A Blueprint to follow
Ok before we begin our analysis of the Insulet (NASDAQ: PODD) earnings we want to provide a warning as we are going to say some nice things about Insulet. Which seems to be trend lately as we have said some nice things about Livongo and even Tandem (NASDAQ: TNDM) lately, although being nice to Tandem didn’t last long. Just in case anyone has been wondering why we’ve been nice to companies that we have previously dumped on it’s not because we were bitch slapped by Momma Kliff. It’s because when they do something good they should be commended.
We should also state that someone should share this post with Dick Allen who’s the Chairman of Tandem’s Board of Directors, heck it should be shared with every member of the Board. It should be shared because what Insulet has done shows what happens when the Board acts and does not sit around twiddling their thumbs. Frankly the parallels between Insulet and Tandem are stunning.
Both companies we’re built on a simple and very common premise, that they would eventually be acquired. Yes, we know they both talked about improving the life of patients but, neither thought they would independent for very long, that they would have to run a commercially viable insulin pump company over the long term. The blueprint was simple, build it, gain some customers and then sell it.
This blueprint worked very well in the past with Roche buying Disetronic and Johnson and Johnson (NYSE: JNJ) acquiring Animas. Had Medtronic (NYSE: MDT) not sued Deltec they too would have been acquired by Abbott (NYSE: ABT). Back in the day when it came to insulin pump companies the formula was simple and predictable.
All this changed after 9/11. All of a sudden companies that we’re built to be acquired were faced with a new and uncomfortable reality. The blueprint they were built on was no longer valid. Money was not free and easy. The world had been turned upside down. It was no longer good enough to build a way cool toy, gain some share and then have one of the big boys come along and buy you for a nice multiple. No in the new world a company would only be acquired when it demonstrated that it made money and would be quickly accretive to the acquiring company. Simply put it would only be acquired if it was commercially viable and didn’t need major help.
This new reality is what cost Insulet’s previous management team their jobs. Since they could not sell the company, another similarity with Tandem, they were forced to run it. And let’s be honest they did a very poor job running it which ultimately cost them their jobs. We’d suggest going to the archives section of the web site and reading what we wrote about Insulet back then as we were just as hard on the Insulet Board of Directors and management as we are on Tandem’s Board and management today. The big difference is unlike the Tandem Board which is out surfing and enjoying the great weather in San Diego, the Insulet Board acted and installed a new team.
Insulet CEO Pat Sullivan took over in September of 2014 and since that time shares of Insulet have increased 116.73%, over that same time span shares of Tandem have fallen 98.07%. While it’s true that Pat had some early missteps he also wasn’t stupid. Realizing that he had the backing of the Board and understanding that the previous team really screwed up in the beginning he threw this old team under the bus anytime he could. Again, we would recommend hitting the archives as back then we noted that at some point Pat would have to stop blaming the old team and take ownership of the results. That yep the old team was bad, but it was his job to fix the problem.
Well there is no question that Pat and the team he has assembled are on their way to turning Insulet into a commercially viable insulin pump company. This journey is not yet complete but for the first time in a very long time we think they will make it. Sales are great, margins are improving, and execution is getting better. It also doesn’t hurt that one of their main competitors is going out of business and another has some serious leadership issues.
Looking ahead the company’s long-term prospects look better than ever, here’s why.
1. At long last they are covered by Medicare and while we don’t see this significantly impacting sales this year it does help with private payors who use Medicare coverage decisions for modeling purposes.
2. Animas is going out of business and many of these patients do not want to go to the evil empire or risk going to Tandem and having the same thing happen.
3. The DASH is coming a major improvement over the current PDM.
4. International expansion, although as the company noted during the call there will be some minor hick ups as they transition to their new role.
5. Their work with Lilly (NYSE: LLY) which has the potential to open new doors. Bringing pump therapy to the Type 2 patient population has always been a challenge and it won’t be easy for Insulet either, but they are well ahead of everyone else here.
Yes, it has taken time for Pat and his team to get this train on the right track and no they are not done yet, but they should be commended for the job they have done. Not only have they done an outstanding job for the company’s stakeholders they have also protected their customers from an Animas like disaster. So, kudos to Pat and the entire Insulet team.
The Board at Tandem should take notice here and follow the Insulet blueprint. Get rid of the management team and begin fixing the problem. Give the team a nice severance package, thank them for their service and don’t let the door hit them in their fannies on the way out. Bring in a new team who can throw the old team under the bus and then get about the business of turning the company around. Tandem makes good product and with the right team has the potential for an Insulet like turnaround.
Having been around for 20 plus years we have seen this many times, we have seen how one team can only take the company so far. There is no question change is needed at Tandem the facts speak for themselves. There is also no question without change Tandem will join Animas, Asante, Disetronic and Deltec in the insulin pump graveyard.