Words Matter

When it comes to our wacky world particularly in the toy box lots of funny things can happen. The toy makers use lots of interesting methods to determine things like exactly who’s counted as a user. Installed user base is a key metric in the insulin pump market as it determines several important future numbers.

Just by way of example during the last earnings call Medtronic noted that have “over 135,000 trained active users of our 670G system”. Notice they did not say they have sold 135,000 systems nor did they define exactly what an active user is.

Is an active user someone who tried the system yet didn’t like it and went back to their old system? Or does an active user mean someone who is using the system 24×7 without interruption? Just what makes this person active as opposed to inactive? We aren’t trying to be snarky here but words and the definition of words matter big time.

Here’s why- lets say you have 100,000 pump patients each of whom generates approximately $3,000 per year in pump supply revenue – which equals $300 Million in revenue – add sensor revenue to that and that’s an additional $312 Million in revenue – for calculation purposes we assumed 52 sensors per year costing $60 each.

We bring this up as many were surprised by the quote from Medtronic’s last earnings call which stated;

“Overall, sales of CGM from both the Guardian Connect and the sensors attached to pumps grew 70% with over 90% growth in the U.S. Revenue from CGM now exceeds our pump revenue and is establishing a consistent long-term and dependable revenue stream for our Diabetes Group.”

To us this says several things – SALES OF NEW PUMP SYSTEMS ARE LAGGING. Yet conversion of the EXISTING INSTALLED PATIENT BASE FROM OLDER NON-SENSOR AUGMENTED SYSTEMS ARE PROCEEDING AS ANTICIPATED. Put in the simplest terms possible Medtronic is taking advantage of their huge installed user base.

It should also be noted that during the Q&A of the call the company did mention older non-sensor augmented systems will be phased out. They did not say exactly when this will happen but it is going to happen. And why not look at all the additional revenue it generates.

For grins and giggles lets say Medtronic has 1 Million patients globally with 65% here in the US. They note they have 135,000 users on the 670G and lets just assume another 135,000 on the 630 which has low glucose suspend – that leaves 380,000 users NOT using a sensor augmented system – if they convert 75% of patients not using a sensor augmented system to one that’s an additional $889 MILLION in added revenue ANNUALLY. HELLO!

The simple fact is, yes those snarky facts again, Medtronic does not need to add new patients to see revenue growth – all they need to do is keep converting existing patients to the new sensor augmented systems CHA CHING.

Which is even more reasons why we cannot fathom or reconcile their actions. Managing this unit should be the simple – do nothing that screws with the goose that lays those golden eggs – the goose begin the installed user base- keep these people happy convert as many as possible to sensor augmented systems and laugh all the way too the bank.

Yet Medtronic being Medtronic just can’t be content with having the simplest business in the world – kind of like BD and their crazy quest to move out of their core competency and into the patch pump market. Why these companies insist on doing this we’ll never know. But every time they do it only bad things happen. It’s like in the old days when Woody Hayes coached the Ohio State Buckeyes when asked why he didn’t pass more he noted that only one good thing can happen when you pass and two bad things can happen and he didn’t like the odds.

Let’s be honest about this MiniMed before being acquired by Medtronic built one hell of a business. Medtronic didn’t grow the business because of anything they did they grew because everyone else screwed up. They put Deltec out of business using their huge IP portfolio and JNJ surrendered.

Yet not content with having a monopoly they insist on straying from their core competency. They insist on rushing systems to market before they are ready for primetime. Why? Because they are greedy. Gordon Gekko may think greed is good but when it comes to the insulin pump market patient safety and ethical business practices are more important.

Even wackier here is the company knows they don’t need to have the best toy in the toy chest. All they need to have is a system that works well enough. This makes their recent actions even more befuddling. There is no need for any of the shenanigans. There was no need to rush the 670G into mass distribution. There is no need to use fancy semantics when reporting adverse events. There is no need to over promise and then under deliver.

Tandem and Insulet may have cooler toys but Medtronic knows full well that they own this space. They are not just sitting in the catbirds seat they own the catbirds seat. Neither Tandem or Insulet can afford to take them on. The burden isn’t on Medtronic to grow their installed base the burden is on Tandem and Insulet to add new patients and take share away from Medtronic.

As we have said many times the only way this changes would be if Medtronic screws up. Something they have done in the past but always recovered from. Yet this time could be much different now that FDA is sniffing around. The FDA has the power to do what Tandem and Insulet cannot do as they can make life miserable for Medtronic.

While it seemed unthinkable only a short time ago there is a very real and distinct possibility that Medtronic is in serious danger. That all the games the unethical business practices the shenanigans will at long last catch up with them and like the shark in Jaws eat them alive.