Crazy Times

Crazy Times

Who would have predicted that on a day when Medtronic reports earnings it would be a secondary story in our wacky world. Before we get into the bigger news, which will come in a sperate post let’s take a look at the Medtronic earnings which for their diabetes unit continue to struggle. According to one of the slides used during the call;

“U.S. Revenue: Declined high-teens, primarily due to new patient starts delayed by closing of physician offices, and competitive challenges”

The earnings release states;

“Diabetes Group fourth quarter revenue of $570 million decreased 9 percent as reported and 7 percent constant currency. Diabetes Group revenue performance was impacted by a delay in new patient starts on insulin pumps due to the closing of physician offices as a result of COVID-19. This was offset by an increase in demand for diabetes supplies, including continuous glucose sensors and infusion sets, particularly in international markets.”

As we noted yesterday COVID is only partially to blame for Medtronic’s poor performance. Ironically the results for the unit would have been much worse without COVID as those same patients who cannot see their doctor to start a Medtronic pump neither can they start or convert to the Control IQ. The increase in supply and sensor revenue also isn’t surprising as like others in the space they are seeing patients stock up due to COVID.

The simple fact is Medtronic is now playing catch up. Try as they might there is nothing they can do in the near term to offset the momentum Control IQ has. Again as we have stated previously nothing in the pipeline, assuming of course it gets here, looks to be superior to Control IQ. This creates a huge problem for the unit as if they pull even with Control IQ it may be too late with the damage being done and irreversible. Keep in mind that Tandem is not standing still with Control IQ with future versions that will be even better.

The unit has not run out of bullets yet but given COVID and Control IQ many of these shots are missing the target. Medtronic has a decision to make should they decide to keep the unit and as we have said before that isn’t a certainty. Having already instituted several cost cutting measures the focus becomes twofold. First limiting the damage to their installed user base, i.e. protecting the golden goose as best they can. Second fight in markets where they can still win which places an even greater emphasis on international markets.

The problem with both measures is that we don’t see how they can prevent Control IQ from taking more patients away, nor do we see anything changing with new patient starts for as we have stated before Medtronic has fallen to the third option behind Control IQ and the OmniPod from Insulet. While strong internationally now Tandem and Insulet are gaining ground. It won’t be long before the international markets mirror what is happening here domestically.

This is not a matter of going big or going home. This is a matter of rightsizing the unit to reflect the realities of the market. The company still holds a commanding lead when it comes to installed patients, they continue to own the formulary space albeit not like they once did and while not the best anymore their technology is adequate. Managed properly with realistic expectations the unit can continue to generate decent revenues and a nice profit.

However to believe they can return to their glory days when they ruled the insulin pump universe is like thinking the New England Patriots will remain a dynasty without Tom Brady. Let’s hope that management doesn’t pull a Jerry Krause who after a building the greatest team of all time believed the Bulls could win championships without MJ. Just as the Bulls haven’t been back to the championship since MJ left, Medtronic will become an afterthought in the insulin pump space should management foolishly believe they can return to their former glory.