Diabetes is a chronic expensive disease whose burden is great, but it looks like many top companies are looking to get out of the space, or at least parts of it.
Consider Exhibit A: Johnson & Johnson announced last week that it’s aiming to prune its consumer diabetes device business that consists of test strips, blood glucose meters, and insulin pumps.
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Specifically, the New Brunswick company noted that it is exploring strategic options — “operating partnerships, joint ventures or strategic alliances, a sale of the businesses, or other alternatives either separately or together” — for the business that includes the Animas, LifeScan and Calibra Medical, which makes a wearable insulin-patch device, which came to it through an acquisition in 2012.
Here’s how Chairman and CEO Alex Gorsky described the decision that the business was no longer core to the company.
“Look, it’s always a difficult decision and when you look at your portfolio and as I frequently describe, it is little bit like your children, you love all of them just from time-to-time we are trying to make decisions that we think ultimately are in the best long-term interest of our customers…,” he said in response to an analyst’s question, according to a transcript of the fourth-quarter earnings call from Seeking Alpha.
So how did the consumer diabetes device business arrive at the stepchild status? It appears that the rationale for a jettisoning in some shape is rooted in a reimbursement decision from the Centers for Medicare and Medicaid back in 2013 that had a wide-ranging impact.
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“In 2013 Medicare & Medicaid really slashed reimbursement for those testing strips, which really crippled the business model of these companies which practically gave the meters away and made reoccurring money on the strips,” explained Venkat Rajan, industry analyst with Frost & Sullivan, in response to questions in an email.
In fact even last year the reimbursement for diabetes device testing strips was lowered by another 20% according to the Midwest Association for Medical Equipment Services. All of this has made it hard for companies selling the devices.
“The diabetes pricing over the last several years has been challenging and although I think our team has done a nice job of adjusting the cost structure, the level of profitability that business has declined,” explained Dominic Caruso. J&J chief financial officer last week. “We don’t give you specific franchise profitability, but it’s been challenging to generate strong profits in the business where there is significant price decline year-after-year.”
Johnson & Johnson is not the only company to have soured over the consumer diabetes device business. In 2015, Bayer sold its Diabetes Care business to Panasonic Healthcare Holdings backed by well-known private equity firm KKR and Panasonic Corp. for more than $1 billion.
And Roche’s struggles with its diabetes testing business is well-documented, prompting speculation that it too will follow the lead of Bayer. And now J&J.
Photo: nadia_bormotova, Getty Images
