Not as crazy as it might seem

Not as crazy as it might seem

This morning Diabetic Investor read the following headline; “Johnson & Johnson to seek buyer for medical device maker unit”. Naturally this peeked our interest as we thought the unit they were seeking a buyer for was their diabetes device unit which includes glucose monitoring and insulin pumps. As it turns out the unit rumored to be for sale is their cardiovascular unit Cordis. While this may come as relief to the all the good people who work at JNJ diabetes, the idea of this unit being sold is not as crazy at it might seem.

First, as we have noted in the past it’s only a matter of time before they unload Animas, their insulin pump unit. The sad fact is this unit has never turned a profit since being acquired by JNJ nor has the unit help sell additional test strips for the company’s BGM unit, LifeScan. Now Diabetic Investor prefers not to dwell on the many reasons Animas did not perform as expected, let’s just say the insulin pump market isn’t easy and it doesn’t help any when the left hand doesn’t know what the right is doing.

It’s also not out of the realm of possibility; actually we think it’s a distinct possibility, that the company would consider selling LifeScan. As we note on almost a daily basis the BGM market is in a world of hurt and money is no longer falling from the sky. Yes there is money to be made still but not the bundles of cash this business used to generate. Roche, the number two player, who also wanted to sell their diabetes devices unit has realized this and is spinning this unit off into a privately held company.

The simple fact is when it comes to diabetes and JNJ, it’s all about Invokana.  Yet here as well the picture isn’t as bright as it was. Yes Invokana has performed very well but that was before it had competition. In fact Invokana could well be the poster child for how the diabetes drug market is changing. It also shows that being first to market is important but not as important as once was given the level of competition in the marketplace.

Looking ahead Diabetic Investor believes that when it comes to diabetes JNJ has a choice; get out or double-down.  Doubling down might not be as crazy as it sounds even with the market changing. The way things are going in BGM it’s just a matter of time before we’re left with two major players and everyone else.  For all practical purposes Bayer can no longer be considered a major player while Abbott (NYSE:ABT) and Roche continue to struggle.  The BGM business may not be what it used to be however JNJ has the scale and brand equity to remain a major player. Think last man standing.

Should the company double-down Diabetic Investor thinks they wouldn’t necessarily have to go it alone. While they don’t have all the pieces that Novo Nordisk (NYSE:NVO) needs Diabetic Investor could easily see these two former partners rekindle their love affair and hook up again. We don’t see JNJ buying Novo but a partnership is certainly not out of the question.

The company can hit the acquisition trail and pick up some drugs, i.e. a long-acting GLP-1 from say GlaxoSmithKline (NYSE:GSK) which has the potential to be a blockbuster in a growing category. Yes they would face some competition but now that it looks like Pfizer (NYSE:PFE) is reengaging with AstraZeneca (NYSE:AZN) and that Lilly’s (NYSE:LLY) long-acting GLP-1 has not yet been approved by the FDA now would be the perfect time to strike.

The simple fact is the wacky world of diabetes is about to get even wackier and no scenario no matter how crazy it might seem should be dismissed. For all the problems facing the diabetes market, drugs and devices, it remains a huge market. Diabetes continues to grow at epidemic rates on a global basis. Those with the fortitude, and a very strong tolerance for pain, who stick with it could reap major rewards down the road. To Diabetic Investor this is the cornerstone of Lilly’s diabetes strategy, stay relevant while everyone fights then pick up the pieces after the fight is over.

JNJ has all the elements to stay relevant – the question is what choice they will make.