Medtronic Reports – The Illusion Continues

Medtronic Reports – The Illusion Continues

This morning Medtronic (NYSE:MDT) reported their fiscal 2009 fourth quarter and full year results and their diabetes unit continues to plod along. Like so many companies who must deal with a struggling unit the company did their best to put the best face on rather lackluster results. Revenue for the fourth quarter grew just 8%, while annual revenues increased just 9%.

The company did indicate that sales of continuous glucose monitoring systems are running at a $100 million annualized rate. The company commented that they have a three year lead on the competition when it comes to having an integrated pump/cgm system. Finally Bill Hawkins, Medtronic’s chairman and chief executive officer, stated they will soon be announcing some type of deal with Lilly (NYSE:LLY) related to their insulin pump business. The company is conducting an investor day on June 2nd but it was unclear if the Lilly announcement would come before that event.

At one time Medtronic had an agreement with Novo Nordisk (NYSE:NVO) to produce a pre-filed insulin cartridge for the Paradigm line of insulin pumps. This agreement was later dropped and its possible Lilly seeing an opportunity will try and pick up where Novo left off.  Whatever this agreement is we should hear something soon.

The company was mysteriously silent on their pipeline of new pumps in particular their new patch pump that’s designed to compete with Insulet’s (NASDAQ:PODD) OmniPod. As Diabetic Investor has previously reported sources who have seen this new patch pump consider it inferior to the OmniPod. These same sources have indicated that the patch pump is well behind schedule.

Diabetic Investor sees a rather disturbing trend with Medtronic’s public comments compared to what they are saying privately or out in the field. With their patch pump delayed the company’s sales force is telling anyone who will listen that Insulet is on its death bed and will soon be out of business. They are extending this forecast to Dexcom (NASDAQ:DXCM) their primary competitor in the continuous glucose monitoring market. Diabetic Investor is hearing reports that things have become so nasty that some physicians are no longer seeing Medtronic sales reps. In one case getting a restraining order to prevent reps from visiting their office.

Market conditions being what they are it appears Medtronic will resort to almost any tactic. The fact is when it comes to new pump starts, patients not previously on pump therapy, Medtronic is losing out to Animas, a unit of Johnson and Johnson (NYSE:JNJ) and Insulet. Medtronic is also beginning to see erosion in their critical upgrade market, patients on pump therapy who upgrade to newer systems. This upgrade market is critical to Medtronic’s success as each pump patient generates nearly $2,000 per year in pump supply sales. Should this erosion in the upgrade market continue Medtronic would be facing a serious revenue problem for their diabetes unit.

Diabetic Investor is also investigating reports that Medtronic insulin pumps have been delivering insulin without being prompted by the patient. This unexplained delivery of insulin could lead to serious even life-threatening issues for the patient. According to field reports this issue is not related to patients wearing their pumps near or during an MRI. Some industry sources believe there is a design flaw with Medtronic pumps that causes this problem. Obviously Diabetic Investor continues to investigate these reports and will keep subscribers updated as more information comes forward.

Although the company holds a commanding lead in terms of market share, they are cognizant that new competition is coming. As Diabetic Investor previously reported Abbott (NYSE:ABT) has plans to launch their Aviator pump, Roche is getting ready to introduce an updated version of their Accu-Chek Spirit and Bayer is getting ready to enter the pump business as well. Besides these well established companies Diabetic Investor is tracking several less well known companies who believe they have what it takes to compete in this highly competitive market.

Why anyone would want to enter the insulin pump market at this point honestly baffles Diabetic Investor. The market is growing at less than 10% annually and quite honestly there isn’t much more that can be done to improve pump technology. The improvements we have seen over the past few years have been incremental and have done little to expand the market or reinvigorate market growth.  About the only truly innovative product has been the OmniPod, whose success has inspired several Insulet wannabes.

Truth be told, a pump is a pump. While there are some minor differences between products they all get the job done. Patient choice is actually relatively simple once they have made the decision to use pump therapy. If they prefer wireless technology there’s only one choice with the OmniPod. If they prefer a conventional pump it’s either Animas or Medtronic. If they want a CGM/Pump combo Medtronic is the only option although Dexcom is working with both Animas and Insulet and this advantage will soon disappear.

The reality is not much has really changed for the insulin pump market. As Diabetic Investor has said several times in the past the insulin pump market is not large enough nor is it growing fast enough to support all the current players let alone the many players getting set to enter the market. The first causality occurred when Smith’s Medical decided to exit the insulin pump market. Diabetic Investor suspects Smiths exit is just the beginning and the insulin pump market will continue to consolidate just as the BGM market consolidated.

While we’re sure that Medtronic’s upcoming investor day will provide a glimpse into their future with diabetes, this will do nothing to change the realities of the market. All one has to do is look at the current situation in BGM to see what lies ahead for insulin pump companies. Not exactly a pretty picture.

Still it’s amazing how many companies want to be in the insulin pump business falsely believing the axiom; If we build it customers will come. Never mind the high infrastructure costs of actually running an insulin pump company or that market growth is stagnating. As Brooks Atkinson wrote; “People everywhere enjoy believing things that they know are not true. It spares them the ordeal of thinking for themselves and taking responsibility for what they know.”