How to blow a billion bucks

How to blow a billion bucks

It seems the folks at Roche are hell bent on completely destroying their insulin pump franchise. Diabetic Investor has learned the company has begun terminating contracts with their distributors outside the US market. It seems the company is attempting a strategy similar to what Medtronic (NYSE:MDT) pursued after acquiring MiniMed. While the upfront cost of an insulin pumps can run as high $7,000 or $8,000 in the first year, like the glucose monitoring business insulin pumps have the continuing revenue stream from the sale of pump supplies. The average insulin pump patient spends an additional $2,000 or so annual for infusion sets, reservoirs, etc. And like glucose test strips these supplies carry a nice little profit margin.

The difference between what Medtronic did and what Roche is doing comes down to timing. Prior to Medtronic terminating their distributor agreements the company first concentrated on getting their huge patient base to purchase their supplies directly from the company. Effectively Medtronic waited to terminate their agreements until they knew their strategy was working. Today nearly 80% of Medtronic insulin pump patients order their pump supplies directly from the company increasing the company’s margin.

In typical Roche fashion they have chosen a strategy that is untested and ill-timed. As Diabetic Investor has been reporting this franchise has been nothing but a disaster since Roche acquired Disetronic back in 2003 for $1.2 billion. Shortly after the acquisition the company was hit with an import ban from the FDA which lasted until October 2006. This import ban effectively killed any chance the company had to compete in the US. When the ban was finally lifted the company instead of launching a new innovative pump came out with the Accu-Chek Spirit which by nearly measure was technologically inferior to the competition.

Today the company is seriously considering abandoning the US insulin pump market so they can concentrate on protecting their international presence. Diabetic Investor believes the decision to exit the US market has already been made as the company has begun handing out pink slips here in the US. They had hoped to stay competitive in the US with the launch of the Accu-Chek Spirit Combo, a product which combined the Spirit pump with their new Nano glucose monitor. Yet the combo will never see the light of day as the Nano is dead in the water at the FDA as the Nano test strip still uses the PQQ enzyme. Even if the company changed the enzyme by the time this was completed it wouldn’t save a product that was pretty much doomed to fail from the beginning.

This makes their recent decision to terminate these agreements strange. Unlike the US market where they have practically no presence, overseas the Roche name still means something in the insulin pump world. Rather than proceed methodically to see if patients will actually buy their pump supplies directly from the company, the company is proceeding down a path that will likely end up backfiring. Like the US market patients typically replace their pumps when the warranty expires, most warranties last four years. Knowing what the company is doing what incentives do distributors have to continue to push Roche products.

Distributors understand that Roche is not the only insulin pump available and can easily sign deals with Roche’s competitors as Ypsomed did with Insulet (NASDAQ:PODD). As Diabetic Investor has reported Medtronic and Animas are increasing their international efforts. Based on recent reports these efforts are beginning to eat away at Roche’s presence. Additionally it’s no secret there are several companies getting set to enter the insulin pump market who will be delighted to sign with distributors dumped by Roche.

Given the way Roche has run this unit since it was acquired it almost seems as if they want to throw a billion dollars into the toilet. The company’s attitude of if we didn’t build it, it isn’t any good speaks to an arrogance that befits Roche. Looked at realistically there is no way the company should have let Ypsomed sign up Insulet. Instead of being the sole distributor of the OmniPod, a product that Diabetic Investor believes will be well accepted overseas, they have turned a former friend into a fierce competitor.

In the end it is truly sad to see Roche run Disetronic into the ground. Back in the day Disetronic systems were actually superior to what MiniMed offered. The main problem back then was marketing, simply put MiniMed outgunned Disetronic. Many believed that once acquired by Roche the company had the resources necessary to make the insulin pump market a two horse race. Instead it’s been one mistake after another.

The FDA import as bad as it was did not have to be a death sentence for the company. The company could have used the ban to revamp their insulin pump line. Instead they chose to proceed with the Spirit which by the time the ban was lifted was already inferior to the competition. It should come as no surprise the Spirit was developed internally.

Diabetic Investor has no sympathy for Roche as their problems can be directly linked to several poor decisions made by their very own management team. The decision to terminate agreements with their distributors is just another example of their corporate hubris. Guess at Roche they really don’t care that their own stupidity is going to cost them to lose over a billion dollars. If Diabetic Investor hadn’t seem this situation develop with our own eyes we wouldn’t have believed it. You just can’t make this stuff up.