Can design trump function?
After this year’s ADA conference Diabetic Investor speculated that we have reached the point of diminishing returns for diabetes drugs and devices. While there are some notable exceptions, such as Bydureon from Amylin (NASDAQ:AMLN), Lilly (NYSE:LLY) and Alkermes (NASDAQ:ALKS) and the Pogo all-in-one glucose monitor from Intuity Medical, most of the drugs and devices under development look very similar. Perhaps realizing this some companies are attempting to change the paradigm by putting a greater emphasis on the design of their products.
Diabetic Investor likes to call this trend of design over function the iPhone effect. As everyone knows the iPhone has been widely successful with people standing in line for hours to buy the newest version of what really is a very well designed cell phone. The success of the iPhone has spawned many copycats as other cell phone companies attempt to climb on the iPhone bandwagon with their own versions of phones that look cool. Yet when you strip away the cool look of the iPhone and the many iPhone wannabes at heart they are just cell phones that all basically do the same thing just in slightly different ways.
This trend stood out at the recently completed AADE conference where one of the busier booths was the booth for Tandem Diabetes Care. Diabetic Investor has been aware of Tandem for some time and had heard many different stories about their version of an insulin pump. However, until the AADE we had never actually seen the product. Given what we heard Diabetic Investor was anxious to see what all the fuss was about. Besides actually seeing their pump we were particularly interested in how this small, relatively unknown company planned to compete in the highly competitive insulin pump market. As we have stated several times before it’s no big deal to build an insulin pump the real difficultly is running an insulin pump company.
The first we noticed is just how much the Tandem pump looks like an iPhone. There is no question the pump has cool down pat. Besides looking like an iPhone the company has made the pump function like an iPhone using touch screen technology to control the pump. Yet for all this coolness, the Tandem pump is pretty much your standard insulin pump and really not that much different than what’s already on the market.
The next thing we noticed is for a pump that’s supposed to be way cool is how much the pump doesn’t do. While the pump communicates with a computer it does not allow the patient to program the pump from the computer, basically it’s a one way communication from the pump to the computer. Nor does the pump communicate with either a conventional glucose monitor or a continuous glucose monitor. In fact looking over the features offered by the pump about the only difference between it and other pumps is its larger color screen.
The company also has a pretty simple marketing strategy, rather than try and expand the market adding new patients to insulin pump therapy as Insulet (NASDAQ:PODD) has done, their main business strategy is to steal share from market leader Medtronic (NYSE:MDT). The company believes that there are thousands of Medtronic patients who are unhappy with their pumps looking for an alternative not currently offered by either Insulet or Animas, a unit of Johnson and Johnson (NYSE:JNJ). (Did we mention that the Tandem pump is also conventional in another way as it is a wired pump?)
According to company officials their interviews with existing pump patients revealed that these existing Medtronic customers are unhappy with their existing pumps and the current crop of alternatives. They went on to state that after these patients had an opportunity to see the Tandem pump they would anxious to switch. Before we go any further we should also mention that according to the company their pump won’t be any cheaper than a Medtronic or Animas pump. We should further note Tandem will follow the conventional business model for insulin pumps selling both the pump and pump supplies, just as Medtronic and Animas does. Finally we should point out that while it was not discussed Diabetic Investor believes the patients interviewed did not see what we saw at the AADE but more likely looked at PowerPoint presentation that outlined what the Tandem pump could look like.
This is pretty much commonplace for the many companies who are looking to enter the insulin pump market. Typically they will pack a ton of cool looking stuff into a presentation and then ask which pump a patient would prefer. It’s hardly surprising that patients would choose the newer, cooler looking pump over their existing pump especially when this new pump promises to do everything expect wash their dishes after a meal. This is not unlike how many football fans feel about their starting quarterback who’s not performing as expected, the second stringer looks promising even though he could be just as bad as or worse than the starter. Unlike the starter, the second stringer has the benefit of no track record and the added benefit of offering hope.
But just as the second stringer looks promising sitting on the bench, the real proof comes when he actually has to get into the game. And when it comes to insulin pumps the game is just as tough as second stringer facing a real defense under live game conditions. It’s pretty easy to perform well in practice but its whole different world going against the proven competition. When asked how they planned to gain access to patients, the company offered little specifics other than their pump was much more patient friendly and easier to use than what is already on the market. That sure sounds nice but it’s also very unrealistic.
First off Tandem must somehow manage to navigate the tricky waters of reimbursement. Next, they must somehow gain access to physicians. Although physicians rarely choose a pump for the patient, they do control access to their offices and who sees their nurses and/or educators. While educators may be impressed with the coolness of the Tandem pump, they are experienced enough to know that cool alone isn’t enough. These experienced educators understand that selecting a pump for a patient goes beyond the pump itself and what it can do and extends to the company who makes the pump and what they can do.
Tandem officials insist they have the capital necessary to manufacture, sell and support their pump. According to the company they have raised $65 million to date and have burned through approximately $30 million. They claim the remaining capital will be enough to get the pump through the FDA while they build a sales and customer support teams. Once on the market the company acknowledged they will need to sell approximately 18,000 units to break even. Based on the current market for insulin pumps, that means that Tandem would need to capture approximately 5% of the US insulin pump market.
While this may not seem like a large hurdle to overcome, consider the market they will be entering. Medtronic owns the insulin pump market controlling nearly 70%, Animas is a distant second with 20% followed by Insulet. It is also generally acknowledged the insulin pump market is growing around 10% per year and there are several companies besides Tandem getting set to enter the market. It is also true that like the conventional glucose monitoring market, insulin pump players are beginning to feel intensifying pricing pressure.
Its possible Tandem is trying to take a page out of the Therasense playbook. Like Tandem, Therasense came into the market with the simple strategy of taking share away from the major players. Their strategy worked as the company was acquired by Abbott (NYSE:ABT). However, there are some notable differences between Tandem and Therasense, the most obvious being that the FreeStyle meter was actually better than the existing meters on the market giving patients a compelling reason to actually switch from their existing system.
There is no question that the Tandem insulin pump has the cool factor but beyond that it is nothing more than a conventional insulin pump; a conventional insulin pump which will come to market missing several features that are commonplace throughout the insulin pump landscape. True the screen is large and easy to see and yes touch screen technology has its benefits but will these two cool factors trump the ability to communicate with a conventional or continuous glucose monitor? Will the cool factor trump years of experience dealing with pump patients? Will the cool factor trump the fact the competition is deeply entrenched with physicians and educators? Will the cool factor change the fact that two of Tandem’s major competitors have the capital, both human and financial, to fight back?
Anyone who doubts just how difficult the insulin pump market has become need only take a look at Insulet, a company that recently celebrated their 10th anniversary, and their OmniPod system. The OmniPod is truly a revolutionary product which has actually expanded the market for insulin pumps. Yet, even with its revolutionary design and equally unique pay as you go pricing platform, Insulet has not made a profit.
During Insulet’s tenure we have also seen the demise of the Cozmo another well designed system that became victim to Medtronic’s relentless protection of their intellectual property. Also during this same time frame we have seen Disetronic, once the number two player in the world, get acquired by Roche and fall completely from the face of the earth.
The harsh reality of the insulin pump market is that Medtronic remains the clear and undisputed leader. The company has taken on all comers and while they have lost some market share no one is even within shouting distance. The stark reality is while Medtronic may not have the best systems, they do have what their competition lacks, a huge installed user base who for the most part are happy with their pumps and see no compelling reason to change. They may not be winning the battle for patients new to insulin pump therapy and they will on occasion lose an existing patient to the competition but for the most part it’s hard to argue against the fact they are clearly winning the insulin pump war.
Given what we have seen so far, Diabetic Investor suspects Tandem will be just one more competitor that comes to market only to be crushed by the weight of the 800 pound insulin pump gorilla more commonly known as Medtronic.