Not a pretty picture

Not a pretty picture

As we approach the annual ADA conference in a few weeks three companies in the diabetes space just might be singing the blues as they arrive in New Orleans. Take a look at the year to date performance of Tandem (NASDAQ: TNDM) down over 41%, Insulet (NASDAQ: PODD) down almost 29% and MannKind (NASDAQ: MNKD) down over 36%. Of the three Insulet perhaps is the most likely to survive yet the same cannot be said for either Tandem or MannKind. Let’s look at each individually.

While it would seem like MannKind has the most difficult path of the three we don’t see it that way. Not because we see a light at the end of the tunnel as quite frankly that light is more like a freight train headed straight for the company. Now firmly in control of Afrezza the company has laid out their strategy for doing what Sanofi (NYSE: SNY) couldn’t or was incapable of doing. The only problem is the strategy they have discussed won’t produce results fast enough and provide what the company needs more than anything, sales.

Why MannKind has chosen to build their own sales team is a mystery to Diabetic Investor. During their recent earnings call the company noted they would be building this team of approximately 70 reps from ground zero. Think about that for a moment, that means reps have to be hired, trained and put into the field. By our estimates that means the earliest these reps can start producing sales would be 6 months from now. This of course assumes that physicians will even see them.

But the timing isn’t the only issue. It cost on average $250,000 per year to keep a rep in the field. Which means if the company does hire 70 reps it will cost them $17.5 million. Keep in mind this a company that has more financial issues than Florida has sunshine.

Yet, and we know this hard to believe the financial picture only gets worse. As management noted during the call they must become more aggressive pricing Afrezza. Plus, just to add gas to a raging fire besides lowering the price they will also sample more aggressively, which just adds more cost.

Now we may not be the sharpest knife in the drawer but this doesn’t exactly seem like a well thought out strategy for a company that is on the verge of bankruptcy. Which is exactly what will happen as time is not on their side. MannKind needs sales and needs them in a hurry, like yesterday. Yet the strategy they are pursing won’t yield anything for another 6 months likely longer. Should sales come they will come at a lower price point.

Yes, we know this is the wacky world of diabetes where anything can and usually does happen, but even in this wacky world it would take a major miracle for MannKind to remain a viable entity.

Tandem is also facing a capital crisis and Diabetic Investor suspects it’s just a matter of time before the bloodletting begins. This will likely start with the company implementing cash conservation strategies, which is a nice way of saying lots of Tandem employees will be out of work. Next the company will begin throwing themselves at Medtronic (NYSE: MDT), Johnson and Johnson (NYSE: JNJ) and Dexcom (NASDAQ: DXCM), none of whom will take the bait as they all know if they simply wait it out they can pick up the Tandem customer base for pennies on the dollar.

Insulet faces a different set of issues especially now that Medtronic has decided to throw their weight around with payors. The reality is Medtronic could put both Tandem and Insulet out of business should they continue to sign more deals like they did with UnitedHealth. Even if they don’t they have put everyone else in the insulin pump space on the defensive. Basically Medtronic has put Tandem, Insulet and Animas, a unit of JNJ, in the uncomfortable position of competing on price. Something neither Tandem nor Insulet can afford to do and JNJ does not want to do.

And just to digress for a moment a special note to all those diabetes bloggers out there who have stated that this deal between Medtronic and United is bad for patients, that it will somehow stifle innovation – get a grip. This is the business of diabetes not some charitable endeavor. When will these people learn that companies like Medtronic are run for the benefit of their stakeholders. Stakeholders who expect the company to make money.

This argument that this agreement will somehow stifle innovation is flat out wrong and just plain stupid. Listen the insulin pump market has been a tough market for several years yet over the years we have numerous innovations. The reality is agreements like this actually force the competition to be better, to build a better mouse trap.

So enough with this crap about how this is bad for patients or this will stifle innovation as it is flat out untrue.

Now getting back to MannKind, Tandem and Insulet all of whom face very difficult futures. Yes, we know this isn’t a pretty picture but no one said this was going to easy. And let’s be honest here all three companies have made major mistakes which have only contributed to the problems they face today. This may not be what they want to hear but as Momma Kliff used to say when it comes to business if you want a friend get a dog, otherwise put on your big girl panties and deal with it.