So you want to be in the insulin pump business.

So you want to be in the insulin pump business.

Ask anyone who’s actually in or been in the insulin pump business and they will tell you that building the pump is actually the easiest part of the process, the difference between being successful or failing is knowing how to run an insulin pump company. As Diabetic Investor has stated previously the closet parallel to running an insulin pump company is running an airline. The simple fact is insulin pump patients require around the clock attention and the possibility exists that if your product fails the patient can die. This is one reason pump companies spend millions on quality control, training and patient support.


There is no question that insulin pump therapy is one of the more effective therapy options, but it is also true that insulin pumps are machines and machines malfunction. Making matters more complex is another simple fact, insulin pumps are used by humans and humans also make mistakes.


Over the past few years we have seen a tremendous advancement in insulin pump technology. Today’s crop of insulin pumps are basically mini-computers with a host of features designed to make insulin pump therapy more patient friendly. Still, like a computer, there are times when the patient does not use the system as intended or the system malfunctions, this as they say is the nature of the beast. Perhaps the difficultly of running an insulin pump company is best summed up when one insulin pump executive told Diabetic Investor; “We don’t charge thousands of dollars because that’s what it cost us to make the pump, we charge that much because we have to run an insulin pump company.”


This is one reason Diabetic Investor has been fascinated with the many companies who are not currently in the business seeking to enter the market. Many seem to believe that the key to the market is having a pump that is cheaper to manufacture. They also seem to believe in the old saying “If you build it, customers will buy it.” When asked how they plan to sell and support their whiz bang systems which are cheaper to build Diabetic Investor is typically greeted with blank stares.


There are some who naively believe that their pump is so easy to operate support costs will be cheaper. Others believe they can use the internet to handle support and training issues. The reoccurring theme is that unlike current pump companies they will be able to run their operations more efficiently because their systems are so advanced and easy to use. This attitude reminds Diabetic Investor of another old saying; “When a man with money meets a man with experience, the man with the experience ends up with the money and the man with the money ends up with the experience.”


Still these newcomers remain undaunted in their zest to enter an already over-crowded market which is facing slower growth and a tougher regulatory and pricing environment. Some who also are in the glucose monitoring business see pumps as another way to sell more test strips. It’s a well known fact that insulin pump patients monitor their glucose levels more frequently and account for nearly 25% of all test strips sold. An amazing fact when you consider that there are only 500,000 or so insulin pump patients worldwide.


Diabetic Investor recommends that before these companies spend millions they take a close look at Johnson and Johnson (NYSE:JNJ), who owns LifeScan and Animas. When JNJ acquired Animas they had hoped their acquisition cost would be partially offset by increased sales of LifeScan test strips. Test strips are far more profitable than insulin pumps and pump supplies. This is same reason LifeScan signed a deal with insulin pump market leader Medtronic (NYSE:MDT) for the OneTouch UltraLink™. The UltraLink™ glucose monitor communicates directly with the MiniMed Paradigm® insulin pump.


Just as the UltraLink™ works with the Paradigm® system, JNJ also has the Ping® which communicates with the Animas insulin pump. Unlike the UltraLink™, the Ping® does not just send glucose readings to the pump it also serves as a remote control for the pump. According to the Animas web site; “The pump is packed with unique capabilities that may be accessed both wirelessly (by using the meter-remote) and manually. And the meter-remote, with its full set of functions, is designed to make your life with diabetes easier and more discreet. In fact, you can even dose your insulin from it.”

On the market for two years the Ping® is off to a somewhat rocky experience. Back in March the company issued a correction notice for Ping® users which stated; “We have learned of several cases in which pumpers have accidentally delivered excessive insulin when they ignored pump warnings and did not disconnect from their infusion set before loading the pump cartridge. In each of these cases, the pump had been damaged.  Because of this damage, the pump delivered the whole cartridge of insulin during the “load cartridge” step of the priming sequence.”   To their credit Animas took decisive action and did not wait until a small issue became a big one.

Looking over the FDA’s MAUDE database which tracks adverse events related to medical devices, from January 1, 2010 to August 31, 2010 Animas reported a total of 860 events. Of the 860, 319 or 37% were related to the Ping®. Drilling down the data even further over the same frame there 18 deaths reported, 11 of the 18 were associated with the Ping®. (It should be noted that one cannot draw the conclusion that the Animas pump or Ping® actually caused these deaths. Just as you cannot state the 78 deaths reported from Medtronic were caused by their pumps. Interestingly there were no reported deaths reported by Insulet (NASDAQ:PODD), the makers of the OmniPod system.)

Before we go any further here Diabetic Investor wants to make clear we do not necessarily believe there is an issue with the Ping®, as the number of reported adverse events falls in line with other pump related events given their respective market shares. For the record Medtronic reported 3,761 adverse events while Insulet reported 151 events over the same time frame.  Also as noted in the above paragraph Medtronic reported 78 deaths while there no deaths reported by Insulet.


What this data really says is just how difficult it is to run an insulin pump company and it’s delusional to believe that just because a pump is cheaper to make that the system will be adverse event free. Animas, Medtronic and Insulet spend millions on quality control, training and customer support and while not perfect Diabetic Investor believes they have performed admirably given the complexities of insulin pump therapy. As this data clearly indicates insulin pump therapy can be tricky and running an insulin pump company is much more involved than build a pump with lots of whiz bang technology.


The stark reality is no matter how technologically advanced a pump is, it’s a machine used by humans. Machines no matter how well they are manufactured and how many quality control steps are in place, malfunctions still happen. There is no such thing as a machine that works perfectly 100% of the time.


The same is true when you look at the human element. Animas has perhaps the best pump training for their customers and their customer service is consistently rated above their competitors. Still even the best training programs and quality customer service cannot overcome the human element. The simple fact is patients, even well trained patients, make mistakes or do things that should not be done. The machines they use may be of the highest quality but as an old professor once told Diabetic Investor when speaking on computers and programming; “When garbage goes in, you’re likely to get garbage on the way out.”


Still these newcomers seem to believe they will somehow be immune from the realities of the insulin pump market; that somehow technology will trump reality. That would be true perhaps if the technology was not used by the most technologically advance instrument on earth, humans. Humans afflicted with a complex disease that does not always behave rationally. As Diabetic Investor has noted consistently diabetes is not a simple disease to manage, there are a multitude of factors that impact results. Even the most overly educated, diligent patients do not get it right 100% of the time.


Yet unfazed by reality they remain committed to spending millions of shareholders or investors money. Rather than acknowledge the complexities of the market they seek to enter, they move full speed ahead ignoring the many hurdles they will surly encounter along the way.  Diabetic Investor does not have a problem with new companies entering the market, we have a big problem when these companies fail to understand it’s complexities for in the end it’s not the companies who show up as adverse events reports it’s real people. After the company fails they have only lost millions and can move on. The same is not true for patients whose lives depend on these products. In the end it’s the patient who loses.