Insulet – Changes announced, more changes coming
This morning Insulet (NASDAQ:PODD) announced that the company has
amended its $60 million credit facility with Deerfield Management signed back
in March. According to a company issued press release;
“Under the terms of the amended agreement, Insulet will repay the
$27.5 million of currently outstanding debt by issuing 2,855,659 shares of
common stock to Deerfield at a price of $9.63 per share. This represents a 6%
discount from Insulet’s closing price of $10.28 on September 25, 2009.
As part of this amendment, Deerfield has agreed to eliminate all future
performance-related milestones associated with the remaining $32.5
million available on the credit facility and reduce the annual interest rate on
any borrowed funds to 8.5% from 9.75%. In addition, Deerfield will forego the remaining 1.5 million
additional warrants that would have been issued upon future draws. Insulet will immediately draw down the remaining $32.5 million available on the
credit facility at closing. These changes are expected to result in more than
$12 million in cash and non-cash interest savings to Insulet over the remaining
term of the credit facility. As a result of the amendment, Insulet will record
in the third quarter a onetime non-cash interest charge of approximately $6
million to accelerate the amortization related to the warrants and other costs
in connection with the original draw last March. The borrowed funds remain
repayable in September 2012.” (Highlighting added by Diabetic Investor)
It’s interesting to note that the “future performance related
milestones” that Deerfield agreed to eliminate where connected to Insulet’s profitability.
It’s equally noteworthy that the 1.5 million warrants that Deerfield is forging
allowed them to purchase almost 4 million shares of common stock. According to
the original agreement which was filed with the SEC back in March; “Upon
execution of the Facility Agreement, the Company issued to the Lenders warrants
to purchase an aggregate of 3,750,000 shares of common stock of the Company at
an exercise price of $3.13 per share (the “Initial Warrants”) in connection
with the initial $27,500,000 draw down from the facility.”
Some may recall that back when original agreement was signed back
in March, Diabetic Investor was impressed by Deerfield’s ability to execute an
agreement that not only made Insulet pay interest on the money they borrowed
but also to interest on money not yet borrowed. Granted market conditions were
much different back in March still these terms would make a Chicago Mob boss
blush.
The question is why is Deerfield willing to accept shares instead
of cash and why are they willing to forgo a potentially huge pay day by
eliminating the warrants? Should Insulet be acquired as everyone expects, one
would think these warrants would be extremely valuable.
Considering that shares of Insulet are up over 5% today it appears
the Street isn’t asking these questions. The street seems to believe the
company stands to benefit from lower capital costs and an improved balance
sheet.
Once again Diabetic Investor isn’t sure the street is properly
analyzing the deal but when it comes to diabetes device companies this isn’t
all that unusual. The street seems convinced that it’s only a matter of time
before Insulet is acquired and this deal only helps make that scenario more
likely. Diabetic Investor also believes it’s only a matter of time before
Insulet is acquired. However, the company still has several issues to overcome
before this can happen.
While the company has benefited from Deltec exciting the market
and will likely benefit from Roche’s upcoming exit from the US insulin pump
market, the fact remains they need to sell more systems. Increasing sales is
critical to Insulet as goes directly to the heart of the issue facing Insulet,
lowering the cost of goods sold. As Diabetic Investor has said on numerous
occasions, Insulet needs to lower COGS in order to be an attractive acquisition
target.
Based on various field reports the company is doing better than
they have in the past and has no doubt benefited from Deltec’s exit from the
market. While the company no longer discloses new patient adds Diabetic Investor
estimates the company will add between 2,200 to 2,400 new patients this
quarter. As solid as these numbers are it is still below the level necessary
for the company to effectively lower COGS. Although market conditions have
changed dramatically since the OmniPod first came to market, the company had
planned on new patient add exceeding 3,000 per quarter by this time.
Diabetic Investor has also learned that the company will be laying
off another 26 employees, including the company’s co-founder John Garibotto.
According to the company the majority of the job’s eliminated will come from US
manufacturing facility with some additional cuts coming in product support. As
one company official put the goal here is to “trim the fat” and move further
towards profitability.
Besides today’s layoffs the company is also in deep negotiations with
Roche to become their international partner. As Diabetic Investor has previously
reported Roche is seriously considering exiting the US insulin pump market and
concentrating their efforts overseas. While Roche is minor player in the US,
they remain a serious player overseas and are facing increasing pressure from
US market leader Medtronic (NYSE:MDT). Realizing they cannot effectively
compete in the US, the company sees the OmniPod as way to blunt Medtronic’s
growing patient base overseas.
The sticking point for a deal to get done is Insulet’s insistence that
the deal be structured so that it can be undone should Insulet be acquired. As
Diabetic Investor has reported in the past the most logical suitor to acquire
Insulet is Johnson and Johnson (NYSE:JNJ) and it would be unlikely JNJ would
make acquire Insulet if they felt this would benefit one their main
competitors. Although a deal with Insulet makes perfect sense for JNJ, they
could just as easily acquire Medingo and use their new Solo system as their
entry into the wireless/patch pump market segment.
Some would argue that Roche is in more desperate need of a system
such as the OmniPod and that this international partnership is just a first
step until the company eventually acquires Insulet outright. Diabetic Investor
doesn’t see it that way given that Roche has already spent over a billion
dollars to acquire Disetronic and that acquisition has been nothing short of a disaster.
At the end of the day nothing really has changed for Insulet as
the ultimate goal remains to be acquired. Given the fact that Deerfield was
willing to restructure one sweetheart of a deal and take a greater equity
position in the company is a signal they too see Insulet being acquired. The
question is no longer if this event will occur but when and who will do the
deal. In essence the more things change, the more they really stay the same.
