What the Cardiocom® acquisition means.

What the Cardiocom® acquisition means.

Early last week Medtronic (NYSE:MDT) the insulin pump market leader announced they were acquiring privately held Cardiocom for $200 million. According to a company issued press release; “This acquisition is in support of Medtronic’s transition toward expanding the company’s medical device product offerings to broader healthcare services and solutions, providing meaningful clinical and economic value for hospitals, physicians, patients and payers.  The first area of focus for Medtronic will be in heart failure, where the addition of the Cardiocom technology and patient services to its product offerings will expand its reach to more patients across the heart failure care continuum.”

Later on in the release it states; “Cardiocom is specifically focused on a number of important challenging diseases, such as diabetes and cardiovascular disease, including heart failure and hypertension. “

Now some may look at this acquisition as great fit given Medtronic’s status in the cardiovascular space, according to company’s most recent annual report the Cardiac and Vascular Group accounted for over 50% of revenue while the diabetes unit accounted for just 9%. It seems to make perfect sense that the company’s first area of focus will be heart failure, but it should not go unnoticed that the company did mention Cardiocom’s presence in the diabetes space. This to Diabetic Investor is the hidden treasure of this deal.

There is near universal agreement that at some point in the future physicians will be incentivized for helping their diabetes patients achieve better outcomes. Diabetes as a disease states lends itself perfectly to this as there are standard verifiable data sets which define when a patient is under good control. It also well known that patients who are under good control avoid many of the complications associated with poorly controlled diabetes. As we noted last week with the Harvard study over half the cost of diabetes management is directly linked to these complications. Not to mention the fact that patients who are under good control are more productive as they miss fewer work days due to their diabetes.

As Diabetic Investor has pointed out on several occasions solid diabetes management also makes business sense too, as compliant patients use more test strips and take their medications as prescribed. This also applies to insulin pump patients, while it is true that these patients tend to be more educated than non-pumpers, the same principal applies. As highly educated insulin pump patients are brand loyal with the additional benefit of using more of the products that Medtronic sells. Keep in mind that the sale of insulin pump supplies is the gift that keeps on giving and is a virtual annuity for Medtronic.

Yet the sale of insulin pumps and more supplies is just half the picture as Medtronic also knows physicians are more likely to recommend their system over the competition as insulin pump patients are the most demanding of all diabetes patients. While everyone else in the insulin pump market is cutting back Medtronic is using their scale and dominance in the insulin pump market to press their advantage. Rather than replace people with technology the company is enhancing people with technology. Given where the things are headed physicians will be even more likely to recommend Medtronic systems as not only will the Cadriocom model help them train their insulin pump patients more effectively but provide the added benefit of producing better outcomes.

Simply put Medtronic has the opportunity to help the physician achieve two critical objectives, lowering their cost while enhancing their earnings.

Now it remains to be seen with the coming changes to reimbursement and the very real possibility of competitive bidding whether this is high touch model, which is also high cost will continue to pay off. Although Diabetic Investor highly doubts insulin pump will experience the dramatic cuts experienced by blood glucose monitors. These are totally different animals and should Medicare follow the path they did for BGM don’t expect any of the major insulin pump players to play in the Medicare market. For the moment however Medtronic does see this high touch, high cost model paying off.

The reality is Medtronic is not really selling an insulin pump or insulin pump supplies; they are selling a diabetes management system which involves all the people who work with the insulin pump patient, a system which benefits everyone.  The patient gets better training, experiences fewer adverse events and most importantly of all has a greater chance of achieving good outcomes. The physician sees their cost lowered while at the same time has the opportunity for making more money from having patients who are under better control. Medtronic not only sees greater brand loyalty and greater sales of pump supplies they prevent the charging competition from making any further inroads.

Granted we are not yet at the point where physicians or health plans are paid for better outcomes, but this day is coming. To their credit Medtronic who’s had their share of issues in the insulin pump market lately are not sticking their heads in the sand nor are the overreacting by slashing costs. They are doing something which seems foreign to almost every other company in the diabetes space; they are planning and investing for the future. They see patient education not as an afterthought but as tool to enhance revenue. Lastly with the acquisition of Cardiocom they can, if market conditions change, refine their high touch model so that the cost is more in line with reimbursement.

As Abraham Lincoln once said; “The struggle of today is not altogether for today—it is for a vast future also. With a reliance on Providence, all the more firm and earnest, let us proceed in the great risk which events have developed upon us.”  Yes there are great risks with this strategy however Diabetic Investor believes they are risk worth taking, risks which will ultimately pay off in the long run.