The Eclipse is over
Yesterday millions of Americans witnessed a truly rare event a solar eclipse, something that’s about as rare as a single person winning tomorrow’s Powerball drawing with a jackpot of $650 million. Rarer still is an insulin pump company telling the whole truth and nothing but he truth. Listening to their earnings calls or reading their statements there are always shades of the truth but there is also lots of room for versions of the truth. We felt this way this morning when Medtronic (NYSE: MDT) reported their fiscal first quarter results.
The earnings press release contains the following;
“The group is experiencing strong global demand for its new sensor augmented insulin pump systems, but is temporarily affected by the previously disclosed limited supply of continuous glucose monitor (CGM) sensors.”
The presentation that went with todays call includes a slide with the following;
“Temporary Sensor Supply Constraint Impact
Increased global demand outstripped global sensor production capacity
Since launching 640G in Q3FY15, OUS sensor volumes up ~2.5x and now account for over 40% of total MDT sensor shipments
Obligation to existing customers at expense of supplying pump/sensor systems to new patients
35,000 Priority Access enrollees affecting ability to sell pumps to new patients”
Now we should note a few things right away – first we did not listen to the call – second unlike previous management teams at Medtronic at least this one is publicly acknowledging what everyone in the diabetes world already knows and lastly the company is telling their version of the story. That being said, here is a clearer version of what’s really going on.
See Medtronic wants everyone to believe that incredible demand for the 670G is creating the sensor shortage, that they just cannot keep up. Well this isn’t exactly correct as for they even acknowledge this somewhat with the statement that; “35,000 Priority Access enrollees affecting ability to sell pumps to new patients”. While 35,000 patients may seem like a lot it’s a fly on an elephants tush for Medtronic a company that for all practical purposes has a monopoly in the insulin pump market.
So, let’s set the record straight demand has nothing to do why the company cannot supply patients with sensors and as we reported are telling suppliers to recommend the Dexcom (NASDAQ: DXCM) system until they can supply patients with the new Enlite sensor that works with the 670G. The issue here is what we’ve been saying along they cannot manufacture these new sensors and this would not change if only 10,000 patients were on the 670G. This isn’t a demand issue this is a manufacturing issue.
Another misconception that the company seems to be perpetuating is that the introduction of the 670G is expanding the pump market, that patients are switching from other forms of insulin delivery to a pump because of the 670G, that is not the case and there is no evidence to indicate that. Domestically all the company has done is moved people from the 630 to 670G they are not expanding the market. These people were Medtronic customers already they are not new customers.
The fact is the launch of this way cool whiz bang toy has been somewhat disjointed. Frankly we have never understood why a company that has a monopoly would rush this new toy into the market. Why they felt it necessary to be so public about the launch of this way cool whiz bang toy. Given how things have gone it’s clear the company just wasn’t ready and likely should have been less anxious and more methodical. Yet as someone said before the launch began; “The train has left the station already and all they can do now is hope it doesn’t crash.:”
Yet as we have noted before given their position in the market the company knew they had nothing much to lose. Even with the $299 “refund” debacle and some other “miscommunications” the company knew they were in position were mistakes would not hurt them. And thankfully, at least so far, they have avoided the biggest mistake of all as no one has died, at least that we aware of, who was using the 670G. And no, we are not being overly melodramatic here.
As we have said from the beginning the company could everything 100% correct, which they haven’t, and still get screwed. Again, as we have stated the 670G may not be an artificial pancreas but it is an advancement in insulin pump technology. Still it is a medical device and medical devices fail and malfunction. This medical device also happens to deliver a life-saving albeit lethal drug when it’s delivered improperly.
Frankly it is a testament to the company that no one has died and no we are not being sarcastic, the 670G is an incredibly sophisticated piece of technology with lots of moving parts and is used by humans. And just as medical devices fail or malfunction there is something called human error. So, kudos to Medtronic on this point.
The reality is Medtronic will eventually work everything out and while they will suffer somewhat short term the train is unlikely to jump off the track. It’s just a matter of time before Tandem (NASDAQ: TNDM) implodes and Animas, Johnson and Johnson’s (NYSE: JNJ) pump unit is a one large cluster (insert your favorite adjective that begins with the letter F and is very popular on Game of Thrones).
The reality is for reasons only the company knows they rushed the 670G to market. This rush as we anticipated created lots if issues, some self-inflicted, some not. Still without much competition they will win anyway. When Tandem does implode they will pick up 80% possibly more of the installed base. With Animas going nowhere with no strategy and no buyer they will not pose a threat. Which leaves Insulet (NASDAQ: PODD) as their main competition and no disrespect to the good people at Insulet they are outgunned.
Now some will say this is what happens when a company has a monopoly, that Medtronic is the Evil Empire that has built the Death Star. They will blame the system saying that the system allowed Medtronic to gain so much power. This is horseshit.
This happened because of the ineptitude of companies like Roche who blew a billion bucks on Disetronic. This happened because Deltec, a unit of Smiths Medical, failed to do their legal due diligence. This happened because JNJ spent a few hundred million on Animas, had to fix its many issues and then failed to integrate the unit. This happened because Tandem their management team and their board of directors have proved beyond a shadow of a doubt there is no cure for stupid.
Do not blame Medtronic for creating this monopoly, they merely took advantage of the hand they were dealt. Or put more bluntly they didn’t (again insert that adjective used a lot on Game of Thrones) up. Sure, they have made some mistakes with the 670G launch and yes, they will pay a short-term price but in the end, they will win by default as there is no one around to give them some healthy competition.
As Momma Kliff used to say; “You can complain all you want but that won’t change reality.”