We’re off and running and it’s not a good start
This morning Johnson and Johnson (NYSE:JNJ)
reported third quarter results and for their diabetes care unit the news wasn’t
good. Sales in the US were down nearly 5%, as were sales overseas which also
fell 5%. For the first nine months of the year sales worldwide have fallen
nearly 9%. Diabetic Investor isn’t surprised by these results as it has known
for some time that the blood glucose monitoring market continues to experience
contraction.
These results also should send an ominous signal
for the company reports from Abbott (NYSE:JNJ) who reports tomorrow morning and
Roche who reports Thursday morning. As Diabetic Investor has been stating JNJ
is one of the few companies in the BGM market who actually understands where
the market is headed and has taken steps to deal with the changing market
dynamics.
These results should also remove any notion
that the BGM market can recover from its current woes and somehow return to
robust growth. Some would explain away the market contraction as a reflection
of the poor economy but this would be an over simplification of a deeper
problem. The fact is the BGM market has fully transformed into a commodity
market. As the company noted during today’s call while volume increased
modestly pricing pressure continues which hurt results.
Animas, the company’s insulin pump unit
continues to be the lone bright spot in the diabetes care unit. According to
the company the Animas unit grew by 30% operationally with strong growth
overseas. These results confirm what Diabetic Investor sees in the domestic
market where Animas continues to gain share on market leader Medtronic (NYSE:MDT).
The strong international results also confirm something Diabetic Investor
previously reported as Roche is getting ready to exit the US insulin pump market
and concentrate on their international sales which are facing stiff
competition. The fact is Roche has no hope of reinvigorating their insulin pump
sales here in the US and is in serious danger of losing even greater share
overseas as both Medtronic and Animas are proving to formidable competition.
Looking towards the future the company
stated they’ll be introducing a new test strip that will work with their
existing line of glucose monitors. Called the Ultra Blue, this test strip is
designed to provide more accurate glucose readings. The Ultra Blue falls
perfectly into LifeScan’s strategy of targeting insulin using patients who
actually understand the value of accurate glucose readings. The Ultra Blue also
follows JNJ’s successful campaign to make an issue of the use of the PQQ
enzyme.
While Diabetic Investor never believed the
PQQ issue was as serious as the company made it out to be, the fact remains JNJ
was very successful at taking a small competitive advantage and turning into a
major advantage. Today only Roche continues to use the PQQ enzyme which is only
contributing to the company’s continued share erosion in BGM.
Although Diabetic Investor has no issue
with making glucose readings more accurate, stressing greater accuracy is a
dangerous path to follow. The biggest reason being accuracy is a measurable
metric. The problem with measurable metrics is it opens the company to competitive
comparisons. This is typical with the BGM market where technological
advancements are quickly copied and eventually become standard throughout the
industry. This happened with alternate site testing, faster test results,
smaller blood sample size and no-coding.
Given their leadership position in BGM look
for the competition to try and match JNJ’s accuracy claims. It’s only a matter
of time before patients start seeing ad’s that compare one monitor’s accuracy
to another. Claims that will only push the market further into the commodity
market model. Just as all the previous advancements in monitoring technology
have been copied, accuracy will be one more “advancement” matched by everyone
in the market.
Still this is a wise strategy by JNJ as it
forces the competition to address an issue they really didn’t want to deal
with. While the majority of patients assume their monitors are accurate, the
fact is glucose readings provided by today’s monitors can be off by as much 15%
to 20%. While this isn’t much of a problem for non-insulin using patients, it
can be a major issue for insulin using patients who use this data to properly dose
their insulin requirements. JNJ understands that the future of the BGM market
comes down to successfully penetrating the insulin using patient market.
The real question is what happens after the
competition matches JNJ’s accuracy claims, where will they go from here. The
fact is all the BGM companies are running out of technological improvements
that will make glucose monitoring better for the patient. Technological
improvements that have done nothing to expand market growth as evidenced by continued
market contraction. This is the false hope of monitoring technology as BGM
continue to ignore the pink elephant sitting in the room. Until patients value
the information provided by a glucose monitor, and understand how to use this information
market contraction will continue.
What’s really happening here is capitulation
to the market dynamics. After spending millions on technology that was supposed
to make glucose monitoring more patient friendly the fact remains that average daily
testing frequency remains where it was 10 years ago. The good news for JNJ is
they at least see what’s going here and have developed a strategy to deal with current
market dynamics. They understand that insulin using patients control the future
of the market and are doing everything they can to own this market segment. This
is in stark contrast to their major competitor Roche who can’t even acknowledge
they have a problem.
Diabetic Investor is sure many in the
diabetes community will hail JNJ’s commitment to more accurate glucose readings
as a major advancement. While this is a solid step forward and will benefit the
millions of patients on insulin therapy it will do nothing to change the future
of the BGM market. The fact is all of the companies in this space failed to focus
on what patients really needed which was education. Instead they concentrated
on technological improvements which only a handful of patients even use. If
technology was really the answer the market would be growing as the patient
population continues to grow at epidemic rates.
The bottom line here is that JNJ is smart
enough to recognize that the market has changed forever. They have implemented
and executed a successful strategy to capture the insulin using patient.
Understanding that pricing pressure will continue they have made the appropriate
adjustments to their field sales force, marketing budgets as well as outsourcing
their research and development work. Simply put the company has “right sized”
their diabetes care unit to deal with the changing market dynamics. Unlike
several of their competitors they understand that the light at end of the
tunnel is a freight train not a ray of sunshine. The company is not holding
onto any false hopes nor are they ignoring market realities. It’s no longer a
question of if JNJ will overtake Roche worldwide it’s now just a question of
when.
