Mistakes and Missed Opportunities
The diabetes device landscape is littered with companies who came along with what looked like a great idea, looked like they got off to promising start and then due to missteps and missed opportunities slowly disappeared, never to be seen again. A good example of this phenomenon is Amira Medical who way back in the day was the first company to develop an all in one glucose monitor with the added innovation of alternate site testing. Nearly everyone in the BGM industry was fawning over Amira believing they could alter the BGM market for years to come. The only problem was the product really didn’t work all that well and management instead of listening more closely to the many offers thrown at the company started believing they could make it on their own. It didn’t take long for the companies who were once interested in acquiring Amira to discover the product didn’t work and Amira once the bell of the ball was forced to sell to Roche for $100 million, a fraction of what the company could have sold for earlier.
The same can be said for Smith’s Medical and their Cozmo insulin pump. The company got off to promising start and at one time seemed to be poised to take on market leader MiniMed. Abbott (NYSE:ABT) was known to be sniffing around as adding an insulin pump to their diabetes device portfolio would have helped sell more glucose test strips. Just when it seemed Smiths would be able to sell the Cozmo they were hit by a intellectual property lawsuit by Medtronic (NYSE:MDT), the new owners of MiniMed and we all know how this story ends; as crippled by the suit Smiths couldn’t sell either the company or their systems and ended up exiting the business entirely.
Considering what’s going on today between Medtronic and Insulet (NASDAQ:PODD) one has to wonder if history is getting ready to repeat itself. The twist this time is that at one point well before Insulet started selling the OmniPod Medtronic made an offer to buy the company. Whether Medtronic actually wanted to market the OmniPod or keep it from coming to the market is unknown. All we do know is that Insulet said thanks but no thanks which at the time seemed like the right thing to do. Keep in mind back then diabetes device companies were selling for nice multiples as money was cheap and market conditions looked favorable. Insulet likely reasoned that they could capture an even larger sale price by bringing the OmniPod to market and establishing a presence in the market.
Sure enough what seemed like the right strategy at the time, ended up backfiring on the company as the OmniPod while innovative got off to a rocky start and the economy took a serious turn for the worse. All of sudden it dawned on the company and their board of directors that no sale was forthcoming and they would actually have to run the company. This was not what Insulet or their investors envisioned as they believed that the company would be sold and they really didn’t need to worry about such mundane things as actually running the company as a stand-alone entity.
The real question now isn’t whether or not Insulet will be sold, as if anyone would actually buy a company facing a serious legal action. The real question is can Insulet avoid the fate of Amira and the Cozmo and actually survive. Even if the new Eros pod, which is still awaiting FDA approval, actually gets approved it can no longer be seen as the company saving event as it was once envisioned. As Diabetic Investor has stated consistently as innovative as the OmniPod system is the main problem facing Insulet has always been the cost of making the pod. Eros was supposed to solve this problem as the company has consistently stated it cost much less to make than the current pod and once in the marketplace would quickly provide Insulet with far higher margins. That is of course assuming the company can actually manufacture the Eros successfully, which given their public statements seems unlikely.
Not one to miss an opportunity Medtronic jumped on its chance to possibly eliminate a competitor. Medtronic may have issues of their own but they are well versed in using the legal hammer to slow or eliminate their competition. They also realize with their huge market share and worsening market conditions it’s unrealistic to believe they can grow much beyond where they are today. About the only way they could see any real growth is to eliminate a competitor, which Diabetic Investor believes is their real reason for bringing this lawsuit. As we noted before IP in the diabetes device world is a contact sport and there are no points or silver medals for finishing second. This is a winner take all battle.
Besides the monetary damages Medtronic could extort from Insulet should they win the lawsuit, it’s possible that Insulet in order to be in compliance would be forced to redesign the OmniPod system, which would effectively kill the company. Facing extinction Insulet like Amira could be forced into a fire sale and don’t be all that surprised if Medtronic came in and bought the company for a fraction of its true value.
Now some will see Medtronic’s tactics as unnecessary and over the top, seeing Medtronic as the school bully picking on poor helpless Insulet. Although Diabetic Investor would prefer Medtronic compete in the marketplace and not in the court room, they are well within their rights to protect their intellectual property. And who’s to say Insulet wouldn’t do exactly the same thing had Medtronic launched a patch pump. The fact is Insulet should have known better and should have realized this was a possibility. They should have prepared for this once they realized they actually had to run the company and that no one was going to buy the company.
Unfortunately unlike the executives at Insulet who’ve made millions, OmniPod patients are the real losers here. Just ask any of the ex-Cozmo users how they felt when Smiths excited the business. While it’s true there are other insulin pumps they can switch too, there was a reason they were using the OmniPod in the first place. As Diabetic Investor has stated previously we have no issue with the OmniPod as there are many benefits to wireless pumping. Our issues are with the Insulet management team and the company’s board of directors for taking what was a great idea and not putting the patient first. Like so many before them a combination of greed and hubris will be the cause of their demise. This is what happens when a company views patients as a necessary evil.
No matter what one thinks of Medtronic’s tactics here, there should be no sympathy for Insulet as they should have known better. If anyone deserves sympathy it will be the thousands of OmniPod patients who could be forced into a pump they didn’t want in the first place.