The week ahead

The week ahead

As earnings season winds down this week we have three more calls which should shed some light back on devices. Tomorrow we’ve got Tandem (NASDAQ: TNDM) and Dexcom (NASDAQ: DXCM), Thursday Insulet (NASDAQ: PODD) reports. Somewhat ironically all three companies are interconnected as Dexcom has partnerships with both Tandem and Insulet. Of the three Tandem’s call, should be the most interesting given the company’s tenuous financial situation. More than likely Dexcom will field questions on how the upcoming launch of Abbott’s (NYSE: ABT) FreeStyle Libre will impact sales. At Insulet we’ll see whether the recent positive trends continue.

Diabetic Investor continues to believe that time is not on Tandem’s side. The company is struggling financially and will pay dearly if they must go back to the capital markets again. Competition in the insulin pump market is fierce and Tandem just doesn’t have the resources to compete. Yes, they have a slick design but this way cool patient friendly iPhone like user interface just isn’t enough. Their task is becoming more difficult by the day given that Medtronic (NYSE: MDT) remains aggressive with the people who count, payors.

The same can be said for Insulet, as they too must fight an uphill fight against Medtronic. Medtronic is not pressing their size advantage but is also riding a wave of very positive publicity with the approval of the 670G. While not a real artificial pancreas the 670G has the pumping community buzzing. This is big problem for Insulet as they are the only pump company that does not yet have a sensor augmented pump. As we have noted many times sensor augmented systems are where it’s at and Insulet is well behind in this critical area.

Just as Tandem’s user interface isn’t enough to get them over the hump, neither is the OmniPod’s wireless feature enough. The one lone bright spot for both companies is that Animas, Johnson and Johnson’s (NYSE: JNJ) insulin pump unit, is stuck in the mud. With JNJ unwilling to put additional resources into Animas and unwilling to buy Tandem the unit is basically treading water. Should Medtronic buy Tandem, this would deal a significant blow to both Animas and Insulet.

Dexcom must be watching this situation closely as future sales are tied to Animas, Tandem and someday Insulet. This is another reason Medtronic would buy Tandem, not only would it increase their installed user base but it would blunt Dexcom’s growth. Let’s face those pesky facts as the insulin pump and continuous glucose monitoring markets are joined at the hip.

Now Dexcom has done an excellent job of reaching patients who follow multiple daily injection therapy and has a real shot at penetrating patients who do not intensively manage their diabetes. Thanks to their partnership Google and the disposable low cost sensor the company’s future looks to be very promising. However, until this system is ready for prime time they must be cognizant of not just the Libre but the changes going on in the insulin pump market. Given the strength and experience of their talented management team we suspect they will be able to navigate the difficult waters that lie ahead.

Basically, what’s happening in the diabetes device world is the field continues to narrow. Looking ahead we cannot envision a scenario where Tandem and Insulet remain independent five years from today. The two wild cards are JNJ and Bigfoot. Let’s say that JNJ decides they had enough and puts their diabetes device franchises up for sale. Let’s say that Google decides to enter the insulin pump market by acquiring Bigfoot. Tandem goes to Medtronic leaving Insulet without a dance partner.

Yes, it’s possible someone could come along buy the JNJ unit and Insulet but who? It’s also possible that Google will go wild and buy Animas, Tandem and Insulet but again why? Given that sensor augmented systems are where it’s at, Bigfoot has a one that can be bought on the cheap which happens to work with Dexcom sensor, why other than scaling in a hurry would Google go this way. Google isn’t looking at the insulin pump market per se they are looking at the diabetes management system market of which insulin pumps are a part of. Bigfoot also comes with the very attractive monthly pricing model which just so happens fits nicely into Google’s vision of the future.

The third wild card could be Apple, who’s become very public about their desire to enter healthcare. It is quite possible that Apple who isn’t exactly strapped for cash could come along and buy what Google doesn’t. And let’s be real here given how these two companies compete in other areas outside of diabetes there is a fair amount of corporate hubris that will come into play. Diabetes companies aren’t the only ones who do deals to get the better of an arch rival.

We used to say that scale was critical to survive but given how things are changing scale alone isn’t enough. As with most things this comes down to money, who’s willing to spend it and who isn’t. Based on their actions JNJ isn’t, Medtronic is and by the looks of things Apple will join Google in the diabetes pool. Yet unlike the past when traditional diabetes players overpaid for assets, their high-tech competitors will be more strategic and methodical in building their franchises. They don’t need scale as much as the traditional players as diabetes is not their main source of revenue. We’ve said it before and we’ll say it again these companies don’t need to be in diabetes they want to be in diabetes.

Yep an interesting week ahead let’s see who’s paying attention and who isn’t.