Roche Downsizes

Roche Downsizes

This morning Roche provided a detailed view of their “Operational Excellence Program”, which in reality is fancy name for laying off a bunch on employees and initiating a series of cost saving moves. According to a company issued press release; “Implementation plans include reducing the work force by 4,800 positions worldwide, or 6% of the Group’s current work force, over the next two years. The largest reductions are planned in sales and marketing and in manufacturing. Approximately 800 jobs would be transferred to other Roche sites and 700 positions outsourced to third parties. Combination of planned job reductions and transfers affect 6,300 positions overall.”

Specifically looking at their diabetes unit the company noted; “In Diabetes Care the majority of activities will be based in Mannheim, Germany, the unit’s global headquarters. Research and Development of insulin pumps will be transferred from Burgdorf, Switzerland to Mannheim, Germany. In addition, the plan is to outsource manufacturing and close the Burgdorf site thereafter.”

Diabetic Investor is hardly surprised by this news as Roche is not immune from the difficult environment facing large pharma. The company has experienced a series of setbacks and now must right-size the company to deal with these failures. The Diabetes Care unit has been a major disappointment for the company. Here in the US their Accu-Chek line of glucose monitors, once the market leader, has fallen on very hard times losing 12 share points. The company also spent over a billion dollars to acquire Disetronic and has seen this once prominent competitor to Medtronic (NYSE:MDT) in the insulin pump market become a non-factor.

Like so many companies in the BGM space and Roche really is no different, they got fat and happy while their comfort curve test strip pushed the company into the number one position. Rather than capitalize on the success of the comfort curve and reinvest some of the profits into new and even better systems, the company instead ignored the shifting market conditions and allowed LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), to overtake them in the critical US market.

In perhaps one of the strangest moves ever by a company Roche blundered badly when they failed to perform solid due diligence while acquiring Disetronic. Shortly after the acquisition the FDA hit Disetronic with a sales ban here in the US, a move that effectively crippled the unit, allowed new competitors to establish a market presence and gave MiniMed clear leadership in the insulin pump market. The company compounded their mistake by publicly bashing the FDA while the agency was considering lifting the ban, as Diabetic Investor noted at the time it’s not exactly a bright idea to bash the agency that controls access to US market.

Another major mistake was their response to the PQQ enzyme issue. While Diabetic Investor believed the FDA badly mishandled this issue, the fact was the company should have been more aggressive in changing the enzymes they used. Once again they allowed LifeScan to capitalize on this issue which further damaged their reputation in the marketplace.

In an attempt to revitalize their insulin pump unit, which is basically dying a slow and painful death, the company acquired Medingo who makes the Solo patch pump system. Although the company only spent $200 million to acquire Medingo many including Diabetic Investor believe the Solo will never see the light of day. Meant to compete head on with the OmniPod from Insulet (NASDAQ:PODD), the Solo is perhaps the most complex insulin pump ever designed and not at all patient friendly. Here too, the company blundered badly and has likely missed any opportunity to become a serious player in the insulin pump space.

Yet diabetes devices is not the only area where the company has run into problems as their long-acting GLP-1 tasoglutide meant to compete with Bydureon from Amylin (NASDAQ:AMLN), Alkermes (NASDAQ:ALKS) and Lilly (NYSE:LLY), ran into issues of its own and like their insulin pump unit is dying a slow and quiet death. While the company insists the drug is not dead and merely delayed, the fact is tasoglutide will never see the light of day.

Some may believe that Diabetic Investor is gratified by this announcement as it is further confirmation of how badly Roche has managed their diabetes units. The fact is, as right as we have been, managements many blunders have serious consequences as people will soon be out of work. Given the dismal prospects for the BGM market and toughening market conditions for insulin pumps it’s unlikely these fine folks will work elsewhere in the industry. Frankly it’s not exactly a bonus to have Roche Diabetes Care on your resume.

So like everyone else in BGM, Roche is following the standard corporate playbook and cutting expenses. Amazingly the company still holds the number one position in BGM on a global basis and while a distant second here in the US, they still sell plenty of test strips. The insulin pump unit will never amount to much and more than likely the company will eventually abandon this market altogether. The simple fact is when it comes to insulin pumps no one has come within shouting distance of Medtronic no matter how hard they have tried.

At this point Diabetic Investor prefers not to gloat as it possible for a diabetes turnaround at Roche. For anyone who does not believe this to be true we point out that Bayer, also a market leader back in the day and also given up on, brought in a new management team and reestablished the company as a serious player in BGM. It is also true that LifeScan, the current market leader in BGM, is beginning to show signs of share erosion.

The bottom line is the BGM market isn’t that different than college football, where getting to the number one ranking is only half the battle; as it’s just as difficult to stay number one once you get there. The real question for Roche is not whether a turnaround is possible; history tells us it can be done. The real questions are- Does the company want to spend the resources necessary to make a turnaround possible and are they willing to bring in the talent needed to execute a turnaround? Getting back in the game is not just about money but the combination of money and talent.

As Aldous Huxley noted; “There is no substitute for talent. Industry and all the virtues are of no avail.”