Insulet Reports – Some warning signs
When it comes to the insulin pump business everything revolves around the size of your installed user base. Before Insulet (NASDAQ:PODD) came on the scene the size of a company’s installed user base translated into a predictable stream of pump supply revenue. Besides turn the model upside down from a technology perspective Insulet also changed the revenue dynamics with their pay as you go pricing model. Instead of charging new patients upwards of $7,000 for a new system, Insulet offers an affordable starting cost preferring to make the bulk of their revenue from the continuing sale of disposable pods.
This model meant two things for the company. First build a large installed user base as quickly as possible and second use this high pod volume to drive down manufacturing costs which ultimately would lead to profitability. Once profitable it was widely assumed the company would be acquired by a larger rival or blood glucose monitoring company looking to enter the insulin pump market.
Based on the third quarter results released this afternoon the company appears to be moving forward on both fronts. According to company they added approximately 1,975 new patients this quarter bring their total new patient adds for the year to approximately 4,825. With nearly 4,150 patients at the end of 2007, this means the company has more than doubled their installed user base. The company also stated they achieved positive gross profit during the month of September.
So why then is Diabetic Investor concerned?
1. Pace of new patient ads are slowing.
2. The company expects the fourth quarter to come in at the lower range of estimates. The fourth quarter is typically the strongest quarter of the year.
3. With just $74 million in cash and a burn rate of nearly $25 million per quarter the company looks to be headed for another capital infusion or some serious cuts in spending which could limit sales opportunities.
4. Competition from market leader Medtronic (NYSE:MDT) and number two player Animas, a unit of Johnson and Johnson (NYSE:JNJ) is intensifying. They may not have a wireless pump but they have greater resources to get to the patient, physician and nurse educators.
5. The manufacturing issues which the company experienced earlier in the year which caused a higher than normal pod failure rate hurt adoption rates. While the problem has been corrected, you don’t get a second chance with these patients.
Since the OmniPod came onto the market Diabetic Investor believed that once the company reached an installed user base of 10,000 patients an acquisition would come next. Barring a major disaster the 10,000 patient mark should be hit in early 2009. With no credible competition on the horizon for at least another year the company must exceed this number given the changing nature of the financial markets. As the company correctly stated during this afternoons call this is not the time for any missteps.
The key now is to get through what is shaping up as a tough fourth quarter and become profitable on a regular basis. With companies like Bayer looking for acquisitions and the continued popularity of wireless pumping it would not surprise Diabetic Investor one bite that by the time next year’s ADA conference gets here Insulet could be acquired. Insulet has come a long way over the past few years and the end of this long journey is within striking distance. The decisions made over the next few months will determine whether or not this comes to a happy ending.
