A Runaway Train

A Runaway Train

Yesterday without much fanfare Tandem (NASDAQ: TNDM) announced that effective July 17th Jesse I. Treu resigned as director of the company. Now we all know that Tandem is a sinking ship and view this as a smart move by Mr. Treu. Perhaps he does not want to be tainted by the many failures of the current management team. A team which has been allowed to run this company into the ground by a useless Board of Directors.

As we noted the other day the company will attempt to remain afloat when they announce a reverse stock split when they report earnings next Thursday. A move necessitated by the fact the company has been unable to find a buyer or more money. Let’s be clear here money is only part of the problem as the company needs a complete restructure to have any chance at long term viability. It also goes without saying this restructure includes a new management team, one which does not spend money recklessly and understands the ultra-competitive nature of the insulin pump market.

Also, yesterday Johnson and Johnson (NYSE: JNJ) noted that they were taking an impairment charge related to their insulin pump unit Animas. A unit which JNJ would love to unload but thanks largely to their inflated valuation has been unable to do so.

Given that Bigfoot is still years away from coming to market the insulin pump market already dominated by Medtronic (NYSE: MDT) is becoming their domain alone. Yes Insulet (NASDAQ: PODD) continues to remain viable but keep in mind the company is transitioning from being an insulin pump company to becoming a drug delivery company. The fact is Insulet does not have the resources to compete head on with Medtronic.

Simply put when it comes to the insulin pump market Medtronic is like a runaway train with no serious competitors. This is not a good thing not even for Medtronic. Even without Tandem going under the company is struggling with the launch of the 670G. Think of the strain Medtronic would come under should suddenly 50,000 patients were up for grabs. Sure, the company can plan for this event but planning is one thing execution is another.

To be even clearer even if someone came along and bought Tandem or Animas this won’t change anything in the near term. Both companies are in serious need of restructuring which will take not just money but time.

This set of circumstances puts Medtronic in the catbirds seat as with a virtual monopoly they have unusual leverage with payers. Yes, payers want lower prices but they also don’t want their patients without a viable insulin pump company. As we have seen Medtronic hasn’t been afraid to flex their muscles with payers, a move which Tandem and Animas could have matched but for financial reasons they decided not to match. Tandem cried about this, Animas dealt with it.

Frankly the best possible scenario for the insulin pump market is for Tandem to implode – like yesterday- and for Animas to be sold quickly. The longer both companies hang around the stronger Medtronic gets. Think of it this way, Tandem is like a patient with a terminal disease with no hope of survival. Yet the family of this patient just can’t let the patient go and tells the doctors to do whatever they can to keep the patient alive. This only prolongs everyone’s suffering. Sometimes it’s better for everyone to let the patient go so the healing process can begin.

The faster these companies either implode or get bought the better it is for the long term competitive dynamic of the insulin pump market. Think of the pressure Bigfoot will be under when they get here. If nothing changes and right now it does not look like anything will, Medtronic’s share could increase from 70% to 85% or higher. No matter how good the Bigfoot system may be this set of circumstances makes it almost impossible to make money.

Any way you look at this dynamic it will be patients who suffer the most. Not only because choice will be limited. Healthy competition would force Medtronic to stay on their toes, it would force them to continue to innovate. Let’s be honest what incentive does Medtronic have to spend millions on research and development. What incentive does Medtronic have to better their customer service? This does not mean the company won’t spend on R&D or they will ignore patients but what price will they pay if they don’t do a good job.

As it stands Medtronic is a runaway train with nothing but open track in front of them.