Killing the goose that lays the golden egg
As hard it is to believe Medtronic (NYSE:MDT) appears intent on killing the goose that lays the golden eggs. In this case the goose that lays these golden eggs is their insulin pump business which as everyone knows is the dominate player in the space with nearly 70% market share. Rather than manage this unit to maintain their huge share advantage over Animas, a unit of Johnson and Johnson (NYSE:JNJ) and Insulet (NASDAQ:PODD), the company know wants to expand the market by convincing patients with Type 2 diabetes to convert to insulin pump therapy; a confusing strategy given the dynamics of the insulin pump market.
As we have been stating for years the market for insulin pumps is not large enough nor growing fast enough to support not just the existing players but the many newcomers who are entering the market. The simple truth is companies like Animas, Insulet, Tandem, Asante and CellNovo don’t stand much of a chance unless Medtronic, who will soon be going back to the MiniMed name, screws up their existing business. While it would be nice if the company could expand the market and add patients who are new to insulin pump therapy, the fact is with 70% market share this is a very profitable business just by keeping their existing customers happy.
By most estimates there are approximately 400,000 insulin pump patients in North America which would put MiniMed’s installed user base at 280,000 patients. Add in the rest of world, where insulin pump therapy is not as prevalent, and this installed user base increases to about 350,000 patients. With each patient buying $2,500 per year in pump supplies that translates into annualized revenues of just under one billion, $875 million to be exact. With 70% of their installed base on automatic reorder, a system which automatically ships pump supplies to the patient, over $600 million is basically an annuity the company can count on year in and year out. That is, of course, assuming these patients remain loyal MiniMed customers.
According to company’s most recent annual report, the diabetes unit generated over $1.3 billion in sales. This basically means that nearly 70% of the unit’s revenues are virtually guaranteed each year. Not only are these revenues as close to a sure thing as there is in diabetes, pump supplies are a highly profitable business generating 70% to 80% margins.
Now at this point some could say that with such wonderful margins it makes perfect sense for the company to attempt to expand the market. That is, however until one looks at the dynamics of the insulin pump market. Keep in mind that insulin pumps have been around for over 20 years and that with all the advances in technology less than 35% of TYPE 1 patients use an insulin pump. The fact is for every study that shows insulin pump therapy producing better outcomes than multiple daily injection (MDI) therapy, there is one that shows the opposite to be true. The fact is with the newer insulin analogues, both long and short-acting, pumps no longer hold a major therapeutic advantage over MDI. Truth is in today’s market insulin pump therapy is more a lifestyle choice rather than a therapeutic imperative.
Frankly there is a reason that after more than 20 years and with all the technology advancements that insulin pump therapy is not more popular. There is no question that insulin pump therapy with a properly trained patient is extremely effective. However, as noted above patients can achieve similar outcomes following MDI therapy. The fact is IF insulin pump therapy was more effective than MDI, as MiniMed claims it is, there must be other reason why more TYPE 1 patients aren’t on a pump, after all these patients must use insulin. Does it not make sense that the patient’s physician would recommend insulin pump therapy if it was truly more effective than MDI. Given that less than 35% of TYPE 1 patients use an insulin pump there must be other factors influencing which therapy option a TYPE 1 patient follows.
The fact is there are several very good reasons why insulin pump therapy, effective as it is, is not more popular with TYPE 1 patients and insulin using Type 2’s. Given that it cost over $10,000 to start a patient on an insulin pump, the cost of pumping cannot be ignored. Even when insurance is factored in the patient new to pump therapy will likely spend $2,000 out of their own pocket to get on a pump. Then spend another $500 per year on pump supplies, more if they also use a continuous glucose monitor (CGM). Keep in mind this does not include the cost of insulin or glucose test strips, which for a pump patient can add up quickly as insulin pump patients on average test their glucose eight times each day.
Now compare that to what it costs for a patient to follow MDI therapy, where the only supplies they need are syringes or even better insulin pens, which are usually, provide to the patient for free. (Insulin pens are very much like glucose monitors as like meters they follow the razor/razor blade business model.)
Another factor limiting insulin pump usage has always been what Diabetic Investor likes to the calibration phase or put more simply learning how to properly use an insulin pump. While all patients on insulin therapy must learn about carb counting, duration of action, insulin on board and insulin to carb factor; insulin pump therapy is even more complex as the insulin is being delivered, pumped in, to the patient on a continuous basis and not just injected as needed. While calibrating a pump has become much easier with the advent of CGM, it is still not an easy task. Although it varies from patient to patient must pump trainer’s estimate it takes at minimum of 30 days for a patient new to pump therapy to gain a basic understanding of insulin pump therapy. Properly managing diabetes has always been a 24x7x365 job but for patients following insulin pump therapy it can be a much more demanding job and the simple fact is a majority just don’t want to deal with this extra work.
And it’s not the just the patient who must deal with extra work , the fact is insulin pump therapy is also a hassle for the physician, or put more accurately the physicians staff. As noted in the paragraph above an insulin pump patient requires a high degree of patient education which takes time, time which is not readily reimbursed by the patients insurance. While insulin pump companies provide much of the initial training, they do not cover the ongoing costs which can be significant as ask any physician who has patients using a pump as they require the most frequent interventions. But the extra time spent with an insulin pump patient is just half the hassle, as there is also a great deal of extra work dealing with the patient’s insurance company.
While reimbursement has dramatically improved over the years it is not unusual for insurers to require lots of additional paperwork or tests so they will cover the cost of insulin pump therapy. Here too pump companies are trying to help but this extra work largely falls on the patient and the staff at their physician’s office.
Lastly it should be noted that there are many patients who don’t want to be hooked to a machine, no matter how advanced it’s supposed to be. The fact is an insulin pump is a medical device and devices fail. While this one thing for a glucose monitor or CGM, it’s quite another for an insulin pump which is delivering insulin, an essential but also lethal drug when not used correctly. According to the FDA’s MAUDE database there have been 41 deaths from 1/1/12 to 6/29/12, last year there were 85 deaths associated with insulin pump usage. Now not every death can be directly linked to a malfunction, the fact is pump do malfunction.
Looking at the facts and true market dynamics it becomes easier to understand why insulin pump therapy is not more popular. These same set of facts and dynamics also causes one to question why MiniMed seems to be going out of their way to kill the goose that lays these very profitable golden eggs. Why they believe it’s a proper allocation of resources to chase a market which has never embraced insulin pump therapy and is unlikely ever to do so. Why are they not spending more of their resources updating their aging platform or protecting their vulnerable installed user base.
The fact is this new push to get more Type 2 patients on pump therapy says more about the company than meets the eye. For years it has been well known that when it comes to capturing patients new to pump therapy, patients who have never used a pump, that MiniMed was losing the battle to Animas and Insulet. Over the past few years MiniMed is also beginning to see a more troublesome sign as existing customers eligible for a new system are switching to Animas and Insulet as well. (Insurers typically pay for a new system when the existing is out of warranty which for most systems is four years.) The only reason MiniMed’s revenues have not slowed and actually grown is not from pumps but from sales of their CGM units. Here too the company is running into problems as by almost every objective standard their system is substandard when compared to their major competitor Dexcom (NASDAQ:DXCM).
It is not an overstatement to say that without pushing their own CGM system to their huge installed user base, MiniMed really wouldn’t be much of a player in the CGM market. And soon Animas and Insulet will both integrate the Dexcom CGM into their respective pumps. Currently MiniMed is the only company that offers a fully integrated insulin pump/CGM.
The fact is MiniMed is taking their eye of the ball and have begun to believe their own hype. They seem to believe what Diabetic Investor has long believed that until someone, anyone can come along and take away a significant portion of their installed user base they have nothing much to worry about. This is the reason the company still has not introduced a replacement for their aging and out of date Paradigm line of pumps. It is also the reason their much hyped and very much delayed patch pump is unlikely ever to see the light of day.
Yet, there is one caveat to our belief that the company will not change all that much until they start to see serious erosion in their huge installed user base and that is this does not take into account corporate hubris, which Medtronic has in abundance. Tandem and CellNovo, two pump newcomers both have better, more advanced and more patient friendly systems than what MiniMed offers. In the hands of a larger, well-resourced player they could pose a threat to MiniMed. And let’s not forget about Animas and Insulet, two companies who really should be one, but both with established user bases from which they can build.
The fact is MiniMed could virtually insulate themselves from serious competition by refocusing their efforts and getting back to their roots. Back to the company whose number one rule was putting the patient first and whose number two rule was to reread rule number one. Back to the company that actually helped the patient and their physician deal with the complexities of insulin pump therapy. The fact is Medtronic has never understood the insulin pump business and most likely never will. Now that they have tarnished their own brand they have decided to go back to the MiniMed brand name. But if this is all they do then it really won’t mean all that much as the unit not only needs to get back to the MiniMed brand name but get back to what made this brand great in the first place; putting the patient first.