No surprise here
Today both U S News and Reuters are reporting that Johnson and Johnson (NYSE: JNJ) are considering selling LifeScan for $3.4 billion. According to these reports;
“Among the potential bidders is a consortium being formed by Shenzhen-listed Sinocare Inc, which develops and manufactures blood sugar monitoring systems, and China Jianyin Investment Ltd (JIC), a unit of sovereign wealth fund China Investment Corp. The group has hired an advisor to work on a bid, according to two sources.”
This really isn’t news to Diabetic Investor as we have chronicled this process since JNJ announced they were considering all strategic options for their diabetes device units. It’s also no surprise that after making the decision to shut down their insulin pump unit, Animas, that attention has been turned to selling LifeScan. The question always has been who would meet JNJ asking price.
As we have noted while BGM is dying a slow and painful death in developed nations in developing countries the unit still has value. Although we would not necessarily classify China as a developing nation from a diabetes perspective it is. CGM which is gaining traction in developed nations has yet to gain traction in developing nations. Considering the size and growth of the Chinese market plus the fact that this unit throws off lots of free cash this type of deal makes sense.
Our sources indicate there is a high level of interest in LifeScan and when the bidding closes there could be as many as five or more offers for the unit.
Once sold this will mark the end to a long and distinguish move into diabetes by JNJ. It will also mark the end of their once ballyhooed diabetes eco-system. One can only speculate to what might have been had JNJ gone bid instead of going home, something many in the organization wanted to do. It also makes one wonder as to how this sale will impact markets in developed nations.
Our guess and we think it’s a pretty good guess is here in the US payors will continue to drive prices lower for conventional BGM, restrict access to non-insulin patients and shift their attention to CGM. This in turn will force CGM companies into a battle for increasing access to non-insulin patients at a price point equal to or lower than conventional BGM. As we have reported a price war is developing in CGM but increasing access to CGM is an equally important issue.
For CGM to become the standard for glucose measurement it must move beyond insulin using patients, this as we keep saying is the low hanging fruit on the tree. The problem is payors who will reimburse for CGM for these patients have not accepted that CGM should be used by all patients. This in turn has placed the CGM players into convincing payors that CGM helps all patients not just insulin using patients and should be reimbursed even when a patient does not use insulin. Payors in turn will fight back stating they have heard this before and studies have shown that glucose monitoring even when done on a regular basis does not help non-insulin patients.
As we stated long ago even though we felt many of these studies were flawed they would provide payors cover for limiting access to BGM for non-insulin using patients. That payors in their zest to control or cut costs would impose greater restrictions and eventually deny reimbursement for patients that do not use insulin, and this is exactly what has happened. Needless to say, this makes the road very difficult for CGM companies as the non-insulin market is the gateway to real growth.
Therefore Dexcom (NASDAQ: DXCM) is teaming up with Lilly (NYSE: LLY) and Sanofi (NYSE: SNY). Dexcom understands that CGM is a critical component to a diabetes management system, systems which are being developed by Lilly, Sanofi and soon Novo Nordisk (NYSE: NVO). For a company like Lilly CGM will not just help sell more insulin but also more Januvia and Trulicity. If done correctly Dexcom’s customer isn’t the patient rather their customer is Lilly. Lilly essentially buys the product from Dexcom places it into their diabetes management system and it’s the system not the individual pieces of it that gets reimbursed.
Now keep in mind this is NOT how things work today and Lilly like others may not see the forest for the trees. However, a company like Amazon just might. Unlike Lilly Amazon is not handicapped or tied to the old way of doing things. Unlike Lilly Amazon has not built their infrastructure around how payors reimburse for drugs and devices. They could if they choose to do so, do what they have done in other markets and change the paradigm. The same of course is true for Google and Apple should they decide to do so.
As we noted before this year began 2018 could well go down as a transformational year for our wacky world. Old players are saying goodbye and new ones are beginning to become more public and transparent. This could fun.