Restructuring is not a growth strategy
Having been around for a few years Diabetic Investor is always amused when companies announce a major restructuring and actually believe that this is somehow synonymous with a growth strategy. That investors will somehow ignore the problems facing a business unit, when in reality the restructuring no matter how well thought cannot change the core issues facing the markets these units participate in.
Thus was the case today listening to the Johnson and Johnson (NYSE:JNJ) fourth quarter and full year earnings call. For two hours the company outlined their new operating structure but when it comes to their diabetes franchise all this change won’t change the dynamics of the markets they play in.
Looking at the new structure LifeScan and Animas are now part of the Global Medical Solutions Group (GMSG) which is one of three components of the Medical Devices and Diagnostics group. Also lumped into GMSG are Vision Care, ASP and Ortho Clinical Diagnostics. While all of these individual units which make up GMSG are supposed to be synergistic the overall plan for the diabetes franchise appears to be the same it was before this change was announced.
Diabetic Investor also questions why the company is touting canagliflozin, their SGLT2 that they expect to submit to the FDA during the first half of this year. Some may recall that the FDA declined to approve dapagliflozin from AstraZeneca (NYSE:AZN) and Bristol Myers Squibb (NYSE:BMS), the first SGLT2 to be submitted to the agency, over bladder and breast cancer concerns along with infection and liver damage issues. While there is nothing yet to indicate that canagliflozin has these same issues at minimum the company must realize that the FDA will be examining the drug closely given the issues that developed with dapagliflozin, this does not mean the drug is dead on arrival, however it already is on life support.
Diabetic Investor also doubts that either LifeScan or Animas will benefit much from this new structure as the two units which were supposed to be working together already have each had their own issues. While LifeScan is holding its own at the moment, Diabetic Investor is beginning to see early signs of share erosion. The company is also facing a host of new competitors who at minimum will draw attention away from the launch of the new OneTouch® Verio® and who could slowly eat away at the company’s market share. Frankly the story for the glucose monitoring market hasn’t really changed even with the entry of these new players, this is still a commodity market with intensifying pricing pressure and slower overall growth.
The market dynamics aren’t much different for insulin pumps but Animas has bigger problems than just adverse market conditions. While Animas has moved into the second position behind market leader Medtronic (NYSE:MDT), the company appears to be doing everything they can to give this number two spot away. Anyone who has read the warning letter issued to the company by the FDA will understand that this unit is in need of some serious changes. However quality issues are just the tip of the iceberg for the company as they will soon face some serious competition from newcomers Tandem and CellNovo.
Diabetic Investor would also like to clarify something we wrote about yesterday when we noted that Roche was killing the Solo patch pump. As several readers noted Roche has not discontinued the Solo rather they have closed down the Israeli operation and moved everything to the mother ship in Germany. So factually the Solo is not dead, however from all practical purposes the Solo is dead as this is one of the worst designed pumps of all time and unless Roche plans on revamping the entire system and starting from square one this system has zero chance of gaining any traction in the marketplace. Given these facts in the real world the Solo is a dead duck even though the duck has not been officially slaughtered.
The bottom line here, at least when it comes to the major players in diabetes, diabetes devices in particular, is that the more things change the more they remain the same. All the restructuring, repositioning and regrouping of units cannot change market dynamics. As we have noted before these establish players in diabetes devices, are ill-equipped to deal with the new market realities. Try as they might they cannot get away from worn out strategies that worked in the past but just won’t work now. All this change is really nothing more than cover until either these units can be sold or at minimum milked for every possible dime of profit. A new day is dawning in diabetes devices and based on what we have seen so far in 2012 this new day will usher in new players with new ideas while the old guard will slowly fade away.