The new reality

The new reality

Yesterday Johnson and Johnson (NYSE: JNJ) reported fourth quarter and full year results and when it comes to their diabetes franchises, both devices and drugs it’s become obvious that a new reality has set in. Way back in the day it was devices, glucose monitoring in particular, that lead the way. It’s not an understatement to say that back then money was falling from the sky. The market was growing at double digit rates and margins were obscene.

In the device area, again glucose monitoring in particular, all this changed when the market completed its transformation to a commodity market. As we have noted many times the implementation of competitive bidding did not cause the problem it merely completed the transformation from a medical device to commodity market.

Thankfully for JNJ they saw this transformation coming and implemented a strategy that dealt with the new realities of the market. JNJ was the first of the major device companies to right size their unit. Although these cuts were painful and a dramatic departure from the past they had to be implemented to survive. As we have said many times JNJ is very good at not just knowing when to enter a market they are equally adept at knowing when to exit a market. They also knew that while selling the diabetes device unit while preferable would be difficult given the dynamics of the market.

Simply put looking over all the options available they chose to ride out the storm and accept the new realities of the market. As results show sales in devices continue to fall as full year sales in the US fell by 3.6% and 14.3% internationally. The one bright spot has been the success of the Animas Vibe sensor augmented insulin pump. Now JNJ would like to own this success however the fact is the reason the Vibe has done so well has more to do with the fact the Vibe uses the Dexcom (NASDAQ: DXCM) sensor rather than the Animas insulin pump. It should also be noted that this success may be short lived as more competition is on the way in this space.

One area where the company continues to show impressive sales growth is Invokana. Invokana is now officially a blockbuster with sales last year reaching $1.2 billion in the US.  Yet even here the company is not without competition especially given the cardiovascular data shown by Lilly’s (NYSE: LLY) SGLT2 Jardiance. This is a good news bad news situation as most experts agree that the impressive data shown by Jardiance will be replicated by Invokana and Farxiga AstraZeneca’s (NYSE: AZN) SGLT2. Should that turn out to be the case the SGLT2 market like the rest of the diabetes drug market will continue its march towards commodization.

What JNJ’s results show more than anything is the new realities of the diabetes market both drugs and devices. Even with the continued epidemic growth rate in diabetes making money in this market is more difficult than ever. No matter where you look, drugs or devices, competition has intensified while payors remain firmly in control over pricing.  As the SGLT2 market illustrates there are just too many entrants in this category that do the same thing the same way. Same can be said for glucose monitoring and insulin pumps.

Diabetic Investor does not believe that emergence of JNJ, Lilly or Novo Nordisk (NYSE: NVO) as leaders in diabetes happened by accident. The same can be said for Medtronic (NYSE: MDT) and Dexcom. Yes, each of these companies have had their share of issues. Yet, each has taken a very realistic look at where the market is and more importantly where it is going. They have not buried their heads in the sand or refused to accept what is really going on. Something that cannot be said for Sanofi (NYSE: SNY), AstraZeneca, Abbott (NYSE: ABT) or Roche.

In the past market dynamics provided cover for many of the mistakes made. The market was growing at double digit rates, reimbursement levels allowed for healthy margins and payors had yet to fully control access. Even though there was competition market dynamics allowed for multiple winners in the same category. This is not the case today as market dynamics now instead of covering up mistakes reveal mistakes with stunning clarity.

As Momma Kliff used to say any idiot can make money when times are good but it takes real talent, foresight and fortitude to make money when times are tough.