Pump it up
The insulin pump marketplace continues to undergo a transformation as the companies already in the market and those seeking to enter the market attempt to deal with quickly changing market dynamics. Not unlike the blood glucose monitoring (BGM) market, insulin pump companies are facing intensifying pricing pressure, slower growth, greater competition and tougher regulatory requirements. Looking over the competitive landscape it’s interesting to compare and contrast the different strategies being implemented to deal with changing environment.
Taking a top down approach let’s take a look at how Medtronic (NYSE:MDT) the market leader is dealing with all this. In an attempt to maximize profits the company continues to implement cost savings strategies. As Diabetic Investor previously reported the company has cut back head count and now has decided to move their entire customer support area to their new San Antonio facility. While the company claims this is not a reduction in head count it’s unlikely that all the people in the positions being moved will move from California to Texas.
It’s all becoming obvious that the company has cut back or at least slowed down the development of their much hyped yet much delayed patch pump and the long anticipated replacement for the aging Paradigm line remains on the back burner.
For Medtronic it’s not so much about gaining new share rather holding onto to existing share. With 70%+ share the company understands that the days of double digit market growth are over. They also realize that their many competitors will continue to struggle as long as they can hold onto their installed patient base. Finally they realize that should they begin to lose share they can always buy their way out of the problem by acquiring a replacement for the aging Paradigm line.
At the moment it’s difficult to understand what Animas, a unit of Johnson and Johnson (NYSE:JNJ), is doing. As Diabetic Investor has reported while the company has firmly established them in the number two position behind Medtronic, they remain well behind Medtronic and have yet to turn a profit for JNJ. Based on what Diabetic Investor is hearing it also appears JNJ has decided to follow the cost cutting trend by combining their BGM unit, LifeScan, with Animas. The company has already acknowledged the two units will work more closely together but this togetherness is expanding into the elimination of duplicate back office and some sales functions.
Yet the folks at Animas must be wonder why then LifeScan signed a deal with insulin pump newcomer CellNovo. According to press release issued this past Tuesday; “Cellnovo, developer of the first mobile diabetes management system, today announced a technology alliance with LifeScan, Inc. that will bring new portability and control to diabetes patients worldwide.
Under the global agreement, Cellnovo will integrate LifeScan’s blood glucose monitoring technologies into the handset of its mobile diabetes management system. The Cellnovo system, the first of its kind, consists of an insulin patch pump and a touch screen handset that wirelessly transmits real-time data to a secure portal for patients and healthcare providers to use.”
This is not the first time LifeScan has partnered with an Animas competitor, as the company once had a similar agreement with Medtronic. (It should be noted that Diabetic Investor is hearing that the Bayer/Medtronic alliance is also off to a problematic start. Bayer replaced LifeScan after they terminated their relationship with Medtronic and given how things are going this looks like a good move. Perhaps the problem isn’t with Bayer or LifeScan, but that’s a story for another day.) Still one has to wonder why after their Medtronic experience and that CellNovo is a direct competitor to Animas, why LifeScan would do such a deal. While Diabetic Investor understands why CellNovo wanted LifeScan, we cannot understand why LifeScan wanted CellNovo. Basically LifeScan is telling Animas they aren’t getting the job done and oh by the way we just might replace you one day by acquiring CellNovo.
Diabetic Investor is well aware that LifeScan wants to sell more test strips and that insulin pump patients use more test strips than any other patient. We also believe that CellNovo although not approved here in the US, has an interesting and low cost platform from which if acquired by LifeScan could give Medtronic a serious run for their money. Still Animas actually has an installed user base, a solid and established system. Given these developments it seems as if LifeScan has taken a page out of the Lilly (NYSE:LLY) playbook on what it means to be a “partner”.
The lone patch pump player Insulet (NASDAQ:PODD) also continues to struggle and rather than increase share through conventional tactics the company foolishly went out and wasted over $60 million to acquire a suspect DME. From the moment Insulet announced this deal Diabetic Investor suspected it was a diversionary maneuver to take investor attention away from lagging sales. The simple fact is Insulet is facing a critical juncture as Diabetic Investor has noted previously the company has bet the ranch on their new, smaller, cheaper to make pod which is still awaiting FDA approval.
Yet even if this new pod is approved, Diabetic Investor hasn’t quite figured out how this translates into greater sales of the OmniPod system. Based on numerous reports from physician offices and interviews with existing OmniPod patients Insulet has a problem. Simply put the quality issues that plague the existing system will make selling the new pod more difficult. As the physicians have put it if a patient wanted to be wireless they would chose the OmniPod regardless of pod size. While there may be a small minority of patients who would not select the OmniPod due to pod size, it is not a large enough percentage of patients to make Diabetic Investor believe that a smaller pod would somehow dramatically increase sales. Additionally the company has already stated that patients on the existing pod will be converted to the new pod once it becomes available. Even if a patient didn’t like the existing pod there really is nothing to stop them from trying the system realizing that the new pod will soon be available so they would be inconvenienced for a few months.
The bigger problem for Insulet is their unacceptable pod failure rates. Although the company denies there is a quality issue, field reports indicate otherwise. Although not scientific Diabetic Investor estimates pod failure rates to be running at 15% to 20%. The basic problem is no matter what the pod size patients and their physicians want a system that works and works consistently. Unlike conventional pumps, it’s not that simple to remove insulin from a pod failed, it can be done but this issue is one that disgruntles the patient community. No matter what the pod size patients want a reliable system, especially pump patients who rely on their pumps. Simply put Insulet reputation isn’t that great and when it comes capturing patients companies with a reputation for poor quality don’t get a second bite at the apple. As innovative as the OmniPod system is, this really doesn’t matter much if the system isn’t reliable.
Looking of the remainder of the pump companies the story remains much the same as it was before, try and build share and then get acquired by a big player. Everyone knows that Sanofi-Aventis (NYSE:SNY) wants to enter the space and that Nipro Diagnostics wants to reenter the market. There is also speculation that a non-diabetes consumer product company will come into diabetes devices in a big way, not unlike how GE (NYSE:GE) is coming into the BGM arena.
Rumors are rampant that Roche wants to reenter the market and will use the Solo system as their reentry vehicle. Diabetic Investor doesn’t believe the rumors and even if they turn out to be true we doubt the company will have much success. Based on their track record Roche isn’t very good at growing market share, now should the goal be to totally screw up a market like they have with BGM or waste money – as they did when they spent over a billion dollars to acquire Disetronic – then Roche stands a chance. About the only thing Roche has proven to be good at is turning a large fortune into a small one, other than that the company hasn’t done that much. Let’s be honest it takes real talent to lose 15% share points in the US BGM market and totally screw up the Disetronic acquisition.
The reality is when it comes to pumps Roche has no business even thinking about being a player. They failed miserably when conducting their due diligence when acquiring Disetronic. There are two possibilities, one is they knew of Disetronic’s impending problems with the FDA and went ahead anyway or they were duped by Disetronic, neither possibility speaks well of how Roche does business. Based on what Diabetic Investor knows of the acquisition Roche knew of the issues facing Disetronic and went ahead anyway. If this isn’t an example of corporate hubris (others would say stupidity) we don’t know what is.
The reality is when it comes to diabetes devices the Roche name, once held in high regard, and has fallen into the abyss. As Henry Ford once said; “You can’t build a reputation on what you are going to do.”
There are also a host of what Diabetic Investor call quasi-pumps, systems that deliver a pre-determined basal rate or allow patients to manually administer their insulin. The basic attraction to these systems is nothing more than cost to manufacturer yet Diabetic Investor has yet to figure where these quasi or dumb pumps fit into the treatment paradigm. The question is why a patient would use a dumb pump when they can just as easily use an insulin pen. At the other end of the spectrum today’s smart pumps do offer several compelling advantages over multiple daily injection therapy. That being the case just it’s an open question just where these dumb pumps fit into the treatment paradigm.
Another problem facing everyone new and old alike is competition from new drugs and smarter pen delivery systems. The reality is insulin pump therapy seems to have tapped out with Type 1 patients, try as they might pump companies cannot seem to increase share in this market beyond where it stands today at around 30% penetration. It would seem natural then that it would make sense to convert insulin using Type 2 patients to pump therapy, a market where less than 10% of patients follow pump therapy. Sounds good but these insulin using patients prefer pens and GLP-1 therapy will eat away at insulin usage in this huge patient population.
Years ago it was true that insulin pump therapy was more effective and produced better patient outcomes. This is not the case today; studies have proven that patients, Type 1 or Type 2, can achieve solid outcomes following multiple daily injection (MDI) or GLP-1 therapy. Today insulin pump therapy is as much a lifestyle choice as it is a therapy choice. While Diabetic Investor believes strongly in insulin pump therapy we can also understand the many reasons why more patients do not choose this option. Given the high structural costs associated with insulin pump therapy and current market dynamics we also understand the various strategies being deployed; although we must admit are somewhat befuddled by what’s going on at JNJ.
No one can blame Medtronic for maximizing profits and protecting their turf. Like Diabetic Investor they realize until someone else comes along and knocks them out of the number one position the goal is simple; don’t screw things up. When it comes to insulin pumps Medtronic is like the New York Yankees in baseball or the New England Patriots in football, two teams that may not win the championship every year but always are in contention to play for the championship. While the Yankees and Patriots may have off years every now and then no one can argue with their track records.
As Napoleon once said; “Since one has to take sides, one might as well join the side which is winning …. It is better to eat than eaten.” Or as Russell Baker wrote; “A winner [is] somebody you mess with only if you don’t mind your block knocked off.” As it stands today Medtronic is eating very well and knocking the blocks off the competition. It remains to be seen if any of their competitors have what it takes to offer a serious challenge and give them a real run for their money.
Diabetic Investor would like nothing better for this to happen as this would benefit the entire market. The reality is insulin pumps can be much better than they are today, smarter, easier to operate and more reliable. Yet this will never happen without leadership and right now there is no reason for the current market leader to get any better than they are today. The question is – Is there anyone out there willing to take on this challenge?