Have the wheels come off the wagon?
It’s no secret that Medtronic has more than a few issues with their diabetes unit. The company is in the midst of a recall that has the potential to impact over 300,000 units. They no longer have the coolest toy in the toy chest with the Control IQ now owning that title. And like everyone else is dealing with the coronavirus which for Medtronic could be a good thing as they are making ventilators which has a much better business model.
Word now comes that in the midst of this “goodness” the company is making deeper cuts in their diabetes unit, cuts that have ascended into the executive suite. While we can’t say we are surprised by this news it does reinforce just how dramatically things have changed for the unit. Even without the coronavirus the unit was facing several obstacles as noted above. About the only good news for the unit is that thanks to the coronavirus and social distancing existing patients aren’t switching to competing systems such as the Control IQ.
Although our annual April Fool’s post was meant to be funny, given how things are going it would shock no one if this post goes from being fiction to fact. Omar Ishrak the former CEO is now gone from the company. Mr. Salmon who is now running the unit isn’t thought to be long for the job. Sources note his primary job is to decide the long-term fate of the unit. Do they keep it or sell it?
The fact is the unit has so many issues it’s difficult to know where to begin the rebuild. It’s well known that the CGM sensor is a major source of problems for the company and quite frankly there is no quick fix for this issue. The company continues to insist they are working on new and improved sensor but so far, we have seen nothing concrete just talk. Even if they can fix the accuracy and reliability issues, they must also eliminate calibrations something they want to do but are being very slow to do. The big problem is should all this happen the new sensor would not be better than the G6 from Dexcom or Libre from Abbott, it would merely be on par with them.
Next comes what happens when social distancing ends and patients once again begin visiting their physician. Will 670G remain loyal or will they begin switching to the Control IQ or OmniPod. Before social distancing signs were pointing to 670G patients switching to Control IQ. The real question is will this trend restart with the end of social distancing. Given the rave reviews the Control IQ continues to get on social media we think it’s a good bet more and more Medtronic patients will make the switch.
Now comes the really hard part with what is now subpar technology how do they compete for new patient starts, patients who are new to insulin pump therapy. The fact is they really can’t compete. The Control IQ is now the standard while the OmniPod is now the most affordable option. Looked at realistically Medtronic is now the third option. Take away their formulary advantage, something OmniPod can do with their pay as you pricing model and Medtronic really doesn’t have a leg to stand on.
Mr. Salmon could decide to join the open loop movement and allow the G6 or Libre to communicate with the 670G, but this would be tantamount to admitting their sensor is worthless. He could commit complete heresy and abandon their sensor entirely or at minimum abandon trying to compete in the stand-alone market. Or he could just say enough is enough and find a buyer.
We all know that when this crisis passes, and we begin to recover there will be a new normal. No one really knows what this normal will be but eventually patients will get back to seeing their physicians and start deciding what to do with their insulin delivery system. Those whose system is out of warranty will likely switch shrinking the Medtronic installed base further. These converts will not be replaced by new patients are these patients are choosing either Tandem or OmniPod. This leaves existing patients still in warranty, a large group but not what it once was.
Mr. Salmon has already taken the easy steps shrinking the unit, cutting costs while reining in future capital commitments. These are just short-term fixes designed to maximize margins while the company makes the bigger decision which really comes down to two options. Go big or go home, there is no third option.
While we know that Mr. Salmon isn’t really interested our opinion, we’ll give it anyway. Get out while you can before it’s too late. The unit still has value and will likely fetch a nice multiple. Take the money, whatever you can get for it and enjoy some well-deserved downtime.