Decision Time for Medtronic

Decision Time for Medtronic

Yesterday Medtronic (NYSE:MDT) reported their fiscal fourth quarter results and based on the results it would appear their diabetes franchise is doing quite nicely. In his prepared remarks Omar Ishrak, Chairman and CEO stated; “The MiniMed 530G system with the Enlite sensor is taking meaningful share, resulting in strong US diabetes growth.” Gary Ellis, the company’s CFO added some detail to this remark when he stated; “Since launching the MiniMed 530G system, we estimate we have gained over 500 basis points of US pump share and over 600 basis points of US CGM share.”

Yet just when it seems that everything is fine and dandy with diabetes the company did announce a little over a week ago that Hooman Hakami would replace Katie Szyman as head of the company’s diabetes unit. This change in leadership as Diabetic Investor reported was not unexpected as the diabetes unit has struggled somewhat under Szyman’s leadership. As Diabetic Investor reported when the change in leadership was announced when it comes to Medtronic and diabetes rule one is not to screw up the goose that lays the golden eggs, rule two is reread rule one. Medtronic is the unquestioned market leader in insulin pumps with nearly a 70% share of the market.

It would seem however that the company has reached an inflection point when it comes to their diabetes unit. Yes it is true the unit is still the 800 pound gorilla of the insulin pump market and a serious player in the continuous glucose monitoring market, however the company is facing serious competition in both markets. Insulet (NASDAQ:PODD) and Tandem (NASDAQ:TNDM) have been chipping away at the company’s insulin pump share and Dexcom (NASDAQ:DXCM) clearly has the better CGM system. Additionally it won’t be long before competitive bidding comes to the insulin pump market making an increasingly competitive market even more price sensitive.

Perhaps this is the reason for the change in leadership, perhaps the company has reached a point where they are deciding whether to double down in diabetes or fold. Perhaps they are beginning to see what everyone has seen for some time, that when it comes to new insulin pump starts, that is patients new to insulin pump therapy, the competition is winning. Perhaps they are beginning to realize that as way cool and gee whiz as an artificial pancreas may be, the market for this very expensive piece of technology may not be large enough to be profitable. Perhaps they are beginning to realize they have spent a small fortune on developing an artificial pancreas and this may not have money well spent.

Take a look at a comment made by Mr. Ishrak made during the Q&A portion of yesterday’s call; “Like I’ve said before, we are focused around our three strategic clinical areas: cardiovascular, restorative therapies, and diabetes. And in each of those areas, we need to fill out. To the degree that things don’t fit in those core areas or don’t have any technology linkages with them, and we don’t think we can win those markets, they are opportunities for spin outs. And although we haven’t done any recently, I can assure you that we constantly look at that, and those will happen over time, but they will fit into a strategic framework. So that’s the way we look at that.”

To Diabetic Investor this statement is the reason there was a change of leadership in the diabetes unit, its Mr. Hakami job to decide whether to double down in diabetes or get out of diabetes. Let’s take the second option first and no it’s not crazy to believe that Medtronic would “spin out” their diabetes unit. Keep in mind this is exactly what Johnson and Johnson (NYSE:JNJ) is doing with Animas, their insulin pump franchise. Let’s face facts, the insulin pump market is changing just as the blood glucose monitoring market has changed, competition is intensifying, prices are eroding and competitive bidding is on the horizon. Medtronic just might decide that given their still huge market share in the insulin pump market better to get out now while they can still get a decent multiple.

Then again Mr. Hakami just might move in the opposite direction and double down in the space. It’s well known that Insulet and Tandem would be very receptive to being acquired and that both companies would add value to Medtronic. To Diabetic Investor Insulet would be the better choice given there scale and the OmniPod would round out Medtronic’s product portfolio. While the t:slim from Tandem is a way cool insulin pump with a much more patient friendly user interface Diabetic Investor can’t see the company buying them just for this reason. Diabetic Investor still anticipates that Medtronic will eventually sue Tandem as the company is now becoming a threat, this is just standard operating procedure for Medtronic.  We seriously doubt given antitrust issues that the company could acquire Animas from JNJ, nor could we see them going after Dexcom. When it comes to diabetes and Medtronic it’s all about insulin pumps and keeping the goose that lays the golden eggs fat and happy.

Looking at it from this perspective the change in diabetes leadership is now clearer. It’s not as though Ms. Szyman performed poorly rather Mr. Hakami has a different skill set which better meshes with Mr. Ishrak management style, keep in mind the two both came from GE. Mr. Ishark has basically said to Mr. Hakami; tell me whether to double down in diabetes or get the heck out. Hopefully Mr. Hakami will not fall into the classic diabetes trap which is trying to do both. Yes in the wacky world of diabetes devices we’ve seen it time and time again, where indecision then forces a decision.

Diabetic Investor does not see a middle ground for Medtronic, even with the results they announced yesterday. The diabetes device market is changing and the insulin pump market along with it. Quite frankly we would not be surprised with either option chosen, a strong case could be made for both. The one option that won’t work is doing nothing for if they fail to act diabetes won’t be the goose that lays the golden eggs rather it will become an albatross hung around Mr. Hakami’s neck.