Better to be lucky than good

Better to be lucky than good

Yesterday Insulet (NASDAQ: PODD) announced results which judging the street’s reaction were received vey well. Now before we get into the story behind the numbers let’s give credit where credit is due, CEO Pat Sullivan and his team have done a good job. Pat inherited a major mess when he took over and for a time it seemed like it was nothing but steady stream of bad news. Bad news which he rightfully blamed on the previous management team. Yet while he was throwing this team under the bus we know there would come a point where he would have take ownership of the situation.

Today the company for all practical purposes seems to be hitting on all cylinders. Margins are improving and the sales team is delivering. The near-term outlook seems favorable and while there will likely be bumps along the way, Insulet at long last seems to be on solid footing. That as Momma Kliff used to say is the good news.

On the flip side what’s really driving Insulet’s move forward, the stock before today was up over 24% on a year to date basis, is the changing dynamics of the insulin pump market. Or put in the simplest terms possible Insulet has luck on their side. With Tandem (NASDAQ: TNDM) on the brink of financial collapse and Animas running around like the Keystone Cops, by default Insulet is now the most credible threat to market leader Medtronic (NYSE: MDT). Should current trends continue and we see no reason they won’t, patients will have two choices when it comes to pump therapy, the 670G from Medtronic or the OmniPod from Insulet.

Now this could change dramatically if many behind the scenes moves now being contemplated become a reality. See what most of the analyst’s miss is that while the financial outlook for Insulet has improved this was the low hanging fruit. The harder part is driving greater patient starts and in that area Insulet is well behind were they should be. The company has done a fine job of talking up all the way cool whiz bang stuff in their pipeline but this pipeline is behind schedule and this could cost the company dearly.

Let’s say we are right and that Tandem implodes by the end of year and lets further assume that Dexcom (NASDAQ: DXCM) does not come in and pick up the pieces. The main beneficiary will be Medtronic who we suspect will pick up approximately 80% of the Tandem patient base. Now if Insulet had a sensor augmented OmniPod, which quite frankly they should have already, the story might be different but Tandem patients are already using a sensor augmented system and they like it. Going to the OmniPod would be a step backwards for most of these patients.

About the only way Insulet can avoid this would be to do what Medtronic did, basically promise these patients that when the Dash does arrive they will be automatically upgraded either at no-cost or very low cost. This is exactly what Medtronic did when the 670G was approved but not yet launched, any patient who got the 630 would get the 670G for “no-cost”. Something Medtronic could afford to do but the same cannot be said for Insulet. The move is not just risky but does carry a high cost.

Looking down the road we could soon live in a world where Tandem and Animas are under one roof, Bigfoot has their system on the market and Medtronic will still be in firm command of the market. This scenario has some speculating that will all the good work Pat and his team has done that Insulet at long last will fulfill their destiny and get acquired. Frankly we cannot argue with that sentiment as a combined Insulet, Tandem and Animas would be at least on paper be a formidable competitor to Medtronic.

Still we see an even bigger threat to Insulet coming and it’s the same threat facing every insulin pump company, a sensor augmented “smart” insulin pen. This system would hit Insulet hard as their target market is patients currently pursuing multiple daily injection (MDI) therapy. A system that would not only deliver outcomes on par with the OmniPod but at a far lower cost to the OmniPod.

Let’s be clear we aren’t taking away from the fine job done by Pat and his team. We just look at things from a much different perspective from analysts who are way too short term focused and fail to see the bigger picture. The key now is to see if more dominos fall in Pat’s direction for if they do this company could achieve its ultimate destiny.