Waking a sleeping giant

Waking a sleeping giant

There was a time when a Medtronic’s (NYSE: MDT) earnings call was a painful experience. Looking specifically at their diabetes franchise there was no way to sugar coat just how poorly this unit was doing. Back then we we’re fond of saying that when it came to managing the diabetes franchise management had one and only one job; not to screw up. Medtronic was and is the clear leader in the insulin pump market, although under previous management this lead appeared to be in danger.

Recognizing that change was needed Medtronic CEO Omar Ishrak did what needed to be done, cleaned house and bought in a new team. Back then we weren’t sure how this team would do but we did know the old team had to go. Now with this new team in place Medtronic Diabetes is back on track and unfortunately for the competition this once slumbering giant has awoken.

To illustrate just how steep the uphill fight is for the company’s competitors review the full year results recently released by Tandem (NASDAQ:  TNDM) and Insulet (NYSE: PODD) – since Johnson and Johnson (NYSE: JNJ) does not break out results for Animas their insulin pump unit it’s difficult to do a direct comparison, but we’ll have more on JNJ a little late. Last Wednesday Tandem reported sales for the full year at slightly over $72 million, Insulet who reported the next day had full year sales of $324 million – in the recently completed fiscal third quarter Medtronic Diabetes had worldwide sales of $474 million.  If that set of numbers does not reflect the steep climb faced by the competition, then you must be working at Sanofi (NYSE: SNY).

Last week we found it somewhat amusing that both Tandem and Insulet embraced the cloud as their savior, that yes interconnected diabetes management (IDM) would give them the edge over Medtronic. Let’s make insulin pump therapy easier for the patient these companies shouted, let’s give them tools they need to more effectively manage their diabetes.  The only problem is even with magic fairy dust from the equally magical cloud Tandem and Insulet have much bigger problems to solve, namely lowering their manufacturing costs and becoming profitable on a consistent basis, minor items when compared to the magical cloud but something that actually matters to the investment community.

Well it seems like the folks at JNJ are jumping on the IDM bandwagon as just this morning they announced a deal with WellDoc. According to a WellDoc press release;

“WellDoc, a digital health technology leader, today announced a collaboration with LifeScan, Inc., a business within the Johnson & Johnson Diabetes Care Companies and a world leader in blood glucose monitoring, to deliver a bestin-class digital health solution for patients living with Type 2 diabetes. The agreement was facilitated with LifeScan affiliate Cilag GmbH International. In addition to the collaboration, Johnson & Johnson Innovation – JJDC, Inc. (JJDC) participated in WellDoc’s $29.5 million Series B financing.

Under the collaboration, WellDoc’s BlueStar® product, the first FDA-cleared digital therapeutic for adults who live with Type 2 diabetes, will be integrated with LifeScan’s OneTouchVerio Flex™ Bluetooth® Smart blood glucose monitoring system and OneTouch Reveal® mobile app. The collaboration will seek to leverage LifeScan’s trusted blood glucose monitoring system and mobile application along with the robust data analytics and patient engagement of WellDoc’s clinically validated, reimbursable, mobile prescription therapy, BlueStar®, to create a comprehensive, real-time, personalized approach for the management of Type 2 diabetes.”

The timing of this announcement is ironic not just because it comes on the same day that Medtronic released earnings but also as Medtronic makes a deeper push into the Type 2 market. Yes, it seems everyone is looking for that silver bullet, magic potion that elixir that will open the vault of money from the largest diabetes market there is, Type 2 patients. Frankly it should surprise no one that nearly every company has embraced IDM as the way to unlock this vault. That just as payors holds the keys to the kingdom today IDM holds the keys to the kingdom of tomorrow. A future we all believe will include outcomes based reimbursement, that systems not products will be the thing.

Now we will not regurgitate our feelings on the limitations of IDM, a subject that we have covered extensively. We will only add that the biggest issue facing IDM is not that it doesn’t work, it clearly can help patients more effectively manage their diabetes and ultimately lead to better outcomes. The biggest issues facing IDM is can this model be done cost effectively on a large scale and the continued focus on data collection rather than data transformation. Diabetic Investor is not surprised that JNJ has jumped into this arena and WellDoc does have experience in this area yet we still don’t see BlueStar as the silver bullet for solving the Type 2 mystery.

The harsh reality is what all of these systems lack is a real understanding of what a patient goes through each and every day. Sure they have data analytics down cold, yet they lack the warmth and understanding of the why’s and wherefores of patient behavior.  That it’s one thing to provide guidance but a whole different world when it comes to getting the patient to actually follow this guidance consistently. However, this will not stop every diabetes device, heck every diabetes company, from embracing IDM as the answer to their prayers.

Thankfully for Medtronic they do not have to rely on IDM to save them, the insulin pump unit is back on track, they are closing the performance gap with Dexcom (NASDAQ: DXCM) and they have a plan for the complex Type 2 market. This is not to say the unit does not have issues. The reality is when it comes to patients new to pump therapy the market is very competitive and Medtronic is no longer the default option. Although the competition has major uphill climb they are offering solid alternatives and in the case of BigFoot a unique pricing model. The key remains keeping these competitors from converting existing Medtronic patients to another system. This is the goose that lays the golden eggs for Medtronic.

Looking towards the future we can understand why the company has branched out from their competency and dived into the Type 2 pool. We said it before and will say it again, the insulin pump market is not large enough nor is it growing fast enough to support all the existing players let alone the many who seek to enter this market. The fact is for the diabetes unit to grow it has to expand beyond insulin pumps and continuous glucose monitoring.

The question is can this team, which has so far exceeded our expectations, swim in very choppy waters, waters which are filled with undercurrents, ripe tides and lots of sharks. The Type 2 waters have claimed many victims, as Medtronic is not the first company to venture into these waters. Still we remain somewhat encouraged by the steps the company has taken so far. This by no means guarantees success but it is refreshing to witness a team not just develop a well thought out plan but actually begin to execute that plan.

Time will tell if they will succeed and it should not be understated that when it comes to the Type 2 market they are in for the fight of their lives. The insulin pump market will seem like a trip down easy street when compared to the rough and tumble world of Type 2 diabetes.