Welcome to the game

Welcome to the game

This morning Bigfoot BioMedical and Abbott (NYSE: ABT) announced the following;

“Abbott (NYSE: ABT) and Bigfoot Biomedical today announced that the companies have entered into an agreement to develop and commercialize diabetes management systems, integrating Abbott’s FreeStyle® Libre glucose sensing technology with Bigfoot’s insulin delivery solutions in the United States.”

This is a major step forward for Bigfoot as they move ever closer to bringing their version of a closed loop insulin delivery system to market. It also comes at a time when the insulin pump world is about to transform yet again. It’s no secret that Tandem (NASDAQ: TNDM) is imploding which puts their 50,000 or so patients up for grabs. Johnson and Johnson (NYSE: JNJ) is also trying to unload Animas but has yet to find a buyer. Insulet (NASDAQ: PODD) is in the midst of transforming themselves from an insulin delivery company to a drug delivery company. And then there is Medtronic (NYSE: MDT) who literally has a monopoly in the space.

Given this set of circumstances it’s fair to speculate a little on how this will play out over the next two or three years. And when you’re talking about the insulin pump market we must start with the big boys on the block, Medtronic. The question, as it has been for some time, remains can anyone effectively compete against Medtronic. This is not just because they have the latest way cool whiz bang toy in the 670G, Medtronic’s real strength is their huge installed user base.

We’ve 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. Thanks to technology this statement takes on even greater significance as the biggest threat to the market are the many companies working on a cloud enabled insulin pen combined with CGM combined with advanced insulin dosing algorithms. It should be noted that Bigfoot is one of those companies and all they lacked, until today anyway, was the CGM component.

We hate to be redundant but this is all about money and the fact is a cloud enabled insulin pen/CGM/App combo is cheaper than an insulin pump and for the most part just as effective as an insulin pump when it comes to producing solid patient outcomes. It’s also well known that Medtronic too is looking down this path. Yes, they have the 670G but they also are moving more aggressively into the non-intensively managed market.

For a company like Bigfoot to succeed where everyone else has failed is not developing a “better” insulin pump. The key here is, what else, having the financial resources to take on Medtronic where they have the biggest advantage of all, their relationship with payers. As we have said many times anyone can build an insulin pump but it takes real talent to run an insulin pump company. And as we have seen Medtronic isn’t afraid to press this advantage as they have inked several value-based deals some of which include exclusivity. This is the battlefield Bigfoot must master if they are going to have any real chance at all.

Realistically Bigfoot must find a way to use what we would call guerilla warfare against Medtronic. Tactics which could include the drastic yet necessary step of going 100% at risk with payers. Such a tactic would require massive financial resources as Bigfoot would be paid on the backend. The reality is Bigfoot must take away Medtronic’s size advantage.

Here’s where things could get somewhat interesting. Given that JNJ wants to unload Animas and Tandem could be bought for a song Bigfoot with Abbott’s backing could achieve scale quickly. At the moment Tandem’s market cap remains under $30 million, assuming a small premium say 15% Bigfoot could pick up approximately 50,000 patients for the bargain basement cost of around $700 per patient. Bigfoot could then renegotiate Tandem’s $80 million in debt, perhaps settling them for pennies on the dollar something we suspect their lenders would be amenable too. Listen given the choice for these lenders its better to get something then nothing should Tandem implode.

Acquiring Animas is not just more expensive but a little trickier. But we see a way out here too, as given that JNJ is getting desperate to unload Animas it’s not outside the realm of possibility that JNJ would finance this deal. Perhaps work out a deal where the company retains some sort of ownership stake which is bought out over time with the price based on performance metrics.

Under such a scenario Bigfoot/Abbott would convert patients to the most cost-effective system while they complete the development of their closed loop system. Once that system is ready they will do what Medtronic is doing right now as they attempt to convert their installed base to the 670G. Just like Medtronic they would still be generating revenue from the sale of pump supplies along the way.

Now at this point we know what everyone is thinking besides the cost of these acquisitions integrating these companies under one roof is a huge job. Hey, we didn’t say this would be easy but it is possible.

The way we see it given all the dynamics at play here about the only way to compete head on with Medtronic is to make this a two-horse race, three if you include Insulet who also must be curious about what would happen if they made a run at Tandem. Insulet could stand pat with their current strategy and complete their transition or they could look at the numbers and realize that given the cost of acquisition the Tandem patients are cheap. They then could do the same thing Bigfoot/Abbott would do and convert patients to the OmniPod. The bigger obstacle for Insulet is acquiring Animas but just as Bigfoot/Abbott could work out a creative deal with JNJ so too could Insulet.

Like we said none of this will be easy but someone must start thinking way out of the box if they are to have any chance at all of taking on Medtronic. Let the games begin.