Are Medtronic's Competitors Finally Catching Up?

Small- and mid-cap companies that compete with Medtronic's diabetes division are releasing new products, which may spell trouble for the company in the long term.

Brian Feroldi
Brian Feroldi
Oct 2, 2015 at 10:47AM
Health Care

Medical device juggernaut Medtronic (NYSE:MDT) is a big player in the world of healthcare, and it holds strong competitive positions in a huge number of diseases including cardiac care, minimally invasive surgery, spinal surgery, and more.

One division that is certainly an important long-term growth driver for Medtronic's business is its diabetes franchise, as the diabetes market is simply huge. The American Diabetes Association estimates that about 29 million Americans had either type 1 or type 2 diabetes in 2012, and the numbers get bigger in a hurry when you include the rest of the world.

Medtronic is currently the leader in selling medical devices that help patients control their blood sugar levels, as the company has long dominated the market for both insulin pumps and continuous glucose monitoring devices. In fiscal year 2015, which ended for the company in April, Medtronic reported preliminary net sales of more than $1.7 billion from its diabetes division, up more than 9% over the previous year on a constant currency basis, making it one of the faster-growing divisions in the company. 

Source: Medtronic.

While the company has dominated the space for decades, more recently, its biggest competitive advantage has stemmed from the fact that its insulin pump and continuous glucose monitoring system communicate with each other, which is a feature providers and patients alike have found useful. A continuous glucose monitor, or CGM, allows patients to constantly measure their blood glucose values throughout the day, which can change rapidly for a variety of reasons. CGM's allow patients to see trends in their levels so they can take action to prevent highs and lows, and are a superior technology to traditional glucose meters, which only provide a single point-in-time number.

However, the superior technology that has long set Medtronic's devices apart from those of its competitors is finally eroding; smaller competitors have caught up and now can match, or even exceed, the larger company's technological capabilities.

Rivals nab FDA approvals
Late in 2014, Dexcom (NASDAQ:DXCM), a continuous glucose monitoring rival, and Animas, a pump competitor that is a division of Johnson & Johnson, announced that the FDA had approved a device allowing their products to communicate with each other. Dubbed the Animas Vibe, users of the system can now receive data from their continuous glucose monitors directly from the Dexcom sensor on the pump itself, which greatly increases patient convenience.

Source: Animas.

More recently, diabetes pump upstart Tandem Diabetes (NASDAQ:TNDM) announced that the FDA has approved the sale of its t:slim G4 pump that works with the Dexcom's G4 system. Since its launch, Tandem has been attracting customers at a rapid pace, as its sleek insulin pump features a touchscreen interface many patients find appealing. 

Source: Tandem Diabetes.

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The company has been chipping away at market share of the pump market since its launch, and it managed to ship an impressive 3,331 pumps in the second quarter alone, up a sharp 49% over the year-ago period, and that was without having a continuous glucose monitor hooked up to it. Now that the t:slim G4 insulin pump is approved, Tandem should see sales accelerate from their already torrid pace, which could cause a flood of patients to move away from Medtronic's offerings. 

Another player in the space that has been a thorn in Medtronic's side for years is Insulet Corporation (NASDAQ:PODD), which offer patients a tubeless insulin pump. While it looks like it will still be some time before this company will incorporate a continuous glucose monitor directly into its handheld receiver, they have already announced that they are working with -- you guessed it -- Dexcom on doing just that.

640G insulin pump. Source: Medtronic.

Medtronic fights back
Mind you, Medtronic isn't exactly sitting still as these smaller players offer unique features that set them apart from the giant. It has announced a new system it calls the 640G, which is currently being sold overseas and looks to finally bring the look of the company's pump into the 21st century. It features a brand-new layout and color screen that should appeal to its customers who have been choosing more user-friendly options, though it should be noted that it will not feature a touchscreen.

However, this new pump may still help set it apart from competitors, as it will feature the ability to suspend delivery of insulin as a patient's glucose levels get low, and resume pumping once glucose levels have a chance to recover. If the company can get that approved, it would certainly be an important step in the race to create an artificial pancreas. The pump will also work with a newer version of the company's sensor, dubbed the Enhanced Enlite, that promises greater accuracy and increased patient comfort. 

The 640G is currently available for sale overseas, but the device has not yet been submitted to the FDA, as phase 3 clinical trials for the device are currently under way. 

Now what?
Competition in the space continues to look fierce as these companies battle head-to-head for dominance in the space. Medtronic is still far and away the leader, and the odds look good that it will continue to hold that title for the foreseeable future, but it's by no means my favorite name for investing in the space. Medtronic investors would be wise to watch these smaller competitors closely.