The Problem in a nutshell

The Problem in a nutshell

“Diabetes Care – U.S. BGM price declines in MCO channel; ID lower due to competitive pressure – OUS ID competitive pressure”

First quarter results Diabetes Care US -14.4% International -1.6% Overall -7%

“Worldwide operational results, excluding the net impact of acquisitions and divestitures, were driven by electrophysiology products in the Cardiovascular business; ACUVUE® contact lenses in the Vision Care business and endocutters in the Advanced Surgery business, partially offset by declines in the Diabetes Care business.”

This information comes from Johnson and Johnson (NYSE: JNJ) earnings announcement and corresponding presentation. Information which in a nutshell explains why the company is having such a hard time divesting themselves of the diabetes device unit and is now expanding their strategic options to include finding a partner. An option which given the dismal dynamics of the space will be as tough or tougher than finding a buyer.

The harsh reality is the folks in New Brunswick will soon be faced with one of two options; sell the unit even if that means selling at much lower multiple than anticipated, or keep this stripped-down unit milking it until the cow runs out of milk. Of the two we see a fire sale as the best, albeit painful option. The fact is JNJ knows when it comes to conventional BGM it’s a dying business, Animas, their insulin pump unit, is not just facing difficult market conditions but has the additional burden of having outdated technology.

It’s difficult to imagine anyone coming along and wanting to partner with the company given the enormous problems facing the unit. About the only way, we see this happening would be for JNJ to finance the partnership yet relinquish control to the partner. Basically, JNJ would be betting that the partner could turn things around increasing its value so it can be sold at later date giving JNJ the opportunity to recoup some of their investment.

The problem we see with this option is that conventional BGM cannot be saved and Animas needs some serious money to become competitive. We suppose it’s possible that JNJ could approach Dexcom (NASDAQ: DXCM), yes Dexcom and offer to finance a deal which would prevent Dexcom from using their own money. Dexcom then in turn could use the LifeScan installed user base as the launching pad for their Band-Aid sensor they are working on with Google. Having Animas Dexcom could also at least partially blunt Medtronic (NYSE: MDT) who not only has the 670G but is moving aggressively into the stand-alone CGM market.

The wild card here might just one of timing. It’s no secret that Tandem (NASDAQ: TNDM) is on life-support and baring a last-minute miracle will implode. While we continue to believe that Medtronic will pick up the majority of Tandem’s installed user base, the Animas Vibe does work with the Dexcom sensor as does Tandem’s t: slim. It’s also know that while the new sensor for the 670G appears to be outperforming the old sensor, Dexcom still has the best sensor on the market. In the hands of Dexcom management, the same team that built MiniMed, Animas would stand a much better chance of picking up Tandem patients.

The news unfortunately is not much better for Invokana, once the leading SGLT2. Per the earnings presentation-

“INVOKANA®/INVOKAMET® lower sales due to higher utilization in Medicaid and discounts in Managed Care channels. TRx share of 6.0% in T2D market”

Here JNJ is running into two major problems, this market has commoditized quickly and Lilly (NYSE: LLY) has EMPA-REG data for Jardiance and AstraZeneca (NYSE: AZN) is out discounting out rebating both JNJ and Lilly. OK that’s three problems.

Yes, the company will unveil their cardiovascular data for Invokana at ADA in June but unless it’s spectacular, something we doubt, it won’t do anything but create copy for us and a reason for all the experts to pontificate.

Reality is beginning to set in at the mothership and it’s not very pleasant. This is one time JNJ overplayed the hand they were dealt. Now they are caught bluffing and the only way they can get out of a bad bluff is to fold or throw more money into the pot and hope.

As Momma Kliff used to say; “Sometimes you have to take your lumps and move on. Better than sticking around and losing even more.”