Why it’s over
We knew that when Sean Salmon took over the diabetes franchise that he’d be swimming upstream against the tide. The unit besieged by multiple issue was in serious need of overhaul and it was Mr. Salmon job to turn things around. Tandem and Insulet were forging ahead developing newer, better systems and were beginning to eat away at the company’s huge installed user base. Their CGM was a complete disaster and had frankly became an embarrassment making then CEO Omar Ishrak look like a fool for stating the stand-alone system would become a multi-billion-dollar franchise.
We speculated back when Mr. Salmon took over his real job wasn’t necessarily to turn things around but to evaluate the franchise and decide if Medtronic should keep it or sell it. As we noted the Medtronic’s investment bankers had given their blessing to sell the unit and for a while it seemed that the only thing holding up a sale was finding a buyer willing to pay Medtronic’s asking price. The franchise even in its depressed state had value and the last thing the company wanted was to pull an Animas.
Not to digress but for those new to Diabetic Investor, JNJ the former owner of Animas pulled perhaps the greatest blunder in diabetes device history. Desperate to get out of the insulin pump business JNJ basically gave away Animas to Medtronic. That’s right JNJ did not sell it for billions they gave it away and truth be told actually paid Medtronic to take this unit off their hands. And no we aren’t making this up although the folks at JNJ wish we were.
Anyway back to Medtronic and why we know it’s over. Last night the company held their annual ADA diabetes investor forum and folks the fat lady is warming up and getting ready to sing the Medtronic diabetes swan song. Before we get into some additional analysis of the Blackstone deal, another indicator it’s over, we encourage everyone to review the slide deck used with last nights presentation.
First the company acknowledges thankfully that their CGM sensor is inferior and needs to be improved. So on slide 28 they provide an update on their CGM systems under development which includes the following;
“DESIGN GOALS: ▪ US: ▪ 95% fewer fingersticks ▪ Day 1 cals only ▪ Meet iCGM criteria”
That’s right here we are in 2020 with two competing systems neither of which require any calibrations whatsoever and one of which already has garnered the iCGM designation and Medtronic is still screwing around with fingerstick calibrations. Fingerstick calibrations in 2020 is like finding a rotary telephone connected to a land line. Did Medtronic not get the memo that fingerstick calibrations even if it’s just one is a non-starter. Have they not seen that every Dexcom wannabe makes it clear their wannabe systems will not require ANY fingerstick calibrations, zero, zilch.
Seriously folks if this doesn’t send a clear message that Medtronic doesn’t get it we don’t know what does. Heck my grandson Austin (Tyler’s younger brother) knows that fingersticks are a non-starter.
But let’s get back to the Blackstone deal which as we noted yesterday was another sign that it’s over. The fact that the Mothership did not want to give the unit $337 is not exactly a vote of confidence. Keep in mind that Medtronic has a market cap of almost $125 Billion and has about $11 billion sitting around in cash. So naturally they cannot spend a puny $337 million on diabetes R&D, please.
The reality here is that this is a win-win for the Mothership as they get Blackstone to pony up the cash in exchange for a healthy royalty, that is if these products prove to be successful. Should it look like things won’t work out they can proceed with the sale process and since Blackstone is already taken a look under the hood, guess who the most likely buyer would be. Even if Blackstone passes on the deal a sale of the unit will likely generate a nice chunk of change for them.
Remember the press release that announced this deal contained the following, “Additional terms of the arrangement were not disclosed.” Well part of those “additional terms” likely is one that says if Medtronic sells the diabetes franchise to someone other than Blackstone, they will pay Blackstone something. Just what that something is we have no idea but the folks at Blackstone are very smart, so we suspect that something is a nice chunk of change.
Another likely “additional term” is that Medtronic has the option to buy Blackstone out of the royalty stream also at a premium. Something Medtronic would only do if these new products are successful.
The bottom line here really is the bottom line. The Medtronic mothership can hear the fat lady warming up and knows if something dramatic doesn’t happen she’ll be singing an unhappy tune. They haven’t been able to find a buyer just yet, they don’t want to throw good money into a bad asset so they find a friend to help out, telling that friend they’ll get first crack at buying the unit and if sold to someone else they will be well compensated.
Bottom line IT’S OVER FOR MEDTRONIC DIABETES AND THE ONLY QUESTION NOW IS WHEN THIS HAPPENS AND NOT IF IT HAPPENS.