Diabetic-Care Product Maker MiniMed Is at a Turning Point

MiniMed Inc., a Northridge maker of infusion pumps for diabetics, posts gains in sales and profit that most businesses envy. Few companies, however, would be proud of the giant decline in MiniMed’s share price over the last six months.

What makes MiniMed’s precipitous 67% drop surprising--even in a sour stock market--is that its strong track record of growth in earnings and revenue gives it the appearance of the kind of company investors are searching for.

“Unlike some of the tech companies, MiniMed is a company with real earnings, real sales and lots of customers,” said David Lothson, an analyst with UBS Warburg in New York.

The medical products company is a victim of its own success. Since its 1983 introduction of a pump that sends a continuous stream of insulin into a diabetic’s body, MiniMed has captured 80% of the market.

Much of that growth came from “early adopters,” endocrinologists who liked the pump treatment for the chronic disease and patients ready to use MiniMed’s technology. Those turned out to be the easy sales.

Now MiniMed must penetrate deeper into the market by reaching family practitioners and patients used to periodic insulin injections rather than to hooking themselves up to an infusion pump. At the same time, analysts say, MiniMed must evolve from primarily a single-product company focused on selling insulin pumps and disposable supplies to a broader business with multiple products.

“Most people with diabetes don’t take care of themselves the way they should,” said Alfred Mann, MiniMed’s chairman and chief executive. “It takes a great deal of effort. You have to measure glucose levels with a finger stick three or four times a day. You have to use a pump or give yourself insulin injections.”

Untreated, high glucose levels can damage the eyes, kidneys, nerves and heart. But the damage often develops slowly, giving patients a false sense of security, Mann said.

His solution is automating the treatment process so that patients face fewer needles and fewer interruptions to daily life. One step toward that goal could come near the end of the year if the Food and Drug Administration approves a continuous glucose monitor designed to more precisely judge when diabetics need insulin. Eventually, Mann sees MiniMed selling an integrated package that includes MiniMed’s pager-size infusion pump and glucose monitor, which would command the pump to automatically deliver the needed insulin to the diabetic.

More than 10.3 million Americans have diabetes. Doctors are diagnosing new cases at a rate of about 2,200 daily, according to the American Diabetes Assn. Moreover, an additional 5 million people have the disease but don’t know it.

Diabetes appears in several forms. Type I diabetes is an autoimmune disease in which the body does not produce insulin. It’s found mostly in children and accounts for about 10% of all diabetes cases. Patients with Type I diabetes must take daily insulin injections and are prime candidates for the kind of insulin pump MiniMed produces. Fewer than 20% of the roughly 1 million Type I diabetics use a pump, a potentially large market for MiniMed if the company can change treatment habits. Mann said MiniMed is hosting as many as 70 symposiums annually for health-care professionals about diabetes treatment.

Type II diabetes is a metabolic disorder in which the body doesn’t make enough insulin or doesn’t process it correctly. This is the most common form of the disease, often linked to obesity and a sedentary lifestyle, and accounts for about 90% of the cases.

There’s also gestational diabetes, which appears in a small percentage of pregnant women but usually subsides after they give birth. Those women have a greater risk of developing Type II diabetes later in life.

Certainly, there is a huge business for companies that specialize in treatments for diabetes. The nation spends about $44 billion annually, or about $4,000 a patient, treating the disease. Although prices are not yet established, Mann expects MiniMed’s glucose monitor to cost about $1,200 to $1,300 a year per patient. A disposable, three-day insulin pump MiniMed is developing for Type II diabetics will run about $2,000 annually, including the insulin.

The huge market for products to treat diabetics gives MiniMed tremendous room to grow, Lothson said.

MiniMed’s fourth-quarter operating income soared 44% to $13.7 million. Sales grew 30% to $92.5 million. For the year, MiniMed saw net income rise 97% to $43.2 million and revenue grow 39% to $294.4 million.

But this year MiniMed joined what has become a chorus of companies to announce lowered expectations for the fourth quarter and 2001.

Unlike the other businesses, Lothson said, MiniMed’s problems do not result from a slowing economy. Diabetics need insulin, even in recessions. Rather, MiniMed faces a period of slower sales growth because of its market penetration. At the same time, research-and-development expenses and the cost of launching new products will drag income growth down as the company attempts to expand. MiniMed’s future offerings include glucose sensors and disposable insulin pumps, as well as implantable pumps and sensors.

Lothson believes that MiniMed’s earnings growth will slide into the 20% range during the first half of this year but will pick up in the fall when the company starts to sell a new model of its external insulin pump, resuming a 30%-plus growth track next year. He believes that the share price will bounce back too, growing by about a third to $42 over the next year. MiniMed shares closed at $30.69 on Nasdaq on Friday, down from a high of $92.56 in September.

One key product in MiniMed’s expansion strategy is the continuous glucose monitor that would enable patients to escape the pain and inconvenience of using multiple finger-stick tests daily to determine whether they need insulin. Though it is approved for use by physicians, the product has faced delays in obtaining FDA approval, in part because of problems with glucose-measuring devices made by competitors.

In December, Johnson & Johnson agreed to pay $60 million in fines and settlement fees when it pleaded guilty to three misdemeanor charges for hiding problems with its LifeScan Surestep Blood Glucose Meter and for other regulatory violations.

“The FDA has become very cautious with these types of devices,” said Keay Nakae, an analyst with Wedbush Morgan Securities in Los Angeles. “And the FDA wants to be careful to make sure that the patient will understand how to use the data from the device.”

Getting the monitor to market is just one of multiple challenges the company faces.

With 90% of its sales domestic, it’s yet to become an international company, Lothson said. Mann said MiniMed opened a European headquarters in Belgium last year and is starting to make headway.

Lothson also noted that MiniMed’s strategy of adding products will require high levels of research-and-development spending and significant expenditures to expand manufacturing, sales and marketing.

But if it executes properly, MiniMed could top $1 billion in sales by 2005, Lothson said.

The question, Lothson and other analysts ask, is whether MiniMed’s management is up to the complex task of simultaneously developing new products and marketing them effectively to new customers.

“What is holding MiniMed back right now is getting their products clinically tested, through the FDA and out into the market where they can compete,” Nakae said.

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Falling Shares

MiniMed’s shares have dropped 67% since reaching a high in September, even though the company controls 80% of the market for infusion pumps used by diabetics and has posted strong gains in sales and profit.

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MiniMed, weekly closes on Nasdaq

Friday: $30.69

Source: Bloomberg News