The wacky world of insulin pumps
A day rarely goes by here at Diabetic Investor when someone doesn’t call up or send us an email about some new insulin pump company that supposedly has a great new pump that will revolutionize the pump market. While each of these companies has a slightly different twist on how their particular pump will change insulin pumping, there are some consistent themes that apply to all the stories. First as one might expect all the OmniPod wannabes, companies seeking to develop a disposable or semi-disposable patch pump, claim they can make their systems much cheaper than the OmniPod. As Diabetic Investor has mentioned numerous times if Insulet (NASDAQ:PODD) has an Achilles heel it’s their cost of goods. You cannot continue to remain a viable company when you’re not making money on the product you sell. Although Insulet is not where they need to be with their COGS, the company has made progress in this area and should get over the hump when their new, smaller pod is introduced.
The second common theme is that all of these new systems will be very patient friendly thus making training pump patients a snap. This is direct response to the fact that everyone knows that training a new pump patient, not converting an existing pump patient to a new pump, is very expensive and time consuming. The fact is converting an existing pumper is pretty easy as once a patient understands the basics of insulin pump therapy they can pretty much use any pump on the market. It may take some time to learn the particulars of a new system but the fundamentals of insulin pump therapy don’t change.
While Diabetic Investor applauds the efforts to make insulin pump therapy more patient friendly, these companies are ignoring the fact that learning how to use the pump is only half the battle when it comes to initiating insulin pump therapy. The reality is transitioning a patient from multiple daily injection (MDI) therapy to pumping requires a fair amount of training. Besides learning how to operate their pump, patients must also understand carb counting, duration of insulin action, insulin to carb ratios, etc. It would not be an understatement to say that learning how to use the pump is actually the easiest part of pump training. The hard part is not the pump but calibrating the pump to fit the needs of the patient. No matter how easy the pump itself is, this does not help make the calibrating the pump any easier.
The third common theme is what Diabetic Investor likes to call the “Cool Factor”. Piggybacking on the success of Apple’s iPhone, nearly every new pump company lets their pump either communicate with or be controlled by a smart phone. All a patient needs to do is download an app and their off and pumping. Yes this way cool but it also ignores the fact that no one is quite sure how the FDA will examine such a product. We should get a glimpse of what the FDA is thinking as Debiotech has submitted their Jewel pump for approval, a system which allows the pump to be controlled by a smart phone. Diabetic Investor is anxious to see what happens with the Jewel as what happens here will provide a pathway for other companies working on similar systems.
Yet what’s missing from all these companies are such mundane things like how they plan to sell and support their systems. Diabetic Investor has said it a thousand times; manufacturing a pump is the easiest aspect of the insulin pump business the hard part is running an insulin pump company. For all the problems at market leader Medtronic (NYSE:MDT), the company still holds a commanding lead in terms of market share. Based on most industry estimates Medtronic controls almost 70% of the market, followed by Animas and Insulet. This means that any newcomer to the market must not only battle for attention with a well established market leader who has years of pump experience, they must somehow convince patients, physicians and certified diabetes educators (CDE) that they will be around long enough to support the pump.
The reality of the insulin pump market is that in most offices that recommend insulin pump therapy the choice of which pump to use comes down to Medtronic and either Animas or Insulet. While there are some offices that offer all three and some that offer only Animas and Insulet, in the vast majority of cases Medtronic is always in the mix. It is also true that the choice of which pump a patient uses is not based solely on the pump itself, rather how much support the pump company will provide the patient and their physician. While reimbursement is commonplace for insulin pump therapy, several insurers still require additional paperwork for pump patients.
This leads to another area where all these newcomers are silent, namely how they plan on getting their systems covered by managed care. Just because pump therapy is covered by insurers does not that their particular pump will make its way onto formulary. Just ask anyone at an existing pump company and they will tell you one of the most difficult aspects of running their company is not just getting their pump on formulary but dealing with various requirements these insurers have so they get paid. Insulin pump therapy may be well accepted but the fact remains reimbursement requirements are not universal throughout managed care. Navigating this maze of reimbursement is a strain for the existing pump companies and we can only imagine what it will be like for these inexperienced newcomers.
The reality here is these newcomers really only have one goal in mind and that’s to be acquired. They see companies like Medingo, who was recently acquired by Roche, and believe that if someone is crazy enough to think that patients will use the ultra complex Solo system they too will find a buyer. The question is who in their right mind would acquire an unknown newcomer when they can acquire Insulet or possibly Medtronic’s insulin pump unit. Even if the technology is whiz bang including all the latest bells and whistles, this won’t change the market dynamics which are bad and getting worse.
Diabetic Investor hates to keep repeating ourselves but the fact remains the insulin pump market is not large enough nor is it growing fast enough to support all the existing players let alone the many newcomers seeking to the enter the space. To illustrate this point take a look back to 2001 and a special report by ABN-AMRO which stated, “We estimate the market for external insulin pumps, a sub-segment of the overall market for intensive therapy, to be 120,000 pump users in the US (or 30% of the 400,000 intensive therapy patients) or 12% of the Type 1 market in the US.” Three years later in the NiliMed Business Overview, NiliMED is one of the many pump newcomers, it stated; “It is estimated there are 200,000 patients using insulin pumps in the United States and more than 300,000 worldwide.” Today it is generally acknowledged that there are approximately 375,000 insulin pump patients in the US and another 100,000 ex-US; bringing the total worldwide pump market to approximately 500,000 patients.
Taking the estimate from the ABN-AMRO and looking at recent market data that means over the past 8 years (we’re excluding 2010) the US market has added 255,000 new pump patients or an average of 31,875 per year. This number falls in line with Diabetic Investor’s estimate that the insulin pump market is growing at 10% annually, a far cry from the days when sales were growing at 50% per quarter.
Looking forward however Diabetic Investor sees growth rates slowing even further. Insulin pump companies initially concentrated solely on patients with Type 1 diabetes. The fact is even with its proven effectiveness insulin pump therapy is used by less than 25% of all Type 1 patient’s. Insulin pump companies have thus been forced to attract insulin using Type 2 patients to sustain their growth. Here is where the problem lies. The stark reality is insulin pump therapy, for reasons already mentioned, is the therapy option of last resort for an insulin using Type 2 patient. Once new drugs such as Bydureon from Amylin (NASDAQ:AMLN) hit the market Diabetic Investor sees insulin usage among Type 2 patients taking a major hit. It’s far easier to inject Bydureon just once-a-week than deal with all the complexities of insulin therapy. And anything that’s bad for insulin therapy correspondingly hurts insulin pump sales.
Basically what this means is that insulin pump companies will be stuck trying to convert Type 1’s not currently using a pump. There are two main problems with this fact; one there are far fewer Type 1’s than Type 2’s and second, for all the studies that back pump therapy the majority of Type 1 patients simply don’t want a machine attached to their bodies and chose to inject.
Still none of these market realities has stopped newcomers, who continue to attract venture money as there still people out there who believe these guys can build a better mouse trap. Never mind that these newcomers have no real plans for selling and supporting their fancy systems. These systems are so cool and easy to use they will sell themselves and support will be a snap. Heck patients won’t mind at all sitting on hold or waiting for a customer service rep to get back them should there a problem, after all this 2010 and people have come to expect poor customer service.
Who cares about managed care coverage, these pumps are so cool patients will be willing to fork over thousands of their hard earned money just like the millions who bought the latest version of the iPhone. Too bad this really cool phone can’t even perform the very simple function of actually placing a phone call, does it really matter with all those great apps. Hell, actually using a phone to make a phone call is so old school, who needs to talk anyway when we just text message everyone. This just might the model for the future of pump support.
Diabetic Investor can imagine a whole new revenue source for these newcomers as they can follow a path set by banks. Instead of offering human support, the pump patient can chose a basic support plan which provides support via email or text messaging, or they can pay extra for the ability to talk with a real live human being. Even better they can pay even more for priority access.
Should we mention that the insulin pump market is major minefield when it comes to intellectual property, something Roche will discover should they ever try and launch the Solo. Anyone who doubts that Medtronic won’t pounce on Roche would be wise to remember that the Deltec Cozmo, a great pump, is now gone larger due to the fact Deltec violated Medtronic’s IP. While there case was settled, the settlement agreement was so one sided that it effectively handicapped Deltec eventually forcing them to surrender.
The saving grace for all the newcomers is the absolute stupidity of any company who buys them without perform even the slightest due diligence. Roche may be that dumb, but companies like Sanofi-Aventis (NYSE:SNY) are not. The bottom line here is that no matter how cool these new systems are and no matter how many whiz bang features they have this won’t change the underlying fundamentals of the insulin pump market. A market that is already over-crowded, experiencing slower growth and increasing pricing pressure.
Diabetic Investor wishes these companies well but wonders who in their right mind will come along and buy them. Not only will any acquiring company have to spend millions just to buy the company, they will have to spend millions more to manufacturer, sell and support the system. Just take a look at Johnson and Johnson (NYSE:JNJ) who spent over $500 million to buy Animas and then invested millions more to sell and support their systems. The company has a great product line, has firmly established themselves as number two in the market yet still has not turned a profit. Or consider Insulet, who came out with an innovative product, built a solid user base and yet cannot find a buyer.
Still Diabetic Investor believes no matter how clear the facts may be these newcomers stand a chance of actually realizing their goal. Acquiring companies always seem to find a way to rationalize a purchase when they set their sights on entering a new market. They somehow believe they will be different than everyone else and will succeed no matter what obstacles stand in the way. They become fascinated with the technology and forget that there is a real person who actually must use this fancy gadget. This happened time and time again in the diabetes device space and leads Diabetic Investor to agree with something Barbara Tuchman wrote back in 1980; “Wooden-headedness consists of assessing a situation in terms of preconceived, fixed notions while ignoring or rejecting any contrary signs. It is acting according to wish while not allowing oneself to be confused by the facts.”