The End of an Era
We knew this day was coming it was just a matter of time. This morning Johnson and Johnson (NYSE: JNJ) released fourth quarter and full year results and for all practical purposes this once powerful company is no longer in diabetes. Yes, they still have Invokana but when it comes to diabetes devices the area where they used to shin darkness has set in. The decision has been made to shut down Animas with their patients shipped off to the evil empire and LifeScan is about to get new owners.
For those who are new to this wacky world this seems like a non-event. After all, as we have noted the insulin pump market is dominated by Medtronic (NYSE: MDT) while the BGM market has been dying a very slow and very painful death. Although not the root cause of LifeScan’s demise competitive bidding put the final nail in the BGM coffin and it was just a matter of time before LifeScan was sold.
Yet for those of that witnessed the rise and now fall of JNJ this is a sad day. JNJ earnings calls used to be cause for celebration as LifeScan was growing at double digit rates. Yes, it seems hard to believe today but BGM was once a great business as companies made strips for pennies and sold them for dollars. Even now this unit still throws off an incredible amount of cash. While Animas NEVER made a profit for JNJ it seemed when the unit was acquired that JNJ would be the first company to introduce a diabetes management system, keep in mind years ago they also did a deal with Novo Nordisk (NYSE: NVO) for the way cool whiz bang now dead InDuo pen/meter device.
JNJ at one time also looked to be a leader interconnected diabetes management (IDM) as they didn’t miss a chance to tout their diabetes eco-system.
So, what happened? And no, it would be a major mistake to blame the demise on competitive bidding alone or Medtronic’s dominance in the insulin pump market.
Well what happened is what always happens, management screwed up. Back in the day JNJ had an uncanny ability of not just knowing when to enter a market but also when to get out. The fact is, and management knows this, is they should have exited the device market years ago when it was obvious the future was bleak. Yet management unable to see the forest for the trees couldn’t pull the trigger. Rather than see the handwriting on the wall that was written in all caps, they continued to rake in the cash while placing impossible demands on the team to generate profits.
Given that prices were contracting, market growth slowing the team did what they had to do and began downsizing. Yet at the same time the company keep touting their diabetes eco-system which if to be successful would require a major investment, something the higher ups didn’t want to do. Many times, we wrote that the company had a decision to make that either they go big or they go home. Instead they went sideways which ultimately destroyed the value of Animas and LifeScan.
Let’s be honest here and there is no way to sugarcoat this but to shutdown Animas when the unit has almost 100,000 patients is one of the biggest blunders ever. Even with the many issues facing Animas and the tough market dynamics in the insulin pump market the company should have gotten something rather than nothing. The same can said for LifeScan, yes $3.4 billion sounds like a lot for the unit but it could have been twice or three times that amount had they sold it years ago.
But as they say this is now water under the bridge. Management will collect their fat bonuses and million-dollar salaries while Animas patients are forced into a system they don’t want. Yes, we commend the company for not leaving these patients twisting in the wind but even with this arrangement this move leaves a bad taste in the mouths of many.
The question to ask is who’ll be next to exit diabetes. Will it be our friends in France or perhaps our friends across the pond? Crazy maybe but who would have thought that JNJ would be out of diabetes. Who would have thought that any company would leave a market where the number of patients are exploding?
The reality here is JNJ will survive and be just fine. They may have made many mistakes in diabetes, but they also made many excellent contributions which should not go unnoticed. Their Irish Coffee at AADE was not just a great party but a well-deserved tribute to educators. The company was a strong advocate for patients with diabetes. These positive contributions along with others should not go unnoticed.
However, we cannot help but wonder what could have been, which sadly is something that is common in diabetes. JNJ isn’t the only company who screwed up a very good thing. They are not the only company which failed to adapt to changing market dynamics. Nor are they only company to make billions in profit while patients with diabetes weren’t getting any better. We are not blaming JNJ or any company for making money but it sure would be nice if when they leave they left behind a better place than they started and quite frankly we’re not sure they have.