Final Paper v12

Medtronic MiniMed in the Insulin Pump Industry:

The Power of Complementary Assets and Reinforcing Loops

15.912 Technology Strategy

Johanne Auerb?ck Maria Grunwald Ethan Russell May 11, 2005

Table of Contents

1

Background, ...................................................................................................................... 1

2 The Insulin Pump Industry .............................................................................................. 1

3 Technological Development in the Industry ? S-curves............................................. 2

4 Value Chain and Value Capture .................................................................................... 4

5 Five Forces Analysis........................................................................................................ 6

6 Complementary Assets and Uniqueness ..................................................................... 7

7 System Dynamics of the Industry ? Reinforcing Loops ............................................. 9

8 System Dynamics Simulations..................................................................................... 12

9 Conclusion....................................................................................................................... 14

10 System Dynamics Simulation Exhibits........................................................................ 16

In this paper we present a thorough analysis of the US insulin pump industry and explore how one firm, Medtronic MiniMed, has been able to achieve and retain dominance.

1 Background1, 2

About 1.1 million people in the US suffer from Type I, or insulin-dependent diabetes, a chronic disease requiring regular insulin replacement in order to ensure survival.3 An additional 10 million people suffer from Type II, or non-insulin dependent, diabetes. Recent research suggests that about 48% of patients with Type II could benefit from supplementary insulin, and 25% of the 48% actually inject insulin. The total market of insulin users is therefore about 2.3 million people. The total insulin-injecting population is growing 1-2% a year.

Insulin delivery is currently achieved using three distinct technologies. First and second are syringes and insulin pens, which require a patient to self-dose and self-inject boluses of insulin several times a day. The third technology is insulin pumps, computerized devices that can help the patient calculate insulin doses4 and which provide continuous release of insulin through a catheter placed under the patient's skin. Soon, patients will have access to non-invasive technologies such as oral, inhaled or transdermal formulations of insulin, and research efforts are ongoing to find a vaccine or cure for diabetes.

2 The Insulin Pump Industry

The insulin pump market includes both a durable good and a consumables component. The pump itself sells for about $5,000 and lasts for 5 years; consumables cost the user about $6 per day. Currently, the vast majority of the insulin-injecting market still uses substitute products with a longer history in the market (syringes or insulin pens). Only about 10% of Type I diabetics (~100,000 people) use infusion pumps, and almost no Type II diabetics use them.5 This is changing as people start to better understand the benefits of tight insulin control, and gain comfort and familiarity with being connected to an insulin pump 24 hours per day (Figure 1, below). Growth rate in the insulin pump industry is about 9% per year, compared to about 2% in the overall diabetic population.6

1 General industry information was gathered from: Hamilton, Gayle, "The Diabetes Market Outlook," 2004.

2 Frost & Sullivan, "The U.S. and European Diabetes Delivery Systems Market, B034-54," 2002.

3 National Diabetes Fact Sheet, United States CDC, 2003. .

4 Calculations are based on based on inputs about blood sugar levels and carbohydrate intake.

5 Frost & Sullivan, 2002.

6 Ibid.

1

FIGURE 1: FEATURE TRADE-OFFS

Comfort/

Familiarity

Syringes/ Pens

Insulin Pumps

As pump manufacturers educate patients and physicians & overcome lack of familiarity/comfort with the new technology, the pump market will take over much more of the delivery market.

Disease control

3 Technological Development in the Industry ? S-curves

As hinted at in the industry background, the insulin delivery industry has been subject to significant technological change over its history, resulting in significant improvements in performance as measured by the control of blood sugar levels. When insulin was first brought to market as a therapy, it was injected using standard syringes, with patients calculating their dose and administering it via bolus injection. Incremental innovations to suit the needs of diabetics injecting insulin resulted in the insulin pen, a simple device that looks and functions like a syringe containing its own vial of insulin and which simplifies dose measuring and injection. The potential for performance improvement on this model is limited, however, by diabetics' need for a basal dose, a small amount of insulin to be delivered constantly throughout the day and night in addition to boluses at mealtimes. Although research has produced varieties of long-acting insulin to be injected once daily in addition to meal boluses in order to provide a basal dose, the uptake of long-acting insulin cannot be tailored to the needs of individual patients.

Insulin pumps, though the initial models were large and obtrusive, offered immediate improvements in terms of blood sugar control (see Figure 2). Pumps consist of an insulin reservoir controlled by a small computer, connected to the patient through a catheter inserted under the skin. Pumps are designed to deliver insulin continuously after being programmed with the patient's varying insulin needs throughout the day7, and deliver boluses on demand based on inputs about the amount of carbohydrate intake and current blood sugar levels. Incremental innovations have reduced the size of the

7 For example, many patients require more insulin in the early morning when blood sugar levels naturally tend to rise (the "dawn phenomenon"), and less during the day when the patient is active and moving around.

2

unit, increased the convenience and control of dosing, and promise to eventually have the pump selfregulate, essentially working like an artificial pancreas.

FIGURE 2: INSULIN DELIVERY MARKET S-CURVES

Tight regulation

Fully selfregulating, unobtrusive

Performance (control of blood sugar levels)

The Present

Flex pen

Coupled to glucometer

Syringes

Pumps requiring manual input, large & inconvenient

Inadequate regulation

Manual insulin injection

Oral, Patches, Inhalation

Islet cell transplants

Genetic engineering

Vaccine

Time

Self-regulating insulin pumps;

"artificial pancreas"

Noninvasive

insulin

delivery

"Cure"

Prevention

Beyond delivery

Supported by innovations in the

insulin being delivered (e.g. fast-

acting, recombinant, "smart cells")

Up to this point, the only way to deliver insulin has been by subcutaneous injection, but new delivery mechanisms ? possible discontinuous innovations ? are planned for launch in the near future that

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