What happens when no one shows up at the party?

What happens when no one shows up at the party?

Once again we’re in the midst of earnings season which for the diabetes device sector means another series of boring calls where companies do their best to put a positive spin on negative news. So far this week we’ve heard from Johnson and Johnson (NYSE:JNJ) who we think still sells diabetes devices although one wouldn’t know it by listening to the earnings call. As we have noted in past when it comes to diabetes and JNJ it’s all about Invokana, devices have become an afterthought.

This morning we heard from our friends at Roche and perhaps the most startling number to Diabetic Investor was the fact sales in the US we’re lower than sales in emerging markets. According to the company’s slide presentation sales so far in 2014 for the North American market came in at $338 million while emerging markets or what Roche classifies as the rest of the world excluding Europe, Middle East and Africa came in at $355 million. If this one number alone doesn’t show how far this once mighty franchise has fallen we’re not sure what does.

Still the bigger story for both companies is not what the numbers came in at, rather where each company is going. Let’s take a look at Roche first. As we reported long ago Diabetic Investor continues to hear that since the company cannot find a buyer for the diabetes device franchise, the company will spin this unit off as a privately held company.  When this happens is anyone’s guess but we’re putting our money on an announcement coming in the fourth quarter.

In the meantime the company continues to tout their “advancements” in diabetes devices which basically consistent of two products neither of which is available in the US. Like everyone in diabetes devices Roche is jumping on the interconnected diabetes management (IDM) bandwagon with the Accu-Chek Aviva/Performa Connect and the Accu-Chek Insight insulin pump. As the name implies the Aviva/Performa wirelessly transfer results to an app which in turn sends this information to the cloud. The Insight takes a page from pump newcomer Tandem (NASDAQ:TNDM) and uses two-way Bluetooth connectivity between the pump and remote control. A remote control which looks like … wait for it .. the way cool iPhone.

Now we hate to point out the obvious here but this move towards IDM so late in the game is so Roche. The fact these products aren’t available in the US where IDM is the hottest thing going is also so Roche. Yes some of this has to do with the FDA but diabetes devices companies cannot continue using this as an excuse for not launching new products in the US. The fact is everyone in the space is dealing with the FDA and as difficult as they can be they do hold the keys to the kingdom. This constant complaining about the FDA is wearing thin. Either do something to change the FDA, adapt to how the FDA operates or get out the business for goodness sack but please stop complaining already.

Turning our attention to our friends at JNJ the story is somewhat different. As everyone knows the diabetes device segment as it was once known basically no longer exists.  Animas, the company’s insulin pump franchise, again thanks to the folks at Tandem and how their IPO was valued made JNJ put the unit up for sale. Diabetic Investor has confirmed the company shopped Animas to just about everyone but found no takers. Unable to sell Animas the company is now trying to decide just what to do with Animas.

LifeScan, the blood glucose monitoring franchise exists in name only. Everything that once was LifeScan has been folded into Janssen, the keepers of the current goose that lays the golden eggs; Invokana. Now facing competition the drug conti8nues to perform above expectations something Diabetic Investor doesn’t see lasting too much longer. Like just about every other drug targeted at Type 2 patients competition is fierce and companies aren’t shy about using price as a weapon to gain share.

While the company continues to insist they are committed to diabetes, both drugs and devices, Diabetic Investor remains skeptical. Now that they stripped about as much cost as they can out of LifeScan and have been unable to sell Animas they are faced with a conundrum.  With the $64 dollar question being how long will the Invokana horse be able to run.

Diabetic Investor suspects that the decision on what to do next will not be driven by strategy but by metrics. If there is one thing that can be said about JNJ is this company has never meet a metric it didn’t like and that these metrics drive nearly every decision made at the company. We’ve said it before and we’ll say it again JNJ is not just good about knowing when to jump into a market they are equally skilled at knowing when to exit a market. They are also well aware of all the diabetes devices companies for sale they are the most valuable and given that market conditions continue to deteriorate now just might be the time to strike a deal, even if that means accepting a lower multiple than originally envisioned.

The company could follow Roche and take the diabetes franchise private; they can package it with another JNJ franchise and spin it off to shareholders as a separately traded company or perhaps sell to a private equity firm.  Of course they could chose to just run the diabetes franchise and play the last man standing game but Diabetic Investor isn’t sure JNJ stakeholders would prefer this option.

The fact is the diabetes device arena may not be as profitable as it once was but the arena still makes money. Yes it’s true that BGM is not making the obscene margins it once did but then again how many markets are there where the product is made for pennies and sold for dollars.

The same can be said for the insulin pump business; while the dynamics are vastly different than BGM the business can be profitable if run correctly. The fact is everyone in the insulin pump market other than Medtronic (NYSE:MDT) who has the benefit of scale, can increase profits by adopting new technologies for selling pumps and training pump patients. Further efficiencies can be found by how pump patients are supported.  Lastly someone out in pump land should turn things upside down price wise and follow the lease versus buy model.

The biggest change of all is one of mind set and this where companies like JNJ and Roche will have the biggest problem. Companies like Tandem and Dexcom (NASDAQ:DXCM) live in the 21st century and realize that pumps and CGMS aren’t medical devices they are consumer electronics and should be marketed and supported as such. Try as they might the good people at JNJ and Roche still see meters and pumps as medical devices. And please don’t tell Diabetic Investor that selling meters in pretty colors makes them a consumer electronic.

What makes the story for companies like Dexcom, Tandem and many of the newcomers so compelling is they understand when it comes to consumer electronics it’s not just way cool that sells, its better design. That patients want devices that make their lives easier, come with patient friendly user-interfaces, are platform agnostic when it comes to connectivity and don’t require an advanced engineering degree from MIT to operate. These companies understand that it won’t be much longer before the patients smartphone will become the centerpiece of their diabetes management. Those diabetes devices should not just connect with the smartphone but be as easy to use as one.

Given that so far not one of the old guard has been able to find a buyer for their diabetes device units should send a clear and very loud message. Think of it this way, JNJ, Roche, Bayer and Abbott (NYSE:ABT) decided to throw a party for perspective buyers which featured disco music, Old Style beer and boxed wine. The only problem is today buyers want rap, micro brews and Prisoner. Is it any wonder no one showed up?