So what will it be?

So what will it be?

Tomorrow likely before 8am EST we’ll find out the following;

1. Just how bad is the Medtronic diabetes unit doing.

2. Whether a change in leadership is announced.

3. The strategic options for the unit.

Part one how bad is it is almost a moot point as unless they can pull a rabbit out of the hat, we doubt it will be a pretty picture. A more important question is what are they doing to fix the unit, more on that in a moment.

According to our sources inside the company there has already been a change in leadership. Yet other sources note that this team is setting up meetings for the upcoming ADA conference. Digging a little deeper here’s what we have learned. Yes there is a change in leadership it’s a question of when it becomes “official”. A consensus seems to be emerging that this change will be made official after the ADA conference giving the exiting team an opportunity to introduce the new team.

It’s the third point that is the most interesting. As we have reported the company has basically decimated everything that’s not directly linked to their core insulin pump franchise. The goose that’s laying all those profitable eggs is in danger and they doing everything they can to make sure that golden goose does not turn into a dead duck. However this is just a short-term fix. Longer term the company is seriously considering selling or spinning off the unit to private equity.

As we have been reporting the way cool whiz bang 670G isn’t performing as anticipated. The Animas conversions which were supposed to be a layup have turned into a nightmare. The FDA is investigating the franchise. The competition is gaining ground and the pipeline is lackluster. Plus it does not help much the reimbursement model is changing to a subscription model. Nor does it help that the straw that stirs the drink, the sensor is an issue they cannot easily or cheaply fix.

So per the past the company is following its SOP, first slash and burn shedding as much cost as possible without harming the golden goose. Next out with the old management and in with the new. Yet this time around it does not appear the new team will be given a chance to fix and rebuild, rather put a band-aid on it, keep it running as smoothly as possible in a difficult environment until a deal can be put together.

Again as we have noted in the past as bad as things are for the franchise it’s still the largest insulin pump company and the supply business is very profitable. These two factors alone make the unit attractive to a potential buyer. The one kink in the armor is what the FDA might do something that can be dealt with by Medtronic protecting any buyer from this possibility. The key question really is what Medtronic values the unit at and whether someone will pay that price.

As it stands today Tandem has a market cap of almost $4 Billion, Insulet $6 Billion and Dexcom almost $11 Billion. There is no way Medtronic will sell the unit for less than any of these companies, this just isn’t going to happen they could not stand the embarrassment. Hence the problem as it’s unlikely private equity the most likely buyer would want to take on so much debt to finance the deal. As we noted when Platinum bought LifeScan they leveraged the hilt out of the deal, this as they say is how it rolls.

Yet the silver lining here might be rather than an outright sale, spin the unit off as a separate privately held company with Medtronic maintaining a minority stake and private equity holding the majority. Once private and free from the mothership this now independent company can go about fixing what’s wrong so they can take the company public again via an IPO.

Having a minority stake Medtronic makes the deal more palatable for private equity. It creates the opportunity for a future payday, and it allows them to protect their other stakeholders from any action taken by the FDA. And we should make something very clear about this investigation as it is possible the FDA won’t do anything, while we think this is unlikely it is possible.

Also free from the mothership the company can do a deal with Dexcom allowing the Dexcom sensor to communicate with the 670G and future versions of the 670G. This immediately fixes a huge problem for the company and is fiscally smart over the long run as it would allow the company to halt their current CGM effort, a vast waste of capital today. It’s also smart from another perspective as the insulin pump market is moving towards a mix and match market with all the sensors talking with all the pumps.

Unlike the current leadership at the mothership which cannot come to grips with the fact their sensor sucks when compared to the competition and has an ice cubes chance in hell of being commercially viable, the new owners likely would have no attachment to something that doesn’t work, will cost millions to fix and even if fixed will come to market too late.

We’ll also give you another reason we see a sale and/or spin-off as a very real possibility, Omar Ishrak Medtronic’s CEO is in real trouble. Besides having a disastrous performance at J P Morgan this year stakeholders are unhappy with his performance. And what better way to distract everyone than by getting rid of a unit that’s a drag on the company’s other units, fetch a few billion now and the possibility of a few billion more later and most importantly of all look like you’re doing something big. As Momma Kliff said, “You really don’t have to do anything all that substantial or real, you have to look like you are doing something substantial and real.”

The reality here is that the insulin pump market has changed, Medtronic did not change with it and they let their own hubris get the best of them. Early on they knew their sensor had issues, yet they rushed the 670G into the market and then screwed up the Animas conversions. Unlike the past when things could be fixed too much damage has been done to the Death Star this time around. It’s time for Medtronic to say goodbye to MiniMed before it’s too late and they destroy the last remaining elements of what was a great company.