Medtronic Analyst Day

Medtronic Analyst Day

Yesterday Medtronic (NYSE:MDT) held their annual analyst meeting where they provided an update on all their business units including what lies ahead for their diabetes franchise. Perhaps the biggest news coming out of this event was their much hyped patch pump is facing yet another delay. What was even more fascinating was the company’s explanation as to why the patch pump is delayed, again.

At first it seemed like the delay really didn’t matter as the company stated that the patch pump market was a “niche” market and wasn’t growing as fast as anticipated. A strange remark when you consider that Insulet (NASDAQ:PODD) a much smaller company than Medtronic with far fewer resources is doing quite nicely. The remark is even stranger when you look back at some of Medtronic’s earlier comments when they first began development of their patch pump. Back then the company was truly excited about this market segment believing that it could actually expand the market and bring in new patients who previously would not have considered pump therapy.

The reality of the situation is Medtronic has committed millions to a design that really isn’t all that practical, user-friendly or easy to manufacture. Unlike the OmniPod where the only permanent piece is the Personal Diabetes Manager (PDM) which controls the system, the pod itself is disposable. The Solo system and the Medtronic system also have a PDM but the patch itself consists of two parts, one permanent and one disposable. The two designs, which are very similar and likely will invite an intellectual property lawsuit should the Solo ever see the light of day, were purposed mainly for cost reasons.

Medingo, which is now owned by Roche and Medtronic, understood that OmniPod’s Achilles heel was their cost of goods. They reasoned that should they be able to build a cheaper system they could undercut Insulet and become the leader in the patch pump market. However, what neither Medingo nor Medtronic anticipated is just how difficult it would be to manufacture these units. What once looked great on paper has turned out to be a nightmare to manufacture at the scale required.

Medtronic and Medingo also committed to designs that looked great to engineers but seemed to forget there are patients who will be using these systems who don’t have advanced engineering degrees. The real attraction of the OmniPod is the simplicity of the system. The patient simply fills the pod with insulin, places the pod somewhere on their body then hits a button on their PDM and the system is up and running. Both the Solo and Medtronic system requires a fair amount of patient constructing which ultimately increases the likelihood for user error. Apparently neither Medingo nor Medtronic got the memo that said insulin pump patients want simpler not more complex systems.

Rather than acknowledge they have committed to a poor design and go back to the drawing board Medtronic is trying to downplay the importance of being in the patch pump space. They seem to believe that analysts will buy into the belief that it’s really no big deal that this once much hyped product is years behind schedule as the market really isn’t that big anyway. Of course this begs the question; if the market really isn’t that big why are they spending millions to be in it?  Why do they continue to invest even more money when according to their own words the market isn’t all that special? Would it not stand to reason based on their comments they are throwing good money after a bad market?

The reality of the situation is Medtronic is caught between a rock and a hard place. As it stands today the company holds a dominate market position in the insulin pump market. While Insulet and Animas, a unit of Johnson and Johnson (NYSE:JNJ), have been chipping away at Medtronic’s market share, the fact is Medtronic still controls nearly 70% of the insulin pump market. However looking into the future the company probably sees something Diabetic Investor has been stating for years; the insulin pump market is not large enough nor is it growing fast enough to support all the current players let alone the many new companies getting set to enter the market. If they are living in the real world, Medtronic management must acknowledge that it is a far greater possibility they will lose share over the next five years rather than gain share in the insulin pump market.

Management also understands that as long as they can hold onto the majority of their installed user base the unit will continue to generate a considerable revenue stream from the sale of pump supplies. In reality this should be the core strategy for Medtronic as should they begin to see a mass exodus from their current user base the unit would be in serious trouble. Frankly they can talk all that want about how well their continuous glucose monitoring unit is doing and their never ending quest to develop a true closed loop insulin delivery but the fact is Medtronic’s main goal is preventing Animas and Insulet from doing further damage to their market share.

Along this same line the company must remain vigilant of possibility they soon could have more competition from others in the diabetes space. Sanofi-Aventis (NYSE:SNY) is one company who has publicly stated that they are seeking to introduce more insulin delivery options. Sanofi is one of the few companies currently not in the insulin pump market who has the resources to effectively compete with Medtronic. Whether they enter the space via acquisition, which seems the most likely route, or develop their own pump, Sanofi’s entry could dramatically alter the insulin pump landscape and set off series of events that would place Medtronic at greater risk.

As Diabetic Investor has noted previously such a move by Sanofi could be the catalyst which prompts JNJ to acquire either Insulet or Dexcom (NASDAQ:DXCM) or both. While their Animas unit has firmly established themselves as the number two player in the insulin pump market, acquiring Insulet would allow the company to offer a range of pump options and gain a leg up on Medtronic. Add in Dexcom and JNJ would also have the most complete line of integrated insulin pumps both wired and wireless. Using their considerable marketing clout JNJ would be positioned to give Medtronic a serious run for their money.

The bottom line for Medtronic is moving forward their best offense will be a solid defense. Holding onto their installed user base is critical. Should current Medtronic customers begin leaving the company in greater numbers it will mark the beginning of the end.