The beginning of the end for Deltec?
Diabetic Investor has learned that Deltec (Deltec is a division of Smiths Medical), the makers of the Cozmo insulin pump, has stopped taking orders for new pumps and is not shipping any pumps. According to their customer service department there is some type of supply chain issue and the company is waiting for components before resuming sales.
When Diabetic Investor called Deltec’s corporate office and spoke with two Deltec executives, they would confirm that pump sales have been halted but issued a flat “no comment” as to the reason. When asked specifically if this was a supply chain issue, once again a flat “no comment.” This disconnect between what the executives aren’t saying and what the customer services are saying leads Diabetic Investor to believe there is more to the story, possibly much more.
Once the darling of the insulin pump world, the company has fallen on hard times. The decline began after they settled an intellectual property lawsuit brought by market leader Medtronic (NYSE:MDT), the owners of MiniMed. Prior to this settlement between the companies it was widely speculated that Smiths was getting set to sell Deltec to a major blood glucose monitoring company. As we pointed out earlier this week insulin pump patients check their glucose levels more frequently than any other patient with diabetes and account for almost 25% of test strips sold in the US. Given the changing dynamics of the BGM market insulin pump patients are critical to the future success of the BGM market.
Basically the terms of the settlement between Medtronic and Smiths, crippled Smiths efforts going forward. This allowed Medtronic to stymie Deltec’s sales efforts which were chipping away at MiniMed’s existing customer base. The company has issued several software updates for the Cozmo but has yet to introduce a new pump. While Medtronic, Animas (a unit of Johnson of Johnson (NYSE:JNJ) and Roche have introduced new versions of their pumps and Insulet (NASDAQ:PODD) came to market with the OmniPod, Deltec was stuck with old technology. The company is also well behind in integrating a continuous glucose monitoring system into their pump.
As it stands today the OmniPod is gaining traction in the marketplace and could quickly supplant Deltec as the number three player in the market behind Medtronic and Animas. Diabetic Investor believes this supply chain issue could be a smokescreen by Deltec. Given the terms of the agreement with Medtronic, selling the Deltec unit is problematic as any company that acquires Deltec must renegotiate with Medtronic. Based on their public comments around IP it’s unlikely that any acquiring company would find negotiations with Medtronic an enjoyable experience. It’s possible Smiths, could spin off Deltec as a separate operating unit, but with their declining customer base it’s doubtful the company could survive over the long term. The most drastic but possibly most realistic option might just be shutting operations entirely.
This option may not seem as drastic as it sounds based on the dynamics of the insulin pump market. While diabetes has been growing at epidemic rates there are only 500,000 or so patients worldwide using an insulin pump. The pump market is dominated by MiniMed, Animas now has access to JNJ ‘s vast resources while the OmniPod offers a unique design and equally attractive pricing structure. Although Roche has re-entered the market the Accu-Chek Spirit has failed to gain traction. Diabetic Investor does not see Roche abandoning the market after paying over $1 billion to acquire Disetronic. While Roche does not appear to have a coherent strategy as to how to gain pump placements they do have the resources to stay in the market.
The final nail in the coffin could be something Diabetic Investor has been saying for years; “The insulin pump market is not large enough or growing fast enough to support all the current players and the many who are getting set to enter the market.” There are several companies who see themselves as Insulet wannabes, each developing what they believe is a cheaper version of the OminPod. There are others taking a different tack who plan on following the model set by the BGM market, namely give the pumps away for free and make money selling pump supplies. It seems each year a company comes along believing they can build a better or cheaper mouse trap.
The fact of the matter is making an insulin pump is not rocket science, the real issue is selling and supporting the pump. Typically these newcomers believe that they will be acquired leaving the sales and support functions for the acquiring company. Diabetic Investor has always questioned this strategy for two reasons. Medtronic bought MiniMed, JNJ bought Animas and Roche bought Disetronic. Although Novo Nordisk (NYSE:NVO), Lilly (NYSE:LLY) and Sanofi-Aventis (NYSE:SNY) have expressed interest in the market it’s unlikely they would acquire any company without a proven concept. That leaves Abbott (NYSE:ABT) and Bayer as the remaining companies where acquiring an insulin pump company makes any sense. Abbott already has a relationship with Insulet, and so far Bayer intentions here are unknown.
This leads to the second point, why would anyone acquire a new and unproven concept when Insulet is an independent player with a proven product that’s gaining share.
The reality is the Cozmo pump as good as it is would have never gained any traction in the marketplace had it not been for the many missteps made by MiniMed. Both Animas and Deltec came on the scene when MiniMed was in turmoil. While there are some who would contend that MiniMed is still in turmoil, they have the advantage of controlling nearly 75% of the market. Diabetic Investor does see MiniMed losing share but baring a major misstep it’s difficult to imagine anyone giving them a serious threat.
Part of Diabetic Investor would be saddened should it turn out the Cozmo is on its last legs. The Cozmo is one fine pump. However, the realities of the marketplace tells us that our instincts are correct. It looks like the Cozmo will be the first causality of the increasingly competitive battle over market share.
David Kliff
Publisher
Diabetic Investor
www.diabeticinvestor.com
www.davesrunfordiabetes.blogspot.com
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