Insulet Reports – Is there an exit strategy?
Ten years into the game and two questions circulate around Insulet (NASDAQ:PODD) who reported earnings this evening- where does Insulet stand and is there an exit strategy? On the positive side of the ledger the company successfully launched an innovative product and has done something Diabetic Investor once thought impossible; actually expand the market for insulin pump therapy. Yet here are we are ten years into the game and the company continues to struggle with lowering their cost of goods and gaining greater market share.
As Diabetic Investor has pointed out Medtronic (NYSE:MDT), the market leader in insulin pumps, maintains a commanding share of the market. Even with their many missteps and absence of a patch pump, their competition; while slowly eating away at their dominance are still just a distant sight in Medtronic’s rear view mirror. The simple and stark fact for Insulet and Animas, a unit of Johnson and Johnson (NYSE:JNJ), is that even with what many would call better products than Medtronic they are finding it a very tough road.
While the company maintains they are comfortable remaining an independent, no one at the company realistically felt that after ten years someone would not have come along to acquire the company. Given the innovative nature of the OmniPod and Insulet’s ability to actually expand the market, the question has to be asked; why after ten years has no one come along and pulled the trigger?
It’s well known within the industry that several players have come in, kicked the tires and took a serious look at the company. It is also known that at one point Medtronic actually made an offer which the company felt was inadequate. Granted this offer came long ago and it was reasonable at the time for the company to believe they would only become more valuable over time.
Is it possible that their COGS are so high that a bigger player could not drive greater efficiencies? Even if the answer is no, does not the new, smaller pod come with lower COGS making an acquisition more attractive?
Diabetic Investor believes a combination of factors have prevented what everyone once thought was a certain exit strategy. Unfortunately, the insulin pump market is undergoing the transformation the BGM market went through a few years ago, in particular pricing pressure is intensifying. It’s also true that competition is intensifying. While all the players benefited when Smiths left the market, this benefit has dissipated. Perhaps the biggest obstacle is the many new players seeking to enter the market who claim not only to have even better technology but a much lower cost of goods.
The fact is Insulet validated the need for a patch pump. They proved patients would not only accept such a product but embrace it. To their investors this seemed good enough, especially when you look back at the environment ten years ago when money was free and deals were abundant. Everyone knows what has happened since then and the reality is there is nothing Insulet could have done to prepare for such a dramatic change in the economy.
Diabetic Investor believes the many newcomers can learn a valuable lesson from Insulet. While it’s great to have really cool technology, cool technology by itself isn’t enough. The reality is running an insulin pump company is enormously expensive and equally complicated. Add in the fact the market leader not only has nearly 70% of the market but has been around for 20 years and is the most recognized brand when it comes to insulin pumps.
This does not mean that Insulet will never reach their goal of being acquired, the company does have much to offer. Rather, it shows just how difficult this market is. Still as it stands today, ten years in, their original goal remains elusive and market conditions are not in their favor. The saving grace for Insulet just could be the wacky world of diabetes devices. Heck if someone is dumb enough to pay $160 million for Medingo anything is possible. But then again there just aren’t too many companies who are as dumb as Roche.