Pump up the volume

Things are certainly getting interesting in the insulin pump market and for the first time in recent memory Medtronic (NYSE:MDT) the current leader in the market is beginning to feel threatened. For years Diabetic Investor has been noting that as long as Medtronic can hold onto the vast majority of their huge installed user base the unit should do just fine. It’s a well-known fact that Animas, a unit of Johnson and Johnson (NYSE:JNJ), Insulet (NASDAQ:PODD) and now newcomer Tandem Diabetes have been winning the battle for patients new to pump therapy. However, until recently no one has been able to find a profitable strategy that successfully converts existing Medtronic patients to a competing product.

Thanks to help from Medtronic, who continues to pursue a true closed loop insulin delivery system, the competition has begun to chip away at the company’s highly profitable installed user base. It should be noted that nearly 80% of Medtronic’s existing patients are on automatic re-order for their pump supplies, supplies which generate approximately $2,500 per patient per year in revenue. Simply put Medtronic’s installed user base is the gift that keeps on giving, or at least it was. As much as many see a true closed loop system as the ultimate, the fact is Medtronic’s existing platform is outdated technology when compared to the competition. A fact not lost on existing Medtronic patients.

Perhaps the best example of how outdated Medtronic’s technology comes when it’s compared to the t:slim from Tandem. Although the t:slim performs many of the same functions as a Medtronic system, its user interface and slick iPhone like design has made existing Medtronic patients stand up and take notice. The fact is, with exception of the OmniPod from Insulet which is wireless, all insulin pumps do basically the same thing the same way. Therefore things like a user friendly interface and pump design can be the determining factor when patients chose which pump best suits their needs.

Now feeling the heat Medtronic has decided to make some rather drastic changes to their platform. According to well-placed sources within the company the company has embarked on new pump platform code named kitchen sink, likely because the company is throwing everything but the kitchen sink into this new platform. This project is so important to the company they have completely abandoned their much hyped and much delayed patch pump project; news which is likely to warm the souls at Insulet who have just launched their new smaller and less costly to make Eros pod.

Based on internal documents reviewed by Diabetic Investor this new platform will have many interesting features. To put it mildly the company is borrowing, more like copying outright, many of the features and design elements now available from the competition. If imitation  is the most sincere form of flattery then the folks at Tandem should be feeling very flattered as surprise, surprise the new platform will look like what else but the iPhone. The folks at TelCare should also feel flattered as like the TelCare glucose monitor the new pump will contain a sim card which will allow the pump to seamlessly communicate with a cellular network and ultimately the cloud. Not a real surprise as the pump will fit nicely into the interconnected diabetes management craze. Like the TelCare system the new pump will basically be like a smart phone that does everything expect make phone calls.

Medtronic sees many advantages to this approach as well some interesting new sources of revenue. The company believes they will be able to charge patients for remote monitoring of the pump.  While the details are still being worked out it seems there are two possibilities here, under one plan patients who chose remote monitoring will be charged should they call tech support, not unlike when banks charge a customer for using a teller instead of an ATM. Under the second option, patients can pay a monthly fee which would allow them unlimited calls to tech support in addition to remote monitoring.

But this is only the beginning as with the ability to communicate with the cloud patients with the new system will have the ability to actually download their favorite songs directly to the new pump. Based on various focus group data it seems pump patients believe that the sounds currently used for alarms and alerts are rather old school and they should have the ability to choose which sounds or songs go with the various series of alarms or alerts. Given we live in a world where almost everyone has custom ring tones or Pandora, this is not a surprise.

What is truly surprising is the company is seriously considering allowing the new pump to communicate with the future generations of the Dexcom (NASDAQ:DXCM) continuous monitoring system. While still in early stages the company knows from internal surveys with existing patients that their CGM systems basically sucks and this poor performance is causing existing patients to consider switching to the new Animas system which communicates with the Dexcom CGM system. The company figures it’s better to keep the patient and their continued pump supply revenue and lose the CGM revenue than to lose the entire patient to the competition.

Yet the pump itself isn’t the only drastic change being considered by the company as they look not just for additional sources of revenue but also areas where they can save some serious money.  In what would be a stunner for an industry built largely by a strong field sales force, the company is seriously considering abandoning the entire field sales force or using just a handful of specially trained reps. The company figures that pump training can be outsourced to Certified Diabetes Educators who are basically independent contractors and therefore can be hired and fired at will. They further reason given that physicians are no longer seeing pump reps, they can use the web and conferences to market the new system.

Now before everyone starts asking the company when this new system will become available or why they are considering so many drastic changes keep in mind that even if they did provide a timeline it would be meaningless. Keep in mind this is the same company that said they would have a patch pump on the market by 2010, then 2011, then 2012 and now, with good reason we might add, the company is mute on the subject. It seems they have learned that it’s better to be thought a fool than to open your mouth and remove all doubt.

Happy April Fool’s Day everyone.