Stuck in the past

Stuck in the past

This morning Johnson and Johnson (NYSE:JNJ) is holding their Medical Devices and Diagnostics Business Review which obviously includes their two diabetes companies LifeScan and Animas. While listening to Michel Paul, Company Group Chairman for the diabetes units, outline the future for this unit Diabetic Investor began to wonder how long the company will remain entrenched in the past rather than move into the future.

Looking at glucose monitoring for example in the past when the market was growing at double digit rates and there was little pricing pressure companies like LifeScan would grow by introducing new more sophisticated systems; a strategy that worked well as patients would folk to these new systems and their enhanced features. However, in today’s world where the market is barley growing, pricing pressure continues to intensify  and the majority of monitors offer the same features, the introduction of new system has become a non-event and does little to move share numbers.

It’s also clear that the BGM market has become totally dependent on insulin using patients. A prime example of this was seen when Bayer introduced their new ContourUSB monitor targeted directly at the insulin using patients. This is also the reason LifeScan has aggressively promoted the accuracy of their systems. However, here too a strategy which initially looked brilliant could end up backfiring on the company when the FDA adopts stricter accuracy standards for all glucose monitors.

One just might think that at some point BGM companies would realize that you cannot simply introduce a new system to gain share and begin looking for alternative growth strategies. Logic would tell you that when something isn’t working new options are needed. Logic, however, does not apply to an industry that has become fascinated by technology and has forgotten there is an actual patient who actually uses these systems; a patient who does not need another new monitor with even more fancy features that go unused.

Yet even when there is overwhelming evidence that the build a new meter and they will buy strategy isn’t working that’s exactly the core of JNJ’s supposed growth strategy. While it’s great to see LifeScan will finally have a no-coding monitor with their OneTouch Verio™, which is being tested overseas, all Verio does is put the company on par with the many no-coding systems already on the market.

The bright spot for the company continues to be their insulin pump unit Animas which continues to gain on insulin pump leader Medtronic (NYSE:MDT). But here too, the company is in danger of falling into the follow the leader strategy. As everyone knows the company has a relationship with Dexcom (NASDAQ:DXCM) and will soon have an Animas insulin pump that works with Seven Plus continuous monitoring system. As with Verio, this system will merely put the company on par with Medtronic and Insulet (NASDAQ:PODD), who will soon have their OmniPod system integrated with the Seven Plus system.

Animas has also fallen into the closed-loop insulin delivery system trap. At a time when insulin pump patients are demanding easier to use more patient friendly systems, like the OmniPod, Animas like Medtronic seems to believe that patients, physicians and payers will somehow embrace an extremely complicated and costly system. While a true closed loop insulin system would be a technological breakthrough Diabetic Investor wonders if either Animas or Medtronic has bothered to examine if there would even be a demand for such a product should it make it all the way to market?

The reality of the situation is JNJ like most large companies has a difficult time thinking out of the box and adopting truly innovative growth strategies. Instead the company is relying on their well worn strategy of cutting cost to maximize margins. Diabetic Investor has no problem with this approach given the deteriorating market conditions for BGM. And quite frankly even with the progress Animas is making it’s unlikely without a major blunder they could overtake Medtronic for insulin pump market leadership. The bottom line here is that JNJ really has no compelling reason to embrace innovative growth strategies, in the BGM market Bayer is their only true competition as Roche and Abbott continue to flounder. In the insulin pump market they will continue to gain share and if need be they could buy Insulet to gain greater share. True change in either unit won’t happen until someone else comes along and forces the company to change by taking share away from JNJ. Until that happens the company will remain content on old, albeit, out-dated growth strategies.