Medtronic Reports – Diabetes Growth Slowing
This morning Medtronic (NYSE:MDT) reported first quarter results and the trend for their diabetes unit isn’t promising. While it is customary to compare quarterly results to the same period a year ago, a clearer picture of how the company’s diabetes unit is doing can be seen by looking at quarter to quarter results. Taking a look at the trend in diabetes it appears the company is feeling the effects of a reinvigorated Animas, a unit of Johnson and Johnson (NYSE:JNJ) and the increasing presence of Insulet (NASDAQ:PODD) in the market.
Compared to the final quarter of fiscal year 2008, diabetes revenues in the first quarter of fiscal year 2009 declined 2.18% worldwide and 5.11% domestically. According to the company the lower than expected revenue for diabetes was due to two main factors, lower new pump placements and competition from new products in the marketplace.
One of the biggest issues facing Medtronic is the lack of innovative new products. Currently the company is touting their Paradigm® Real-Time system which combines a Paradigm insulin pump with the Real-Time continuous glucose monitoring system. At the moment Medtronic is the only company that has this combination. Not far behind is Animas who is working with Dexcom (NASDAQ:DXCM) and Insulet who is working with both Dexcom and Abbott (NYSE:ABT). In the near future this combination of an insulin pump and CGM system will be standard throughout the insulin pump industry.
Medtronic has stated they are working on a patch pump system to compete with Insulet but this system is not expected to hit the market until 2010. Diabetic Investor knows that Insulet is not sitting around waiting for Medtronic to enter the patch pump market and already has a new version of the OmniPod system under development. With a smaller pod and improved PDM, the device that controls the pod, the new version of OmniPod will provide tough competition for any product that Medtronic develops. While Insulet has experienced some growing pains of late, they have proved there is a demand for wireless pump systems.
In the past Medtronic has always been able to take advantage of two important factors. First, they are the 800 pound gorilla when it comes to insulin pumps controlling nearly 75% of the market. Second, their technology out-paced the competition. While the first point is still true, the second is no longer the case. The fact is the competition has caught up in terms of technology and in the case of Insulet actually surpassed Medtronic. Once Animas and Insulet have combo systems, Medtronic will no longer have any technological advantage.
When the company finally launches their patch pump system in 2010, they will be in the strange position of being second to market. Additionally Medtronic is not the only company with a patch pump system under development and like conventional wired pumps, patch pumps will become just one more product offering by all the pump companies.
Diabetic Investor senses that the insulin pump market is heading down a path similar to what happened with glucose monitoring. Diabetic Investor knows of at least one company who believes they can give away the pump for free and make their money through the sale of consumables. Besides having an innovative system, Insulet offers payers a compelling pricing model. While the OmniPod reaches price parity with conventional systems after two years of use, its lower upfront cost is attractive to payers. And it’s no secret there are several companies touting their ability to make even cheaper conventional pumps.
While the companies in the market may beg to differ other than the OmniPod there really isn’t that much difference between conventional pumps. At some point insurers just might realize that it’s not necessary to pay nearly $7,000 per new pump placement and begin demanding cheaper alternatives. Should Insulet or any other manufacturer be able to bring their annual cost for pumping, including start up costs, down to the $1,500 per year level Medtronic would face a real challenge.
The handwriting is on the wall here as pricing pressure is likely to intensify. Insurance companies do not care that running an insulin pump company is an expensive proposition and that customer service will surly suffer as companies struggle to meet insurers demands for lower prices. The reality is that the cost of making a conventional pump is nowhere close to $7,000 and more likely closer to $1,000. However, when you’re running a business that requires lots of handholding and 24x7x365 customer support there’s a reason pump companies price their systems so high. The bottom line is that the insurance companies who pay the bills here look at profits not customer service ratings.