Medtronic Reports/Tandem Raises Additional Capital

Medtronic Reports/Tandem Raises Additional Capital

Yesterday we learned that Tandem Diabetes, whose insulin pump is currently awaiting FDA approval, raised an additional $12 million in financing. According to regulatory filings this financing could eventually total $13.7 million.

Some may recall that the FDA asked Tandem to conduct some additional clinical trials before approving their t:slim™ insulin pump. These additional requirements severely handicapped the company as funds previously set aside to market the pump had to be diverted to cover the unexpected cost of these new trials.  Even if approved it remains to be seen if Tandem can successfully penetrate the highly competitive insulin pump market. While these additional funds should allow the company to get the product through the FDA, greater resources will be needed to launch the system.

Like so many others seeking to enter this already over-crowded market, Tandem will not be able to establish a market presence without the help of an established partner. Also like so many pump newcomers the real strategic objective for Tandem is to be acquired by a larger rival or another diabetes device company looking to enter the insulin pump market.  Something that likely would not happen until the company proves it can establish at least some presence in the market.

This is the basic problem with the majority of insulin pump newcomers, besides Tandem we have CellNovo and Asante, as well as others, all of whom have no other strategy than to be acquired. Given current market conditions combined with lousy economic conditions this present an interesting dilemma; can they establish enough of a market presence, therefore proving their model, to become an attractive acquisition target.

All these newcomers just might learn something from the folks at Insulet (NASDAQ:PODD) who also thought that they too would be acquired. Here we are 10 years later and still Insulet remains independent and this for a company with an established user base and an innovative product. Even worse for Insulet is that they actually no closer to finding a buyer today than they were when they started. The harsh reality facing Insulet and every other insulin pump company is that so far not one has found a way to steal share from insulin pump market leader Medtronic (NYSE:MDT).

Although none of the these companies will admit it the central fact is the insulin pump market is not large enough nor is it growing fast enough to support all the players. There just isn’t enough organic growth in the insulin pump market to become a successful insulin pump. The only way these companies can become consistently profitable is to take share away from Medtronic and that just isn’t happening. Something that was reinforced today as Medtronic reported another quarter of strong growth for their diabetes unit.

The one and perhaps only saving grace for these pump newcomers and Insulet, are companies like Sanofi-Aventis (NYSE:SNY), Novo Nordisk (NYSE:NVO) and possibly Lilly (NYSE:LLY) who see pumps not necessarily as a profit center but rather as a tool to sell more of their core insulin products. Yet even if this is true with so many new entrants into this space it has become a buyers’ market.  The days of huge multiples are long gone as any potential suitor can basically play these companies off one another. While they all will beg to differ, none of their products stand out as really that much better than systems that are already on the market.

The reality is no matter how “cool” or “cheap” these new systems may be; cool and cheap doesn’t help when you’re competing against an 800 pound gorilla like Medtronic who commands a 70% share.  It also doesn’t help any when you have two other competitors, Insulet and Animas, who are fiercely competitive with the additional benefit of installed users. What this basically means for companies like Tandem is that they not only have to overcome the obstacles of customer support, managed care coverage and no brand recognition; they must also gain the attention of physician’s and nurse educators just to be considered by a pump patient.

In the real world when it comes time to choose an insulin pump the reality is the choice typically comes down to a Medtronic system and someone else. While there are offices that offer patients all three brands and even some who offer just Animas and Insulet, the vast majority of patients are choosing between Medtronic and one other. For companies like Tandem, they must somehow find a way to become the Medtronic alternative therefore displacing either Animas or Insulet in the process, two companies who as we noted earlier have installed user bases and well known product offerings.

Even if Tandem was successful at displacing either Animas or Insulet as the Medtronic alternative, they then have to convince the patient to go with a new unknown, unproven system over a company that literally invented the insulin pump and has been around for over 20 years. Even when the new system is really cool and really cheap this is a tough sell. This is after all a device that controls the patient’s life and when it comes to crunch time better the devil you know.

These newcomers would also be wise to learn another lesson from Insulet as they better not screw up because the insulin pump market may be a big business but it’s a small and very vocal community. Insulet came to market with lots of buzz as pumpers where excited by the opportunity to become wireless. Unfortunately for Insulet quality issues plagued the system with pod failures reaching an unacceptable rate, this cost the company dearly as word spread that while it’s nice to be wireless, it sucks when your system keeps failing. One just might think the company would have learned from this experience but according to field reports failure rates remain high and as such continues to hurt pod sales.

The harsh reality when it comes to pumps is that companies don’t get a second bite at the apple. If they are successful at capturing the patient and then the system fails or underperforms, it’s unlikely these patients will ever come back. This is exactly what’s happening at Insulet today as far too many Insulet patients are trying the system and then switching due to unacceptable pod failure rates.

Until these newcomers can overcome these hurdles it’s unlikely we’ll see any substantive change in the insulin pump market and that Medtronic will continue to dominate the market. This is just the way things are and from what Diabetic Investor has seen to date none these newcomers have the product to change anything.