A big deal or Pandora’s box?

Yesterday per a Tandem press release:

“Tandem Diabetes Care, Inc. (NASDAQ: TNDM), a leading insulin delivery and diabetes technology company, today announced that the U.S. Food and Drug Administration (FDA) has classified the t:slim X2™ insulin pump as the first in a new device category called Alternate Controller Enabled Infusion Pumps (ACE pumps). Along with this authorization, the FDA is establishing criteria, called special controls, which outline requirements for assuring the accuracy, reliability, cybersecurity and clinical relevance of ACE pumps, as well as describe the type of studies and data required to demonstrate acceptable pump performance. The approved indication for the t:slim X2 pump states that the pump is able to reliably and securely communicate with compatible, digitally connected devices, including automated insulin dosing software, to receive, execute, and confirm commands from these devices.”

Shares in Tandem which have been basically trading sideways broke from this pattern and now are approaching their 52 week high. The question we have is while we see this as feather in Tandem’s cap we’re not sure it’s a big deal and it could be a Pandora’s box. Frankly we are more excited about the Control IQ pump which works with the Dexcom G6 and TypeZero insulin dosing algorithm, to us this product will do what the 670G from Medtronic was supposed to do but because of sensor issues has not done.

The problem we have with patients mixing and matching their devices and/or algorithms or software comes to down to a few basic areas, most notably patient support. With the patient basically designing their own system just who is responsible for what?

We also question just how many patients will actually build their own system as while it sounds way cool it does involve some heavy lifting. Yes there is a small subset of patients who will do this but we cannot see the majority of patients doing this. Simply put we think it’s easier when everything is under one roof.

That being said overall this is a notable accomplishment for Tandem and puts even greater pressure on Medtronic who’s already under pressure. Stacked side by side the technological and design differences between the Tandem and Medtronic systems are striking. This has placed Medtronic in a very difficult position as either they redesign their systems and bring them into the 21st century or risk losing even more patients to newer more advanced systems. This is not an easy decision given the size of the company’s installed base.

This is one reason Medtronic fought so hard to keep their exclusive deal with UnitedHealthCare as frankly they could not afford to lose this exclusivity. When it comes to patients new to pump therapy Medtronic is losing and Tandem and Insulet are winning. Take away Medtronic formulary advantage and create a level playing field Medtronic would be in huge trouble.

Also keep in mind that the FDA investigation continues and could result in major problems for the company including a halt to sales of the 670G. Although no one knows for sure what the FDA will do the odds are strong they will do come down hard on the company. Everyone went out on a limb to get the 670G approached and no one especially the FDA wants to look bad.

All in all the insulin pump market seems on the cusp of a major change which is another reason we suspect the rumors about Medtronic selling their diabetes franchise are more than just rumors. In the past each time mistakes were made, it was out with the old management team and in with a new team. The new team would fix the problems and the cycle would continue. What the company always had going for them was they had the largest installed user base and owned formulary, it also helped that until recently their competitors weren’t a serious threat.

And long as that goose continued to lay those very profitable golden eggs everything was ok.

Yet this time around even a change a management may not help as the problems are no longer small in nature, this is not a simple fix like the past. The entire platform needs a drastic overhaul, the sensor especially needs to be replaced and major changes in rep comp should be instituted immediately. The fact is Tandem and Insulet have better systems now, are more financially secure now and can more effectively compete now.

The last domino to fall is creating a level playing field and in an ironic twist Medtronic themselves has made this possible by ignoring the problems they themselves created. As Momma Kliff used to say you can only play with fire for so long before you get burned.