Over 34 million people in the United States have diabetes and cases are increasing around the world. There are two primary forms of diabetes. Type 1 diabetes is caused by autoimmune conditions or genetic traits that cause the pancreas to produce very little or no insulin. Patients are generally diagnosed with Type 1 diabetes as children and require insulin therapy for life. Type 2 diabetes is progressive and generally diagnosed in adults. Obesity, sedentary lifestyle, age, race, and other factors contribute to one’s risk of eveloping Type 2 diabetes. Poorly managed diabetes leads to debilitating complications, including kidney disease, blindness, nerve damage, and limb amputations. The best way to reduce complications is by using insulin pumps and continuous glucose monitoring (CGM) systems to maintain blood glucose in an optimal range.
Insulin injections used to be required to maintain blood glucose in a healthy range. Fortunately, patients can now use insulin pumps that inject insulin on-demand or automatically. CGMs use sensors to measure glucose sugar continuously. Pumps transmit data to pumps which automatically adjust the timing and quantity of insulin delivered. Less than 1 in 4 diabetic patients uses a pump and even less use CGMs. I’ll focus on five companies that stand to benefit patients and shareholders in the growing insulin pump industry.
Insulin pump Innovation is similar to that of cell phones. Patients want them to be smaller, last longer, and have more functions. The two largest companies in diabetes care are Abbott Laboratories (ABT) and Medtronic (MDT). These are legacy healthcare businesses that have many divisions and products in addition to diabetes care. They both make pumps and CGMs that are widely used but are not always popular among patients. The net promoter score (essentially the percent of users who would recommend the product) for Medtronic’s CGM is 7. That’s 7 out of 100, so it is not popular. Diabetes care accounts for less than 10% of revenue for these companies which may reduce their focus on patient satisfaction. This also means Medtronic and Abbott are investments in medical devices and overall trends in healthcare rather than diabetes specifically. Medtronic has basically tracked the S&P for 10 years but its price frequently moves opposite of smaller growth stocks in my portfolio so provides ballast.
Tandem (TNDM) and Insulet (PODD) focus on diabetes care and particularly on pumps and related software and supplies. Tandem produces the t:slim X2 which, as the name suggests is smaller than other pumps. They have a new product in the pipeline called t:sport which will be half the size of t:slim. Where Tandem has carved a niche producing small pumps Insulet has focused on tubeless pumps. Most pumps have thin tubing that connects the pump to a subdermal port. Insulet’s Omnipod System is a small pump with a built-in port. The unit adheres to a patient’s body and provides simplified insertion and maintenance.
Both of these companies are increasing revenue and have product innovations in their pipelines to continue growing. Tandem sales have nearly tripled from 2018-2020. They are predicting even higher sales in 2021 and positive operating profit by 2024. Insulet is growing revenue at a compound annual growth rate of 24% and in 2020 had a positive operating profit of 6% that they expect to double in 2021. The primary risk I see to these companies is that they both produce basically one product: t:slim for Tandem and Omnipod for Insulet. If a new company or one of the larger companies made a comparable pump they could lose market share quickly. Tandem carries a lot of long term debt but revenue and cash on their balance sheet are increasing. Insulet has a high valuation (e.g. P/E) but only because it has actual earnings which Tandem does not. I tend not to focus on valuation if innovation and revenue keep growing.
The last company, and probably my favorite, is Dexcom (DXCM) which does not produce insulin pumps but instead produces CGM sensors and software. Dexcom CGM systems are used by Tandem and Insulet in addition to the European company Ypsomed. Dexcom recently partnered with Roche, another European pump maker, to provide its CGM system. CGM market penetration, among patients with pumps, is only about 20% for Type 2 patients and 45% for type 1 patients. This means most patients are not using CGM technology that reduces long term complications and expenses. Dexcom is trying to make CGM systems more accessible by selling them through pharmacies. They are currently classified as durable medical goods so they cost more and have to be ordered and delivered to patients. This also reduces the company's margin due to all the extra logistics involved.
I have a personal interest in diabetes care and particularly in technology that reduces long term complications. I own all of these companies for different reasons. Abbott and Medtronic provide stability and dividends but slower growth. Tandem and Insulet are small allocations that are riskier but could pay-off big. Dexcom is where I would invest new money. It has a proven track record of growth and innovation and most of the other companies need their, highly-rated CGMs. If one pump maker company fails, Dexcom can still sell CGM systems to the others. Pump makers have to fight for a share of the eligible patients but Dexcom can access patients of multiple companies. This also provides easy access to international markets by partnering with local companies. Dexcom is a profitable company with optionality and a best-in-class product. I think it has plenty more room to grow.
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I write Stock Musings for fun and to learn more about investing. This should not be construed as stock advice or recommendations. I am an amateur who enjoys investing, research, and writing with no training in finance, stock analysis, or related fields. I may own stocks discussed.
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