Is Medtronic playing offense of defense?

Is Medtronic playing offense of defense?

The conventional glucose monitoring market isn’t the only market undergoing major changes, as the insulin pump market is also undergoing its own transformation. While Medtronic (NYSE:MDT) continues to dominate the market in terms of total market share, for some time the company has been seeing their growth in new pump patients slow. Now before we go any further let’s clarify how Diabetic Investor looks at the insulin pump market; while total revenue is obviously important it’s equally important to examine new pump starts, that is patients who are new to insulin pump therapy, and upgrades; patients already on a pump that upgrade to a new system.

We make this distinction as adding patients new to pump therapy is real growth while upgrades merely keep existing patients buying their pump supplies from their existing provider.  With annual pump supply costs running at approximately $2,500 the upgrade factor cannot be minimized. However, the insulin pump market is not unlike a football game where new pump starts is like scoring points while upgrades are like playing defense the goal being not allowing the opposing team to score. In Medtronic’s case playing defense is critical as the bulk of their revenue does not come from new patient starts rather the huge installed user base which continues to order pump supplies.

This is not to say that the company does not want to increase this base, rather they understand that as long as they can prevent the competition from converting their existing base to a different platform the unit will continue to generate a very predictable and profitable revenue stream. The company also knows that the market is not growing fast enough, nor is it large enough to support all the existing players let alone the many who want to enter this market. As we have noted on many occasions the revenue from pump supplies sales is the gift that keeps on giving.

This is one reason Animas, a unit of Johnson and Johnson (NYSE:JNJ), has had such a hard time as they are competing head on with Medtronic. The simple fact is if a patient wants a conventional wired pump there are basically two choices Medtronic or Animas. Even though many would claim the Animas system is superior technology market share numbers don’t lie and the company while in second place in terms of market share isn’t even close to Medtronic’s massive share. As hard as Animas tries to score points the just cannot penetrate Medtronic’s steel curtain defense. This situation recently  lead Animas to dramatically downsize their sales and support staff, as the company which has never turned a profit for JNJ, has for the moment surrendered.

The story at Insulet (NASDAQ:PODD) is quite different and not because they are the only choice when a patient wants a tubeless pump. The revenue model is also quite different with the pod being a disposable item there is no annual sale of highly profitable pump supplies. Insulet’s revenue growth and profitability is directly tied to not just to keeping their existing patients on the OmniPod but consistently adding new patients to the system. This is why the Eros pod is so important to the company as it can help transform the company from being overly reliant on new patient adds to achieve sustained profitability. According to the company the new pod has lower COGS which combined with some additional share growth will lead to greater revenue predictability and ultimately sustained profitability. This is the goose that lays the golden egg for the company as without sustained profitability there is no way the company will be acquired which has always been their goal.

This is why Diabetic Investor will be watching with great interest how Medtronic’s new 530G system performs in the market. While the pump is being touted as the first semi-closed loop insulin delivery system and the first step towards a fully closed system Diabetic Investor sees this as overblown. Yes the pump is supposed to suspend insulin delivery if the continuous glucose sensor detects a hypoglycemic event but other than that “new” feature the 530G is just another wired insulin pump; a feature that doesn’t come cheaply as the entire system, pump plus CGM costs nearly $10,000 and sensor run at nearly $500 per box. Now keep in mind that annual pump supply costs other than additional sensors will continue to run at $2,500 per year.

Given that Animas is pulling back in the market and Insulet has been showing some very nice share growth, Diabetic Investor sees the 530G more as Medtronic playing more defense than offense. Should the company be able to upgrade even a small portion of their already huge installed base to the 530G it will help increase revenues. It will also place Dexcom (NASDAQ:DXCM) in the difficult situation of continuing to grow as the Dexcom system while superior to the Medtronic system, has not yet been approved to work with the Animas pump.  So far Dexcom, like Insulet, has seen some nice share growth however Medtronic has been successful at slowing Dexcom’s growth by playing defense aggressively pushing their integrated pump CGM system at every opportunity.

The fact is Medtronic has the luxury of using their huge market share and brand name recognition to their advantage. They know that now armed with the 530G their sales force who has been complaining long and loud for something new has just that. These sales reps are paid more for new pump starts and have been watching Insulet along with newcomer Tandem eat their lunch in this market segment.  While the 530G may not be impressive to Diabetic Investor we do suspect it will generate a great deal of interest as the company will tout the low-glucose suspend feature with the zeal of a blitzing linebacker.  Considering that the Animas/Dexcom system is not yet approved and Insulet’s combo system is years away. This gives Medtronic another benefit as they will have the only “semi-closed” system available in the United States.

Looked at realistically while the insulin pump market has undergone changes some things remain the same; namely Medtronic continues to own this market and so far no one has been able to take away enough of their installed users to cause them concern. Annual pump supply revenues continue to come in with great predictability and more importantly with nice profitability.  The company can be very comfortable playing defense as they know if the competition cannot score they cannot win and for the competition scoring in the insulin pump  isn’t just about adding patients new to pump therapy in order to win the game they must take share away from the market leader.  As has been said so often sometimes the best offense is a solid defense.