What will it take?

What will it take?

What do the following companies have in common; Xerox, Kodak and AOL? All three once held dominate market positions in their respective industries only to see this market dominance evaporate.  All three faced similar challenges as their once state of the art technology was becoming obsolete and the markets which they once dominated were changing at lightning speed. All three were slow to adapt which lead to their eventual downfalls.

Many are wondering if we’re seeing this same scenario play out in the insulin pump market, a market currently dominated by Medtronic (NYSE:MDT). As it stands today Medtronic holds a 70%+ share and neither of their main competitors, Animas or Insulet (NASDAQ:PODD) have been able to eat away at the existing Medtronic user base. While it’s true that Animas and Insulet have established themselves in the market, neither is within shouting distance of Medtronic.

Yet there is a lengthy list of insulin pump newcomers who believe they have the magic potion to succeed where others have failed. That they somehow they have figured out a way to steal share from Medtronic, something neither Animas nor Insulet have done with much success. That they will not suffer the same fate as the Cosmo, a once promising technology, that is now another example of just how difficult this market has become.  That they will avoid the fate of Disetronic, once the market leader and most promising technology, that fell victim to poor management after being acquired by Roche.

Diabetic Investor has seen what these newcomers are working on and frankly we’re not quite sure they will succeed where so many others have failed.  First we should state, that we do not believe superior technology alone will be enough to overtake Medtronic. It’s time to acknowledge that while Medtronic is the market leader their technology really hasn’t changed all that much over the past five years and that most respected experts would state that their technology is actually inferior when compared to the competition.

We further believe that selling their systems at a lower price point really won’t do all that much.  Many seem to believe that having a lower cost alone is the answer and this lower cost will endear them to the folks who actually pay for the pumps, health insurers. If this premise was true than Insulet should actually have a greater market share than they have today. Unlike Medtronic and Animas, where a new pump start costs nearly $10,000 and $2,500 per year afterwards, the OmniPod system is a relative bargain and the system does not reach price parity with a conventional pump until year 2 or early in year 3.

This fascination with lower cost systems ignores one of the fundamental problems with the insulin pump market most notably it’s very expensive to run an insulin pump company where customer support is akin to running an airline 24 hours a day 365 days a year with no days off. As one ex-pump executive told Diabetic Investor long ago; “We don’t charge $6,000 because it cost $6,000 to make a pump, we charge $6,000 because it cost that much to run a pump company.”  The question Diabetic Investor always has for these low cost producers is how they will make any money over the long term. And the fact remains, no matter how profitable pump supplies may be this is a volume business and without scale it’s difficult if not impossible to turn a profit.  If there are any doubts about this just take a look at Animas who has yet to turn a profit even though they hold nearly 20% of the market or Insulet who continues to struggle to reach profitability.

The final nail in the coffin for the low cost approach to pumping is competing therapy options. As Diabetic Investor has noted on several occasions insulin pump therapy is not an outcomes based therapy choice rather a lifestyle choice. While there is no doubt that insulin pump therapy is very effective, numerous studies have shown that patients following multiple daily injection (MDI) therapy can achieve outcomes comparable to patients following pump therapy at a much cheaper price point.

The stark reality when it comes to insulin pump therapy is that Type 1 patients alone are not enough a large enough market to sustain all the companies in the market and those set to enter the market. Even with all the advancements in pump therapy and volumes of study data supporting the use of insulin pump therapy more 70% of Type 1 patients are injecting their insulin and not pumping; a figure that really hasn’t changed all that much over the past 5 years.

Therefore for any pump company, other than Medtronic, to be successful two things have to happen. Either they take share away from Medtronic or successfully convert insulin using Type 2 patients to insulin pump therapy. As we have already noted so far no one has successfully taken significant share away from Medtronic, so this option does not look all that compelling. This leaves converting insulin using Type 2 patients to pump therapy another difficult strategy and for much the same reasons why more Type 1’s are not using pumps, competing therapy options only for insulin using Type 2’s the competing therapy option is not MDI but GLP-1 therapy.

Diabetic Investor also does not buy the argument that if you made insulin pump therapy more patients friendly a greater percentage of Type 1’s would use pump therapy. While we don’t disagree that pump therapy should be more patient friendly and easier to implement, we just don’t believe that even if this was to occur that we would see a dramatic increase in the number of Type1’s on pump therapy. No matter how easy it is to operate the system this is only half the battle in getting Type 1’s onto a pump. Insulin pump therapy requires a highly motivated and educated patient with a strong support system. Diabetic Investor would go so far and state that learning how to use the pump itself is the easiest aspect of pump therapy.

The real hard part is calibrating the pump to the individual who’s wearing it. While it’s true this task has become far less onerous with the use of continuous glucose monitor, the calibration phase of pump training is a major reason more physicians do not recommend pump therapy. As we have noted before patients using an insulin pump must understand carb counting, insulin duration of action, insulin to carb ratios, the impact of exercise, etc.  It’s a mistake to believe that pumps will become so advanced that a patient can just slap the system on their bodies and have it work perfectly from day one.

It’s important to note that no matter how advanced or smart a pump becomes it still is a medical device and devices no matter who well they are manufactured can and do malfunction. Another reason many patients, both Type 1 and Type 2, do not pump as they don’t want a machine running their already complex lives; especially a machine which has the potential to kill them if it malfunctions.  Insulin is a great drug but it also can be a lethal drug when improperly administered.

So just what then will it take for things to change in the insulin pump market? Frankly, and this will come as shock to regular readers of Diabetic Investor, we have no idea. The central fact is the insulin pump market is following the path of the glucose monitoring market and could soon become just one more diabetes device commodity. Looking over the pump landscape as it stands today an honest assessment would yield the following truth; while there are differences between systems all pumps do basically the same thing.  To Diabetic Investor is not the system that matters but how well trained the patient is that makes the difference, take a well-trained patient and it really won’t matter which pump they use; just as the same holds true for a poorly trained patient. No pump is smart enough to make up for a patient who is not well trained.

The harsh reality is unless Medtronic totally screws things up, something they have attempted in the past, it’s difficult seeing anyone making a serious dent in their market dominance. This is the funny thing about Medtronic, a company that has made several blunders since they acquired MiniMed. Even with all these blunders, out dated technology, subpar customer service and a highly disgruntled sales force the company has been able to hold onto their huge installed user base. Yes Animas and Insulet are winning the battle when it comes to patients new to pump therapy but they are losing the war when it comes to converting an existing Medtronic patient to their system.

Finally it should be noted that Diabetic Investor would like nothing more than for a company to come along and prove us wrong.  However based on what we have seen so far that day is not today.