A sustainable business?

A sustainable business?

This morning Tandem Diabetes (NASDAQ: TNDM) announced they have partnered with TypeZero Technologies to help them with their quest to develop a closed loop insulin delivery system or artificial pancreas. According to a company issued press release;

“Tandem Diabetes Care®, Inc. (NASDAQ: TNDM), a medical device company and manufacturer of a family of innovative touchscreen insulin pumps, and TypeZero Technologies, LLC, a digital health and personalized medicine company, today announced that they have entered into a License Agreement allowing Tandem to integrate TypeZero’s artificial pancreas (“AP”) technology into a next-generation t:slim® Insulin Pump. TypeZero’s AP technology includes a series of treat-to-target algorithms developed by TypeZero from initial research conducted at the University of Virginia. To date, this technology has been used in more than 28 clinical studies including more than 475 participants, with data referenced in a number of journal articles. “

This isn’t off itself big news as every insulin pump company is trying to develop a closed loop system. The question circling around in our mind is, is there a sustainable business model for these systems.

Now before we go on here let’s clarify a few things. First we do believe that such a system will become a reality, that it is no longer a question of whether we will have such a system but when we will have such a system. Second we don’t see this story as being about whether such a system would be beneficial for patients, there is no question in our mind that it would be. Yet we can’t help but wonder whether these systems will be profitable, is there a sustainable business model here.

In many respects this story is not dissimilar to the Afrezza story. As we reported frequently the problem with Afrezza wasn’t whether the drug worked or not, it clearly worked. The problem with Afrezza was market size. Was there a large enough demand for Afrezza. As it turned out there wasn’t.

As it stands today approximately 30% of Type 1 patients use an insulin pump and by our estimates approximately 10% of insulin using Type 2 patients use an insulin pump. That pegs the number of insulin pump using patients somewhere around 1 million or so patients. It is also true that the insulin pump market is growing in the mid to low single digit area. Even with all the advancements in insulin pump technology this market isn’t growing fast enough to support not just the existing players but the many who want to be players. Therefore, it is logical to ask just how many patients would use a closed loop system.

Here are the issues we see and again we want to be clear these issues have nothing to do with the therapeutic benefits such a system would provide.

First, would payors who have been pressing for lower prices provide favorable reimbursement? We ask this because insulin pumps aren’t cheap and a closed loop system would likely be priced higher than conventional insulin pumps.

Next, just how many existing insulin pump patients would convert to a closed loop system. We ask this because logic tells us that these patients already comfortable and well versed with insulin pump therapy would be the low hanging fruit for a closed loop system.

Third question is how many patients not currently using an insulin pump would opt for closed loop system. This is a really tough question as no one knows for certain how such a system would be covered.

The harsh reality here is the insulin pump companies themselves aren’t sure what the market size would be. Here too there is similarities with Afrezza. One of the major themes touted by every company who has or had inhaled insulin was patients preferred inhaled insulin over injected insulin. These companies pointed to patient surveys which noted when asked these patients would prefer inhaled over injected insulin. Yet as we have seen so often these survey results did not deal with the real world aspects patients deal with. Will the therapy be covered? If so, at what level? Will physician feel comfortable with the therapy? Will it be patient friendly?

By our way of thinking a closed loop system is the ultimate piece of diabetes device hardware, nothing could be more enticing or high tech. Talk about way cool and whiz bang, what’s cooler or more whiz bang than a closed loop insulin delivery system. A system which requires minimal patient interaction.

As cool as such a system would be this by no means translates into patient demand. Yes, there would be a small set of patients who would adopt such a system regardless of coverage or out of pocket costs.  However, this small segment of patients is not large enough to sustain a profitable business. The 64-dollar question here is how many patients outside of this small group will adopt a closed loop system. Will it be 10%, 30% just how many?

To complicate matters even further given all the players developing such a system could any one system garner enough patients so that product is profitable. It would seem given their size Medtronic (NYSE: MDT) stands the best chance at reaching profitability but even so this will not stop Tandem, Insulet (NASDAQ: PODD), BigFoot or Animas, a unit of Johnson and Johnson (NYSE: JNJ) from competing. So even if everything fell into place could any one system capture enough patients so that the product is profitable.

To us the mistake being made here is a common one, everyone seems to believe if they build it there will be a demand for it. Well if history has taught us anything the diabetes device community tends to view things through rose colored glasses. A solid case on point here is all this interest in what we call patch pens. The general belief among the companies with these devices is there is a set of insulin using patients who don’t want to move to a real insulin pump yet don’t like injecting insulin multiple times per day. That this group of patients will experience greater therapy compliance because they will be wearing a patch pen.

While there may be a small set of patients who fall into this paradigm we don’t see these patch pens becoming widely adopted. And we are not the only people who feel this way. Yet even though there may not be a large enough market for these patch pens that hasn’t stopped numerous companies from building them. Classic if we build it they will come mentality, when these companies should be asking is there a NEED for these patch pens, what problem are they solving.

Diabetic Investor does not question the need for a closed loop insulin delivery system. Nor do we question whether or not there would be patient demand for such a system. We do see the therapeutic benefits of such a system. However, given all the factors to consider what we don’t see, at least not yet, is a large enough market for a sustainable profitable business.

The question isn’t whether it will be built, the question is will there be enough demand.