The fat lady is singing

The fat lady is singing

Stunning news today coming out of Johnson and Johnson (NYSE:JNJ), while details are still trickling in here is what Diabetic Investor knows so far:

LifeScan, the company’s glucose monitoring unit will now become part of Janssen, JNJ’s pharmaceutical unit.

Animas, the company’s insulin pump unit, will become a separate operating entity, a move Diabetic Investor sees as precursor to the unit eventually being divested.

In yet another move to cut costs LifeScan will be closing their facility in Milpitas, California.

As stunning as this news is Diabetic Investor cannot say we’re all that surprised given the current set of market dynamics. As we have noted for some time the BGM space has fully transformed itself into a commodity market where price is all that matters. While some will say that competitive bidding was the root cause of these changes that would be a vast oversimplification. The fact is the BGM business has been going down the tubes for years and while competitive bidding didn’t help any it’s implementation is more like the straw that broke the camel’s back, which is ironic given guess what day it is HUMP DAY.

Nor are we all that surprised that Animas, a unit which JNJ bought for over $500 million back in 2005, is being put on the block. Although the unit holds the second position in the insulin pump market, the unit has never after all these years turned a profit, nor has the unit been able to make a serious dent in Medtronic’s (NYSE:MDT) huge installed user base. Try as everyone has, and many have tried, Medtronic still owns the insulin pump market with nearly a 70% market share.

Already speculation is rampant over who will buy Animas, will it be Medtronic, will it be a management buyout or will Insulet (NASDAQ:PODD) pull off a stunner and buy the unit. Looked at realistically Diabetic Investor cannot see regulators allowing Medtronic to acquire the unit, as combined with their existing share this would mean that with Animas they would effectively control almost 90% of the insulin pump market. The issue with Insulet is capital, unless of course JNJ is so desperate to unload this unit that they are willing to actually finance the deal. A management buyout might work especially if management partners with a well-heeled private equity group.

Diabetic Investor also suspects that while LifeScan reps that are now Janssen reps, more layoffs are on the way. Let’s be honest about this Janssen really doesn’t need more reps and meter sales and support can easily be either outsourced or handled electronically. Given that the company is closing their Milpitas facility Diabetic Investor believes anything LifeScan related will be handled using the internet or telesales, or both. The fact is the days of meter maids, the industry term for BGM reps, are over.

The real speculation should be what will everyone else do? Listen if JNJ, the market leader in BGM, is taking such drastic action what does this mean for Roche, Bayer and Abbott (NYSE:ABT). Also how will this move impact Dexcom (NASDAQ), who’s been waiting patiently for Animas to get the Vibe through the FDA? Perhaps the only clear winners here are Medtronic and Insulet as with Animas in disarray, they can use this news to chip away at Animas’s installed user based.

It’s no secret that Roche, Bayer and Abbott have all tried and failed to sell their BGM units. Will this move by JNJ prompt these companies to reexamine their asking price or will they continue to delude themselves into believing there are companies who are dumb enough to pay a premium to enter a market that is circling the toilet bowl.

In a strange way this is somewhat of sad day as this really didn’t have to happen. Yes competitive bidding dealt a serious blow to the BGM market but it’s not like these companies are losing money more like profit margins have shrunk to merely decent rather than overly obscene. However, competitive bidding cannot explain the many mistakes made by BGM companies who while they were fat and happy failed to see the handwriting on the wall. Rather than acknowledge that the market was transforming from a medical device to a commodity market, they mistakenly believed that whiz bang technology and pretty colors were answers to continued growth. Never did they realize the impact it would have meant had they actually educated patients as to why monitoring was important which studies have shown leads to increased testing.

It’s also ironic on today of all days when Diabetic Investor claimed that 2013 has been the wackiest year ever in diabetes that this news breaks. This is also the reason we aren’t closing the book on nominations for our annual Corporate Frog awards. Should we now add to the list JNJ who buys Animas, a move which back in the day was claimed to be synergistic as most believed with their vast resources and marketing muscle the company could give Medtronic a serious run for their money. A move which many justified given that insulin pump patients also account for nearly 20% of tests strips sold. The general feeling was even if Animas couldn’t take share away from Medtronic the sale price would be more than made up with additional strip sales.

Yet in a move which no one understood at the time, after buying Animas JNJ goes out and makes a deal with none other than Medtronic. A deal which eventually feel apart and lead JNJ to do something everyone thought they would have done when they first bought Animas and actually make Animas and LifeScan work together, imagine that two diabetes device units owned by the same company actually working together – who would have thunk it.

Next the company decides that since LifeScan and Animas are now under one roof why not bring Janssen, whose new diabetes drug fits perfectly into the JNJ estate of diabetes companies. A move which seemed to make sense at the time but with today’s news is basically being blown up. As we noted this morning as much as we’d like to be making all this up, we thankfully don’t think like companies in the diabetes arena; an arena where common sense is far too often replaced with nonsense.

Look for Diabetic Investor to have much more on this story later and as we recommended this morning we strongly suggest that everyone be sitting down, stay away from sharp objects or open windows on high floors. We’d say that it doesn’t get much wackier than this but the way things are going that would a very foolish statement and unlike others in this business we prefer better to be thought a fool than to open our mouths and remove all doubt.