Roche Reports
Who would have ever thought that a 6% growth rate would be considered significant? That’s how far the bar has fallen in the blood glucose monitoring market. Looking over the results released by Roche this morning it’s evident the company continues to wander in the desert searching for a mirage that just doesn’t exist. The company continues to pursue a strange path with no cohesive strategy.
A perfect example of this helter-skelter strategy is their recent acquisition of insulin pump maker Medingo. According to Roche they acquired Medingo because the insulin delivery market is growing at 11%+, “Insulin patch pump segment estimated to grow over-proportionally” and “Patients new to pumps in the U.S. increasingly favor patch-pump systems”. So it makes perfect sense to acquire Medingo and launch their Solo patch-pump in two years.
Many have looked at the Medingo acquisition with one underlying question; “Why did Roche acquire Medingo which has no customers, a suspect patent portfolio and then wait two years before even launching the Solo?” At first glance some believe that since the cost to acquire Medingo was just $160 million ($200 million if certain milestones are reached) was so cheap they couldn’t pass on such a bargain. However this sentiment fails to take into account that company will have to invest another $300 to $400 million just to bring Solo to market. Keep in mind since Medingo has no customers, no managed care relationships and no customer support personal, Roche is effectively building a pump company from the ground up.
Let’s not forget that when it comes to insulin pumps here in the US Roche is less than after thought, so the company will have the additional hurdle of rebuilding relationships with physicians and certified diabetes educators. As Diabetic Investor noted when we first reported on this acquisition in most physician offices the choice of which insulin pump to prescribe comes down to two companies Medtronic (NYSE:MDT) and either Animas, a unit of Johnson and Johnson (NYSE:JNJ) or Insulet (NASDAQ:PODD) who makes the OmniPod. While Insulet is currently the only company selling a patch-pump it is well known that Medtronic is getting set to enter the market and even with the many delays for their OmniPod wannabe they should get to market before 2012.
Although Diabetic Investor is no expert on patent law looking over the Medtronic patents and Medingo patents we could see Medtronic going after Roche as they did when they basically put Deltec out of business. If there is one thing you can count in the diabetes device market, whether its glucose monitors or insulin pumps, companies defend their IP like a mother lion defending her cubs. Now in the hands of Roche look for Medtronic to aggressively defend their patent position making life even more difficult for Roche.
The Medingo acquisition is even stranger when Roche could have easily acquired Insulet, a company that already has an installed user base of 15,000+ patients. While it’s true the cost of to acquire Insulet would have been higher than $200 million, the company would have gained an immediate presence in the insulin pump market. Again as we noted previously put side by side the OmniPod is much better product than the Solo.
So why then did Roche acquire Medingo? It can’t be just because they believe the Solo is cheaper to manufacture. The truth is they really don’t know what it will cost to make the Solo as there are no Solo customers. The fact is the patch-pump business is really no different than the BGM business where scale means everything. We’re not even sure the Solo can be manufactured in scale as it’s never been done before. As we have seen with the Navigator its one thing to design a product, it’s quite another to manufacture the product in scale so it performs consistently with no quality issues. This is even more important with an insulin pump which as we have seen can kill a patient if the pump malfunctions.
Diabetic Investor does not necessarily dispute Roche’s belief that the insulin delivery market is growing at 11%+, however the insulin pump market is highly competitive and dominated by Medtronic who commands nearly 70% of the market. While Animas and Insulet have done a fine job of chipping away at Medtronic’s share, the fact remains that Medtronic remains the 800 pound gorilla of insulin pumps. For all their problems the choice of insulin pumps always includes Medtronic and rarely is patient choosing between Animas and Insulet alone.
For several years Diabetic Investor has contended that insulin pump market is not large enough, nor growing fast enough to support the existing players in the market let alone the many companies who are trying to enter the market. A fact that became evident when Deltec surrendered and left the pump market to Medtronic, Animas and Insulet.
So we ask again why did Roche, whose diabetes device division is in complete disarray, acquire Medingo? It’s not like they will sell anymore Accu-Chek test strips as even if they put an Accu-Chek meter in the Solo PDM the product won’t be available for another two years. As we noted previously insulin pump users are the more frequent testers using on average eight test strips each day. Had they acquired Insulet and swamped out the FreeStyle meter which is integrated in the OmniPod PDM, they would have at least been able to offset the cost the acquisition through greater strip sales.
Since there appears to be no business rationale for acquiring Medingo, Roche must have something else up their sleeve and Diabetic Investor thinks we’ve figured out the reason for this weird acquisition. Roche being a solid corporate citizen wanted to offer hope to the many companies seeking to enter the insulin pump business and whose sole purpose is to be acquired by a larger more established company. The see investors who are dumb enough to pore millions of dollars into these companies with no realistic hope of ever recovering their investment and they wanted to provide them with hope their investment haven’t been wasted.
Frankly there can no other explanation. These investors can now point to the Medingo acquisition and state; “Heck if Roche if Roche is dumb enough to acquire Medingo for $200 million our company is worth at least that much, if not more.” This acquisition allows provides these insulin pump wannabes with even more ammo when they hit up VC’s for more money. They too can state; “See we told you all along that there are companies willing to waste hundreds of millions of dollars to enter an already over-crowded market and will buy almost any company even when they product isn’t that great.”
In investment parlance this is called the greater fool theory, which as far as Diabetic Investor can tell is the driving factor for many investments made in the diabetes device arena. To Diabetic Investor the Medingo acquisition proves once and for all that Roche is the biggest fool in diabetes devices. Who else could take a dominate market position in BGM and lose 11 share points? Who else would spend over a billion dollars to acquire Disetronic and then have to wait over two years to sell the product they acquired? (This seems to be a trend when Roche acquires an insulin pump company.) Who else would throw even more money into a market, where they have already wasted over a billion dollars, and then compound their mistake by buying a company that doesn’t have a single customer?
When it comes to how Roche has managed their diabetes device unit Diabetic Investor is reminded of what Laurence Peter wrote back in 1982; “You can fool some the people all of the time and all of the people some of the time, but you can make a damn fool of yourself any old time.”
