Never in a million years

Never in a million years

Yesterday insulin pump newcomer Tandem (NASDAQ:TNDM) reported impressive second quarter results. According to a company issued press release sales grew 86% while t:slim pump shipments grew 64% from 1,363 to 2,235. The company also submitted an PMA application to the FDA for the t:slim G4™ Insulin Pump, which integrates our t:slim technology with the Dexcom® G4® Platinum CGM System.

Diabetic Investor is hardly surprised by these results as insulin pump patients are hungry for new systems such as the t:slim which comes with a patient friendly user-interface. As we have noted previously the story for Tandem is not necessarily that the t:slim is a better pump, rather it’s a pump which is easier to use.  The simple fact is when it comes to conventional wired pumps, they all do basically the same thing, the same way. What Tandem is proving is that design matters and patients given the option want a simpler user interface.

It’s well known that insulin pump market leader Medtronic (NYSE:MDT) has been losing the battle when it comes to new pump starts, that is patients to new to insulin pump therapy. While Medtronic continues to focus on building a closed loop insulin delivery, they have failed to adapt to what patients really want which is a pump that’s easier to use. This obsession with developing an artificial pancreas could well prove to be the company’s Achilles heel.

Diabetic Investor has long held the belief that the only way a company like Tandem could eat away at the huge share held by Medtronic was if Medtronic screwed up the goose that lays the golden eggs.  Based on what we’re seeing in the marketplace this is exactly what’s happening. To make matters even worse for Medtronic it now appears that they are losing the battle keeping existing patients, which is patients whose pump is out of warranty. Rather than upgrade to another Medtronic pump these patients are now opting for either the t:slim or the OmniPod from Insulet (NASDAQ:PODD). This is not good news for Medtronic who makes a bundle from the continual sales of pump supplies to their once huge installed user base.

Perhaps this is the reason Medtronic recently made some management changes at their diabetes unit. A unit which quite frankly has lost its way and forgotten about who really matters; the patient. This obsession with an artificial pancreas is a perfect example of how this unit has lost its way. This obsession has diverted attention away from a major problem at the company, namely their pumps are out of date and in desperate need of redesign. Basically Medtronic is selling flip phones while a company like Tandem is selling state of the art iPhones.

Although Diabetic Investor is not privy to the internal discussions at Medtronic one has to wonder whether anyone has bothered to ask whether this obsession with an artificial pancreas will actually pay off in the long run. Now before everyone says Diabetic Investor is against progress and that a true artificial pancreas is the best thing going, think again. We are not against an artificial pancreas in any way and believe that there will be a minority of patients who will benefit from this way cool extraordinarily expensive system. However for the vast majority of insulin pump patients this is not the case. In our eyes Medtronic has bet the ranch on a system that isn’t financially viable over the long term.

Insulin pumps are already expensive enough and given that cost containment is the order of the day Diabetic Investor doesn’t believe payors are in any mood to reimburse for a system that even by conservative estimates will cost two or three times more than what’s on the market today. To Diabetic Investor this has always been the problem with this quest to develop an artificial pancreas. It’s not that such a system wouldn’t benefit patients, there is no question it would. However, the real question is there a sustainable business model for this system. Medtronic has spent millions on this quest already and without any changes will spend millions more. Has anyone bothered to do the math here or has the company become blinded by this quest? Has anyone bothered to notice that while they are working on this project the competition is taking away share?

To Diabetic Investor Tandem is an example that a company can have balance. The company like all pump companies is also interested in this quest for an artificial pancreas. However, they are not obsessed with this quest. They understand that some balance most be brought between what patients need today and what they might need in the future. The ultimate irony here is that given the problems at Medtronic they could well decide to buy Tandem.

Honestly Diabetic Investor is flabbergasted with what’s going on at Medtronic. Never in a million years did we believe that a company with 70% plus market share could screw things up so badly. Then again we really shouldn’t be that surprised as this happened before in the BGM space, just ask the folks at Roche who took a billion dollar business and turned it into a million dollar business.  This is after all the wacky world of diabetes where anything can and usually does happen.