Sometimes boring is good

Sometimes boring is good

In this wacky world of diabetes where anything can and usually does happen sometimes it’s easy to get wrapped up in all the wackiness and ignore a steady albeit somewhat boring performer. Reviewing the various earnings announcement over the past week or so this is the feeling Diabetic Investor had when we looked at the 2014 fiscal second quarter results for Becton Dickinson (NYSE:BDX). While the business of pen needles, syringes and lancets may not seem all that sexy BD is by far the market leader. Yet for reasons only know to BD they may be on the brink of over complicating their lives.

Take a look at this statement made by the company’s COO Bill Kozy during the Q&A of last week’s conference call;

“We did have a solid quarter in diabetes. Interestingly enough we had double-digit growth both U.S. and international, both at right around 10% give or take a few basis points. The U.S. favorability is a continuing story. It’s really around pen needle growth, and it’s particularly been driven by our ongoing penetration with the Nano product. We had growth in the quarter in the U.S. on Nano that was well north of 50%.

So we are really driving our penetration rates with Nano. We are wide now. We are actually north of 25% on Nano penetration. So that continues to be very, very key to the Diabetes Care business.

International was also strong, and you had — emerging market growth is the driving contributor there. Think about that being right around 17%, 18% for the quarter, similar comments to what I made before about emerging market, Latin America and Greater China being the real critical drivers there.

In terms of what’s next for us in Diabetes, we have referenced the fact that we continue to do product development in the area of insulin infusion. And at this point in time that is the high priority kind of product development activity in the company in the Diabetes Care business.”

It’s the very last paragraph of this statement that everyone should pay close attention to. As Diabetic Investor has noted in the past BD isn’t just the market leader in pen needles and syringes they also own a ton of intellectual property in the diabetes space, much of it not surprisingly in the insulin delivery space. To say that BD is well acquainted with the insulin delivery space is like saying the Chicago Cubs are well acquainted with avoiding the World Series. Few companies understand this market as well as BD does.

That being said one has to wonder why the company would want to enter the already over-crowded insulin pump business.  Although the market has not fully transformed itself into a commodity market there are signs it’s headed in that direction. Just as the BGM market faced competitive bidding so too will the insulin pump market. Like the BGM market the insulin pump market is also facing intensifying price pressure. Yet perhaps the biggest obstacle is the 800 pound gorilla in the space known as Medtronic (NYSE:MDT).

How many times has Diabetic Investor stated that try as they might to screw up a very good thing Medtronic remains the clear market leader in the insulin pump market. While it’s true their share has slipped somewhat recently still no other company in the market has its huge installed user base or its brand name recognition. For better or worse when the subject of insulin pumps comes up the first name that comes to mind for the vast majority of physicians is Medtronic. Just as BD owns a ton of IP in the space so too does Medtronic who uses their IP portfolio as a hammer to stifle competition.

How many times has Diabetic Investor written about the many companies who have tried and failed to give Medtronic a serious run for their money? Think about this for a moment Johnson and Johnson (NYSE:JNJ), Roche, Insulet (NASDAQ:PODD) and most recently Tandem (NASDAQ:TNDM) have all tried and failed to steal Medtronic’s thunder. Not to mention Smith’s Medical who was forced out of the market or Abbott (NYSE:ABT) who developed a pump that never made it to market. Actually not entering the insulin pump market was perhaps the only smart decision made by Abbott.

About the only way BD could seriously compete in this space would be via acquisition and not just one acquisition. This is where things could get very interesting. As Diabetic Investor has previously reported now that JNJ has restructured their diabetes franchises it’s just a matter of time before they jettison their insulin pump unit, Animas. It’s also well known that Tandem and Insulet would both be open to the prospect of being acquired. Should BD decide to be bold and wish to spend a few bucks they could make a run at not just Animas but Tandem or Insulet. From a market perspective acquiring Animas and Insulet makes the most sense as they bring with them experience in the market, decent market share and complimentary product offerings. Given that Animas and Tandem both have wired pumps it really doesn’t make sense to acquire both, Tandem’s product may be sexier than Animas but the company lacks Animas deeper market share. Just as the BGM business has become all about scale so too has the insulin pump market.

The one thing BD should avoid at all costs is acquiring a company like Asante, this is not to say that their new Snap pump isn’t a compelling product rather the company lacks a serious presence in the market. Sure they would be cheaper to acquire but then BD would have to spend millions to build market presence. The harsh reality is if BD wants to take on Medtronic and truly give them a serious run for their money scale is critical.

Still Diabetic Investor can’t figure out why BD would want to be in this market in the first place. It’s not like they need insulin pumps in their portfolio or that their diabetes franchise is performing poorly. Nor are market trends going against their existing portfolio of diabetes products, quite the contrary. Insulin usage is increasing as is usage of GLP-1’s, both injectable therapies. Insulin pens continue to replace syringes as the preferred insulin delivery system; the same is true for GLP-1’s. Yes they have some competition in the pen needle and syringe business yet as their results clearly indicate this competition isn’t hurting results.

In many respects BD is the Medtronic of the pen needle and syringe business. They have a dominate market share plus solid brand name recognition. Just as physicians think of Medtronic first when it comes to pumps so too they think of BD when it comes to pen needles and syringes. Just like Medtronic has seen its share of competitors who have tried and failed so too has BD. Yes like Medtronic they have lost some share recently this is not unexpected when they practically own the market. Like Medtronic it’s just as important to maintain their market share as to expand it.

The main difference between BD and Medtronic is that unlike Medtronic BD isn’t trying to screwing up a very good thing. The company has consistently brought out new and innovative new products. About the only time the company did screw up was their ill-fated attempt to enter the BGM market. Hopefully the company learned a valuable from this experience and won’t get away from a business they know inside and out.

Sure the pen needle and syringe market is boring and not that sexy but sometimes boring is ok especially when a company is really good at it and BD is the best at what they do. Why they would want to enter the insulin pump market seems like a huge waste of capital and a major departure from their bread and butter business. Still this is the wacky world of diabetes where anything can and usually does happen. Let’s hope for the sake of BD and their stakeholders they come to their senses and avoid getting overly wacky. Boring and highly profitable is sure better than sexy and broke.