Rumblings in toy land

First comes news that Dexcom and Verily, Google’s life sciences unit, have amended their partnership agreement. A move we attributed more towards Google being unclear on where they are going then Dexcom not wanting Google as a partner. Partnerships in business like life relationships go through their ups and downs. Therefore, we weren’t that surprised when Dexcom announced they were raising more money.

Per a press release;

“DexCom, Inc. (DXCM) (“DexCom”) announced today that it intends to offer, subject to market conditions and other factors, $750 million aggregate principal amount of Convertible Senior Notes due 2023 (the “notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). DexCom also intends to grant the initial purchasers of the notes a 13-day option to purchase up to an additional $100 million aggregate principal amount of notes.”

Before we go here a couple of quick points as there seems to be lots of misinformation circulating in toy land;

1. Dexcom and Google have not broken up as many seem to believe they have just changed the nature of their relationship. It should be noted that this was never an exclusive relationship from the beginning.

2. While this may sound wacky to some the fact is Google needed Dexcom more than Dexcom needing Google. Now that may seem crazy with Dexcom being this small MedTech company and Google being a cash rich high-tech behemoth, but the fact is Dexcom knows diabetes and Google is still learning diabetes. There is no question that Google brought many positives to this relationship but strictly from a diabetes perspective Dexcom brought more.

3. The CGM market continues to expand and if Dexcom is to be in it for the long run they need bucks. The additional funding makes this possible. While we do believe that one day in the future the company will be acquired that day is not today. The CGM market is still years away from maturing and there is lots of growth ahead which will make Dexcom even more valuable.

We’ve also been getting lots of questions about the competitive environment as many were shocked when Medtronic noted during their earnings call stated;

“Overall, sales of CGM from both the Guardian Connect and the sensors attached to pumps grew 70% with over 90% growth in the U.S. Revenue from CGM now exceeds our pump revenue and is establishing a consistent long-term and dependable revenue stream for our Diabetes Group.”

First let’s make something perfectly clear when it comes to the stand-alone sensor arena before this call Medtronic had ZERO sales NOTHING NADA ZILCH, so any sales are an improvement over ZERO. Second given that the company is converting their huge installed user base to sensor augmented systems they better be selling more sensors or else they have a huge problem on their hands. What Medtronic does not however reveal is how many patients stop using their sensors and convert to either the Dexcom or Libre sensor, something that is happening in greater numbers than the company cares to talk about.

The fact is, yes, those snarky facts again, Medtronic CANNOT make sensors on a massive scale which is why they have so many problems with accuracy and reliability. As we have stated consistently when the damn thing works its great the only problem is the damn thing does not work often enough and far too often delivers widely inaccurate readings. This poor performance can be directly tied to the design of the sensor which makes manufacturing in scale very difficult.

What the company does not mention is replacement costs or how much has been spent replacing sensors sent back by patients. Nor do they mention all those adverse event reports that keep piling up noting that the sensor is not working all that well. The simple fact is when it comes to performance and reliability the Dexcom G6 and Libre are head and shoulders above anything Medtronic has produced.

By the way we hope everyone had a chance to read this report on Medtronic – https://www.icij.org/investigations/implant-files/medical-devices-harm-patients-worldwide-as-governments-fail-on-safety/?fbclid=IwAR0dEP5tg5YMl10YfZt-XxPqve70FU7GFqCv_2-iCzQzxkBsgqOzl0lAi9Q – if not we’d recommend it. For those who have yet to read this let’s say it’s not good news for Medtronic and confirmation of many of things we have already written about.

There is a great piece on this report which can be found on the Drug Delivery web site (https://www.drugdeliverybusiness.com/medtronics-insulin-pumps-highlighted-in-medtech-injury-report/) which contains the following:

“Allegations are not facts and should not be interpreted to suggest that Medtronic violated our legal, ethical or regulatory obligations in any way,” Medtronic spokesperson Rob Clark said in a statement to the ICIJ. “Our reputation is the result of our commitment to patient safety, transparency, compliance, and ethical business practices.”

Now to be fair we do not know Mr. Clark and we’re pretty sure he’s just doing what he’s told to do but his words ring hallow given what we know about what the company is doing. At this point we’d recommend sitting down as we are about to take a walk through the complex world of adverse event reporting. The FDA’s MAUDE database was not designed for the world of sensor augmented insulin pumps. The 670G or any hybrid closed loop system is basically a collection of devices designed to work together. When all the devices work as designed everything is great, however when any one device fails or malfunctions the entire system fails.

Given the way MAUDE works it’s up to Medtronic to classify each adverse event report. Some reports are tied to the sensor, others to the pump itself and others to the reservoir. MAUDE is not designed to detect problems with the system itself rather individual pieces of the system. This is where Medtronic is playing very fast and very loose with their reporting and why the FDA has begun their investigation.

In an attempt to cover up problems with the system Medtronic is basically diverting attention away from a bigger problem making it seem like lots of little inconsequential problems. While we would not go as far and state that the company is lying to the FDA let’s just say they are taking full advantage of how MAUDE works. Yet this Texas two-step could well come back to haunt them now that the FDA is taking a long and hard look.

Just as it’s not nice to fool Mother Nature it’s not a good idea to piss off the agency which regulates the products you sell. The FDA expects companies to tell the truth and has a history of coming down very hard on companies which play fast and loose with MAUDE reporting. Again, to be crystal clear here we have no clue what if anything the agency will do to Medtronic. However, they are taking a deep dive into this very issue and should they find what we have found they will not be kind.

Let’s also state the agency along with JDRF and others don’t want egg on their faces. The agency approved the 670G faster than anyone anticipated and many including the JDRF were quick to jump onto the 670G bandwagon hailing it as a major achievement in diabetes technology. Well as it’s turning out this major achievement is turning into a major nightmare as the system isn’t living up to expectations. Regardless of what Medtronic says publicly there are just too many reports of problems.

Why the company would risk the wrath of the FDA is anyone’s guess. Based on history we suspect this has everything to do with hitting their quarterly numbers. Their quest to put profits and bonuses over patient safety. This my friends is what happens when one company has a monopoly and with over 70% market share in the insulin pump market this is exactly what Medtronic has. Which makes what they are doing even more mind boggling as there is no need to do it.

There was no reason to rush the 670G onto the market especially when it was not ready for primetime. But promises were made, the productions lines were tooled up and the train had left the station before it was ready to leave. It was not until the system was distributed on a wider scale that these problems began to emerge. Problems which could have been nipped in the bud but for reasons only Medtronic knows were ignored.

With the FDA investigation underway we suspect these once small problems will turn into a much bigger problem for the company which could have major implications for the entire insulin pump market. As Momma Kliff used to say this is what happens when greed is combined with hubris. When companies forget how they became monopolies in the first place.

Perhaps the best way to think of the situation Medtronic is in to see the movie Tombstone. There’s a great scene when Kurt Russell who plays Wyatt Erupt says; “Tell em the law’s coming. You tell em I’m coming, and hell’s coming with me!”