This is how we roll

This is how we roll

This morning Tandem (NASDAQ: TNDM) announced that UnitedHealthCare will no longer cover Tandem insulin pumps. According to a company issued press release;

“Tandem Diabetes Care®, Inc. (NASDAQ: TNDM), a medical device company and manufacturer of the t:slim®, t:slim G4™ and t:flex® Insulin Pumps, stated that it has learned that UnitedHealthcare yesterday announced that effective July 1, 2016, UnitedHealthcare Community Plan and Commercial members will no longer have an in-network choice among insulin pump providers. This unexpected decision by UnitedHealthcare designates Medtronic as their preferred, in-network durable medical equipment provider of insulin pumps. The Company anticipates that this decision will prevent a majority of UnitedHealthcare members from purchasing an insulin pump on an in-network basis from Tandem Diabetes Care and several other durable medical equipment providers.

“Having diabetes isn’t a choice. How people manage it should be,” said Kim Blickenstaff, president and CEO of Tandem Diabetes Care. “Insulin pumps are not a one-size fits all solution. Selecting which pump is the best fit for a person to manage their therapy needs should be a decision made between a person and their healthcare provider.”

UnitedHealthcare’s preferred relationship does not apply to members who are 18 years old and younger, UnitedHealthcare Sierra Health and Life Commercial members, as well as all Medicare Advantage members. UnitedHealthcare will continue to cover supplies for all insulin pump brands while in-warranty and still functioning properly. In 2015, the Company shipped approximately 15,500 insulin pumps, of which approximately 1,200 pumps were to people who would not have been eligible for in-network coverage under UnitedHealthcare’s new preferred relationship.”

Diabetic Investor isn’t shocked by United’s decision for as the song goes this is how we roll. As we have noted many times the insulin pump market has become ultra- competitive. Also as we have noted Medtronic (NYSE: MDT) the insulin pump market leader has been reinvigorated under new leadership. Simply put the battle in the insulin pump market is no longer about who has the best technology, it’s about price.

We hate to be repetitive but when it comes to insulin pumps all pumps do basically the same thing the same way. Yes, there are differences between systems but none so overwhelming that a properly trained patient would experience significantly better outcomes using one system over another. This is now true in the fastest growing segment of the insulin pump market, sensor augmented pumps. Medtronic, Tandem and Animas, a unit of Johnson and Johnson (NYSE: JNJ), all have sensor augmented pumps.

The real question is how aggressive Medtronic will be with other plans. A question that is likely being asked with trepidation at Animas, Tandem and Insulet (NASDAQ: PODD). Given their commanding share in the market Medtronic can afford to be aggressive, while the remaining players with the possible exception of Animas cannot be. Yet all of Medtronic’s competitors are now between a rock and hard place. Should they try and undercut Medtronic on price they would set off a price war that Medtronic can afford to fight.

Yet on the flip side they may have no choice as they can ill-afford to lose formulary access. Medtronic’s competitors know that when it comes to choosing an insulin pump insurance coverage is as important as technology. Again we hate to be redundant but each day the insulin pump market is moving ever closer to becoming a full blown commodity market where price trumps technology.

This new found aggressiveness from Medtronic not coincidently comes just when it looked like the competition was gaining traction. Based on the recent round of earnings reports Tandem, Animas and Insulet all outperformed expectations. Now under previous management Medtronic may have simply ignored this falsely believing that with nearly 70% share some share loss was to be expected. Obviously the new management team isn’t being foolish.

This news also couldn’t have come at worst time for Tandem as the company continues to bleed cash and may have to hit the capital markets again. Nor can our friends at Insulet be thrilled either as besides having to deal with a price war they cannot afford, they have yet to integrate the OmniPod with the Dexcom (NASDAQ: DXCM) sensor which puts them at huge competitive disadvantage. For their part Animas can afford a price war given the deep pockets of JNJ, but the question is for this unit that has never made a profit will the folks in New Brunswick want such a fight. Yes, the Animas Vibe is doing well but as we have said before the Vibe’s uptake is more related to the fact it works with the Dexcom sensor.

Just as the conventional glucose market has become all about scale, so too is the insulin pump market moving in this direction. With nearly 70% of the market combined with this new aggressiveness Medtronic understands this and is taking steps to protect their installed base while at the same making the competition play defense. Talk about bringing a gun to a knife fight.

Now if this was the past we would say the easy way out of this plight would be consolidation. Yet this isn’t the past as a company like JNJ can no longer try and buy their way out of the problem. The reality is several suitors have sniffed around both Tandem and Insulet, yet after doing their due diligence they all come to the same conclusion, there are too many issues that have to fixed before any acquisition would be accretive to earnings. Frankly we cannot envision JNJ who is still smarting over the Animas acquisition doubling down and acquiring either Insulet or Tandem.

When it comes to the insulin pump market Medtronic is the 800-pound gorilla who isn’t shy about throwing their weight around. They are the King Kong of the insulin pump market and to date no one has been able to knock them off the Empire State building. The question is will Tandem will be the most recent company to get crushed.