Picture coming into focus

Picture coming into focus

Medtronic (NYSE:MDT) diabetes has undergone many changes over the past few years. While the unit never lost their dominate position in the insulin pump market there were cracks in the armor. Physicians were complaining about aggressive sales tactics, patients were complaining about poor customer service and the competition was slowing chipping away at the goose that lays the golden eggs, the units huge installed user base. Many who have watched the insulin pump market over the years believed that company had lost its way and was ill-equipped to change as the market was changing.

Looking at the results the company announced today this unit which used to focus exclusively on insulin pumps and continuous glucose monitoring has been transformed into a complete diabetes unit which touches every patient no matter if they are Type 1 or Type 2. When this restructuring was first announced Diabetic Investor was both intrigued and skeptical. Intrigued as it signaled the company had finally arrived in the future and was ready to change. Skeptical because the unit was getting away from its core competency and sailing into previously uncharted waters, Type 2 patients.

While today’s results were just fine there is much bigger picture here as we believe we have cracked the code for the future of this unit. The biggest clue came when looking at the slides the accompanied today’s call. The company spent a great deal of time explaining what the company looks like now that they have acquired Covidien. Slide 8 of this presentation (which is available on the company’s website) shows what the new Medtronic looks like and what stood to Diabetic Investor was the diabetes unit will generate 6% of the revenue plus there is nothing under this unit. By way of comparison the Restorative Therapies group will account for 25% of revenue and has four units that make up this group.

So here’s the deal, Omar Ishrak Medtronic’s CEO brought in Hooman Hakami to transform the diabetes group. Omar basically said to Hooman, “I’m going to give X amount of money and X amount of time to make this unit work. If we can’t get it to the level we want we’ll sell the unit.  You have my full support on this but understand the business of diabetes is changing and if we can’t change with it, we have no business being in the business.”

To his credit Mr. Hakami has blown up the old model and sees that if Medtronic diabetes is going to remain relevant and continue to grow it must expand beyond its legacy insulin pump franchise. He understands what Diabetic Investor has been saying for some time, the insulin pump market is not large enough nor growing fast enough to support all the existing players in the market let alone the many who want to enter this market. If Medtronic diabetes is going to grow it must expand not only to insulin using Type 2’s but also non-insulin using Type 2’s. Insulin delivery will play a major role yet it must go beyond just insulin delivery.

Every deal Mr. Hakami has done has been related to the where the market is headed, the coming of interconnected diabetes management (IDM) combined with advanced data analytics. We also believe the rumored deal between Medtronic and Tandem Diabetes (NASDAQ:TNDM) will become a reality as Mr. Hakami knows it’s faster and cheaper to acquire Tandem and use the t:slim platform to replace the aging Paradigm platform.  Perhaps the most refreshing aspect Mr. Hakami has bought to this unit is they are no longer fixated on developing a closed loop insulin delivery system. Yes they are still working towards this goal but is in longer the core strategy that drives everything the unit does, it’s now just one more thing the unit is working on. Simply put he’s smart enough not to bet the ranch on whiz bang technology that has limited commercial appeal.

Still he knows that he only has so much time and money and that if the unit cannot reach the desired metrics it will be placed on the block. This ladies and gentlemen is the GE way and both Omar and Hooman are cut from the GE cloth.

Time will tell but so far Diabetic Investor likes what we see, like the Lilly (NYSE:LLY) strategy in drugs it’s a vast departure from the past and innovative as the strategy may be we’re not sure it will work. Yet unlike so many others in this space at least the company has a well-thought out strategy and isn’t fumbling about lurking from one strategy to the next. The key as always is how well this strategy is executed and for the moment we like what we see.