Another wacky week

Well it’s Friday and here in Chicago there’s dancing in Grant Park as the lollapalooza festival music gets underway. Yet Chicagoans aren’t the only people doing the hippy hippy joining them are our friends in that beautiful city of San Diego. Both Tandem and Dexcom reported better than expected earnings sending Dexcom shares soaring and further building on Tandem’s incredible run.

Over the past six months shares of Dexcom have increased almost 122% a pretty impressive move until you compare that to Tandem’s gain of 1,107% and no that is not a misprint. Think about this just for a moment it wasn’t that long ago that Tandem had a market cap of below $30 million and could have been acquired for less than $250 million. As we go into trading today the company’s market cap stands at just under $1.6 BILLION.

Wonder how many companies that kicked the tires at Tandem and said thanks, but no thanks are kicking themselves. You can almost take it to the bank that one of these companies who said no thank you will come along and pay over $2 BILLION to acquire this company which they could have had for a fraction of that. Only in the wacky world of diabetes can this happen.

One company that’s in no danger of being acquired but wishing for a Tandem like resurgence is MannKind. The company reported earnings yesterday followed by one of the most detailed earnings call ever. Reading through the transcript, not an easy read by the way, all we could think of is the promise of tomorrow. This has been and continues to be MannKind’s narrative.

While we appreciate the detail in the call, a far departure from the old days when Al Mann was running the company, all the detail in the world won’t change the fundamentals of the short-acting insulin market. A market which is dominated by Lilly and Novo Nordisk with Sanofi soon to chime in if they ever get their act together with Amedlog.

MannKind’s problem has never been whether Afrezza works or not, their problem has been and continues to be getting the product on formulary and being able to sell it at a profit. Yes, as physicians learn more about Afrezza they become impressed with the results. Unfortunately, when these physicians get back to their offices they run into the harsh reality that Novolog and Humalog are favored by payers and Afrezza isn’t. And yes, it is that simple.

A few miles away from the MannKind headquarters the folks in Northridge must feel a little bruised and battered. Although Insulet’s results released yesterday weren’t great their problems are not domestic, here in the US the OmniPod is doing just fine. Throw in Tandem’s better than expected results and suddenly people are waking up to something we noted long ago, for the first time in ages Medtronic can be had.

It seems everywhere the folks in Northridge look there is a problem. The conversion of Animas patients isn’t going well. The 670G is doing ok but not great. The Guardian Connect their stand alone CGM is dead on arrival. And worst of all they have a huge cost problem as a hardware replacement looms on the horizon.

Yet one crucial fact remains even with all these problems the company still maintains a virtual monopoly in the insulin pump market. As long as Medtronic can hold onto the real estate they own, it will be uphill sledding for the competition. The goose that lays the golden eggs will continue to lay them until someone comes along and starts converting Medtronic patients to another system. The fact is when it comes to new pump starts, patients who have never used a pump before, Medtronic is already losing. This isn’t news.

Medtronic faces two critical challenges. The first as we have noted is holding onto their formulary advantage. The second being holding onto their huge installed user base. Should they lose their formulary advantage or start to see substantial erosion of their installed base watch out below. This is why the company initiated their guarantee with payers and why they will do everything they can to insure they don’t start losing existing customers in a big way.

Listen the folk in Northridge are many things but stupid they aren’t. They see what’s going on and will do whatever it takes to protect the goose. The question is with all the recent management changes and the many problems they face can they do it. Besides worrying about Tandem, Insulet and Dexcom new threats are emerging from Abbott, Bigfoot, Onduo and Lilly just to name a few. Can they successfully protect their turf while navigating the treacherous waters of a costly hardware replacement?

Looking further down the road another large challenge looms as it won’t be long before Tyler arrives. The introduction of Tyler – our name for a “smart” insulin pen, CGM app system – will provide pump like outcomes at a fraction of the cost of a pump. Novo and Dexcom have teamed up in this quest, Bigfoot and Abbott have chimed in and others will soon follow. We suspect Medtronic will chime in as well giving them another challenge.

We would be remiss if we didn’t mention our friends who are members of the West Coast Mafia. A group who once claimed that patient choice and innovation would be stifled in the insulin pump market by Medtronic’s business tactics. Well here we are with Animas gone and that hasn’t exactly turned out to be the case. Now that Tandem is on solid financial footing, Insulet launching the DASH and a host of players waiting in the wings neither patient choice or innovation has been stifled in fact the exact opposite has happened.

At some point you would think these people would learn this is what capitalism is all about. That it makes them look foolish when they write disingenuous self-serving letters designed not to help but only to bring attention to themselves. That we don’t need government intervention. What we needed and what happened is capitalism letting market dynamics fix the problem, which in this case they did beautifully.

So, enjoy the weekend everyone for some it will joyous for others trepidatious but most of all it will be wacky.