The clock is ticking

The clock is ticking

Just in case anyone is wondering why Johnson and Johnson (NYSE:JNJ), who reported earnings this morning, is trying to decide how to move forward in diabetes take a look at these numbers –

Third quarter Diabetes Care DOWN 27.7% Domestically

First Nine Months Diabetes Care DOWN 23.4% Domestically

International sales which are less profitable for the company now account for more than 50% of sales, a sharp reversal from just a year ago.

Although the company did not release any specific sales numbers it is known that sales of their type 2 drug Invokana® are exceeding expectations. Even so the problem with the JNJ diabetes franchise lies squarely at the doorstep of their glucose monitoring unit, LifeScan; once a cash cow that produced nothing but profits, the unit is now in the middle of a hurricane which is wreaking havoc throughout the entire BGM market.

Now it would be easy, and incorrect, to blame the LifeScan’s issues strictly on the impact of competitive bidding. Yes it hurts and hurts badly when a third of your business sees an immediate 70%+ cut in reimbursement. However, the company knew this was coming and should have taken steps to prepare for this possibility, like the other major BGM companies LifeScan failed to consider the possibility of extreme low ball bids.

The company also failed to integrate their insulin pump unit, Animas with LifeScan. Consider that insulin pump patients on average use eight test strips per day and account for nearly 25% of all test strips sold. Yet for reasons that remain a mystery JNJ failed to capitalize on what should have been immediate synergy between their BGM unit LifeScan and insulin pump unit Animas.

This is why JNJ management is now in the midst of making some major changes to the company’s entire diabetes franchise. Given the early success of Invokana it’s no surprise that there will likely be greater collaboration between the device side and the drug side. The main issue here is while this greater collaboration could sell more Invokana we doubt it will have a measurable impact on the sale of test strips or insulin pumps. Frankly one could make a strong argument that since Invokana is off to a better than expected start why rock the boat and make changes which could actually slow down the drugs momentum. Given this is the wacky world of diabetes nowhere is it written that greater collaboration equals greater sales, in fact these efforts often have the opposite effect.

As we noted last week JNJ management needs to make a decision and needs to make it soon. Either the company is committed to the diabetes market and is willing to ride out the storm or sell now while there is still value to the franchise. Yes we know it sounds almost implausible that JNJ would exit the diabetes market entirely but given the major shifts in this market it would be unwise to discount this possibility. The fact is of all the device companies JNJ is best positioned for sale as even with recent sale declines they are still the market leader in BGM and while Animas has been struggling the unit is second only to market behemoth Medtronic (NYSE:MDT) in the insulin pump market.

The longer this decision making process takes the worse things will become as their competition is not sitting around doing nothing.  If the decision is to stay in diabetes, the company needs a more comprehensive strategy which is in line with the future of diabetes management. A future which will likely include reimbursement rates tied to patient outcomes. In the future physicians will likely prescribe diabetes management systems rather than individual pieces of the system.  The fact is JNJ almost has all the pieces it needs to be a major player in the future, even bigger than they are today. But this potential will never materialize if they don’t act and act now.

The bottom line for JNJ is the clock is ticking and failure to act will likely have devastating consequences. As we have seen before no one in diabetes, not even market leaders, are immune from missing opportunities or making serious strategy missteps. Let’s just hope the clock doesn’t reach zero – tick – tock.