The Easiest Job In Diabetes?
Listening to Medtronic (NYSE:MDT) report earnings this morning where their diabetes unit continues to plod along and deliver solid albeit unspectacular growth, one has to wonder whether or not running this unit is the easiest job in diabetes. Although the company has yet to update their insulin pump technology and continues to encounter new competitors, the unit continues to hold onto their huge installed user base. The simple fact is while the competition continues to offer more advanced technology, so far none of these competitors have found a cost effective strategy to steal share from Medtronic and until they do Medtronic really doesn’t have much to worry about.
The one area where the unit does face credible competition, the continuous glucose monitoring market, continues to grow mainly due to their huge installed insulin pump user base. While Diabetic Investor believes Dexcom (NASDAQ:DXCM) offers a more attractive product, unlike Medtronic they do not have a built in insulin pump patient base they can sell too and must rely on their insulin pump partners to sell more of their sensors. The simple fact is while a Medtronic patient may favor the Dexcom system from a practical standpoint it is easier for this patient to use the Medtronic CGM as it seamlessly communicates with their Medtronic insulin pump.
This does not mean Medtronic can sit around and do nothing; however the fact that they own 70% of the market means they can move methodically or put another way, don’t do anything stupid which would kill the goose that lays the golden eggs. As long as they can keep their existing patient base happy and prevent these people from switching to a competing system, the company will continue to see a very predictable and very profitable revenue stream from the continual sale of pump supplies. While it is true they are not winning the majority of new pump starts, these are patients new to pump therapy and not patients already on a pump who is upgrading; the company really doesn’t have to win the little battles to win the war.
Everyone in the insulin pump space knows that the market is not growing fast enough nor is it large enough to support the existing players already in the market let alone the many new companies entering the market. Medtronic is also in the catbirds seat here as well, as if they do see a credible threat on the horizon they have two options they can follow. Besides having a huge installed user base they also own a huge portfolio of intellectual property, a portfolio they can use to litigate a competitor to death. Even if the competitor wins they could lose as the legal process is not just a lengthy one but also very expensive. The second option for Medtronic is they can use their considerable resources to acquire a possible threat and turn what could have been a negative into a positive.
The real threat for Medtronic would be a competitor who is willing to think out of the box and take some of the positive elements from the competition combine these elements into one company, a company which would need not just patience but a fairly large bankroll. Diabetic Investor would envision such a company to develop a very easy to use, low cost system that comes in both a wired and wireless configuration. We also envision a lease versus buy pricing structure not unlike what Insulet (NASDAQ:PODD) has attempted with their OmniPod system. The main difference being these lease payments would cover not just the initial hardware but also include pump supplies. Patients on such a system would also be given the opportunity for free upgrades when new technology comes out.
This company would also be forced to find a more cost effective way to manage the high customer support costs that comes with insulin pump patients. Even with an ultra-easy to use system this is still a medical device and medical devices do malfunction. Although it’s true that insulin pump patients are sophisticated and would not be averse to using the internet or mobile technology to help with support functions, not every support function can be handled with technology. As we have stated several times the key to the insulin pump market is not just advanced technology but customer support. The insulin pump business may be big business but it is a small and extremely vocal community, as we have seen with the recent issues at Insulet poor quality or poor customer support can kill a great idea.
Perhaps the biggest obstacle of all is capital. As we noted previously the hard part is not building an insulin pump, the real hard part is running a profitable insulin pump company. Besides the heavy cost of customer support, an insulin pump company needs sales reps and marketing. Simply put someone has to get this system into the physician’s office, someone has to get it covered by insurers and someone has to make sure patients know about the system. Just how much capital is needed? Consider this fact, Animas the insulin pump unit of Johnson and Johnson (NYSE:JNJ) has NEVER turned a profit and it’s not an understatement to say that JNJ has a fair amount of capital.
The harsh reality is the insulin pump landscape is littered with companies who have tried to compete with Medtronic and failed. Disetronic and Smiths Medical are two companies both of whom had solid systems and capital backing that show how tough this market has become. Taking a realistic view of the insulin pump market all of Medtronic competitors follow a very familiar path. Just as it seems Republicans are searching for a Mitt Romney alternative, so are insulin pump patients and their physicians who look for a Medtronic alternative. Just as in the Republican race, someone comes along and captures a percentage of the vote but then either fades away or plateaus not being able to gain any further ground.
This is almost exactly what the insulin pump market has become, while patients and physicians would love a Medtronic alternative, they have yet to support any of the Medtronic competitors strong enough so they can sustain their momentum and ultimately come back to Medtronic. Like the Republicans who seem to be stuck with Mr. Romney and his faults, insulin pump patients are stuck with Medtronic and its faults. The main difference between the race for the Republican Presidential Nomination and the insulin pump market is that no matter whom the nominee is this person will not be running against an incumbent with a 70% market share.
Just as many Republicans are unhappy with the choices they have, so too are insulin pump patients, as so far no one has come along to capture their attention which would make them switch to a competing system. And while it is possible that someone could come along, out of the blue and change this dynamic the way it stands today neither the Republicans nor insulin pump patients will get what they want and will have to settle for what they have.
