These are growth platforms?

These are growth platforms?

This morning Johnson and Johnson (NYSE:JNJ) is conducting their annual Medical Device and Diagnostics Business Review. Looking at the company’s diabetes franchise which includes, OneTouch glucose monitors, Animas insulin pumps and Invokana, an oral medication for Type 2 patients Diabetic Investor sees both promise and peril. On the positive side Invokana is off to a strong start and could well become a blockbuster in the near future. Unfortunately the future isn’t so bright on the device side.

As everyone knows the glucose monitoring market has undergone a dramatic transformation. The market has fully commoditized forcing companies like JNJ to strip out costs. Listening to today’s presentation the company is pinning their hopes on new products such as the OneTouch Verio Sync, a glucose monitor which transmits readings to the way cool iPhone. As Diabetic Investor has noted in the past when it comes to diabetes management in the future interconnected systems will become the standard. The only issue here is as the valuable as these systems are they fly in the face of current market pricing dynamics.

Looking at insulin delivery JNJ has pinned their future hopes on the Calibra Medical patch pump. Interestingly the company noted that this technology will not hit the market for another 24 months.  No matter when this product gets here Diabetic Investor does not believe it will have a material impact. There are several reasons for this and not surprisingly one of those is cost. Although the company did not comment on what the patch pump would cost current prices for alternate insulin delivery systems, i.e. syringes and insulin pens, are also under pressure. Like the BGM market the insulin delivery segment is also commoditizing.

The proponents of these non-electronic disposable patch pumps stress the discrete nature of insulin delivery plus the need for fewer insulin injections. According to JNJ’s presentation this patch pump will be positioned between injections and durable pumps.  While that may be true perhaps a more important question is there actually a need for this technology. Insulin pens have become the preferred insulin delivery system for non-pumpers. Syringes remain very popular as well. The real question then becomes will a patient really want to wear a patch pump when they are already comfortable with their current insulin delivery system. Yes there will be some but not that many that this market will be significant.

Diabetic Investor also believes this interest in the patch pump signals that Animas is up for sale. It was pretty obvious in today’s presentation that Animas is no longer a growth platform. As we have noted recently Medtronic (NYSE:MDT), even with their recent missteps, still owns the market. It’s also true that Insulet (NASDAQ:PODD) and Tandem (NASDAQ:TNDM) are garnering a greater share of new pump starts. The final nail in the Animas coffin is the fact that this unit has NEVER delivered a profit for JNJ.

Looking longer term it wouldn’t surprise Diabetic Investor at all if JNJ excited the diabetes device market. Just as JNJ is strongly disciplined when it comes to buying businesses they also know when it’s time to exit a market. When it comes to diabetes devices the future isn’t bright. Innovation no longer drives growth as price has become the key factor.

Think of it this way as Animas offers a perfect example of how much this market has changed. When JNJ originally bought Animas many believed given the company’s financial and marketing muscle they would give Medtronic serious competition.  Yet due to some missteps combined with changing market dynamics the unit never lived up to expectations. This is not like LifeScan, which at one time was a major cash cow. The fact is Animas has been a major distraction for JNJ that never came even close to delivering the return the company anticipated.

It’s almost ironic that JNJ could well be in the same position as Sanofi (NYSE:SNY) when it comes to diabetes. Just as Sanofi is a one-trick pony with Lantus, the same could develop with JNJ and Invokana. The big difference between the two is that JNJ isn’t faced with a generic threat to Invokana.

Quite frankly if the OneTouch Verio Sync and Calibra patch pump are the products that are supposed to deliver growth in the future there isn’t much of a future.