One Step forward, two steps back

One Step forward, two steps back

It is not worth spending a great deal of time discussing the results Roche released today as the diabetes franchise continues to show more sales declines. The fact is it’s been so long since we’ve actually seen any growth in this unit; this continued sales decline is not news.  Real news would be if the company could at minimum stop the bleeding or possibly reverse this negative trend. As we noted the last time Roche released results there have been small signs of progress as the company now publicly acknowledges there is a problem, which may not seem like much but this is a major step for Roche.

Looking towards the future Roche is doing what everyone else in glucose monitoring is doing and trying to capture insulin using patients with new systems. As part of their presentation the company highlighted three new systems – the Accu-Chek Aviva Expert – the next generation of the Accu-Chek Mobile and next generation of the Accu-Chek Active. The Expert is squarely targeted at insulin users as the meter as built in bolus advisor. The Mobile is also target at insulin users as it is an integrated device similar to the Pogo from Intuity Medical, the main difference being the Mobile cartridge contains 50 test strips compared to the Pogo cartridge which has 10 test strips. The Active is the company’s attempt to play in the Medicare market as it’s a no frills low cost system. These new systems will complement the new Accu-Chek Nano and provide Roche with a broad portfolio of products which cover almost any patient need.

While it is nice to see these new systems Diabetic Investor isn’t quite sure they will do anything to reverse sales declines although it’s an outside possibility they could somewhat slow this continued sales decline. Frankly the problem is not the systems but the company’s unwillingness to reengage with the payors and regain lost formulary position. A difficult move today as prices continue to decline and competitive bidding looms on the horizon. The fact is Roche is paying a huge price for their decision years ago not to compete with LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), when JNJ basically decided to do whatever it took to gain the number one formulary position with the major payors. While it’s true the company made additional mistakes but this decision was the most costly in the long run and the most difficult to overcome.

One has to wonder with margins shrinking and little hope of a turnaround is the company considering selling the unit. Like everyone else in BGM they have cut costs and continue to look for even more areas to cut further. Their reputation, once solid, has taken a major hit in the diabetes community. While the new products are step in the right direction the competition for the insulin users is going to be fierce and costly. The bottom line is if this unit is to have any chance at all at a turnaround Roche must invest more not less resources; a tough investment to make considering the BGM market and where it is going.

So why not bite the bullet and sell the unit when it still has value, albeit a diminished value from even a year ago. Roche like everyone knows what went on when Bayer tried and failed to sell their troubled diabetes unit. Yet unlike Bayer, Roche shouldn’t have much of problem selling their unit as quite frankly they have more to offer than Bayer does. This of course assumes they don’t make the same mistake Bayer did and get overly greedy.

The bottom line for Roche is while they are making some progress it’s likely a story of too little too late. It’s also true that a leopard does not change its spots and Diabetic Investor isn’t convinced that the Roche management can make the major changes needed that could change the future direction of the unit. The diagnostic division is under new leadership, the real question is does this new leader truly have a vision or will it be more of the same. Diabetic Investor is encouraged as at least they are now acknowledging they have a problem. However, this acknowledgment is just the first of many steps that are needed and it’s an open question as to whether the company has the stomach to do what is truly needed. Otherwise it will be one step forward and two steps back.