This could get ugly – the Insulet Saga Part Two

This could get ugly – the Insulet Saga Part Two

Yesterday Diabetic Investor reported on the many issues facing Insulet (NASDAQ:PODD) including the issues they are facing with the new FreeStyle test strip. Diabetic Investor has reached out to the company to get some answers but as of this writing the company isn’t talking. Given this lack of response Diabetic Investor has spoken with several industry contacts in an attempt to gain some perspective on the situation.

At first Diabetic Investor believed the reason the company has not received FDA approval for use of the new strip with the OmniPod PDM was a cost and timing issue. As everyone knows Insulet is also awaiting FDA approval for their new Eros pod which also comes with a new PDM. It is also well known that Insulet has been considering replacing the FreeStyle meter which is integrated into the PDM with a competing meter; many have speculated that LifeScan is the leading candidate to replace the FreeStyle. Given that the new PDM will also need FDA approval, Insulet may have thought it was a waste of time and money to seek FDA approval for the new strip in their existing PDM, as these units will be replaced when the new pod is approved.

Given that the new pod and new PDM are still awaiting FDA approval, it appears the company has miscalculated. Even if the new pod and PDM were here already, it’s seems unrealistic to believe that the company could convert their existing patient base to the new system quickly. The simple fact is existing Insulet customers will continue to use the “old” system until they receive the new one. This fact alone should have been obvious to the company.

The reality here is that Insulet has known for more than 18 months that Abbott (NYSE:ABT) was coming out with a new strip. They also were well aware that once the new strip was approved Abbott would stop making and supplying the old strip. Given that test strips do have expiration dates and cannot be distributed or sold once they reach that date, Insulet had to be aware of the possibility that their new system may not be approved by the FDA in time and prudence dictates they should seek FDA approval for the use of the new strip with their existing PDM.

In their defense Insulet also knew that there were no performance issues with the new strip when used with their current PDM. Basically they believed this was not a material event and they could receive approval quickly with a letter to file, rather than the more expensive 510K regulatory process. However, the company again seems to have miscalculated or didn’t reach out to the FDA and see how they viewed the situation. One just might think that before deciding on a regulatory strategy, especially in today’s regulatory environment, the company would have at minimum asked the FDA for their input.

Although Diabetic Investor has received various estimates as to the cost of proceeding with the 510K filing, the cost quite frankly is immaterial when you consider the company receives $500 from Abbott for every PDM they place in the market: this is pure profit for Insulet. Assuming there are 35,000 OmniPod users that’s $17.5 million of pure profit and would have more than offset the cost of the 510K.

Diabetic Investor has tried to find out if the company has even submitted a 510K, but as we noted before the company just isn’t talking.

Here’s where things could get really ugly. With supplies of the old FreeStyle test strip dwindling and the new strip not approved for use with the existing PDM; OmniPod patients could be forced to use a different glucose monitor. Diabetic Investor is already aware of situations where patients have gone into their local pharmacies and been told they can no longer supply them with the new strip as it has not been approved for use with the PDM and they no longer have the old strip in stock. A fact that must make the folks at Abbott even more upset with the company than they already are. (More on this in a minute.)

Even though there are no performance issues should an OmniPod patient use the new strip, many patients are concerned as they believe there is an issue. Rather than take any chances these patients who can longer find the old strip are switching to an alternate glucose meter. Not only is this hurting Abbott, it’s a real pain for the patient who must now manually enter their glucose readings into the PDM. Even if the patient goes out and buys a FreeStyle meter, this extra step of manually entering readings into the PDM and having to carry around another item just adds to the patient’s frustration. Patients who are already frustrated with unacceptable pod failure rates.

Now Diabetic Investor may not be the sharpest knife in the kitchen but it doesn’t take an advanced degree in marketing to know that it’s not a good idea to alienate your customers; especially insulin pump patients who are the most vocal of all patients with diabetes and have been expressing their displeasure with the company on diabetes blogs and social communities. Blogs and social communities where other pump patients who are considering switching to the OmniPod go or where patients new to pump therapy also visit when they are selecting which pump to use.

Believe or not the situation could get even worse for the company as the FDA could well decide that since the company cannot immediately distribute the new PDM when the new pod is approved, that they will NOT approve the new system until the new test strip is approved for the old PDM. Given that the company is betting the ranch on the new system, this is one more hassle they just don’t need.

It’s also somewhat ironic, considering what’s at stake here for Abbott, that they didn’t help Insulet in any way. Keep in mind that the OmniPod users on average use six test strips PER DAY and that Abbott can ill-afford to lose this volume.  As we noted yesterday Abbott told Diabetic Investor that approval for the new strip with old PDM was Insulet’s responsibility, although they did inform Insulet well in advance that they were going to be coming out with a new strip.

While Diabetic Investor is not privy to the discussions that went on between these two “partners”, we can’t imagine the relationship between them is all that great. The folks at Abbott are not stupid and know that Insulet has been shopping for a new meter for their new PDM. They probably don’t like the fact the company can go to LifeScan, who will be more than delighted to take the strip volume, and then come back to them and try to extort even better terms. Insulet has done some really stupid things but here we have to agree with the company as this is a business and it makes perfect sense to get the best deal you can. Abbott may not like it but this is how the real world works.

The harsh reality here is that time is not on Insulet’s side. The longer this situation drags on, the worse it gets. The company already has a damaged reputation given the many quality issues with the current pod they can ill-afford more bad publicity. As we noted earlier insulin pump patients are very vocal and when things go wrong word spreads very quickly in the pump community.

What Diabetic Investor does not understand is how management let this happen. Granted the FDA isn’t easy to deal with but that’s not anything new. They may not like having to deal with all the craziness but the fact is they must deal with it as the FDA has the power to make a company’s life a living hell when they don’t do things as instructed. At minimum they should have reached out to the FDA about this issue. They are also keenly aware that it’s imperative to get the new pod approved as quickly as possible and do everything they can to make this happen. It really doesn’t matter whether they agree or disagree with the agency, the simple fact is if the FDA says jump, you jump.

The bigger question is what happens next for the company, a company that many, including Diabetic Investor, thought would have been bought already. Let’s be honest about this, who in their right mind would want to acquire a company that can’t seem to get their act together. Not even Roche is that stupid and that’s saying something.