Medtronic’s insulin pump deal shows size matters

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The apparently unstoppable push by Medtronic to dominate all the areas in which it is active as well as the medtech industry as a whole got another fillip yesterday as it became the preferred supplier of insulin pumps to the insurer UnitedHealthcare.

In so doing it has hobbled its smaller rivals Tandem Diabetes Care and Insulet, whose shares fell 20% and 10% respectively yesterday. One of the arguments underpinning the wave of consolidation in the medtech sphere – that increased size allows a company to offer its wares more cheaply while still turning a profit – seems to have worked nicely in in this case.

Big but slow

According to data compiled by EvaluateMedTech before the UnitedHealthcare deal, Medtronic was forecast to be the leading company in insulin pumps in 2022 with sales approaching three quarters of a billion dollars. But these sales are slow-growing – at an annual rate of just 3.7% they are increasing more slowly than the medtech sector as a whole, and looked very sluggish compared with the up-and-coming smaller companies.

Insulin pump makers
WW annual sales ($m)
Company 2015 2022 CAGR
Medtronic 569 734 +4%
Insulet 227 544 +15%
Ypsomed 67 233 +20%
Tandem Diabetes Care 60 189 +18%
Cellnovo 1 32 +81%

Tandem in particular has just reported a storming quarter. Its first-quarter revenues were up 63% to $20.1m, markedly better than consensus expectations of $17.6m. It sold just over 4,000 pumps in the quarter, surprising analysts from Deutsche Bank who had forecast that it would shift 2,772.

Roughly 60% of the pumps Tandem sold were its flagship t:slim G4 model, which incorporates, under an agreement struck in July, a G4 Platinum continuous glucose monitor (CGM) developed by DexCom – itself forecast to be the leading CGM company in 2022. The rest of Tandem’s sales were of the original t:slim, without CGM capability, and t:flex, which has a larger insulin reservoir.

As of July 1, though, most of the diabetes patients covered by UnitedHealthcare will no longer have the option of one of Tandem’s pumps, though those aged under 18 and those with certain plans will still have a choice. Moreover, patients who already have a pump will continue to receive supplies from that company as long as the pumps are still working and in warranty.

Economies of scale

Tandem says around 8% of its customers from last year will be denied its pumps under the new rules. And of course it will also be unable to convert new patients among UnitedHealthcare’s customers. Insulet, by contrast, claims that UnitedHealthcare’s move will not have a material impact on sales of its OmniPod system or its financial results.

Neither Tandem nor Insulet is profitable, and their shares were down 12% and 13% respectively so far this year even without yesterday’s drops. Their lower valuations might even see a buyer step in – and there is a chance that this buyer could be Medtronic.

After all, the giant is extremely interested in the sector (IBM collaboration is Medtronic's fifth diabetes deal in a month, April 14, 2015). And Tandem is one of the more innovative insulin pump companies, with Wedbush analysts writing in mid-April that it was the only pump maker to have launched a new system – the t:slim G4 – in the previous six months.

Though Medtronic has developed both its pumps and glucose monitors in-house, it might want to pick up some newer technology, especially if it can get it cheaply.

But it is already winning. Medtronic surely must have secured the UnitedHealth deal by offering its pumps at a lower price than its rivals, and it can only afford to do this thanks to the economies of scale that come with being the biggest medtech company in the world. Medtronic’s vast inorganic expansion over the past couple of years has paid off in diabetes. In time it will surely begin to undercut its competitors in other sectors too.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizEPVantage on Twitter

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