Bigger isn’t always better

Bigger isn’t always better

Typically the first quarter is one of the slower quarters for diabetes device companies, insulin pump companies in particular. Yet for OmniPod maker Insulet (NASDAQ:PODD) the year got off to a good start with first quarter revenue jumping 20% compared to last year. The company also noted in their prepared remarks; “Since March 1st, new referrals and shipments have increased by more than 40% as compared to the prior year and in April these metrics were up by more than 50% over April of 2012. “

This increase in sales and referrals can be directed tied to the introduction of their new Eros pod. Although the company won’t be converting their installed user base to the new pod for another 90 days as according to the company; “While the manufacturing process continues to improve, we had an unexpected component issue that resulted in a lower than planned production in the latter part of Q1. While this component issue was quickly identified and remedied in conjunction with both Flextronics and the supplier, we determined it most prudent to build inventory (inaudible) both manufacturing lines while operating efficiently before we commenced the transition of over 45,000 customers to the new OmniPod. At this point, we expect that conversion will start in the next few weeks and we remain confident that nearly all customers will be transitioned by the end of the third quarter.”

The best news for Insulet is the new smaller, cheaper to manufacture Eros pod is off to a strong start both in Europe and here in the US. At a time when insulin pump market leader Medtronic (NYSE:MDT) appears to be floundering, the door has been opened for competitors like Insulet to step in a steal share. Although Diabetic Investor was somewhat skeptical that the new pod would make that much of a difference, it seems as though this one time when bigger isn’t better.

While existing OmniPod patients may be unhappy waiting to be converted to the new pod, Insulet is taking the prudent path here. The company knows they won’t get a second bite at the apple and must make sure they can adequately supply their installed user base of approximately 45,000 patients. The harsh reality is once this conversion process begins there is no going back to the old pod, so the company must get it right. As we have noted previously any major issues with the conversion process, any supply interruptions or manufacturing issues would deal a devastating blow to the company.

Looking at the pipeline the company remains well behind the competition with CGM integration. Yet even so Diabetic Investor doesn’t see this issue hurting sales in the near or mid-term. Although we believe strongly the company made major mistake terminating their partnership with Dexcom (NASDAQ:DXCM), we remain unconvinced that CGM/Pump integration will influence a patients pump choice. The simple fact is should a patient desire to be wireless the OmniPod is the only viable option. Would it be nice if the OmniPod worked with a CGM of course, however, in this case we see the ability to be wireless trumping being tethered to a conventional pump which is integrated with CGM.

Given the issues facing Medtronic, Insulet has a real opportunity here. As we have noted on many occasions while other pump companies have better technology, the key for Medtronic has been their ability to hold onto their huge installed user base. This is the gift that keeps on giving and is basically an annuity for Medtronic. The fact is many physicians who were major Medtronic supporters are now actively looking for alternatives. They see the new Tandem system and now the new smaller pod and basically like what they see.

This is one reason Diabetic Investor is glad that Insulet is not rushing the new pod into the hands of their installed user base. They know they have a great opportunity here and also know that they won’t get a second chance if they screw up. Insulet will not unseat Medtronic as the insulin pump market leader but they do have the chance to land some serious body blows. In our eyes Medtronic is about to find out bigger isn’t necessarily better.