Dexcom Reports and other news from the insulin pump market
After listening to Dexcom (NASDAQ:DXCM) report full year results yesterday Diabetic Investor came away believing that the company remains on track and is beginning to feel the impact of Terry Gregg’s leadership. About the only negative to come out of the call was the company’s announcement that their third generation device would be delayed. To Diabetic Investor this is a very minor negative as we believe Dexcom has the best device and they are still well ahead of the competition.
We also view the company’s agreements with Animas and Insulet (NASDAQ:PODD) as positive and see little impact should Abbott (NYSE:ABT) ever get Navigator out of the FDA. While it is true that measuring glycemic variability is gaining traction at the research level it will be some time before physicians will use this measure with regularity. Because of the intensive nature of insulin pump therapy and the fact that insulin pump patients already understand the value of the information that CGM systems provide, Dexcom’s near term future is directly tied to the insulin pump market.
It was interesting to note that with this being the case the company has not pursued a deal with Deltec, the makers of the Cozmo insulin pump. As Diabetic Investor reported last week there is speculation that Deltec may shut down operations, be spun off by Smiths Medical or be sold. Coming from MiniMed Mr. Gregg knows the insulin pump market very well. He also has made it clear that he would like the Dexcom system to work with all insulin pumps. During his comments yesterday he also made it quite clear that the agreements he already has in place do not prevent the company from doing agreements with other pump companies. The fact the company has no agreement with Deltec speaks volumes as to the company’s fate.
After speaking with several experts in the pump community Diabetic Investor remains convinced that Deltec’s days are numbered. Reviewing the public announcements and presentations made by Smiths Medical it’s apparent the company is no longer committed to the pump market. Without additional resources it’s difficult seeing Deltec survive over the long term. For some time now the company has been losing sales representatives who see the handwriting on the wall.
Looking towards the future three facts are clear, sales of conventional pumps will stagnate, it’s imperative future systems work with a CGM system and tubeless systems such as Insulet’s OminPod will gain an ever increasing share of the market. Evidence of this can be found from MiniMed the current market leader. Medtronic (NYSE:MDT) already has a patent on file for their version of a tubeless system. Like other OminPod wannabes the Medtronic system is a combination of a permanent piece and disposable reservoir. This is not unlike a system being developed by M2 Medical and let’s not forget that Medingo has already filed a 510K for their tubeless system. Diabetic Investor is also aware of several other companies developing their version of a tubeless pump.
Looking over Insulet’s possible competition nearly every concept is designed so that the system can be manufactured cheaper than the OmniPod. As Diabetic Investor has previously reported cost of goods is the main question surrounding Insulet’s long term viability. Currently the company loses money on every pod sold. Back in January the company stated that the initiatives they have taken to lower COGS will soon be baring fruit. While Diabetic Investor does believe lowering COGS is important it’s just as important that the company continue to take full advantage of being first to market. Just as Navigator will face a tough situation being the third to market in the CGM space, anyone who comes in behind Insulet will have an equally tough task.
The reality is the future of the insulin pump and CGM markets are almost identical, neither market is large enough or growing fast enough to support all the current players let alone the many who want to enter the markets. It should be noted for all the rumors of new players entering the insulin pump market none have materialized into actual reality. Perhaps they see the same thing Diabetic Investor does and do not want to throw good money into a high competitive slow growing market. After conducting their due diligence they realize that making an insulin pump is not that complicated however the actual day to day operations of running a pump company is quite complex and expensive.
Finally they discovered that although insulin pump therapy is quite effective there are several structural hurdles that limit future growth. The fact is the majority of physicians, including endocrinologists, lack the infrastructure to handle pump patients. Putting a patient on insulin pump therapy requires hours of training and support. But this is only half the story. Besides training and support physicians must also deal with increased demands from insurance companies so the patient receives reimbursement. While it is true that reimbursement for pumps have improved it remains a cumbersome task. Letters of medical necessity, c-peptide test, month’s worth of glucose logs and proof that the patient has received diabetes education are just some the items insurers require before considering whether or not they will provide reimbursement. The bottom line is physicians just don’t want the hassle and added expense of placing a patient on pump therapy.
Lastly it should be noted that even with numerous studies that prove the benefits of insulin pump therapy less than 30% of Type 1 patients use a pump and these are patients who must use insulin. It’s not surprising that number of pump patients worldwide has barely grown over the last few years and remains around 500,000. This in spite of several improvements in pump technology and more studies proving the benefits of pump therapy.
From an investment perspective Diabetic Investor would recommend accumulating shares in both Dexcom and Insulet, as both are trading near or below their 52 week lows . Ultimately both companies will be acquired by larger players most likely sometime in next 12 to 24 months. The road may get bumpy at times but in the end patient investors will be amply rewarded.