Pain at the pump

Pain at the pump

Yesterday we reported on the earnings from Tandem (NASDAQ:TNDM) noting that we weren’t overly concerned that the company failed to meet the expectations of analysts. As we noted Tandem is going through the normal growing pains of any company new to the insulin pump market. Such is not the case for Insulet (NASDAQ:PODD) who reported earnings late yesterday. Unlike Tandem, Insulet is not new to the market and has firmly established themselves as the number three player in the market behind Medtronic (NYSE:MDT) and Animas, a unit of Johnson and Johnson (NYSE:JNJ). In very early trading shares of Insulet are down nearly 6% as the company failed to meet analysts’ expectations plus Canaccord lowered their price target to$40 from $53.

Looking over the results and reading through the transcript of yesterday’s call Diabetic Investor can’t say we’re overly concerned here. It’s not surprising that growth in first quarter slowed as this is typical given that patient deductibles have been reset for the New Year. The fact that the company continues to build it sales team with the addition of 15 key account managers should be seen as strong indication that the company is confident sales will continue to accelerate. The fact is both Tandem and Insulet are picking up an ever greater share of new patient starts a trend Diabetic Investor sees continuing in the future.

Diabetic Investor also believes Insulet will get a further boost when the OneTouch VerioIQ glucose meter is integrated into the OmniPod PDM. Although how this new PDM will be rolled out seems to be a source of disagreement within the company; check out this exchange between CEO Duane DeSisto and CFO Brian Roberts when asked how the new PDM will rolled out- DeSisto – “So we’re never updating anything for free. So you can hear it here, you can write that. As long as I’m here, I’m never doing anything for free, because it hurts too much. I would say I think, once that product is approved then we will just start transitioning new customers and we’ll go from there with it.”  Roberts – “I mean we haven’t solidified any commercial plans yet, but…” DeSisto – “We solidified one” Roberts – “Except for the free part. But most likely what we will do is, new customers will ultimately transition directly to the new product, to the LifeScan Verio PDM and these customers, existing customers who wish to get that PDM, I’m sure will have some kind of an upgraded path for those customers, very similar to what we did back probably about five years ago or four years ago when we moved from the PDM 100 to at the time what was the PDM 200.”

Given that Insulet can’t seem to decide what to do Diabetic Investor suspects that JNJ will likely play a role in how the new PDM is transitioned to the existing patient base. The simple fact is with the BGM market becoming ultra-competitive, each OmniPod patient uses approximately 6 test strips per day and JNJ needs every share point except some type of price support from JNJ to get these new PDMs into the hands of existing OmniPod patients. Think of it this way with an installed user base of 50,000 or so, if JNJ can convert just half to the new PDM that translates into nearly 55 million test strips sold each year.

Looking towards the future Diabetic Investor remains unconvinced the company will be successful in their efforts to integrate a continuous glucose sensor into the OmniPod. When asked about this DeSisto stated; “There is an awful lot of leverage to be gained by effectively integrating that center directly into the product, insertion, battery power, the ASIC all of these different pieces. I think it’s unique to us in trying to be able to put these two devices together which allows us a kind of gross margin leverage play.” While that may be true so far Diabetic Investor has yet to find any experienced CGM expert who believes that Insulet can get this technology to work. Without getting overly technical the issue centers on the distance between where insulin is delivered and where the glucose sensor is located.  Most of the experts interviewed by Diabetic Investor believe that if the sensor is too close to where insulin is being delivered it will adversely impact the accuracy of glucose readings.

On a more positive note the company’s effort to develop a pod that delivers highly concentrated U500 insulin looks much more promising.  Targeted at Type 2 patients who are highly insulin resistant this pod would be an innovative and more patient friendly method for delivering insulin.

The biggest issue for Insulet isn’t necessarily how they perform but how this market is changing. As we have noted these past few days the insulin pump market is in a state of transition; JNJ wants to get out and Becton Dickinson (NYSE:BDX) might look to jump in. Tandem is off to a solid start and many see Asante as a possible acquisition target. Although going nowhere in a hurry Roche also has a pump as does Abbott (NYSE:ABT) even though it’s never been marketed. Watching all this is market leader Medtronic who continues to see newcomers slowly chip away at their once dominate market share. In some respects it’s not surprising that Medtronic has lost some share given how difficult it is for any company to maintain a 70%+ share, still should this recent share lose accelerate expect Medtronic to fight back hard.

Every company in the market also has to be concerned with prospect of competitive bidding and its possible impact on pricing; pricing which is already under pressure from private payors. While Diabetic Investor does not except competitive bidding to cut prices as dramatically as it did in the BGM space, it will adversely impact the market going forward. Competitive bidding could also spark a move by private payors to demand even further price concessions.

So far the insulin pump market is one of the few diabetes markets that has avoided transitioning into a commodity market where price trumps performance.  However this could change in heartbeat. Yes there are differences between all the insulin pumps on the market; still all pumps do basically the same thing in the same way. Yes some have more advanced features than others but with payors increasingly looking to cut costs nothing is outside the realm of possibility. Consider that insulin pump therapy isn’t cheap to begin with costing upwards of $10,000 when a patient begins pump therapy and then ongoing annual supply costs of $2,500+.

Although Diabetic Investor sees it as suicidal some pump companies are seriously considering giving away the pump for free only charging for pump supplies. As we have noted many times the insulin pump market is not large enough or growing fast enough to support not just the existing players in the market but the many who want to enter the market. While Medtronic has recently lost share not one of their many competitors has found a profitable strategy to take away major share. Desperate to gain share and force Medtronic into a nasty price war the competition might use price to gain share. To Diabetic Investor such a move would signal the beginning of the end for the insulin pump market as we know it today. This is exactly what happened in BGM market and is currently happening in the diabetes drug space.

The way Diabetic Investor sees the future for the insulin pump market it looks like more pain at the pump.