The Fat Lady is warming up

The Fat Lady is warming up

This morning Roche is conducted their annual investor day for their diagnostic unit. Diabetic Investor was hoping to gain some insight into what the company was planning to do to turnaround their struggling diabetes care unit. We were hoping to learn what strategies they planned to implement to stop the bleeding here in the US for their glucose monitoring business, a unit that has lost nearly 15 share points over the past few years. We thought we might gain some insight into what plans they had to reenter the insulin pump market. We wondered if the company would finally acknowledge the issues with diabetes care and actually share a plan as to how they planned on fixing these issues.

And just what did we get- nothing, nada, zilch. For a unit that accounts for 28% of Roche’s diagnostics sales the company was eerily silent. Looking over the slides that accompanied the presentation, 129 in total, one just might believe that Roche does not have a diabetes care business.  Not one slide was actually devoted to diabetes care and the unit was only causally mentioned on three slides.

While Diabetic Investor can understand the lack of enthusiasm towards this struggling unit, one would think however, that the company would at least acknowledge they actually have a diabetes care unit. That they would at minimum give the unit a cursory mention and the normal corporate speak that while the unit is struggling things will get better. That they would take perhaps a few seconds and give investors a short glimpse into what new systems they had in the pipeline or the status of the Solo patch pump.

Could all this silence signal that the company has finally decided that it’s time to sell the unit before they completely run it into the ground? Or should we take this silence to mean that the company is still formulating a turnaround strategy?

Given this is Roche, a company that seems incapable of acknowledging what everyone else clearly sees, Diabetic Investor suspects this silence on diabetes care actually sends a loud and clear message; the company is clueless and has absolutely no idea what to do.  Diabetic Investor can’t help but think that management is so out of touch with reality that they actually believe the problems facing the unit are temporary and will magically go away.

Let’s assume for moment that management has actually come to their senses and decided to dump this dog, just who would buy it. While it’s true their BGM unit has fallen on hard times domestically, they continue to perform well outside the US. Although the Accu-Chek brand name has lost much of its value, it is still a well-known brand. The simple fact is anyone who comes along and buys the unit will achieve instant scale and when it comes to glucose monitoring scale is critical. However, as we have noted on many occasions the unit comes with a host of issues and Diabetic Investor believes some of which cannot be fixed.

Quite frankly anyone looking to enter this market would be better off buying Abbott’s (NYSE:ABT) diabetes device unit.  While Abbott has their own share of problems they are far less severe than the problems facing Roche and they actually have a better patient base in BGM as their products are popular with insulin using patients and as we noted yesterday insulin using patients drive BGM sales. It’s also true that Abbott has already dealt with PQQ enzyme issue and Roche has not. The simple fact is looking over the existing Roche product line not one meter stands out. Anyone who acquired the company would have to undertake a massive and expensive overhaul of this aging product line.

The same can said for their insulin pump unit which at the moment basically consists of the much hyped and much delayed Solo patch pump. (Maybe we’re just crazy but it seems that other than Insulet (NASDAQ:PODD), who already has the OmniPod, that anyone who has a patch pump under development has the phrase “much hyped and much delayed” tattooed to their foreheads.)

Given this is the diabetes device market where anything can happen and usually does; Roche could find someone dumb enough to take on this Herculean task and actually pay for the privilege.  They see companies like Sanofi-Aventis (NYSE:SNY) getting set to enter the market and understand what the scale of their unit would mean to Sanofi. They also see newcomers like GE (NYSE:GE) entering the market who would also benefit from an instant worldwide presence. History tells us that there is always a company who believes they have all the answers and no matter how bad things have become they can fix them. There is always a company out there who sees a masterpiece when everyone else sees a worthless piece of junk. Thankfully for Roche hubris is alive and well in the diabetes device arena.

Another possibility exists in that Roche like the other major players will decide just to milk the unit until the well runs dry. They could also decide given the continued pricing pressure to switch gears and become a value option. As Diabetic Investor has noted before it’s just a matter of time before one of the major players does away with their field sales force and expensive marketing efforts focusing strictly on selling ultra-low cost systems. Even though the company continues to lose share the business remains hugely profitable and throws off tons of cash. Take away the expense of a huge field sales force and limit marketing expense and the company just might have something. The best way to think of this is to look at what Nipro Diagnostics has done only at a much larger scale.

The bottom line here is that the fat lady is warming up and getting ready to sing, the only remaining question is when she gets on the stage. Given Roche’s inept management and current market dynamics Diabetic Investor does not see a turnaround as we saw with Bayer, a turnaround as it happens was short lived as Bayer too is having problems. Nor do we see a company like Sanofi coming in as a white knight as Roche’s current product mix and customer base does not fit into Sanofi’s long term plan. Given that GE already has a partner we doubt they would make any moves at this time, besides GE is a pretty smart company and unless management has totally lost touch with reality it would make no sense for them to spend billions to acquire someone else’s problems.

About the only thing we can count on with Roche is to do the absolutely wrong thing at the worst possible time. Although many believe Diabetic Investor enjoys consistently dumping on Roche, we would actually prefer they had a strategy as stronger competition forces everyone in the space to perform better. For years the competition had it pretty easy as they knew as bad as things had become in BGM the one thing they could count on was for Roche to screw up. As unbelievable as it seems about the only company that hasn’t acknowledged the depth of the problems is Roche themselves.

So it seems we’re right back were where we started; waiting for the next Roche blunder.  Sad but true.