Here we go yet again

It’s been said that imitation is the sincerest form of flattery but when it comes to the wacky world of diabetes devices, there is also another concept that is obvious as there can be too much of a good thing. Recently Diabetic Investor has been investigating the many newcomers and wannabes in the continuous glucose monitoring space. A space that is currently dominated by two players, Dexcom (NASDAQ:DXCM) and Medtronic (NYSE:MDT). Most experts and more importantly, most patients, favor the Dexcom system considering it superior what Medtronic offers.

Still many seem to believe that neither of these systems are up to snuff. That they can build a better mouse trap. That they will somehow be able to build a viable, profitable business even though there really isn’t room for more players. The CGM space is quickly following the path of the insulin pump market. A market that isn’t large enough or growing fast enough to support the existing players, let alone the many who want to enter the market.

Truth be told what these newcomers are really looking for is a quick payday. That some bigger company will come along and acquire them. That they will be able to convince these potential suitors that they really have something special. When in reality they really don’t have much of anything. We’ve said it before and we’ll say it again – in the wacky world of diabetes companies can steal more money with a good PowerPoint presentation than they could using a gun to hold up a bank.

At some point it would seem that logic would rule and that people would realize that as valuable as this technology is we don’t need 15 CGM systems. Look at the insulin pump market which is dominated by four companies; Medtronic, Animas – a unit of Johnson and Johnson (NYSE:JNJ), Insulet (NASDAQ:PODD) and Tandem (NASDAQ:TNDM). These four companies effectively control over 90% of the market, a market which is growing in the low single digits. Yet this hasn’t stopped companies like Asante from raising capital. Now yes the Asante system has some nice features but at the end of the day it’s an insulin pump, a pump that basically does the same thing all the other pumps do. Frankly about the only company in the space that really offers something different is Insulet with their tubeless OmniPod.

Yet the insulin pump market isn’t the only diabetes device market to follow this copycat, me-too philosophy. Take a look at the conventional glucose monitoring market. A market which is dominated by basically four players; JNJ, Roche, Abbott (NYSE:ABT) and Bayer. Like the insulin pump market these four companies effectively control 80% of the BGM market. Still there are companies out there who’ve been able to raise capital even though this market is dying a very slow and very painful death. Many of these newcomers have convinced investors that interconnected diabetes management is the future and the system they’ve developed is a perfect. While Diabetic Investor does not disagree that the interconnected diabetes management is the future, we’re just not sure there is sustainable business here.

What’s even more astonishing here is the lack of due diligence in this space. A perfect example of this is GE who invested $8 million in C8 Medisensors only to see this investment implode. Now $8 million may be chump change for GE, but it does illustrate how even large well respected companies can be become Kool-Aid drinkers. Had GE bothered to perform even the slightest due diligence they would have seen what Diabetic Investor and many experts in the space knew all along – the damn thing didn’t work.

Over the next few weeks much will be written about these newcomers as the American Diabetes Association (ADA) will hold their annual conference the second week of June, while the American Association of Diabetes Educators (AADE) will hold their annual conference the first weekend in August. Yes everyone will fawn over these newcomers who will surly have a great story to tell. A story which basically goes like this- diabetes is growing at epidemic rates, the majority of patients are not effectively managing their diabetes, that the tools currently available aren’t good enough and we have built a better mouse trap. Normally disciplined investors will start believing the dream rather than investigating the facts. They will become convinced that they will easily profit from this investment as surly these companies will either be acquired or go public or both.

Listen after 20 years of covering this wacky world we have seen this happen time and time again. Although we doubt these investors will listen here’s some free advice – be afraid very afraid. The diabetes device, and for that matter, the diabetes drug market is commoditizing. When it comes to complex devices like a CGM what looks good in early stages rarely makes it to market. Failure is the norm. That millions have been lost in the quest to build a better mouse trap. That management talent, a rarity in this space, is equally important as the technology.

Perhaps the best advice of all is the simplest- if something looks too good to be true it probably isn’t true.

Yes there are some deserving companies out there, but they are few and far between. The harsh reality is when it comes to diabetes device companies they are like fine wine. An experienced wine drinker can instantly spot a good vineyard. They may be pesky and picky but they know good wine. The problem is far too many companies who invest in this space couldn’t tell the difference between something truly outstanding and pure crap. They falsely believe the more expensive the bottle the better it tastes. These are the same people who like to brag they bought a $100 bottle of wine when a $20 bottle would have been more pleasing.

Which brings us to another concept well known in the wacky world of diabetes – there is no cure for stupid.