A tale of two takeovers

A tale of two takeovers

Take a good look at this chart from www.bigcharts.com , it shows the 3 month performance of Amylin (NSADAQ: AMLN) and Animas (NASDAQ: PUMP). Both companies have been the subject of takeover rumors, with Lilly possibly buying Amylin and Johnson and Johnson (NYSE:JNJ) possibly buying Animas. Obviously the Street believes the Amylin Lilly deal is more likely than the JNJ Animas deal.

Diabetic Investor finds the timing of Animas’s price decline interesting when you consider that were was a flurry of insider selling in May. This by coincidence was about the same time the JNJ rumors were hot and heavy. Diabetic Investor never believed the JNJ rumors were serious as Animas is facing a slue of problems. The question now becomes just how long will this price slide last? With Insulet’s new OmniPod system hitting the market and sales of Amylin’s Byetta taking off new pump placements will be hard to come by. This puts Animas in the precious situation of relying on sales of disposables and pump upgrades as their primary revenue sources. Animas also faces the prospect of falling further behind market leader MiniMed, a division of Medtronic (NYSE:MDT), when MiniMed introduces their sensor augmented pump. Finally, with Roche back in the insulin pump business the competitive environment just became that much tougher.

As bleak as their prospects are Animas does have some options. While none of the pump players relish the prospect of a price war Animas may have no choice to fire the first bullet. Simply put the insulin pump market is not large enough or growing fast enough to support all the players. Market share is critical to success as sales of disposables are becoming the primary source of revenue growth. Although we are not there yet, the insulin pump business is set up to follow the blood glucose monitoring business where the meter is given away for free and the companies profit from the continuing sales of test strips.

Given these facts Diabetic Investor finds Animas in a no win situation. There’s no question MiniMed could withstand a price war. The same can be said for Insulet due to the unique pricing structure for the OmniPod. Roche really has nothing to lose and Smiths Medical, the maker of the Cozmo insulin pump, would more than likely be forced into competing. Not a pleasant scenario for anyone in the business.

So what can Animas do to reverse the situation? Selling the company would be the obvious answer but to whom. JNJ isn’t in the business of throwing good money after bad. They already own close to 10% of the company and quite frankly could buy Animas in heartbeat if they really thought the company could be turned around. Given the outlook for the insulin pump market it’s equally unlikely that an established diabetes company would step in. It also unlikely that either Roche or Smiths would buy the company, as much as both would like to pick up market share there are just too many hurdles to this type of a deal. That basically leaves two possible suitors, a company not in diabetes or a private equity group. We suppose this is possible but would view such a deal as a long shot.

Now take another look at the chart and try and imagine what this could look like at the end of the year. Not a pleasant thought indeed.

David Kliff
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