Roche Reports – Have they thrown in the towel?
In a prize fight when one boxer is dominating his opponent the beaten boxer’s manager can throw in the towel to stop the beating. Looking at third quarter results released by Roche this morning it appears the company is throwing in the towel when it comes to their diabetes care unit. On a year to date basis sales have declined 8% in North America and were flat (0% growth) in third quarter. Just as Abbott (NYSE:ABT) tried to put the best face on poor performance, Roche stated that growth was strong in Latin America. Unfortunately in the markets that matter the US and Europe, which account for 85% of sales, sales were horrible.
A more telling sign that the company is throwing in the towel comes by looking at their pipeline as they have just one new product in its pipeline, the Accu-Chek Aviva Nano.
Looking ahead the question becomes one of direction. Will the company make a bold move and acquire a rival to build share or will they try to reinvigorate growth using a new strategy? A clue may have come from the company when during the question and answer session of today’s call they were asked the reasons for the poor performance and what plans they had to stop the bleeding. Like a skilled politician out on the campaign stump the company outlined the issues that lead to the announced results.
1. Transitioning patients from older systems to newer ones.
2. Wholesalers making inventory adjustments.
3. Pricing pressure in the managed care sector.
Unfortunately also like the politicians on the stump they failed to address the second part of the question as to how they plan on fixing the problem.
Another telling sign of just how deep the problems are at Roche comes from their silence on their insulin pump unit. In previous calls the company went to great lengths promoting the sales increases for the unit. The only problem with these comments comes when looking at the realities of the market. While it was true that sales were increasing, it was equally true that the unit was basically starting over. A 30% gain looks great on paper but becomes a rather hollow victory when one considers that 30% gain really translates into a miniscule share of the overall market. Perhaps the company has finally comes to terms with the fact that the Disetronic acquisition is an unmitigated disaster. Besides wasting over a billion dollars to acquire the company, the acquisition took their eye of the ball in blood glucose monitoring Roche’s bread and butter business.
Like Abbott, Roche is facing a difficult decision on where to go from here. Unlike Abbott, they cannot simply sell the unit to get out from the many blunders made by management. Diabetes Care accounts for over 30% of sales in the diagnostic division and brings with it high, although declining, margins. Even with the numerous mistakes made the company still maintains a number two position in the US and number 1 worldwide. However, Diabetic Investor believes that without a coherent well thought out strategy the company is in serious jeopardy of falling into the number 3 spot domestically and number 2 worldwide.
Just as we did with Abbott, Diabetic Investor has some free advice for our friends at Roche. First and foremost, pick a market to play in. One of the biggest problems facing the entire industry is the declining customer base. Try as they might no one, with the possible exception of Bayer, has been able to successfully penetrate the non-insulin using type 2 market. Average daily strip usage in this vertical has barley grown even though the patient population has increased dramatically. That leaves the insulin using population which is currently dominated by market leader LifeScan, a unit of Johnson and Johnson (NYSE:JNJ). Although Roche has stumbled badly they have the resources necessary to compete if they choose to do so.
Second, outbid Bayer and acquire Abbott’s struggling diabetes diagnostics unit. As Diabetic Investor pointed out after Abbott released their results, the FreeStyle monitors are popular in the insulin community. Roche could build upon this platform and more effectively compete with LifeScan. The added scale would also enhance their ability to compete in the critical managed care sector.
Third, become a serious player in the insulin pump market using a rollup strategy. It’s well known that Smiths Medical is desperate to sell their Deltec unit and that Insulet (NASDAQ:PODD) is gaining share with their OmniPod system. Some would see the Deltec acquisition as throwing good money after bad given the company is handcuffed by their IP settlement with market leader Medtronic (NYSE:MDT). However, Diabetic Investor believes Roche could convert the current Deltec and Disetronic customer base to the OmniPod system. Simply put they would be buying Deltec’s customer base. This move would allow them to compete with Animas, another JNJ unit, for second place behind Medtronic in the insulin pump market.
Unfortunately there are two major drawbacks to this strategy, cost and talent. Even if Roche is willing to spend the money they still need a management team that can make it all work. A highly unlikely scenario given that the current team appears clueless and unable to deal with the realities of the market.
The real problem will come when Bayer, whose management team clearly understands the market, goes out and buys Abbott’s diabetes unit. That’s when the real fun will begin. Besides facing a formidable competitor with an excellent management team, Roche will be forced into a move rather than forcing the move. On the defensive the company will face some difficult and very uncomfortable decisions.
It’s clear from what’s going in the market that LifeScan and Bayer get it while Roche and Abbott don’t. It would be poetic justice to see these two companies who have run two successful franchises into the ground combine into one. Although it would be herculean task to combine these companies into one and then run the combined unit into the ground, Diabetic Investor believes if anyone can do it Roche can.
