More changes coming to Animas?
The diabetes rumor mill is buzzing at insulin pump maker Animas as there is a great deal of speculation now that LifeScan has terminated their agreement with Medtronic (NYSE:MDT), that the LifeScan will merge their sales force with the Animas sale force. Equally interesting is the perception at Animas that LifeScan is now taking over the day to day operations at Animas.
Should these rumors turn out to be true the real question is; why did the company wait so long? While Diabetic Investor understood some of the reasons why LifeScan hooked up with Medtronic, we never understood why Johnson and Johnson (NYSE:JNJ), who owns both LifeScan and Animas, did not have these two companies work more closely together from the beginning. Although common sense is not something prevalent in the diabetes device business, combining an insulin pump company with a blood glucose monitoring company actually makes sense; these two units are actually synergistic.
Combining these two units makes sense when you consider that insulin pump patients use more test strips than any other patient and by Diabetic Investor’s estimates account for nearly 25% of all test strips sold. This move makes even more sense when you consider that LifeScan is the US BGM leader and that every company in the BGM is fighting fiercely for insulin using patients. Add in the fact that LifeScan has a major field presence and Animas has had issues taking away share from Medtronic, having LifeScan reps promote the Animas line of pumps seems to make perfect sense.
Yet here we are nearly six years after JNJ bought Animas and the company is just now getting around to doing what they should have done long ago. While some might say better late than never, this change of direction should tell everyone what Diabetic Investor has known for some time; JNJ isn’t thrilled with the Animas acquisition as it has never lived up to expectations. The JNJ mantra has always been to be number one in every market they play in or be a very close number two.
Yes it’s true that Animas has solidified their position behind Medtronic in the insulin pump market, the company is hardly a “close” number two. Even using the most optimistic market share estimates Medtronic still commands a 70% share with Animas sitting somewhere around 15% to 18%. Although the company has done a good job of capturing patients new to insulin pump therapy, they like everyone else in the market have yet to figure out a profitable way to convert existing Medtronic patients to their system. We’ve said it before and we’ll say it again, until someone figures out how to do this nothing will change in the insulin pump market.
Looking over the insulin pump landscape about the only strategy that has yet to be given a try is also the most dangerous. With insulin pumps costing upwards of $6,000 for a new pump and Medtronic offering discounted pricing for patients who upgrade older systems to newer models, about the only option left for the competition is to follow the BGM model of giving away the device for free and trying to make money on the continual sale of pump supplies. While it’s true that pump patients spend on average $2,500 per year on pump supplies, take away the upfront payment and you dramatically lengthen the time it takes for the patient to become profitable.
Had JNJ combined Animas and LifeScan sooner they had one advantage that could have shortened the time it takes for a patient to become profitable. It was possible that Animas could not only offer a free pump but also a free LifeScan glucose monitor and the company could have somewhat offset this high acquisition cost not just with the sale of pump supplies but also the sale of test strips. The fact is the Animas and LifeScan missed a huge opportunity by not combining sooner.
Today the landscape has changed with the growing popularity of continuous glucose monitoring among insulin pump patients. Here too Animas has been slow to act and only know are we seeing the Animas pump combined with the Dexcom (NASDAQ:DXCM) system. Again the question has to be asked, what took so long? Although Animas now has a combo system that merely puts them on par with Medtronic who has had a combo system for a few years.
The question now become is this move too little too late? Considering that both the BGM and insulin pump markets are facing increasing pricing pressure, can JNJ now risk losing even more margin by giving away an Animas pump to capture patients. The reality is other than giving away a pump for free Diabetic Investor does not see an alternate strategy that would effectively take share away from Medtronic.
This is the conundrum facing not just Animas but everyone who’s competing with Medtronic.