Getting their house in order

Getting their house in order

This morning Medtronic (NYSE:MDT) reported results which for the first time in recent memory was more on the positive side for their diabetes unit. During today’s call the company announced a realignment of this franchise which is now being run by Hooman Hakami. The diabetes franchise has been divided into three operating groups, during his prepared remarks CEO Omar Ishrak stated;

“It is also worth noting that in Q2, we realigned our Diabetes Group into three specific business units focused on transforming diabetes care. The first business, intensive insulin management, will concentrate in type 1 and intensive type 2 diabetes management. The second business, non-intensive diabetes therapies will focus on type 2 solutions across the diabetes care continuum.

The third business, diabetes service and solutions will focus on improving their customer experience by bringing together data management and customer support solutions, including consumables, supplies and financial services. We believe that collectively these businesses can leverage Medtronic Technology and services to expand, access, integrate care and improve outcomes, collaborating with patients, providers and peers to change the management of diabetes.”

It’s this last unit, diabetes services which is the most interesting as it shows that Medtronic moving more aggressively into the burgeoning world of interconnected diabetes management (IDM). Like so many in this space Medtronic has recognized in order to prosper in the future, a future where outcomes mean everything, they can no longer be just a provider of hardware. That in the future, particularly with insulin using patients, systems are what matters.

More interesting comments came following this question; “For Hooman, I thought the structural comments on the diabetes franchise were interesting. And I’m wondering how much of this is reorganization? How much of this might you need to build or acquire? And then specifically on the service and solutions, data management is interesting, is that Cardiocom? About how deep might you get into supplies and some of the other tertiary products that especially, type II diabetics might use?”

To which Jeff Warren, VP of investor relations responded by stating;

“The genesis of the structure is really for us to become a much more holistic diabetes company, not just a type 1 pump and sensor company but a true global diabetes care organization. And that’s really the impetus behind the organizational changes that Omar talked about in the text.

If you take a look at the three business units that we’ve created, the first one the intensive insulin management, this is really our core business where we’re going after the type 1 patient and the intensive type 2 with product and solutions. The second one, the non-intensive diabetes therapy business is really our step into type 2 in a broad way. And this starts with the Sanofi partnership but I think you’ll see from us that it’s going to extend.

And with Sanofi, I think, we’ve got some really innovative thing on the horizon that we’re both excited about. And then service and solution, this I think, absolutely can leverage Cardiocom. There is asset both within diabetes, with CareLink and across Medtronic with Cardiocom that can be leveraged as we think about patient management and data management. And you’ll see some additional activity from us along these lines later this year.

But I think you can even extend beyond those types of things. So I think it’s going to be a mixture of both organic and inorganic activity as we look to build out particularly non-intensive and also service and solution.”

A few quick comments here as for years Diabetic Investor has been stating that the insulin pump market is not large enough nor is it growing fast enough to support not just the current players in the market but the many who seek to enter this market. Given this dynamic every insulin pump has looked to insulin using Type 2 patients as a large and as of yet untapped market. The question here is whether a company like Medtronic whose core competency is in intensive insulin management can transition into the world of non-intensive insulin management practiced by the majority of insulin using Type 2 patients.

We further question the value of the Sanofi (NYSE:SNY) partnership for several reasons, the most obvious being the ongoing soap opera at the company. Even when the soap opera goes away one has to wonder whether Sanofi whose is in the midst of launching Afrezza and is struggling to deal with the upcoming Lantus patent expiration, can do something they haven’t been able to do in the past, namely execute. The fact of the matter is the non-intensive insulin world is vastly different than the intensive insulin world and we’re just not sure even if Sanofi gets their act together that this partnership will yield solid results.

The good news here is that Medtronic diabetes under new leadership recognized that without making some major changes this unit would continue to flounder. They recognized that if something wasn’t done that goose that lays the golden eggs was on its way to becoming a dead duck. More importantly they opened their eyes and recognized this business is no longer about who has the best or most whiz bang hardware. That in the future it’s systems that matter, systems which ultimately drive better patient outcomes.

Although the company continues to pursue the Holy Grail of intensive insulin management, a closed loop insulin delivery system, it seems under new leadership this system has been somewhat deemphasized. Yes they will continue to pursue this system but based on the changes announced today and the many recent comments made by the company they have realized that before they can move into the future best to get their current house in order. A house which was in desperate need of repair.

Frankly this is not good news for companies like Insulet (NASDAQ:PODD) and Tandem (NASDAQ:TNDM) who were the major beneficiaries of the company’s past missteps. The last thing they need is reenergized Medtronic. It also doesn’t help that Johnson and Johnson (NYSE:JNJ), has for the moment decided to keep Animas, the number two player in the insulin pump market.

One company that shouldn’t be too concerned is Dexcom (NASDAQ:DXCM) who actually should be delighted with today’s results as Medtronic basically confirmed what we’ve been stating, namely the market for continuous glucose monitoring continues to expand very nicely. Yes Medtronic has the advantage of scale in the insulin pump market and as today’s results clearly show they are taking full advantage of their huge installed user base.

Still we see Dexcom having some strategic advantages over their larger rival. Unlike the insulin pump market the CGM market is clearly big enough and growing fast enough to support both Dexcom and Medtronic. Beyond that we’re not so sure but for these two competitors there are more than enough customers to go around. We also believe that Dexcom because they are not a pump company and has had to focus on getting patients following multiple daily injection (MDI) on their system. Diabetic Investor sees this as a huge advantage given the large and growing number of patients following MDI.

Overall today was a very good day for Medtronic as it seems the new leadership teams actually gets it. Like Insulet who is also under new leadership, it’s early in the process but we like what we’ve seen so far. This wacky world of diabetes devices is getting very interesting, very interesting indeed.