Is anyone up to the task ahead?

Is anyone up to the task ahead?

This morning Novo Nordisk (NYSE:NVO) and Roche Diabetes Care announced they were launching a pre-filled insulin cartridge for the Accu-Check Insight insulin pump. According to a Novo press release; “Today, Novo Nordisk launches NovoRapid® PumpCart®, the first prefilled pump cartridge with an insulin analogue that has been specifically designed for insulin pumps. This new treatment solution, which contains NovoRapid® (insulin aspart) – a rapid-acting insulin from Novo Nordisk – is expected to make insulin pump therapy more convenient for people with diabetes and their care staff. The 1.6 ml cartridge is developed in a non-exclusive partnership between Roche Diabetes Care and Novo Nordisk and is compatible with the new Accu-Chek® Insight insulin pump therapy system from Roche Diabetes Care.”

Now this really isn’t earth shattering news but it did get Diabetic Investor thinking about the future of Roche Diabetes Care and the insulin pump market in general. As we have been reporting for some time it seems that since Roche cannot sell the diabetes unit they have decided to spin the unit off as a separate privately held company.  We anticipate this move will be made official sometime this quarter. While we see this as a good move for Roche we’re not quite sure it will do much for the unit.  The BGM area of diabetes continues to lose share while the insulin pump area has virtually no market presence in the largest market for insulin pumps, the US market.

Given that we have well documented the decline of the BGM market no need to rehash old news. The simple fact is the day is quickly approaching were the Big One – Johnson and Johnson (NYSE:JNJ) and the three blind mice Roche, Abbott (NYSE:ABT) and Bayer, yes Bayer is still in the BGM business, will become the Big One, a blind mouse and a bunch of no name products. The BGM market is the poster child for what happens when a market fully transforms itself into a commodity style market where price trumps performance. This market will never recover and there is nothing the Big One and three blind mice can do about it.

The insulin pump market while not yet a full blown commodity market is headed in that direction. When it comes to conventional wired pumps the market continues to be dominated by Medtronic (NYSE:MDT), followed by Animas, a unit of JNJ, and newcomer Tandem (NASDAQ:TNDM). Insulet (NASDAQ:PODD) amazingly continues to be the only wireless system commercially available, this is either a testament to Insulet,  the failures at Medtronic  or more likely a combination of the two.

Even more amazing here almost everyone acknowledges that the market leader Medtronic has the inferior technology to the competition.  Systems from Animas and Tandem are more patient friendly and easier for patients to learn. It’s also well known that when it comes to patients new to pump therapy Medtronic is no longer the preferred option.  From the beginning Diabetic Investor has noted that as long as Medtronic can hold onto the vast majority of their huge installed user base everything would be ok. Given the recent  and ongoing changes to the Medtronic Diabetes management team it’s pretty obvious that the goose that lay golden eggs, installed users, are taking a hit and the company for the first time in recent memory is worried.

The real question should be what exactly is Medtronic worried about? The fact is only JNJ has the capital necessary to make a run at Medtronic and right now they can’t seem to decide what to do with Animas. First the company decided to divest Animas, only then to change their minds and now has decided to try and run this yet to make a profit unit. Diabetic Investor has learned that the company is considering several options with Animas; however none of these options would be a threat to Medtronic and are more in line with right-sizing the business so it has a chance at turning a profit.

Like it or not neither Tandem nor Insulet have the scale and resources necessary to dethrone Medtronic. Yes they will continue to chip away at Medtronic’s installed base but the truth is they cannot steal enough share without doing something drastic and let’s be honest here for  as innovative as these companies have been they are handcuffed by their limited resources.

In reality the insulin pump market is actually quite simple assuming the goal is to dethrone Medtronic, go big and bring plenty of ammunition. As we have noted for some time the insulin pump market is not large enough nor is it growing fast enough to support all the existing players in the market let alone those who want to enter the market. That all pumps do basically the same thing the same way and about the only major difference between systems is whether a patient wants to be wired or wireless. Yes Animas and Tandem have superior user interfaces than Medtronic but this is something Medtronic could easily rectify if they wanted too. Lastly it won’t be long before all pumps communicate with a continuous glucose monitor which will further push pumps closer to becoming a commodity.

The way Diabetic Investor sees it there are weapons available to fight Medtronic, IF and this is a big IF, someone has the stomach for a fight.  One such option would be to buy share and about the only company who could do this is JNJ and right now we doubt this is the direction they want to move towards. Another option would be to dramatically alter how pumps are sold. For long as we can remember Diabetic Investor has felt that pumps should follow the lease vs. buy pricing structure or at least something like this. Insulet has come close to this model as they have lowered the upfront cost of pump therapy. However the long term cumulative cost of the OmniPod reaches price parity with a conventional pump in about 3 1/2 years.

One thing that shouldn’t be done is to fall into the age old trap of believing that new whiz bang technology will save the day. In this respect the insulin pump market is not unlike the BGM market, while advancements in technology are important they do not influence market share. Anyone who doesn’t believe this we suggest they place all the pumps side by side, match them feature for feature and then take into account who has the better user interface. As we noted earlier Medtronic does not have the best technology nor do they have the most patient friendly user interface yet they still dominate the market where it counts; number of installed users.

The bottom line is nothing much will change in the insulin pump market until someone breaks from the mold and does something radically different. The fact is Medtronic who’s been pretty good lately at trying to kill the goose that lays the golden eggs will eventually get their act together or will sell the unit to someone who will.  Right now just based on scale and resources JNJ is about the only competitor who has what’s needed to take on Medtronic, which of course assumes they want to.  The way we see it JNJ has the how to but they don’t have the want to as they are still struggling with just what to do with Animas.

For their part Insulet and Tandem must be content until someone comes along and buys them.  Yes they will continue to make inroads and gain share but they lack the scale and resources necessary to make this a fair fight.

Which bring us to final parallel between the BGM market and the insulin pump market. Way back in the day the BGM market consisted of what we used to call the Big Four. Before competitive put the final nail in the coffin these companies were fat and happy enjoying margins which can only be termed obscene. Money was falling from the sky and these units were major cash cows. Today the big four are now the Big One and three blind mice, the good times are over and will not return.

The insulin pump market is on that same trajectory, competitive bidding looms on the horizon and market growth is in the low single digits. Just like BGM the glory days of insulin pumps are gone and unlikely ever to return. Yes there will be advancements towards a true closed loop insulin delivery system but even when that gets here it won’t change things much at least not from a business perspective. The simple fact is if anything is going to change here it will have to come not from the market leader but from the competition. Medtronic has the luxury of being in the catbirds seat.

The real question is does the competition have the stomach for a fight?