Breaking Up Is Hard To Do
Rumors are once again circulating in the insulin pump and glucose monitoring world. The latest rumor, Medtronic (NYSE:MDT) the market leader in insulin pumps and LifeScan, a unit of Johnson and Johnson (NYSE:JNJ), are terminating their relationship. This alliance which began back in August of 2007 was always a strange one in the eyes of Diabetic Investor considering JNJ also owns Animas, Medtronic’s main competitor in the insulin pump market.
It was easy to understand why LifeScan wanted the deal as with Medtronic’s huge installed user base; LifeScan believed they could sell more test strips to Medtronic pump patients. As we noted on several occasions insulin pump patients monitor their glucose levels more frequently than any other patient with diabetes, on average eight times each day. It is also known that while pump patients make up only a fraction of patients they account for nearly 25% of all test strips sold.
Now it seems this relationship between two market leaders has come to end. Although it’s a little unclear who broke up with whom, this break up isn’t all that surprising. Diabetic Investor has long been aware this has not been match made in heaven, LifeScan never realized the strip sales they originally anticipated and Medtronic did not receive the royalties they anticipated.
The question now becomes where do we go from here? Taking a look at the Medtronic web site it seems pretty obvious that the company plans on promoting their new Revel™ system, which combines their Paradigm® insulin pump with their continuous glucose monitoring system. Medtronic can also reach out to Bayer to replace the LifeScan based system as Bayer is partnered with Medtronic outside the US. A move that would be welcomed by Bayer as they are in desperate need of something to reinvigorate their test strip sales.
LifeScan shouldn’t suffer too much either as sales of test strips never reached he levels they anticipated when this deal was consummated. Frankly the company has bigger issues to deal with as growth in the BGM has slowed dramatically and the company once dominate in managed care is showing cracks in the once impenetrable armor. The unit has already made dramatic cost cuts as they struggle to maintain their once hefty margins.
This move should also allow JNJ to concentrate on building the Animas customer base. The reality is Animas is facing increasing pressure from the folks in New Brunswick who are not exactly thrilled with the unit’s performance. Acquired has another way to sell more test strips, things haven’t proceeded exactly as planned. While Animas is clearly number two in the insulin pump market, they are still well behind Medtronic. The simple fact facing not just Animas but every insulin pump company is that nothing will change until someone figures out how to steal away from Medtronic’s huge installed user base, or what Diabetic Investor calls the upgrade market.
While Animas and Insulet (NASDAQ:PODD) are winning the battle for new patients moving to insulin pump therapy, neither company has successfully penetrated Medtronic’s existing customer base. With an installed patient base of nearly 400,000 Medtronic’s bread and butter is keeping these patients on Medtronic systems which provide the company a nice little annuity from the annual sale of pump supplies. With the average pump patient using $2,500 per year in pump supplies, supplies which carry very high margins, Medtronic can basically count on nice chunk of revenue without breaking a sweat.
The fact is Medtronic has a huge advantage over everyone else as they are in continuous communication with their patient base providing them with the opportunity to sell these patients new systems under their upgrade program. The patient gets a new pump at a discount while the company maintains their revenue stream from pump supply sales. Supply sales which are made even more profitable as over 70% of their installed user base has supplies shipped to them automatically.
What everyone seems to ignore with the insulin pump market is just how hard it is to get a patient to switch pumps once they have become comfortable with their system. Unlike multiple daily injection therapy where switching from one syringe or insulin pen is no big deal, switching patients from one pump to another is a different animal altogether. Given that insulin pump therapy is more complex than MDI, it’s not surprising that once a patient finds a pump they are comfortable with, has learned how to use the pump effectively that switching to a new system, even if it’s seen as better, isn’t that easy. The reality is it is easier to stay brand loyal as patients prefer not to relearn the workings of a new pump system. This is the main reason Medtronic has been able to maintain their market dominance even as Animas and Insulet have introduced more advanced systems.
This is another reason Medtronic is not overly anxious to find a replacement for their Paradigm line or introduce their much delayed patch pump. While these products are desperately needed to win patients new to pump therapy, they are not desperately needed to keep their existing patient base happy. Medtronic understands given the difficulties in the insulin pump market it is more effective to allocate resources towards patient retention than spend millions of dollars on developing new systems which may or may not make a difference in the bottom line.
The bottom line here is the more things change, the more they stay the same. Medtronic remains in control of the insulin pump market, Animas and Insulet while established have barley put a dent in Medtronic installed user base. It is also true that Animas and Insulet face a greater threat from the many companies seeking to enter the market than Medtronic does. Medtronic just has too many advantages over Animas and Insulet and market share is just one of them. Breaking up may be hard to do but Diabetic Investor doesn’t Medtronic shedding a tear over it.