And the loser is ….
This morning we learned that Roche has acquired Medingo the maker of the Solo insulin pump. According to a company issued press release; “Roche will pay Medingo Ltd.’s shareholders an upfront payment of US$ 160 million as well as up to 25% of the upfront payment in performance related milestones.”
The release later states; “The Medingo Ltd. patch pump is not yet marketed. In a next step, production capacities will be scaled-up to prepare for global launch which is expected by 2012.”
Diabetic Investor can’t say we’re all that surprised by this move as Roche has spent a small amount of capital and really has nothing to lose by acquiring Medingo. The company can now put an Accu-Chek monitor into the PDM that controls the Solo and hope that their sales team can sell the system in what will be a highly competitive marketplace.
The most important part of this deal is when they expect to actually launch the system, which as the press release states will come sometime in 2012. This seems to be a strange launch date given the system has already been approved here in the US and that Medtronic (NYSE:MDT) should have their much hyped patch pump on the market before 2012. And let’s not forget about Insulet (NASDAQ:PODD) who continues to increase sales of the OmniPod and will still be the only player in the patch pump market until either Medtronic or now Roche gets their products to the market. It also worth noting that Insulet isn’t sitting around doing nothing as they will soon have their new smaller pod ready before either the Medtronic or Roche products make it to market.
The reality of this deal is the people who owned Medingo had to sell the company and they finally found a sucker who was dumb enough to pay $160 million, and when you’re looking for companies willing to waste resources there’s no better place to go than Roche. Keep in mind this is the same company who spent $100 million to acquire Amira, a defunct glucose monitoring company just for their IP portfolio. This is also the same company that spent over a billion dollars to acquire Disetronic right before the FDA banned sales of Disetronic pumps here in the US; a move that ultimately killed any chance of taking on market leader Medtronic and allowed Animas and Deltec to establish a market presence. Frankly Disetronic never recovered from the FDA ban and Roche only made the problem worse when they launched the Accu-Chek Spirit insulin pump after the ban was lifted. The Spirit was substandard technology when it was introduced and never caught on in the marketplace.
Given that Insulet has been the only company to successfully sell a patch pump, the OmniPod system is the standard both Medtronic and the Solo will be measured against. Being very familiar with the OmniPod and Solo, Diabetic Investor can’t imagine a physician or more importantly a certified diabetes educator recommending the Solo over the OmniPod. As one noted by one industry expert the Solo; “was designed by engineers to be used by engineers.”
The fact of the matter Medingo did a pretty good sales job on Roche playing up the fact that cost to manufacture the Solo is well below Insulet’s cost of goods and Roche bought this hook, line and sinker. As Diabetic Investor has pointed out on numerous occasions this has always been Insulet’s Achilles Heel as their cost of goods is too high. However, in the real world a lower cost of goods will mean nothing if no one buys your product and as it stands today the Solo is just too complicated to us, especially when put side by side against the OmniPod which is one of the most patient friendly systems available.
Roche also seems to be ignoring the fact that Medtronic, with their huge installed user base will make a major effort when their patch pump is ready. The reality is most physician offices that recommend pump therapy the choice of pumps comes down to Medtronic and one other company, either Insulet or Animas. When their patch pump is finally ready Medtronic will be able to a complete line of pumps making the Solo’s sales job even more difficult. And let’s not forget that the Roche name in diabetes devices has taken a serious hit given how they mishandled the PQQ issue.
While this move will not have a major impact on Animas, the company is now in a position where they must react. Anyone who knows Johnson and Johnson (NYSE:JNJ), Animas is part of JNJ, understands that JNJ wants to be number one or a very close number two in every market they play in. After acquiring Animas, the company has firmly established the company as the number two player in the insulin pump market but still trails market leader Medtronic by a wide margin. Diabetic Investor has learned that even with their success the Animas management team is feeling the heat from corporate as they are losing patience with the unit.
Animas does have an agreement with Dexcom (NASDAQ:DXCM) to integrate Dexcom’s continuous glucose monitoring system with an Animas pump allowing them to compete head on with Medtronic who already has an integrated system. Still the company does not have patch pump which would allow them to keep pace with Medtronic. Given JNJ’s preference for buying new products rather than developing them in-house Diabetic Investor would say that acquiring Insulet is looking more attractive.
Insulet has already begun to lower their cost of goods and JNJ could take them the rest of the way. This move would also benefit JNJ’s other diabetes company, LifeScan, as they could easily replace the Abbott (NYSE:ABT) FreeStyle meter which is now integrated into the OmniPod PDM. This effectively is a double whammy for JNJ as insulin pump patients use more test strips than any other patient with diabetes. Consider that Insulet has approximately 15,000 users and that insulin pump patients on average test their glucose levels eight times each day, translation that’s almost 44 million test strips sold each year. 44 million test strips that would belong to LifeScan and taken away from Abbott. Granted not every OmniPod patient would switch but knowing how JNJ does business they would likely make it attractive to switch to a PDM with a LifeScan monitor attached.
It should also be noted that Insulet, like Animas, has an agreement to integrate the Dexcom CGM system into the OmniPod. By acquiring Insulet and their installed user base, JNJ would also be acquiring something Medtronic and Roche does not have, experience with the patch pump user. Add in the fact that JNJ would be acquiring an existing product with a growing user base they could get a major leg up on both Medtronic and Roche. There would also likely be some additional cost savings as JNJ could eliminate Insulet’s customer support and back office functions.
The bottom line here is nothing much has really changed other than the executives at Medingo jumping for joy with their newfound wealth. Based on their history Diabetic Investor cannot imagine anyone reasonably believing that Roche will be successful here. It takes real talent to lose over 11 share points in BGM and at the same time turn a billion dollar acquisition into one the biggest corporate blunders of all time. Perhaps the silver lining here is that Roche is only wasting $160 million rather than the billion they wasted with Disetronic, for Roche that’s progress.
