This isn’t going to be easy

Now that it appears Tandem (NASDAQ: TNDM) will live on to fight another day our attention turns to the future. The real question is can the company find a way to compete and win. Can they find that path to becoming a commercially viable insulin pump company? Now before we go any further it’s important to understand the hurdles facing every insulin pump company not named Medtronic (NYSE: MDT).

1. The insulin pump 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 the market.

2. The reimbursement environment is NOT going to get better and could get worse.

3. The introduction of Tyler – “smart” insulin pen/CGM/App – is a very serious threat to the market a threat that is vastly underestimated.

4. A true closed loop insulin delivery system will become a reality however this technological marvel will NOT expand the market.

5. The only way any of these companies not named Medtronic can win is take share away from Medtronic and yes, it is that simple.

To fully appreciate just how difficult this is going to be let’s fast forward to 2020 for the distinct possibility exists that we could have 5 closed loop or semi-closed systems on the market. Besides systems from Medtronic, Tandem and Insulet (NASDAQ: PODD) by 2020 Lilly (NYSE: LLY) and Bigfoot will be here.

Think about this just for a moment as leading up to 2020 Medtronic will be even bigger than it is today thanks mainly to Animas shutting down. Even if Tandem and Insulet grab a greater percentage of Animas patients than we originally anticipated the fact remains Medtronic will grab the lion’s share of these patients. Simply put Medtronic will effectively control over 80% of the insulin pump market forcing everyone else to compete for the remaining 20%. Given that the insulin pump market is growing in the low single digits these companies cannot win simply by getting patients new to insulin pump therapy. To win they must take share away from Medtronic.

Medtronic is many things but stupid they ain’t. They will do whatever it takes to protect their huge installed user base as this base has become a very profitable annuity. Based on their past actions they won’t be shy about taking full advantage of their scale.

This set of circumstances will force the competition to make some very difficult choices. Do they play the price game and risk losing money to take share away? Do they play the value based contracting game which is really a price play just in a different form? Do they changed the pricing model completely moving more towards a lease versus buy model? Or do they choose the nuclear option?

Before we explain the nuclear option it’s important to keep in mind what all these systems will have in common; connectivity. Yep each one of these suckers will share information with the cloud. Information which can then be shared with payors. Soon payors will know how many of these patients are staying in range, they will see which are achieving optimal control. This data will empower payors and insulin pump companies making the nuclear option a very real possibility.

This data will allow an aggressive well capitalized insulin pump company to go 100% at risk, to go nuclear. Rather than being paid for all the parts of the toy, the pump, the CGM and pump supplies an aggressive company could go 100% at risk and only get paid by achieving predetermined metrics. Basically, instead of getting paid upfront they get paid on the back end AFTER they have produced results.

Think about this from the perspective of the payor. Rather than dishing out thousands of dollars for each pump patient they only pay when results are achieved. Rather than worrying about managing these patients the burden falls solely on the system. Think about what this would do to Medtronic if someone does go nuclear. Remember as it stands today each pump patients spends around $3,000 per year for pump supplies, throw in the cost of sensors and that number gets even higher.

It goes without saying that to go nuclear financial resources are critical. Any company which proceeds down this path must be able to afford it. In effect the company is going to be giving away the pump, sensors and supplies for free hoping to recoup these costs and more after producing results. Looking at the respective balance sheets of the players Lilly could do it and perhaps Bigfoot if their partner Abbott (NYSE: ABT) helps.

Yet here is where things get more problematic as Medtronic also can afford it. Let’s say someone does go to a payor and offers the nuclear option or a variation of it, Medtronic has resources to match or beat any deal offered. Heck if Medtronic really wanted to they could do a preemptive strike and force everyone else to strike back. Listen for all the crap the company got for their deal with UnitedHealthCare Animas and Tandem were given the option to match Medtronic’s offer they just choose not to do so.

Like we said this isn’t going to be easy by any means and we haven’t mentioned that once Tyler gets here that creates another problem as Tyler can produce equally good outcomes at a much cheaper price point. And let’s not forget this is not about results this is all about money. Heck there is nothing to prevent a Tyler company from using the nuclear option.

Want to make things even more complex think of what would happen if one of our friends in the Valley, friends that have boatloads of cash on hand goes nuclear. Think about Google, Apple or Amazon using the nuclear option. See these companies view this as battle over platforms and they can afford to take loses to expand their respective platforms. They can afford to take loses while they build their installed base. They understand that ultimately this isn’t about way cool whiz bang this all about who has the most patients on their platform.

The fact is healthcare is undergoing a seismic shift and not just because companies like Google, Apple and Amazon have entered the market. The reality is going 100% at risk is no longer a pipedream. Thanks to technology we now have access to data which tells whether the patient is achieving control, we know when and how often they are in range. It is now possible thanks to this technology to prove that the technology works. It also opens the door or perhaps a Pandora’s Box to whole new way of getting paid.

We have long contended that outcomes-based reimbursement would become a reality. That outcomes-based reimbursement would forever change the diabetes management paradigm. It will also change forever how and when healthcare is paid for.

Like we said this isn’t going to be easy.