The only number that matters

The only number that matters

Yesterday Medtronic (NYSE: MDT) held their annual analyst and investor day which of course included an overview and outlook for their diabetes franchise. While much was said the most telling fact to come out of the presentation was found on slide 16 which noted that the company’s market share from 2012 through 2018. A share which only once went below 60% (59% 2016) and now stands at 73%. The company also noted that while past year was filled with many challenges it still achieved record revenues.

For everything else that was said, more on that in a moment, these facts are the only ones that really matter and point to the problem faced by Tandem (NASDAQ: TNDM) and Insulet (NASDAQ: PODD). As we have been stating baring a major blunder it’s virtually impossible for either Tandem or Insulet to dethrone Medtronic as they own the market.

The fact is Medtronic does not need the best technology or the coolest toy in the toy chest as they have the most important asset when it comes to the insulin pump market; they have the most patients. Secondarily they also own the most valuable piece of real estate in the pump market, formulary position. Combined these two assets make it next to impossible for Tandem and Insulet to compete head on with Medtronic and win.

If the company has an Achilles heel it’s their entry into the stand-alone CGM market. As we have noted the company has nothing to lose here and everything to gain as any share is better than zero share. However, what the company is missing is that even if they improve their system, i.e. no finger stick calibration, etc. This won’t help gain more share and here’s why; those pesky insulin dosing algorithms.

See what the company is banking on when it comes to the stand alone CGM market is their way cool whiz bang Sugar.IQ app. A great deal of time was spent on what this way cool whiz bang app can do once it collects data from the CGM. Very impressive until one considers that this app will be replaced and become unneeded as insulin dosing algorithms move from insulin pump therapy to multiple daily injection (MDI) therapy which just so happens to be the target market for the company’s stand alone CGM.

The company spent a great deal of time extolling the virtues of how this way cool app predicts highs and lows, how it looks back and how it provides actionable insights to the patient. As we said very impressive until one considers that an insulin dosing algorithm will eliminate the need for the patient to worry about any of this stuff.

This is what a Tyler – CGM/app/” smart” insulin pen – is all about. The app collects and analyzes the data provided by the CGM and “smart” pen enabling the algorithm to not just function but also learn. In the future all an app will need to do is tell the patient how much insulin to dose.

Perhaps the best way to think about the difference between what this way cool app can do and what an insulin dosing algorithm can do is think reactive versus proactive. The app is reactive, meaning it analyzes data and then tells the patient what they should do based on this analysis. The algorithm is proactive as it analyzes the data and makes dosing recommendations that when followed prevent events from occurring.

Another issue we have with not just the Medtronic app but any app like Sugar.IQ is will the patient act. Whereas a dosing algorithm can eliminate the need to act, it can prevent highs and lows.

When it comes to CGM what’s going to matter are two things; ease of us and cost. As we have stated consistently in the future the major CGM players will all have systems that are accurate, that don’t require calibration and have sensors that last for equal periods of time. Therefore, as these systems commoditize ease of us and of course cost become the determining factors for which systems are more widely adopted.

Quite frankly this is exactly what happened in the market Medtronic now dominates, insulin pumps. The fact is all insulin pumps do basically the same thing the same way. Yes, there are slight differences between the systems but none that make one system stand above the rest. This will hold true as closed loop systems become the standard. As we noted above Medtronic isn’t winning in the insulin pump market because it has the best technology.

The same will hold true with CGM, technology will matter less while market access will matter more. This is one reason we believe Dexcom (NASDAQ: DXCM) will become in CGM what Medtronic is in the insulin pump market. Besides having great technology, they have the most partners who will help drive greater patient adoption. Tandem and Insulet will drive adoption among insulin pump patients, Lilly (NYSE: LLY), Novo Nordisk (NYSE: NVO) and Sanofi (NYSE: NVO) among MDI patients and Google among less intensively managed patients.

Medtronic and Abbott (NYSE: ABT) have fewer partners who will drive adoption. Medtronic will do just fine in the insulin pump market but unless they develop a Tyler will find it tougher in the MDI arena. Abbott does have BigFoot as a partner but Bigfoot is still a year or so away from hitting the market.

The reality for Medtronic is the more things change the more they stay the same. Sure, they will explore every opportunity they can outside of insulin pumps to add revenue but at the end of the day the straw that stirs the drink, the goose that lays those golden eggs has been and will continue to be their core competency; insulin pumps.