Diabetes care businesses may see brighter future in Asia

Provided exclusively by Mergermarket

Chinese buyers value global brands

Diabetes data could draw interest from adjacent markets


Steadily declining reimbursement in the US for diabetes care products is encouraging Asian buyers to reshape a global market long dominated by Johnson & Johnson [NYSE:JNJ], Roche [VTX:ROG], Bayer [ETR: BAYN] and Abbott [NYSE:ABT], according to sector experts.

All of the global players in the diabetes care space have been facing the same pressures ever since Medicare, the national payer for US seniors, began seriously slashing reimbursement on diabetes supplies four years ago. The diabetes businesses were valued at approximately 3x revenue 10 years ago, said a US-based analyst. Now, the units are barely worth 1x revenue, said a UK-based banker and the analyst.

At the patient level, this worked out to mail order reimbursement rates for 100 test lancets at USD 22.16 in 2013, which dropped to USD 8.32 three year later.

Further putting some of these companies on the defensive, Bayer, Johnson & Johnson, and Roche had not significantly invested in latest-generation CGMs preferred by Type 1 diabetics as Abbott and Dexcom [NASDAQ:DXCM] have, added the analyst. CGM is an implanted device and allows for the continuous monitoring of glucose levels in the patient.

As a result of these market forces, Bayer exited the diabetes market three years ago, and Johnson & Johnson appears ready to do so this year. In January, both Johnson & Johnson and Roche reported revenue declines in 2016 at their respective diabetes units. Johnson & Johnson said it would consider options for its USD 1.8bn revenue unit.

Roche, however, with USD 2bn in revenue from its diabetes unit last year, denied reports that it could sell or spin-off the division, and said instead it plans to expand the division and enhance its technology. On 15 February Roche announced an agreement with Medtronic [NYSE:MDT] to develop a Bluetooth Low Energy (BLE) enabled blood glucose monitoring meter that will work with Medtronic’s insulin pump systems.

Abbott, with its Freestyle Libre continuous glucose monitor (CGM) poised for FDA approval, is not facing the same pressure as Johnson & Johnson and Roche, noted the US-based sector analyst.

Brand value in Asia

Following the path of the Bayer sale to Panasonic Healthcare, the Johnson & Johnson unit may find a home in Asia, said both a Japan-based banker and a China-based advisor. A large scale unit like Johnson & Johnson’s would provide a global footprint, and Asian buyers could count on a growing diabetes market throughout the region to compensate for the low margins that Western companies no longer can manage.

In addition, in China the brand name of Johnson & Johnson would carry more cachet in the private pay hospital-based market, allowing the bidder to improve margins, said the Chinese banker. Private pay is where the patient pays for treatment out of pocket, as opposed to healthcare insurance covering the expense.

Adjacent markets

At the same time, the value of the data from a major diabetes unit could be applied across different healthcare and medical businesses at companies like Canon [TYO:7751], Fujifilm [TYO:4901], Jiangsu Yuyue Medical Equipment and Supply [Yu Yue Yi Liao; SHE:002223], and Shenzhen, China-based Mindray, said the two Asian bankers.

None of these four companies have been shy about medical-related acquisitions. Canon acquired the medical device business from Toshiba for JPY 665.5bn (USD 6bn) in March 2016, while Fujifilm purchased a majority stake in Wako Pure Chemical Industries for JPY 198.5bn (USD 1.7bn) in December 2016. Fujifilm has been very aggressive in its pursuit of deals, added a US-based sector lawyer.

Yuyue Medical is a major domestic glucometer player in China. As opposed to more advanced CGM technology, the glucometer is an external medical device for measuring glucose levels in the blood, and has become relatively commoditized. With a market cap of USD 2bn, Yuyue Medical would be able to bid for Johnson & Johnson’s diabetes unit, said the China-based banker.

Mindray, meanwhile, with a valuation of USD 7bn, could want the Johnson & Johnson unit to complement the device, diagnostic and imaging products it sells in Chinese hospitals, said the Chinese banker. Mindray could also expand overseas if it had Johnson & Johnson brands, the banker added.

The glucometers and diabetes products from Johnson & Johnson, Roche and Abbott have dominated sales within Chinese hospitals, while Chinese brands are more prevalent in the OTC market, explained the China-based banker.

Panasonic Healthcare likewise may be investing more in the market, said the Japan-based banker. However, it would need the continued financial backing of KKR and/or Mitsui, he noted. When the Bayer unit was purchased by Panasonic Healthcare for USD 1.1bn in 2014, the private equity firm KKR owned 80% of Panasonic Healthcare. Last November, KKR sold a 22% stake in Panasonic Healthcare to Mitsui & Co. for JPY 54.1bn (USD 489m).

A bid for a diabetes unit like that of Johnson & Johnson’s would not likely to face antitrust scrutiny because Panasonic Healthcare is not yet dominant on a global scale, continued the Japan-based banker.

While Johnson & Johnson reviews options for its diabetes care companies, which include LifeScan, Animas Corporation and Calibra Medical, it is also entering more profitable growth markets. Last year, it paid USD 3.3bn to buy the hair salon business of Vogue International; USD 4.4bn to buy Abbott Medical Optics, the eye care business of Abbott; and in January Johnson & Johnson bought most of the pharmaceutical assets from Actelion for USD 30bn. The acquisitions could be offset by divestitures such as the diabetes unit and other device businesses, said a US-based sector banker.

On 15 February, Johnson & Johnson agreed to sell the Codman neurosurgery device business of its DePuy unit to Integra LifeSciences [NASDAQ:IART] for USD 1.045bn in cash.

The Data Boost

The interest in patient data also extends to US companies with a hand in big data.

Last year, Medtronic entered a partnership with Samsung to co-develop smartphone apps that would extract data from Medtronic’s insulin pumps and glucometers. The goal would be to provide more specific, personalized data for patient management of the disease.

IBM’s Watson Health likewise entered partnerships with three major diabetes companies – Medtronic, Johnson & Johnson and Novo Nordisk [NYSE:NVO] – in recent years in order to determine individual patient responses to different drugs and devices.

Meanwhile, Sanofi [NYSE: SNY] and Verily, the life science unit of Alphabet [NASDAQ:GOOG], last year entered a USD 500m joint venture, named Onduo, to develop new treatments for diabetes.

However, Onduo and companies like Apple [NASDAQ: APPL] are more likely to want to build their own technology and devices, rather than modify an existing electronic product, such as a glucometer, several sources said.

by William Langbein in San Francisco, Mai Mizuta in Tokyo, Mintoi Chessa-Florea in London, and Jane He in Shanghai

As seen in the mergermarket newsletter on 24/02/2017


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