A major gamble for Insulet, or is it?
The insulin pump world is abuzz over the breakup of Insulet (NASDAQ:PODD) and Dexcom (NASDAQ:DXCM). Earlier this at the JP Morgan Healthcare conference the companies presented with Dexcom going first followed by Insulet nearly 24 hours later, both companies acknowledge the breakup which is about the only thing that both companies agree on. The real interesting story is the reasons behind the breakup and like so many things in the wacky world of diabetes devices, there are two completely different stories being told.
Privately most industry watchers are questioning why Insulet would end their partnership with Dexcom, who is widely regarded as having a superior system over Insulet’s main competitor in the insulin pump market, Medtronic (NYSE:MDT). Further questions are being raised as to the wisdom of ending the partnership now that the new Eros pod has been approved shortly after Dexcom launched their latest upgrade, the G4. More questions come into play when one looks at the insulin pump market which is gravitating towards integrated systems. Animas®, a unit of Johnson and Johnson (NYSE:JNJ), has the Vibe™ and newcomer Tandem is also working with Dexcom.
Why then would Insulet after getting past such a huge hurdle, getting the Eros pod approved by the FDA, walk away now when they could not only have a smaller, more patient friendly and less costly to make pod but have this new pod, which comes with a new PDM, integrated with what’s widely considered the best in class continuous monitoring system. Even if the new yet unnamed partner, who is likely Abbott (NYSE:ABT), has experience in CGM, why push the launch of an integrated OmniPod back two or more years. Many are questioning the validity of Insulet’s approach to an integrated system as this new system, which has only been tested on pigs, is being developed where insulin delivery and the continuous sensor will be in very close proximity, a design which many believe just won’t work. Lastly, even if they were to be successful, there is the business side of the equation namely; will patients and payors be willing to pay a higher price for a pod which delivers insulin on one side and inserts a continuous glucose sensor out the other.
It should also be noted that besides questioning the proximity of the sensor to where insulin is being delivered, many are wondering how patients will feel about changing their sensor just when their readings are becoming more reliable. One of the quirks with CGM is that while the Dexcom sensor is approved to be worn for just seven days, many patients where the sensor for much longer and their readings actually are even more accurate the longer they wear it. In the beginning many thought the early adapters of CGM technology where wearing sensors longer to save money, which was partially true, but they quickly learned that besides saving money they were also getting better readings. This fact also creates more questions with the Insulet design, which besides costing more will also require more frequent calibrations.
Still one has to wonder if Insulet is the sly one here. As everyone knows Diabetic Investor has not been a huge fan of the quest to develop a truly closed loop insulin delivery system, not because we don’t see a benefit from such a system rather because even if this quest bears fruit the system will only be attractive to a small group of patients and will likely cost a bundle. The fact is insulin pump prices have been increasing steadily over the years and the newer more advanced systems like the Vibe or the Revel™ from Medtronic are driving costs even higher. This comes at a time when payors are asking for greater price concessions and there are several credible alternatives to insulin pump therapy. Insulet could be thinking why spend the time, human and financial resources to launch such a system when there just not be a sizable market for it. It’s not like they are ignoring the possibility as they can always tell the investment community a system is in the works as evidenced yet unnamed partner which Diabetic Investor believes is Abbott.
The fact is Insulet’s goals really haven’t changed as about the only thing they really want is to be bought by someone. The honest truth is they never expected to remain an independent company this long, the stock has been diluted with their many capital raises and the new pod is here which if successful, will likely push them closer to their sole reason for being; getting bought by someone else.
Diabetic Investor also doesn’t see this news hurting Dexcom all that much as the two companies never really got along all that well to begin with. The fact is Dexcom is in the right place at the right time with the right system. The company has a solid and experienced management team who will grow the company until they too are bought by someone else. The market for continuous glucose monitoring is growing and not just with insulin pump patients where Dexcom is very well position even without Insulet. More patient’s following multiple daily injection (MDI) therapy are adopting CGM, a market Diabetic Investor sees expanding further once Dexcom launches their system which delivers readings to a patients smartphone. And you can almost bet the ranch that Dexcom won’t make the same mistake others have by limiting connectivity to the way cool iPhone and will also have their system communicate with phones using the Android operating system. As we noted earlier the company has an excellent and experienced management team.
For the entire back story about this break-up this could actually be one of those rare occasions where both companies are better off without each other. Insulet can concentrate on the new pod and selling the company while Dexcom won’t have to worry about dealing with a company that isn’t committed to the future of insulin pumping. The Insulet/Dexcom breakup has many subplots but the real truth is both companies could end up winning in the long run.
