Win – Win or Desperation?

Win – Win or Desperation?

Late Tuesday Insulet (NASDAQ:PODD) and Abbott (NYSE:ABT) announced they extended their agreement for Abbott to provide the meter for the OmniPod personal diabetes manager (PDM). According to a company issued press release; “Insulet Corporation (NASDAQ: PODD), the leader in tubeless insulin pump technology with its OmniPod® Insulin Management System, today announced that it has extended its ongoing exclusive agreement with Abbott Laboratories (NYSE: ABT) to continue integration of the Abbott FreeStyle® blood glucose (BG) monitoring technology with Insulet’s OmniPod System. The FreeStyle blood glucose meter is built into the OmniPod hand-held Personal Diabetes Manager (PDM), eliminating the need to carry and manage a separate meter or transfer BG results from device to device.”

Although Diabetic Investor is not surprised by this move one has to wonder if this is a win-win scenario or an act of desperation. Some may recall that back in the day it looked as though LifeScan, a unit of Johnson and Johnson (NYSE:JNJ) was set to replace the FreeStyle glucose meter that’s built into the OmniPod PDM. However as yesterday’s announcement makes clear Abbott cannot afford to give up the strip sales generated by OmniPod patients, who on average use 6 strips per day.

To Diabetic Investor this moves also signals that Abbott isn’t overly confident that the Libre will land on our shores anytime soon. We further suspect given how poorly Abbott’s diabetes unit has been doing of late the company made Insulet an offer they couldn’t refuse. The simple fact is Abbott cannot afford to lose more share and would not be able to sell this unit had Insulet bolted for LifeScan.

Now just in case anyone believes this is a signal that Abbott who’s been rumored to be looking for an insulin pump would out right buy Insulet, think again. Abbott and Insulet have been joined at the hip since the OmniPod arrived on the scene some 10 years ago. If there is one company that knows where all the bodies are buried its Abbott. We also believe all this talk about Abbott coming into the insulin pump market is just that talk, a smoke screen to cover up the fact the Libre isn’t the answer.

Frankly Insulet has become the poster child for what it’s like to be an insulin pump company in the post-Animas/JNJ world. Way back in the day the insulin pump world was pretty straight forward, a company would enter the market, gain some share and then get bought by a bigger player in diabetes. Roche bought Disetronic, JNJ bought Animas and Smith’s Medical was all set to sell the Cozmo to Abbott before the deal fell through. It was widely assumed that Insulet would also follow this path and quite frankly the company was being run to be acquired.

The only problem was no one wanted to buy a company that couldn’t make money, which would not be accretive to earnings.  It also didn’t help matters any that Insulet had some major technical issues when they launched nationally, issues which to this day haunt the company. Add in the fact that previous management was playing very fast and very loose with the numbers, which is a very nice way of saying they lied almost every time they opened their mouths, and it’s understandable why Insulet has not been acquired.

The Insulet story shows that even with an innovative concept, wireless pumping, technology doesn’t overcome market dynamics. In actuality Insulet had another so-called advantage as the start-up cost was much lower than a conventional wired pump. One would think this combination of innovative design and lower cost would almost guarantee success. That was until payors figured out that Insulet reached price parity with conventional systems in in year 3 of usage and this so-called price advantage was really no advantage given how pumps are used.

What’s even more ironic since the OmniPod arrived on the market some ten years ago not much has changed in the market. Medtronic (NYSE:MDT) remains the dominate player, Animas is number two and Insulet has replaced the Cozmo in the number three position. About the only significant change in the insulin pump world is the Disetronic once a very close second to Medtronic (back in the MIniMed days) was soundly run into the ground by our good friends at Roche.

Honestly it takes true talent to run not just an insulin pump franchise but also a glucose monitoring franchise into the ground but Roche proved it can be done. Roche may well go down in diabetes device history for turning not one but two billion dollar units into million dollar units. A close second is our hometown hero’s at Abbott who’ve ruined not one but two BGM acquisitions, frankly we hope they do enter the insulin pump space only to see if their ineptitude extends beyond BGM into the insulin pump market.

As we noted just yesterday the insulin pump market is not for the faint of heart, something Pat Sullivan the new CEO at Insulet is learning in a hurry. This deal or extension of a previous deal was just one more thing he needed to do so he could concentrate on getting the company’s house in order. A process which will likely take longer than anyone anticipated. The goal remains the same as it was 10 years ago, get the company sold. The question will we be saying this same thing 10 years from today?