The Ship Is Sinking
While Roche conference calls are rarely
dominated by how their diagnostics unit is doing and tend to focus more the
Genentech integration. During today’s call the diagnostic unit was barley a
factor, even less than usual. At first glance looking at the results where the
unit seemed to be performing well this silence is unusual. It’s a rare occurrence
when a company doesn’t boost of how well their doing. Considering that
according to today’s press release the diabetes unit appears to be
out-performing not only the competition but is actually growing while the
market is contracting. One just might think that the company would do a little chest
thumping.
Perhaps one reason for the silence comes when
the numbers are examined more closely. According to the company sales for the diabetes
care unit grew 4% worldwide and 3% in the North American market which includes
the US. Looking more closely at these numbers it’s difficult to determine what
exactly the company defines as growth. Looking at the third quarter of 2008
when sales hit 725 CHF m which compares to third quarter results this year when
sales hit 720 CHF m. Although Diabetic Investor is not a math major we can add
and we just can’t figure out how a sales decline could be characterized as
growth.
Looking over the press release it appears
that Roche is borrowing a tactic from one of the competitors in diabetes care
who reported yesterday, namely Abbott (NYSE:ABT). Abbott used to be notorious
for playing up the impact of currency fluctuation. The reality as this 4%
growth reported by Roche is completely attributable to currency fluctuations.
Measured in Swiss francs sales for the diabetes care unit actually decreased
2%. Just as Abbott used to try and hide dismal performance by playing fast and
loose with the numbers, Roche is following a similar path. To their credit
Abbott no longer tries to hide the problems in diabetes care which to Diabetic
Investor takes as a good sign as the first step towards solving a problem is to
actually acknowledge you have a problem.
As Diabetic Investor has been reporting the
biggest problem with Roche is they can’t even acknowledge they have a problem.
The company seems oblivious to what’s going on around them. A prime example of
this comes in how they have handled the PQQ enzyme issue. While all the other
companies in the space have taken steps to deal with PQQ, Roche has remained
alone on an island. This failure to act has turned into a costly mistake as the
company continues to lose share particularly in the hospital market.
But this lack of action actually has had
even broader impact as their entire strategy to stop the bleeding in both their
glucose monitoring and insulin pump units has been impacted. Roche has planned
on bring the Accu-Chek Aviva Nano, now available overseas and a nice little product,
here to the US. The Nano was also an integral part of the new Accu-Check Combo,
the Combo is the Accu-Chek Spirit insulin pump combined with the Nano monitor-
the Combo is like other systems that allow the monitor and pump to communicate
with each other.
The plan was to use the Nano to go after
insulin using patients who have now become the battleground for supremacy in
glucose monitoring. They also knew that if they were to have any chance at all
at becoming a factor in the insulin pump market, the Combo was a must just to
stay level with the competition.
Along comes the PQQ issue, which in reality
has been known for time, and the Nano is now sitting gathering dust at the FDA.
This product will never see the light day in the US until the company changes
from PQQ to another enzyme. However, even if this was done yesterday the damage
has already been done and once again the company missed whatever opportunity they
had. Bayer has come out with the ContourUSB, Animas has introduced their Ping
system and LifeScan continues to press the accuracy issue.
The fact is Roche seriously misread how the
PQQ issue would play out and even worse when it became clear the issue wouldn’t
go away they stood there and watched even more market share slip away. Some
could argue that Roche looking at the situation believed that since the PQQ
issue impacted such a small percentage of the population it would never amount to
anything more than a minor FDA alert. However, they should have also known that
Johnson and Johnson (NYSE:JNJ) was pressing this issue and when the market
leader presses an issue it won’t go way no matter how minor it may be. It should
have been even more obvious when Abbott changed their enzyme. Still the company
did what they do best, nothing.
Now finally word comes today that the company
will be transitioning to maltose independent strip chemistry in key EU markets.
It should be noted that the company said nothing about what plans, if any, they
have for the US market. The last time Diabetic Investor looked the United States
in not a member of European Union, at least not yet. It should also be noted in
the slides that accompanied today’s call all the key product launches for the diabetes
unit in 2009 were launched where- in the EU. Granted the EU is an important
market but Diabetic Investor seems to believe that the US is also an important market.
This brings up an interesting question;
given their fascination with the EU has Roche decided to surrender the US
market to the competition? As Diabetic Investor has previously reported the
company plans on exiting the US insulin pump market so they can concentrate on
the EU where Roche still has a presence. They see that both Medtronic
(NYSE:MDT) and Animas are beginning to chip away at their ex-US insulin pump
sales and understand that there is really nothing they can do to effectively
compete in the US insulin pump market. Part of this strategy involved doing a
deal with Insulet (NASDAQ:PODD) and becoming the international distribution arm
for the OmniPod. Diabetic Investor is now hearing this deal is on life support
and most likely won’t get done.
Looking at the glucose monitoring side the company
just might believe with their market share falling from 30% to 20% and further
losses ahead it isn’t worth the resources to fight LifeScan. There are no signs
that prices will rebound and market growth is problematic at best. They see
Bayer, reinvigorated and making a serious run. They see Abbott, taking steps to
deal with their problems. They know the Nano will never be approved as long as
it uses the PQQ enzyme and their hospital unit is watching sales disappear by
the day. Finally they have to wonder if they can repair the damage already done
by their lack of action on the PQQ issue.
The diabetes care unit reminds Diabetic
Investor of the famous battleship the Bismarck. Once the most feared weapon of
its day, it ruled the seas. Many thought the ship was unsinkable. That was
until the ship was hit with multiple torpedoes and now lies at the bottom of
the ocean.
There was time, back in the day, when Roche
ruled the BGM world. The Comfort Curve test strip was a major success and it
looked as if company was unstoppable. Emboldened by their success in BGM the
company decided to spend over a billion dollars to buy Disetronic. Looking back
the Disetronic purchase was really the beginning of the end for Roche. It wasn’t
long after buying Disetronic that the FDA slapped on ban on sales of their insulin
pumps. A ban, as it would turn out, that would forever cripple the unit in the
US market.
Diabetic Investor isn’t sure if the
troubles at Disetronic caused the company to lose focus on their core BGM business
or if they just became over-confident. Whatever the reason this once dominate unit
is now in serious danger of dropping all the way from the top spot to third or
even fourth position. By their silence it does not appear they have any plan or
strategy for the future. The sales force is demoralized and the company’s
reputation, once held in high esteem, has taken serious body blow. There are no
new products on the horizon and market conditions only worsen every problem the
company faces.
Frankly it’s time for the company to take a
page from another competitor’s playbook and clean house. Bayer, once a company
given up for dead, proved that management can make a difference. Like Roche, at
one time Bayer was king of the BGM world, and also like Roche, the company feel
on hard times. There was time when it seemed as if Bayer couldn’t find water if
they feel out of a boat in the middle of the ocean. Each decision the company
made was worse than the last. Faced with the possibility of becoming a
non-factor in this huge market the company did what every company does when
their desperate, they cleaned housed and brought in an entirely new management
team. Even better they left this new team alone and let them do their job
without getting in the way. Maybe Bayer corporate felt they had nothing to lose
but whatever their reasons the new management performed perhaps the best turnaround
in BGM history.
The question is will Roche follow Bayer’s
example or will they remain provincial deciding instead to play only in the EU?
Based on what Diabetic Investor has seen and not heard all signs point that the
company still hasn’t taken the first step towards recovery; admitting they have
problem. Until that it dawns on the company that the ship is actually sinking,
it won’t matter that back in the day they ruled the world. Those days are long
gone, the ship is taking on water and more torpedoes are headed in their direction.
It may be noble for the captain to go done with his vessel but there’s no
reason for the entire crew to go down with him. The order to abandon ship
should be given immediately.
