The week ahead

The week ahead

This week kicks off another round of earnings calls. First up is Johnson and Johnson (NYSE: JNJ), followed by Abbott (NYSE: ABT) and then Roche. Given the dismal state of the conventional glucose monitoring market look for some similar themes from all three. Frankly we’re not sure what’s worse, having to listen to these three calls or watching the Bears Jaguars game yesterday. So rather than state, again, just how bad the BGM market is let’s take a look at what’s going on behind the scenes at each company, the things they won’t talk about during their calls.

JNJ remains mired in a state of indecision. As we noted in the past JNJ has a choice to make, go big or go home, there is no third option. The longer the company waits to make a decision the worse it’s going to get. The fact is the upper echelon of the company remains convinced that this unit can still deliver solid margins. To deliver this unit has been forced to make even deeper cost cuts. Once a cash cow, LifeScan has become a cash drain. Animas, a unit which has never made a profit, is about to come under attack and while the company has high hopes for the One Touch Via patch pen this product is going nowhere in a hurry.

Now the company could go out and buy Dexcom (NASDAQ: DXCM) or Tandem (NASDAQ: TNDM), the go big route, but upper management has basically said thanks but no thanks. The bottom line here is the bottom line. The company is still stinging from the Animas acquisition, an acquisition that was not made for solid business reasons but to save the company from imploding. The fact is Animas was a mess when it was acquired by JNJ, a mess that never came clean. Now the unit is facing a reinvigorated Medtronic (NYSE: MDT) who under new leadership is not afraid to flex their muscles.

The reality is with Tandem bleeding cash it’s just a matter of time before it will be acquired. Given that JNJ won’t go big more than likely Tandem will end up in the hands of Medtronic. This will not only extend Medtronic’s dominance in the insulin pump market but also give Medtronic the new patient user interface that it desperately needs. The fact is JNJ needs the Tandem patient base more than Medtronic but won’t pay the price to get them.

The same can said about Dexcom. Back in May the company outlined their long term strategy for diabetes devices. Which was “Our Diabetes Solution is an End-to-end Ecosystem”. An ecosystem which in order to work must include a continuous glucose monitoring system. Yet rather than acquire Dexcom and own the best system there is, the company has said thanks but no thanks. This move is even stranger given what Medtronic is doing. The Medtronic/United deal had as much to do with the CGM market as it did with insulin pumps. Should Tandem, another Dexcom partner, also end up in the hands of Medtronic it will only hurt Animas.

The lone bright spot for Animas has been the success of the Animas Vibe, success which can be directly linked to the fact that the Vibe uses the Dexcom sensor.  By letting Dexcom remain independent JNJ risks seeing a critical component of their Ecosystem end up in the hands of another. Dexcom is already partnered with Google, a company that could not just acquire Dexcom but also Tandem, Bigfoot and Insulet (NASDAQ: PODD). The fact is Google if they wanted to could give Medtronic their first serious competition and a real run for their money.

It’s no accident that Medtronic is becoming more aggressive. They understand that their competition is not located in New Brunswick, New Jersey but in Mountain View, California. They know Google is about the only company that has the money to become a sustained threat to their core insulin pump unit. That if they can blunt the growth at Dexcom they might stand a chance in the growing CGM market.

Think for a moment what would happen if Dexcom is not bought by JNJ and Google decides they want to be a player in the insulin pump market. Well if they thought things were bad at Animas now, they would get worse, much worse. The reality is if JNJ doesn’t go big they will not just go home but their entire diabetes solution will collapse.

Looking at Abbott the company is betting the ranch on Libre. The question is how they will play their hand with Libre. The sound move here would be to use Libre as bait. Like everyone else in diabetes devices they know that CGM will become the standard for measuring glucose. They also know that the Libre, even with its current limitations is a good platform. Yet, the company lacks two critical components to transform Libre into a serious threat to Dexcom and Medtronic, money and talent.

In the hands of a company like Apple, Libre has the potential to become a serious product and don’t think that Apple is not looking to become a more serious player in diabetes. Like Google they don’t need to be in diabetes but they see diabetes as another platform to sell more iPhones and iWatches. They too have boatloads of money and overnight could become a serious threat to Medtronic, JNJ and Dexcom. Now the Google has launched their very own smartphone, Apple has even more reasons to jump into the deep end of the diabetes pool.

Given the company’s history in diabetes, the smart move is to sell the unit and move on. Yet also based on their history Abbott rarely makes the smart move.

Roche for their part should be given credit for finally spinning off their troubled diabetes device unit, something we should hear more about when they report earnings on Thursday. If the reports coming out of Germany are accurate this once strong unit will be set free from the mothership. A move which would set up some very interesting possibilities given that Samsung just might want to join Google and Apple in the diabetes pool.

We hate to be redundant but the fate of JNJ, Abbott and Roche all point to the fact that the epicenter of diabetes is now located in the Valley. Of the three JNJ has the potential to remain in the pool but given their reluctant to spend the bucks we don’t see much hope. Abbott with the Libre has the right product at the right time the only real question is will they will screw up Libre like everything else they have touched in diabetes. Roche should be credited with finally realizing they just aren’t a diabetes device company anymore.

As we’ve been saying this wacky world is undergoing yet another transformation. A transformation that will literally change the landscape of diabetes management and the players leading the way. As Momma Kliff used to say; “Change is coming whether you like it or not. So either accept it or get the hell out of the way because you’re going to get run over if you don’t.”