The final nail

The final nail

Given the results we’ve seen from Johnson and Johnson (NYSE: JNJ) and Abbott (NYSE: ABT) it really should come as no surprise that the results released by Roche this morning were no different. Diabetes Care sales in North America DOWN 28%, Europe DOWN 4% while emerging markets GAINED 14%, overall worldwide sales DOWN 4%.

It’s also no surprise that the company didn’t spend a great deal of time addressing this expected poor performance stating in their press release;

“Diabetes Care sales decreased 4%, predominantly due to continued price pressure in the US. Increasing sales were recorded in Latin America, while EMEA and Asia-Pacific regional sales were down. “

Unlike JNJ who’s Animas Vibe insulin pump continues to gain traction or Abbott who has the Libre, Roche does not seem to any product which offers a glimmer of hope. Yes, like everyone they too want to live in the interconnected diabetes management world and yes like everyone else they are struggling to break from the past and move into the future.  We have heard the company is also working on a continuous glucose sensor but in typical Roche fashion the process is moving with glacial speed.

So now that we have seen the results from JNJ, Abbott and Roche what have we learned other than the conventional glucose monitoring market continues to sink further into the abyss.

In our eyes the most important take away is these companies will be lucky if they can survive another 5 years. The US market will continue to see price contraction plus declining usage. The European markets will follow suit while emerging markets just aren’t large enough to make up for what’s happening elsewhere in the world. Even worse there really isn’t anything these companies can do to change these market dynamics.

The second take away is few of these companies are equipped to make the transition from selling products to selling systems. JNJ is the most vocal about their diabetes echo system yet from our vantage point they still haven’t figured out yet just what problem they are trying to solve. As we have noted previously a major handicap for these franchises is they must balance two conflicting worlds, the worlds they grew up in and what the world will look like 5 years from today.

The harsh reality is with the possible exception of CGM, nearly every other diabetes device has become a commodity, a simple piece of hardware. This is even true for the newer way cool whiz bang crop of cloud enabled devices that will be the hardware pieces of future diabetes management systems. Systems which will be separated not by which pieces of hardware they have but by how they transform data into patient relevant, patient actionable information.

It also doesn’t help matters any that none of the units look all that attractive to possible buyers. Or perhaps we should rephrase that and state that no one will pay the multiple these companies want. This basically leaves two options, try and make a go of it, operate on bare bones budgets while trying to develop their own systems. Or spin off the unit into privately held companies, something we thought Roche had decided to do but in true Roche fashion something they couldn’t pull the trigger on.

There was a time when we thought the major tech companies who are cash rich and are diving into the deep end of the diabetes pool would emerge as buyers. These companies are great at data collection, data analytics and communicating effectively with consumers but they don’t know jack about the FDA, dealing with payors or the complex nature of diabetes management. We also thought given that scale is critical it would be easier for these companies to buy scale rather than build scale. Buying their way in would also provide them instantly with the infrastructure they need.

Yet we aren’t so sure even with the money they have to spend these tech companies will make the plunge and make a major acquisition. That given the way things are going they can easily cobble together what they need with minor acquisitions and/or partnerships. They understand that the race here is not to who has the most way cool whiz bang cloud enabled devices rather who has the most complete diabetes management system.

Think of it even more simply why buy the conventional glucose monitoring part of these companies when all they really need is their insulin pump or continuous glucose monitoring units.  Frankly there is no need to have a conventional glucose monitor and if they do want one they can easily buy one on the cheap. In the future these old fashioned monitors will be given away and yes that includes the strips too. In the future money won’t be made from the sale of test strips rather fees earned from users of the system and bonuses from producing better patient outcomes.

Just in case anyone doesn’t believe this can happen we suggest they Google what Procter and Gamble is doing with their Tide laundry detergent. According to various reports this consumer product giant who for years has relied on retailers to sell their products is experimenting with selling direct to the consumer, eliminating the retailer entirely. They have seen the success of the Shave Club for Men business model and believe they can replicate this success with Tide Pods, which in reality is a commodity product.

What would prevent this same concept from being applied to a diabetes management system? Nothing. There is not one part of the system that could not be sent directly to the patient and this includes drugs. Test strips, pump supplies and sensors can all be sent directly to the patient and can be sent without the patient needing to do anything as since the system is cloud enabled it would know when supplies are needed and automatically send them. If people don’t think that Walgreens and CVS aren’t concerned about this think again.

Who’s to say that just for grins and giggles Google decides to partner with their Silicon Valley neighbor Amazon. Google handles the needs of the patient while Amazon handles supply fulfilment.

Just such an arrangement is not just wise for Google and Amazon it also is great for the patient, one less thing they need to worry about. It’s not like Walgreens or CVS are going away either so if the patient does need something quickly this option is available. We call this the Uberazation of America, where anything a patient needs can be delivered directly to their door. Think about that for just a moment.

Heck with apps like Teladoc the patient wouldn’t even have to go to doctor’s office. Heck they might not even need to consult a physician given the apps that will be built into their diabetes management system. We don’t want to say that the physician’s role will be limited to just refilling scripts but in certain instances it will be that simple.

Given the world we have just described who is better equipped to live in this world, JNJ, Abbott and Roche or Google, Apple and Facebook. Think about that, let that sink in for this is where we are headed.