Roche Selling Diabetes Care?
Talk about making an immediate impact in his first conference call as the COO of the Diagnostics Division Roland Digglemann not only acknowledge that Roche actually has a diabetes care unit but this unit is having some real issues. In rare, almost unheard of admission of issues with unit the company’s earnings release contained the following passage;
“This more than offset a decline in the Diabetes Care and Applied Science businesses (both -5%), which are facing challenging market environments. Diabetes Care is affected by further reimbursement cuts and intensified pressure on prices. Both businesses are in the process of restructuring to secure long-term profitability and drive future growth. Diabetes Care’s two recently launched blood glucose meters (Accu-Chek Nano SmartView and Accu-Chek Mobile) are showing promising uptake.”
During his prepared remarks, which included three slides on the diabetes unit, Mr. Digglemann outlined a two-tiered approach to deal with the issues facing this troubled unit and to the shock of no one the initiatives outlined included cost cutting along with product differentiation. He used the Acc-Chek Mobile 2.0 which is available in Europe and the Nano SmartView which was launched here in the US during the second quarter, as examples of the products which differentiate themselves from the competition.
While one slide did contain information on insulin pumps, Mr. Digglemann did not mention when or if the Solo patch pump will ever come to market and we think we know why. According to industry sources Medtronic (NYSE:MDT) besides suing Insulet (NASDAQ:PODD) also went after Roche and Roche decided to settle. While Diabetic Investor has no direct knowledge of the settlement it does provide a logical explanation as to why Roche has yet to launch the Solo. Based on Medtronic’s past it’s likely they would have only accepted a settlement which was based on sales performance and not a straight cash payment. This is how they forced Smiths to exit the market as Smiths was basically paying Medtronic a set amount with each new Cozmo pump placed in the market. This not only killed margins but made it impossible to sell the Cozmo to Abbott (NYSE:ABT). Again we have no direct knowledge that this settlement actually exists but it does explain a great many things when it comes to the Solo.
Solo or no Solo, it is significant that Roche spent time talking about the diabetes care unit and publicly acknowledged that the unit is facing a tough time. In the recent past the company barley acknowledged they even had a diabetes care unit let alone acknowledge publicly that the unit was facing some serious issues. It was stunning to hear the company actually talk about a strategy which went beyond the standard “we’ll do better when the new products hit the market.”
Given this about face Diabetic Investor believes internally Roche has made the decision to sell the unit while the unit still has value. Based on the results announced today from Johnson and Johnson (NYSE:JNJ) is narrowing the gap between the two companies outside the US, while JNJ is well ahead of Roche here in the critical US market. Roche knows that Bayer is also trying to sell their diabetes device unit and like Diabetic Investor can’t believe the multiple Sanofi (NYSE:SNY) will be paying. They also see, as we do, that market conditions aren’t getting any better and there are companies who will pay handsomely to be in this market. Finally, they know as bad as they have managed this unit they do have a huge global presence, a semi-valuable brand name and some decent new products.
The fact is for Roche the diabetes care unit no longer fits with their other business units and they have no real experience in how to milk this cash cow until the well runs dry. Diabetic Investor suspects this new found candor and attention given the unit is just the first of what will be many events which are designed to create value and interest. In between now and the eventual sale the company will continue the slash and burn strategy that has become standard operating procedure for survival in glucose monitoring and will likely make some noise about insulin pumps just so potential buyers don’t forget about they have insulin delivery systems too.
The reality here is that unlike Bayer, the Roche unit has real value and the one thing Bayer does not have, true scale. As we noted before as poorly as Roche has managed their business and even with losing nearly half their share here in the US, their US sales are still well ahead of Bayer. Unlike Bayer who gutted their managed care unit, Roche still has a presence in managed care. Their formulary placement is not as good as JNJ but this is something that can be easily rectified with an owner who is committed to competing and regaining share. The product portfolio is decent enough and the Accu-Chek brand name while wounded still has some value. One of the bigger areas where a complete overhaul is needed is marketing, as Roche never understood that meters are no longer medical devices but a consumer electronic.
Diabetic Investor actually believes even with the baggage this unit brings with it, in the right hands and with a solid management team it can be turned around and give JNJ a serious run for their money. Even though JNJ’s results were less than stellular today with sales down over 5% for the quarter and flat year to date, JNJ has already begun the transition from medical device to consumer electronic; plus they have already cut costs. JNJ also has the added benefit of knowing how to milk a cash cow and has new type 2 drug coming to market. Even so, this is the wacky world of diabetes devices and as Sandra Peterson proved when she was at Bayer, it is possible to bring a once dead unit back to life. (Ironically Ms. Peterson was lured away from Bayer and is now fixing JNJ’s troubled consumer unit.)
Now Diabetic Investor does not believe a sale is imminent, nor are we sure that the company has actually decided to sell the unit. We are basing our conjuncture on the fact that is rare to see a company who typically sticks their head in the sand all of sudden do an about face and seek the sunlight. This would be like the two Presidential candidates coming out in tonight debate and publicly acknowledging they have no clue whether or not any of their ideas will actually work but they really do want to be President anyway.
The bottom line here is that only Roche knows what their real intentions are let’s just hope for their sake they have made the correct decision. That a sale is being seriously considered and they are actually for once making the right decision. Heaven help the unit if Diabetic Investor is wrong and the company actually believes they can cost cut their way back to the top spot. While cutting costs will improve profitable over the short term, it will not solve many of the structural issues facing the company. Cost cutting will not change the dismal outlook for the market and will not alter in any way the fact that Roche has taken gold and turned it into sand. That it takes real talent to LOSE nearly 50% share in the US and watch their reputation fall into the abyss.
The fact is if Roche is not smart enough to recognize they have destroyed value rather than creating it but can still be saved by dumping this problem into someone else’s lap and be well compensated for their ineptitude, they are and will forever be recognized as the worst management team in diabetes device history. Consider the many idiots in this business- some past, some present – that’s really saying something.
