J&J’s Animas closes, exiting insulin pump market; Medtronic chosen as preferred partner for transition; sad news reflects fragile, competitive pump market and high innovation bar – October 5, 2017

In disappointing news, J&J announced this morning that Animas will close operations and exit the insulin pump market. The somber news is not a total surprise, given the ongoing challenges in J&J’s business and the LifeScan/Animas strategic evaluation, first announced in January. Still, exiting the business completely and sending patients to Medtronic took us a bit by surprise, reflecting the fragile and highly competitive insulin pump market. Though we’re in an era with so much gamechanging innovation promise, the business realities of operating a medical device company in diabetes have not changed. J&J presumably could not find a buyer for Animas, a sign of just how tough the field is right now.

J&J acquired Animas in 2005 for ~$518 million, a very exciting acquisition at the time. At the time, we never would have guessed today would come, given how much promise there was. But as we summarize in the second section below, the world looks very different now, particularly for companies not accustomed to the pace of innovation in the smartphone era.

In an email to us, Dr. Roy Beck summarized the implications: “Fewer pump companies in the US is not good for patients.” Similarly, CEO Derek Rapp said “JDRF is extremely concerned” about today’s news, as it means fewer treatment options and less competition. Certainly Medtronic capitalizes on this unfortunate update, though we expect Insulet and Tandem might also see an uptick in new patients.

Below, we summarize the exit details, a few lessons that came to mind, competitive implications, and our questions.

Exit Details

1. Animas Exits US/Canada Immediately, OUS Decision/Timeline TBD; 90,000 Pumpers Affected Worldwide

This morning, J&J announced the very unfortunate news that Animas intends to close operations and formally exit the insulin pump business, affecting ~90,000 Animas pumpers worldwide. Effective immediately in the US and Canada, the company will no longer manufacture and sell the Animas Vibe and OneTouch Ping insulin pumps, but will continue to offer pump supplies, customer service, training, and warranty support through a “transition period.” This period is not quantified in the press release, and based on Medtronic’s blog post, it seems like supply reordering and customer support will actually transfer over to Medtronic in the “next few months.” Outside of the US and Canada, “a decision and timing to exit … is subject to completing consultation with relevant works councils” – in these regions, Animas will continue to sell pumps and operate as usual. Based on the assertiveness and global nature employed in the release’s title (“Animas Corporation to Close Operations and Exit Insulin Pump Market”), we assume a close outside of the US/Canada is also coming near term. J&J has been publicly exploring “strategic alternatives” for its diabetes businesses – including operating partnerships, joint ventures/strategic alliances, or a sale – since the 4Q16 financial update in January. Last quarter, a diabetes asset impairment of $182 million was recorded ($125 million non-GAAP), mostly related to the Animas pump business. The business had been struggling for quite some time, but this was the first time the accounting team had publicly noted a change in value. Despite the struggles and strong competitive headwinds, we’re surprised that outright exit without a sale was the only viable option, given Animas’ sizable installed base – at ~90,000 users, it’s almost as large as Insulet’s, who had ~110,000 as of the end of 2016.

• Worldwide, Animas employees 410 people. The press release only dictates that they will be treated with “fairness and respect,” but doesn’t go into specifics. We assume some might transition over to Medtronic, others will shift within J&J, and still others could go to other pump companies.

2. Medtronic Chosen as “Partner-of-Choice” for Pump Transfers; Insulet, Tandem Also Step Forward with Special Offers

Animas will facilitate transfers to “partner-of-choice” Medtronic, who has created a dedicated web page to explain how current Animas pumpers can switch pumps or order supplies. Medtronic is the safe choice for partnership given its market share and customer support and supply infrastructure. We’re not sure if Animas had to pay Medtronic some sum of money to take this on, or if the reverse was true. Medtronic clearly gets a larger pipeline of customers from this deal than it otherwise would have. To our surprise, Medtronic’s Loop blog today implies that it will take over Animas supply reordering and customer support “in the next few months,” presumably meaning in-warranty Animas customers will need to become Medtronic customers if they want to reorder sets and reservoirs. (This piece was not that clear from J&J’s press release.) 

• We wish J&J had offered some different options for people besides Medtronic, including covering any upfront costs for these pumps. Model of pump aside, a likely consideration was simply that Medtronic is already covered easily by all/most insurance. We believe that prior authorizations and other billing issues are a big overhead driver for pump companies – creating a long, drawn out sales cycle.
• Here are the warranty specifics, followed by details on Tandem’s and Insulet’s own generous transition offers.
  • Animas customers with a warranty expiring on/after September 30, 2019 can transition to a MiniMed 630G for free beginning in May 2018. Notably, Animas is covering the cost of these upgrades – a very generous move.  Medtronic’s sensor supply constraint should be alleviated by that time – the company wants to ensure it can support the transition and maintain commitments to existing Medtronic customers. It is notable, and depressingly for patients, that the 630G/Enlite, and not the 670G/Guardian Sensor 3, is the included option for these customers; we assume most would want the latter and we assume Medtronic played hardball on this front. Still, a free 630G is some incentive for Animas users to switch to Medtronic though we think it would be a no-brainer with the 670G and we believe there will be plenty of customers lost to Tandem and Insulet (we anticipate that a variety of advocacy organizations, including The diaTribe Foundation, will be writing payers to lobby for them to cover the costs of other pumps as well as Medtronic). The web page emphasizes that Medtronic will not be able to supply Animas cartridges or customer support for Animas pumps after September 30, 2019.
  • For warranties expiring before September 30, 2019, Animas will honor the warranty until it expires, at which point patients must transition to a new pump. We’re glad to see that uninterrupted pump supplies and warranty service will continue, since this timing applies to a large portion of Animas users. Once the warranty expires, customers can order any pump they want, including the MiniMed 670G or obviously other companies’ pumps. Animas in-warranty customers can also move to Medtronic before their warranty expires through the Switch2System program (price not specified).
  • For patients who are out of warranty or whose warranty expires by December 31, 2o17, Animas encourages contacting Medtronic to explore their options. A Medtronic page encourages purchasing a 670G in the US or a 630G in Canada before the new year to minimize out of pocket costs. We assume most will take the 670G if they have the option.
• A Medtronic blog today implies that in the “next few months,” Medtronic will actually be the one selling Animas supplies and offering customer support, meaning in-warranty Animas users will presumably now become Medtronic customers. The J&J press release suggests Animas will provide supplies through a “transition period,” but this period is not quantified. The table in Medtronic’s blog post implies this supply ordering AND customer support will move to Medtronic in the “next few months.” We wonder what the deal terms were and how Animas customers will receive this news.

• Notably, Animas closed even without the BD/Medtronic MiniMed Pro-sets (luer lock) officially available. The BD/Medtronic sets that we had once anticipated would be much better than conventional sets are now delayed until FY18 (October 2017-September 2018).
• Notably, Tandem has launched the “Touch Simplicity Today Pump Access Program,” enabling Animas and Roche pumpers to use a Tandem pump for the remainder of their current warranty (up to 12 months) for $999. Following the warranty period, the $999 can be credited to purchase of a new Tandem pump and/or supplies. Alternatively, if participants don’t opt to purchase a new Tandem pump at the end of their Animas/Roche warranty period, they can return the Program pump and receive a refund of the $999 payment depending on how long the pump was possessed (ranging from a full refund to no refund). It seems like only Animas pumpers with a year or less on their warranty can take advantage of this program, meaning the funnel of patients will likely be smaller than Insulet’s program.
• Insulet’s Omnipod Welcome Program provides Animas and Roche pump users with a PDM and 10 Pods (one month’s-worth) at no cost – a generous free transition. After a month, typical ongoing supply payment structure kicks in. The Welcome Program is only available through the end of the year, giving patients less time to switch than the Medtronic and Tandem plans. Insulet can be much more flexible here, given its pay-as-you-go business model, a huge advantage.
• A couple weeks ago, Medtronic also invited patients affected by Roche’s US pump market exit to purchase equivalent Roche supplies directly through Medtronic.

3. Evaluation of LifeScan business with BGM and One Touch Via Ongoing

J&J will continue to evaluate potential strategic options for LifeScan, manufacturer of OneTouch BGMs and the still-not-launched OneTouch Via bolus-only patch insulin delivery device – we believe the latter could be life-changing for some patients, particularly given that 70% of people taking insulin are not in good control. See our January analysis for a look at who might be interested in buying these businesses and why. It’s hard to imagine the BGM side being picked up due to the harsh climate, though perhaps a large established player like Roche or even Ascensia could acquire it for bigger economies of scale and manufacturing. We could imagine Via fitting very well alongside many companies’ insulin delivery portfolios. 

• OneTouch Via is arguably the most appealing and has the highest upside of LifeScan’s offerings, given the patient/HCP enthusiasm for this discreet way of delivering bolus insulin. A launch may be imminent (per conversations at EASD), though reps haven’t been able to say exactly when that might happen. Alternatively, LifeScan may not ever launch the device if a suitable buyer comes in to scoop it up.
• There is potential for J&J’s BGM portfolio in the Verio Flex-WellDoc integration, which allows for the passive relay of glucose data to the BlueStar app (education, real-time feedback, etc.). The technical integration went live in March, but we’re not sure when it will be made available to patients en masse. Pricing and competitive pressures have plagued all of the major BGM companies, and 2Q17 was no exception for J&J, as BGM headwinds helped drive an 11% YOY decline to just $421 million in global revenue.
• The SGLT-2 inhibitor Invokana (canagliflozin)/Invokamet (canagliflozin/metformin) franchise will not be affected by these strategic evaluations. In fact, J&J just submitted an sNDA for Invokana’s CV indication based on CANVAS results earlier this week. We do think that J&J needs a better narrative about its commitment to diabetes; it was only quarters ago that CEO Alex Gorsky declared how much commitment J&J had to diabetes and we’d love to see action on this front. J&J has long had a commitment only to stay in businesses in which it can be #1 or #2, and clearly Animas was not an arena in which this could be the case – we do think it could’ve dramatically improved the overall commercial environment and ability for patients to have choice by selecting Tandem or Insulet. Although the 670G data is incredible, given that patients can’t actually choose the 670G, we wonder if this choice was just the best one financially for J&J.

What Lessons Can Be Learned?

4. Running an Insulin Pump Business Profitably In the Current Environment Continues to Be Challenging – Who Will Successfully Change the Business Model?

Though Animas has ~90,000 users, we assume the business was not particularly profitable, if at all. The pump market’s fragility continues to be a challenge and cautionary tale, reminding us of Asante’s closing in 2015 (subsequently scooped up by Bigfoot 14 days later) and Roche halting new US pump sales in January. One of the major challenges all companies face is the required level of support and overhead needed to run an insulin pump business – neither Tandem nor Insulet is profitable at this point, despite both continuing to grow their user bases and innovate (and in the case of Insulet, more than ten years on the US market). Arguably another challenge is the business model of durable pumps, with a large upfront payment for hardware and then ongoing lower payments for monthly supplies. We assume this makes the business profitable for Medtronic, but only because the company has economies of scale with a huge global user base and ability to wield market power – but we’ve never learned very much about Medtronic Diabetes’ profitability and can’t speak to this.

• It’s possible that the future of sustainable, profitable insulin pump businesses (if they do exist) will rest as much on product innovation as business model innovation. Bigfoot Biomedical is thinking in the right way, in our view, since a monthly subscription model is a better deal for both patients and payers – if a user does not benefit or does not like the product, the payer is not stiffed out of several thousand dollars of upfront costs. This fully at-risk model, however, puts a lot of pressure on companies to deliver. At the same time, spinning up this business model and making it sustainable is the challenge and unknown for Bigfoot – can it work in automated insulin delivery (we think that it can not only “work” here but that it can flourish – we see AID as the killer app, longer term)? What level of monthly pricing makes it sustainable? What will payers reimburse for, especially if CGM + MDI dose titration can achieve similar outcomes? We also think Insulet is primed to move in this direction with the Omnipod, though it’s unclear if it will do so. We’re now seeing this subscription model creep into BGM – unlimited strips + coaching programs direct-to-consumer from mySugr/Roche, Livongo, and One Drop – but don’t yet have a sense of how profitable, sustainable, or scalable they are.
• We also wonder if far easier-to-use/train products will decrease the cost structure of insulin pumps and automated insulin delivery – driving more profitability long term. Right now, pumps still need a lot of hand-holding and training, including the MiniMed 670G. There are tons of settings and things to learn, particularly for new users coming from MDI. Meanwhile, Dexcom and Abbott have built big user bases on far easier to use CGM systems, which are easy enough that people can self-train on their own, especially Abbott (and Dexcom in the near future). What would this look like in insulin pumps? Insulet is easily the simplest pump to use on the market right now (and has been for over a decade) and its growth continues to be strong and it is moving to profitability (EBIT positive is still expected in 2018, with a long-term gross margin target of 70%+). Ease of use/training/prescribing goes hand in hand with scalability and costs. Which companies will be successful on this front?   

5. Animas Did Not Innovate Quickly Enough – The Bar for Product Excellence Continues to RiSe in Diabetes Devices. Animas Has Been Consistently Losing Share to Insulet and Tandem

One of the biggest reasons Animas is shutting down, in our view, is that the company did not innovate quickly enough. The best example of this is its automated insulin delivery program, where Animas could have been first to market with a hybrid closed loop. The artificial pancreas partnership with JDRF was announced back in 2010, and as of 2017, Animas still had very little to publicly show for its automated insulin delivery efforts – FDA pivotal trial plans were still reportedly under discussion, and only a couple conference presentations had shared data from small in-clinic feasibility studies. Conversely, for example, Insulet has been “IN” on automated insulin delivery for only ~1 year, and has already completed several published studies in adults and pediatrics, including an ongoing five-day hotel study and a clear timeline to market. If Animas had launched hybrid closed loop around the time of the MiniMed 670G (or even before), could it have saved the business? Why did the program move so slowly internally? Could it have been first to market with more investment? Even as recently as last May, Animas had guided for a hypoglycemia-hyperglycemia minimizer (HHM) launch by November 2017 (next month!), though this was amended to “November 2017-May 2018” at ADA, and late 2018/early 2019 shortly thereafter.

• Animas’ pump hardware, software, and marketing has also lagged behind competitors Tandem and Insulet. In the dQ&A Diabetes Connections patient panel, Animas has been losing share to both companies since 2014. Though Animas did get the OneTouch Vibe Plus with Dexcom G5 integration approved last December, the product has still not launched 10 months later – and even if it had, it’s not clear Vibe Plus would have saved the business or underlying economics. Meanwhile, Tandem is out with the t:slim X2/G5, bringing a far better feature set than Animas’ current Vibe G4 and One Touch Ping – touchscreen, Bluetooth, software updateable, G5 integration, and an ongoing PLGS pivotal study and seemingly clear path to hybrid closed loop with TypeZero. Insulet has doubled down on its Horizon hybrid closed loop device under Medical Director Dr. Trang Ly and President Shacey Petrovic – the ultimate product should have an outstanding user experience (based on what we continue to see), and the Dash PDM (FDA submission in Q4) looks like a nearer-term product win. For any patient looking at the landscape, Animas pumps’ look/feel and features do not stack up well to Insulet and Tandem. And of course, Medtronic’s MiniMed 670G is also very competitive as the first hybrid closed loop – though many patients are being offered only the 630G, where there is not as much enthusiasm and an older sensor.
• The AID landscape continues to grow: Tandem (US PLGS launch expected in Summer 2018; hybrid closed loop with TypeZero by the end of 2018), Diabeloop (EU launch expected in 2018), Insulet (US launch expected in 2019), Bigfoot (US pivotal to start in 2018), Beta Bionics (Insulin-only possible US launch in late 2019), Cellnovo (EU launch possible in 2018), and Roche (EU pivotal completion in late 2018) are all moving to get on the market in some form by 2020. See our AID competitive landscape for details.
• Below, we include some relevant quotes from How Google Works, which hint at some possible underlying reasons for today’s news. This book serves as a reminder that for pre-Internet and pre-smartphone companies like Animas, the world is much different now – product excellence, speed of development, and a software ecosystem are critical drivers, and all are areas where Animas lagged behind.
  
  • “…many companies get comfortable doing what they have always done, with a few incremental changes. This kind of incrementalism leads to irrelevance over time, especially in technology, because change tends to be revolutionary and not evolutionary. So you need to force yourself to place big bets on the future. It’s why we invest in areas that may seem wildly speculative, such as self-driving cards or a balloon-powered Internet. While it’s hard to imagine now, when we started Google Maps, people thought that our goal of mapping the entire world, including photographing every street, would prove impossible. So if the past is any indicator of our future, today’s big bets won’t seem so wild in a few year’s time.” –Larry Page, Foreword to How Google Works
  • “Many incumbents – aka pre-internet companies – built their businesses based on assumptions of scarcity: scarce information, scarce distribution resources and market research, or scarce choice and shelf space. Now, though, these factors are abundant, lowering or eliminating barriers to entry and making entire industries ripe for change…The result of all this turmoil is that product excellence is now paramount to business success - not control of information, not a stranglehold on distribution, not overwhelming marketing power (although these are still important). There are a couple reasons for this. First, consumers have never been better informed or had more choice. It used to be that companies could turn poor products into winners by dint of overwhelming marketing or distribution strength. Create an adequate product, control the conversation with a big marketing budget, limit customer choice, and you could guarantee yourself a good return…The second reason product excellence is so critical is that the cost of experimentation and failure has dropped significantly…Product development has become a faster, more flexible process, where radically better products don’t stand on the shoulders of giants, but on the shoulders of lost iterations. The basis for success then, and for continual product excellence, is speed. The primary objective of any business today must be to increase the speed of the product development process and the quality of its output.

What Are the Competitive Implications of Today’s News?

6. Medtronic – Very Positive

This news is clearly a positive for Medtronic, as Animas is basically handing over the user base, supply reordering, and openly encouraging users to move to MiniMed pumps. Though the MiniMed 670G has technically launched in the US, it’s not flying off the shelves or driving significant revenue at this point due to sensor supply constraints – Medtronic’s sales declined 8% year-over-year in the US in 2Q17. Indeed, this ongoing sensor shortage has hampered new 670G shipments and is not expected to resolve until a new manufacturing line is up-and-running, expected by April 2018. Clearly not all of Animas’ 90,000 patients will move to the MiniMed 630G/670G, though with one less big-name competitor in J&J, free marketing for the 630G/670G, a new supply revenue source (once Medtronic takes over Animas reordering), and an influx of new patients, Medtronic definitely wins with today’s news and continues to leverage its market power. Medtronic’s 670G data is certainly hard to beat – we are very surprised patients are not being given the offer for this pump, which would make it a no-brainer.

7. Tandem – Positive

Tandem has the only G5 integrated pump right now, and we expect today’s news will drive some movement of Animas users to the newly launched t:slim X2/G5. We’re not sure what percentage of Animas users are on Dexcom, though would guess it is a fairly meaningful number. Given the loyalty of Dexcom users, we’d guess most Animas/Dexcom customers will move to Tandem and not to Medtronic. (Our speculation, of course.) Tandem does have a special offer for eligible Animas and Roche customers to move to the t:slim X2 for a one-time payment of $999 – this assumes there is less than 12 months remaining on the pump warranty, which is certainly the case for some Animas Vibe/G4 users. Notably, the amount can be credited to the purchase of a new Tandem pump and/or supplies. Tandem has had a string of rough quarters, but one less large competitor in the field and the status as the only G5 integration should help drive growth in the 4Q17 and early 2018. If ~10%-20% of Animas users opt for the t:slim, that would be ~9,000-18,000 patients, a very nice tailwind on top of Tandem’s current ~57,000 users.

• Tandem issued the following statement this morning, clearly critical of Animas’ decision to go with Medtronic as its “preferred” pump partner – we completely agree with it but believe Tandem will still get a good number of these patients, as the offer for many is Medtronic’s less advanced 630G pump: “Tandem Diabetes Care believes competition is important to push companies to constantly innovate for people with diabetes and provide the highest level of quality and service at a reasonable price. For that reason, we are disappointed by today's news. Not only have patients lost a popular pump option today, we also believe this kind of consolidation of the insulin pump industry has the potential to limit patient access to innovation in the future. Tandem is now the only company currently offering an insulin pump that integrates with the Dexcom G5 Mobile CGM, approved for making treatment decisions without fingersticks (only two fingerstick CGM calibrations required per day). Dexcom sensor integration is a feature many chose Animas for with the launch of their original VIBE Pump with Dexcom G4 PLATINUM CGM integration and the anticipated VIBE Plus Pump with Dexcom G5 Mobile CGM. It is also the reason so many patients have already chosen Tandem’s t:slim X2 Pump. We welcome the opportunity to help any current Animas customers continue enjoying the benefits of an insulin pump with Dexcom sensor integration when they are ready for a new pump. We know change can be stressful, particularly when it is unexpected, and we are here to help in whatever way we are able. For a limited time, eligible Animas pump users can use a Tandem insulin pump for the remainder of their Animas warranty, up to 12 months, for a one-time payment of $999. This amount can be credited to the purchase of a new Tandem pump and/or supplies at the end of their current pump warranty period or may be refunded. More information is available at www.tandemdiabetes.com/special-offers.”

8. Insulet – Positive

Insulet also announced a no-cost pathway for Animas users to get on the Omnipod this morning: a free PDM plus one month of free pods, with ongoing pods billed through insurance under an existing warranty. This is a very strong program and we expect many Animas users could move to it, particularly pediatrics where Animas was historically strong and Insulet remains very strong. If even 10%-20% of Animas users opt for the Omnipod, that would be ~9,000-18,000 patients, a very meaningful boost over Insulet’s plan to add ~25,000-35,00 users in 2017 (from ~105,000-110,000 at the end of 2016 to ~135,000 by the end of 2017).

9. Other Pump and AID Companies – A Cautionary Tale and an Opportunity?

For companies like Bigfoot Biomedical, Diabeloop, Beta Bionics, Cellnovo, and others, Animas’ story serves as a cautionary tale even as it opens opportunities. Even with Animas’ user base of ~90,000 globally, decades of medical device experience, a significant sales force, reimbursement expertise, and more, J&J could not make this business work. For these startups, therefore, this serves as a cautionary tale – running a pump business and all that it entails is extremely difficult. On the other hand, these companies can also start fresh, rethink the business and innovation model, and drive to product excellence with more speed, smartphone connectivity, and better software. It’s also possible that outstanding automated insulin delivery will serve as a gamechanger for new entrants.

Close Concerns’ Questions

Q: Were there any bids for the Animas business? If there were offers, was it too high hassle to sell the business rather than simply close it or were the offers too low for J&J to take on?

Q: What was Animas’ profitability or losses at the time of closure? What was the trajectory?

Q: What deal terms did Animas strike with Medtronic? Who paid whom, if at all?

Q: Could Animas have been first to market with automated insulin delivery? If the team could rewind the tape to 2010, what would have been done differently? What slowed things down?

Q: Could the DIY community acquire Animas’ assets and manufacturing, selling a  Bluetooth enabled pump that can connect to open-source algorithms driven by great apps (e.g., Loop)? What are the regulatory implications for doing so? This would ease a major pain point of current DIY automated systems, which talk to old Medtronic pumps and still have communication issues. Having an open-source connected pump could drive a huge ecosystem of innovation and we wonder if this is possible – though, of course, the pump would need to be “hackable”.

Q: What will happen to the more valuable LifeScan and Calibra businesses? Will they be sold to larger players? Who is interested? Where could they drive the most value? Is LifeScan profitable?

Q: What can other pump, AID, and diabetes tech companies learn from Animas?

Q: How many insulin pump companies can the market support? Will Bigfoot be successful in innovating the business model of insulin delivery? Will other companies follow with a subscription model instead of large upfront payment?

-- by Brian Levine, Adam Brown, and Kelly Close