Medtronic Patch Pump – Dead or Alive?
The insulin pump world was abuzz yesterday as reports were circulating that Medtronic (NYSE:MDT) had terminated their much hyped and much delayed patch pump program. Rumors were spreading that the company had given up their quest and would be buying Insulet (NASDAQ:PODD) to fulfill their need for a wireless system.
All this started as some noted device analysts reported that during the Medtronic investor presentation this past Monday, Katie Szyman Medtronic’s Senior Vice President and President, Diabetes stated that the program was dead. These comments were in sharp contrast to what Ms. Szyman told Diabetic Investor that very same day. During her interview with Diabetic Investor Ms. Szyman mentioned that Medtronic was spending almost 40% of their R&D budget on the patch pump although they would no longer be providing any status updates as to when this system may come to market.
In attempt to clear the air Diabetic Investor reached out to Medtronic who empathically stated that the patch pump program is not dead and the analysts missed the Q&A session of the investor presentation and one had already issued a clarification of a report they issued. Rather than speculate on who said what and when they said it, let’s take a look at what we know to be true.
First, while it’s possible Medtronic would buy Insulet, Diabetic Investor sees this as highly unlikely for several reasons. Not the least of which being that Insulet just spent $63 million to buy Neighborhood Diabetes in an effort to improve sales and streamline back office operations. A move that would have never been made if the company knew it was about to be acquired. Insulet may one day be acquired but today is not that day.
Next, this program has been in trouble from day one and has undergone several changes. Many, including Diabetic Investor, have felt that the company was never really serious about developing a patch pump and saw their efforts more as move to stifle Insulet than actually get into the patch pump market. The simple fact is Medtronic has no compelling reason to be in the patch pump business, why would the company cannibalize their hugely profitable existing pump business and move to a pay as you go business model.
As Diabetic Investor has noted previously Medtronic with their huge installed user base and commanding market presence can basically sit back and wait for their many competitors to figure out a profitable method for taking away existing Medtronic customers. While they sit and wait for this to happen, the company continues to make a fortune from the sale of pump supplies and upgrades. With nearly 75% of their installed user base having their supply orders filled automatically, the supply side of the business is basically a very profitable annuity for Medtronic.
While it may be cheaper to start a patient on Insulet’s OmniPod system, the system reaches price parity with conventional pumps after about 30 months. This is why it’s critical that Insulet drive down the cost of their pods as it is their primary revenue source. Medtronic has the luxury of not only receiving a higher upfront payment but the continual sale of pump supplies which carry huge margins. As one past industry executive told Diabetic Investor it doesn’t cost $7,000 to make an insulin pump, pumps cost $7,000 because it’s very expensive to run an insulin pump company.
Unlike Insulet which is dependent on new patient adds to reach profitability, Medtronic already has an installed user base of over 250,000 patients. Here’s how great the business is for Medtronic- consider there are approximately 600,000 insulin pump patients worldwide, and by most industry estimates Medtronic owns 70% of the market or 420,000 patients- 315,000 whom receive their pump supplies automatically. The average pump patient spends $2,500 per year on pump supplies which means without lifting a finger Medtronic generates almost $800 million per year in supply revenue.
Compare this to Insulet where pods cost the patient $35 and the average patient uses 122 pods per year, an annual revenue stream of $4,270 per patient. Based on their recent reports Insulet now has 25,000 patients which translate into an annual revenue stream of $107 million from pods sales. However, unlike conventional pump supplies which carry huge profit margins, the pod has little if any profit margin, something the company is hoping to change when their new pod gets to the market.
Given this set of dynamics why would Medtronic want to be in the patch pump market. They are already the market leader in insulin pumps and this business is hugely profitable. As Diabetic Investor has noted on numerous occasions Medtronic’s main job with this unit is not to kill the goose that lays the golden eggs. Or put another way don’t screw up a very good business.
The realty is it doesn’t really matter much if their patch pump is dead or alive, although it would be nice if the company did clarify its position. Based on reports from people who have seen the current version of the patch pump it might as well be dead, as one noted physician with a deep knowledge of insulin pumps told Diabetic Investor at ADA the system as it stands today flat out sucks.
The bottom line here is that Medtronic is in the catbird’s seat and even with their many blunders they continue to hold onto the vast majority of their installed users. It says something when a company seems to be trying to screw things up and can’t no matter how hard they try. Frankly Medtronic should thank their lucky stars that the folks who ran MiniMed before Medtronic bought them did such a great job. MiniMed built a great franchise, so great that it has withstood Medtronic’s many attempts to screw things up. Their patch pump program is a perfect example of this. The company has wasted millions on the program and even if it does make it to market, a highly unlikely scenario, it will never amount to anything.
There are times when management should learn to leave a good thing alone; this is one of those times.