Why do we listen

Why do we listen

All we could think about while listening to the Johnson and Johnson (NYSE: JNJ) is why do we listen. The results for their diabetes franchise, both devices and drugs, came in as expected. Simply put they sucked. Secondarily also as expected they are still having issues selling the device franchise. About the only thing new was the company is taking an impairment charge related to Animas, which when you think about it isn’t all that surprising.

It’s also becoming increasingly difficult to find new and creative ways to say basically the same thing. When it comes to JNJ and diabetes, devices, the company seriously miscalculated what this franchise is worth. However, this does not mean there are not broader implications due to JNJ’s inability to rid themselves of the device franchise.

The biggest winner here, as if they needed it, is Medtronic (NYSE: MDT). The biggest loser is Dexcom (NASDAQ: DXCM). With Animas twisting in the wind and Medtronic in the midst of the 670G launch look for Medtronic to gain even more share. Which of course is no comfort to Dexcom who with each conversion loses another sensor patient. The lone bright spot here is Medtronic continues to have issues supplying patients with sensors.

When it comes to Invokana as expected the lone weapon they have is price/rebates and even with that they are losing share. The winner here is Lilly (NYSE: LLY) as Jardiance is finally making the gains everyone anticipated after the EMPA-REG data was released.

While it is not yet time to write a wrap up piece on JNJ’s exit from diabetes that day is quickly approaching. To be honest we thought JNJ was smarter than this. In the past, the company demonstrated an uncanny ability of knowing when to enter a market as well as when to exit a market. Yet when it comes to diabetes devices their lack of discipline is surprising. Frankly they should have known better as JNJ is many things but stupid is not among them.

The company now must decide what hurts the least. Do they simply throw in the towel and get what they can for the franchise? Or do they just milk the unit until the well runs dry? As bad as things are for LifeScan the unit still throws off a nice amount of cash and frankly does not require much in the way of capital to run. Animas could be sold but here the company’s internal valuations just do not match market realities.

Based on everything we have heard private equity is the most likely buyer for either unit but given the company’s inflated valuation private equity can just wait until the pain becomes unbearable. So, for now the device franchise is like that hamster running endlessly on the wheel, simply put going nowhere in a hurry.