Insulet Reports – Not quite there just yet
At first glance it would that Insulet (NASDAQ:PODD) had a solid quarter:
On a quarter over quarter basis revenues grew by 17%
Gross margin increased from 16% in the first quarter to 22% in the second quarter
The company tightened guidance for the remainder of the year
Lastly the company stated that the cost per pod should drop below $20 per pod during the third quarter
It is this last statement that holds the key to Insulet’s future and the fact is with while the cost to make pods is dropping a $20 per pod COGS is still too high. For those with short memories Diabetic Investor suggests replaying the company’s conference calls from last year when they stated they believed they could bring COGS down to $15 per pod.
Although the company tried to dismiss the coming competition because their systems are part disposable and part non-disposable the fact is these systems were designed with lower COGS as a goal. Diabetic Investor agrees with the company that ease of use is critical however when it comes to profits COGS are just as critical.
Diabetic Investor also finds it interesting that the company no longer is providing new patient starts and while receiving a higher than normal amount of referrals has seen a drop in their conversion rate. While it’s great to have more people interested in the product you sell these referrals mean nothing if they can’t be converted into paying customers. Based on our calculations Diabetic Investor estimates Insulet added approximately 2,000 or so new patients last quarter an increase from 1,800 or so last quarter.
In reality the story for Insulet really hasn’t changed all that much. The company has done an outstanding job of validating the need for a wireless insulin pump and is actually expanding pump usage. Hence the reason why Medingo and soon Medtronic (NYSE:MDT) will be entering this market. It remains to be seen however just how long the company will be able to survive with COGS that at $20 per pod are still too high.
The fact is if the company is to be acquired, which is truly their ultimate goal; COGS have to fall below $15 per pod. Given that Animas has been slow to develop their wireless system Johnson and Johnson (NYSE:JNJ) could step in. The question is will JNJ decide to buy Insulet and use their considerable manufacturing skill and marketing clout to drive down COGS. Or will they take a chance on Medingo and their just approved Solo MicroPump. There is no question JNJ needs to have a wireless offering if they expect to have any chance of cutting into Medtronic’s huge market share.
At the moment Diabetic Investor would give the edge to Insulet for several reasons. The company has an existing user base of approximately 12,000 patients. The company continues to add new patients and they have experience in the wireless space. Additionally it would hurt one of their main competitors in blood glucose monitoring as they would likely swap out the FreeStlye monitor contained in the OmniPod PDM to a LifeScan monitor which would allow them to sell even more test strips to a high frequency user base. Lastly Insulet is also working with Dexcom (NASDAQ:DXCM) to integrate the Dexcom continuous monitor with the OmniPod, just as Animas is also working with Dexcom to do the same thing with Animas insulin pumps.
Given JNJ’s goal of being number one or close number two in every market they play in, plus their well known history of acquiring products rather than developing them a deal of some kind seems almost certain. They know their biggest competitor in insulin pumps is set to launch their wireless offering and they cannot afford to have a whole in their insulin pump product line.
The real question is which company will they take a chance on Insulet or Medingo?
