One good one very bad

One good one very bad

The question facing Johnson and Johnson (NYSE:JNJ) when it comes to diabetes is whether they are diabetes device or drug company. For the moment they are trying to be both yet given the way things are going one has to wonder whether it makes sense to be both. Today’s earnings announcement reflects why this may be the case. As everyone knows Invokana is headed for blockbuster status, globally sales hit $340 million for the quarter and have racked up $936 million year to date.

Yet things aren’t so great for the diabetes device area, with global sales DECREASING 15.8% for the quarter and dropping 11.1% year to date. The simple fact is even with the Animas Vibe doing well, this success cannot offset the impact of continued price concessions in the glucose monitoring market.

Given that things will only get worse in glucose monitoring, that the Animas Vibe will soon have competition (Tandem (NASDAQ:TNDM) also has a pump that works with the Dexcom (NASDAQ:DXCM) sensor) the company could decide it’s time to exit the diabetes device arena and concentrate on Invokana. A strategy that has been considered in the past and may well get revived now that Bayer has been able to unload their diabetes device on Panasonic/KKR. As we have noted before JNJ not only knows when to get into a market they are equally adept at knowing when to exit a market.

As we have been noting there are several well-heeled newcomers entering the diabetes device market. Besides these cash rich newcomers it is also well known that several private equity firms have been sniffing around this space. Simply put there is no shortage of buyers. The problem which JNJ solves is there are really just two diabetes device companies which have complete product lines, massive scale and strong brand name recognition. Roche also has these qualities yet lacks a strong presence in the critical US market nor do they have much in the insulin delivery segment other than a pump. The simple fact is when it comes to diabetes devices JNJ has it all, glucose monitoring and insulin delivery.

We know that JNJ says they are committed to diabetes devices but they are more committed to making money. Simply put if the right offer came along they would sell in a heartbeat. The fact is Invokana carries higher margins and has better growth prospects than any diabetes device JNJ owns. It’s also true that Invokana is better positioned to face its competitors than any diabetes device JNJ owns.

Up until recently we believed that when it came to diabetes devices that the JNJ strategy was to be the last man standing. Yet the question is even if they were the last major brand in diabetes devices what would that market look like when this happens. We don’t see Animas overtaking Medtronic (NYSE:MDT) in the insulin pump market. We don’t see the Finesse dumb patch pump generating much in the way of revenue. We don’t see LifeScan glucose monitors gaining much more in the way of market share and actually see the reverse happening. Plus all of these device markets will continue to face price consolidation.

Add it all up and the fact is Invokana has a much brighter future than any diabetes device that JNJ owns. Then add in the fact that right now their diabetes device unit is the most desirable unit to own. As we noted earlier they have it all. But this window of opportunity will not last forever so the time to strike is now.