employee is told they are axed and they get a severance package that means they are now part of the growing ranks of unemployed individuals. Or to use JNJ corporate speak they have been displaced out of a job.

It seems as if JNJ has decided that since that can’t come within spitting distance of Medtronic (NYSE:MDT) in the insulin pump market and that LifeScan is starting to see some signs of share erosion, along with a host of other issues, the time has come to cut costs even further than they have already. Therefore these two diabetes devices which should have been working together from the moment JNJ acquired Animas are now one company and part of the JNJ diabetes franchise. According to Animas this means that while both Animas and LifeScan will have their own respective marketing and sales teams, these teams will report to one person who will oversee the “diabetes franchise.”

When asked if this meant that LifeScan reps would now be selling Animas insulin pumps and vice versa or if there would be more joint sales calls, all Animas would say is that they a brand spanking new strategy that will be “really good” for the company. When Diabetic Investor inquired for more details as to exactly what this new strategy is and how it will work; all they would say is that the strategy isn’t being shared outside of the walls of JNJ.

Well given this lack of clarity, Diabetic Investor will translate into Diabetic Investor speak – when a company won’t share their strategy they really don’t have one.

The harsh reality is JNJ is caught between the preverbal rock and a hard place. They see dynamics in both the BGM and insulin pump markets getting worse. They have spent millions not just to acquire Animas but putting the company in place to effectively compete with Medtronic. And just what have they received for the millions spent- nothing, nada – not one cent of profit. While they are firmly in second place behind Medtronic they like everyone else in the insulin pump market still cannot find a cost effective strategy to convert existing Medtronic customers to the Animas insulin pump. We hate to beat a dead horse but we’ve said it a million times, the insulin pump market is not growing fast enough nor is it large enough to support all the players in the market let alone the many new players who want to enter the market. A fact Roche will soon find out when they try and re-enter this already over-crowded market.

When it comes to BGM, Diabetic Investor is not surprised that LifeScan after years of strong growth is running into headwinds, more like hurricane force winds. The reality for LifeScan, and everyone else in BGM for that matter, is another fact Diabetic Investor has been stating for some time- the BGM market has fully transformed into a commodity market and the players have lost complete control over what they can charge for their products – when this happens it’s game, set and match for large companies like LifeScan and their large and costly infrastructures. Frankly it makes no sense to spend millions on sales and marketing when this cost will not generate enough additional sales to justify the expense. Better to cut back and milk the unit, which is a cash cow, until someone else comes along is stupid enough to buy it. As we noted many times, JNJ isn’t just very astute when it comes to buying companies they are equally talented at knowing when to jettison units.

It’s about time everyone in the diabetes device world awaken to the fact that things will NOT go back to how they were years ago when growth was abundant and money was falling from the sky. That the marketing and sales strategies that worked back in the day will NOT work today when you have 9% unemployment, a terrible economy and insurers transferring a great share of health care costs to the patient. That you cannot continue to develop me-too systems and expect anyone to pay a premium price for these copycat products, those days are history.

In the new world order of diabetes devices patients want systems that make managing their diabetes easier, systems which do more than just come in pretty colors. The want a reliable insulin pump that does not require hours of training to learn how to use. When they need help they don’t want to left on hold waiting for answers. They want a glucose monitor that fits their needs and does not come with fancy features that they will never use. If there glucose monitor is going to multitask and communicate with other devices or web portals they don’t want to need a degree in advanced engineering to figure out how to get the damn thing to work properly.

And most importantly they don’t want to pay an arm and a leg for all this supposed advanced technology. Not when the majorities of patients are seeing their co-payments increase, feel lucky to have a job and worried about paying their mortgage or sending their kids to college.

Diabetic Investor actually sees the JNJ “displacement” as a wise move given current and future market trends. Diabetes may be growing at epidemic rates but the business of diabetes is changing as well. The simple fact is the diabetes marketplace is once again transforming itself and the sooner the existing players awaken to this fact the better. The day is quickly coming when we’ll see some of the existing players leave the market only to be replaced by some new companies.

Having watched this market for several years we can state with clarity that many of the existing players are just too deeply entrenched in old world thinking and are unable to break out of this box. The smarter ones will recognize this and sell out while they still can. The others are destined to be left behind and then wonder what went wrong. Diabetic Investor does believe JNJ falls into the smarter category and we’re pretty sure from our writings everyone knows who the dumb ones are.