Irrational Exuberance

Back in 1996 then Federal Reserve Chairman Alan Greenspan stated; “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

Looking at the performance of various diabetes device companies we can’t help but wonder if Mr. Greenspan’s comments might not apply today. Look at how some of these stocks are doing on a year to date basis;

Abbott +9.89%

Medtronic +13.41%

Insulet +31.54%

Dexcom +134.21%

Tandem +1,348.79% and no this is not a misprint

Except for Abbott all these stocks are outpacing all the major indexes as on a year to date basis the Dow is up 3.61%, the S&P 500 up 5.53% while the NASDAQ is up 11.23%.

Now let’s make one thing very clear we never have been nor; will we ever be a market prognosticator. However, looking at the performance of some of these companies one can’t help but wonder if there just isn’t a little irrational exuberance going on here.

Tandem is the most obvious example here as no one would have anticipated that a company once on the verge of bankruptcy would not just recover but make such a dramatic turnaround. While we are delighted Tandem did not become another Animas this astonishing rise is well beyond astonishing. Yes, the company is now on solid financial footing, has just launched their new Basal IQ system and has a very promising pipeline but still.

As we witnessed yesterday when Medtronic reported results the evil empire is alive and well. As we noted yesterday while this was not a blowout quarter it was a very good quarter. The company while not perfect still has the largest installed base of patients. They continue to own the most valuable piece of real estate; formulary position and they have their own way cool whiz bang systems. While vulnerable that goose continues to lay those golden eggs.

The rise in Dexcom is easier to justify as this company once given up for dead was never in any danger. Yes, the FreeStyle Libre from Abbott has exceeded everyone’s expectations and yes, it’s cheaper than the Dexcom G6 but as we witnessed when Dexcom reported these factors haven’t hurt the company.

The fact is the CGM market is still in its infancy and there is plenty of room for growth. It’s also true that unlike the insulin pump market, the CGM market is large enough and growing fast enough to support not just Dexcom and Abbott but Medtronic too.

Insulet should be given credit for improving margins. They also have a new way cool whiz bang system out with the DASH. However, they are well behind in the race to launch a competitor to the 670G. As we keep noting when it comes to insulin pumps sensor augmented systems are the place to be and right now Insulet doesn’t even have a system with low glucose suspend. And while we don’t see Solo from Roche or CellNovo or Onduo, being a serious threat they all are jumping into the patch pump pool.

A looming threat for all the insulin pump companies is Tyler. (Tyler is our name for a “smart” insulin pen- CGM – app system) No we do not see insulin pump patients converting to a Tyler, but we do see Tyler impacting new pump starts in a major way for one simple reason; price. Payors will embrace Tyler as it’s a much cheaper alternative to insulin pumps and will provide pump like outcomes. Novo Nordisk, Sanofi and Bigfoot are companies which have a Tyler under development and more are coming.

Looking to the future we see the exuberance in the CGM market justified while the exuberance in the insulin pump market more irrational. Besides the arrival of Tyler, which is a plus for CGM companies, more competition is on the way. Besides Roche, CellNovo and Onduo coming in Lilly also has a whiz bang way cool system coming, as does Bigfoot. While we do not have high hopes for any of these systems the dominos are aligning for nasty price war.

Again, we are not market prognosticators, but we have seen this movie before and it does not always have a happy ending. Summer is coming to an end and that nasty month of October is right around the corner. While the economy looks strong as we witnessed yesterday with multiple guilty pleas a strong economy is not the only factor that influences markets. There is no question MedTech is on fire right now but as we have seen before no fire burns forever. This might be time to take the advice of our good friend Loop who used to tell us with regularity; slow your roll my friend.