Insulet Reports – The Numbers That Really Count

Insulet Reports – The Numbers That Really Count

There are times when everyone is focused on one set of numbers while the real story lies in a completely different set of numbers. This is the case when it comes to Insulet (NASDAQ: PODD) who reported full year results this morning.

Here are the numbers everyone else appears to be focusing on:

1. 1. 4,150 patients now using the OmniPod and increase of approximately 950 patients from the third quarter. A healthy increase when one considers the system is still not available nationwide.
2. 2. Production capacity reached 75,000 pods per month at the end of February of this year. Based on statements made by the company they are well on their way to reaching production capacity of 200,000 pods per month by the end of the year. A critical number as at the 200,000 per month level the company begins turning a profit on every pod sold. Currently the company is upside down on COGS.
3. 3. Sales force growing rapidly allowing the company to cover a greater portion of the country. In the pump market it’s a fairly simple equitation, the more boots on the ground the more systems you sell.

While Diabetic Investors agrees these numbers are important our focus is what those numbers translate into. In particular the ability to produce 200,000 pods per month by the end of 2008, the number at which Insulet begins to turn a profit on every pod sold. Doing some very quick back of the napkin math, Insulet’s customer base would have to grow significantly to adsorb a production capacity of 200,000 per months. Consider that the pod is designed to last for three days which means an average patient goes through approximately 10 pods per month or about 122 per year. Using the numbers from Insulet’s press release production at the of 2007 was 60,000 pods per month and there were approximately 4,150 patients using the system. This translates into nearly 15 pods per month per patient.

Because different patients use varying amounts of insulin over the 3 day life of the pod it is possible that a high percentage of patients go through more than 200 units of insulin (the pods reservoir maximum capacity). Given that 75% of new patient starts for the OmniPod come from patients previously on multiple daily injection therapy (MDI) and that approximately 80% of all insulin using patients on average use 45 units of insulin per day, it’s unlikely this explains the difference between 10 pods per month per patient and 15 pods per month per patient.

It’s quite possible that since 75% of new patient starts are patient new to insulin pump therapy, that they use more pods per month as they learn about pump therapy. As Diabetic Investor has pointed out in the past it can take upwards of 30 days or more for a patient to properly understand pump therapy.

A third explanation could be pod failures. This is, after all, is a medical device and devices do fail from time to time. While Insulet may have experienced a higher than acceptable pod failure rate in the early days when pods were basically made by hand, the failure rate has decreased dramatically as the company has shifted to an automated production process.

The last possibility is that it’s a combination of all three scenarios that account for the difference between patients using 10 pods per month or 15 pods per month. Even if we use the higher usage rate, Diabetic Investor isn’t sure if most of the people realize what that really means. Assuming that patients use 15 pods per month and production capacity increases to 200,000 pods per month, that means that Insulet’s patient base would have to grow from 4,150 users to over 13,000 users.

In effect Insulet would have to add approximately 738 patients per month, a sizable increase when you consider that during the last quarter of 2007 they added a total of 950 patients. To put this in perspective Diabetic Investor estimates that Animas has an installed user base of approximately 14,000 patients and Deltec 11,000 patients. Therefore, by the end of the 2008 Insulet would need to pass Deltec, not an overly difficult task considering the current situation at the company, and be on the heels of Animas.

Diabetic Investor has long maintained that the insulin pump market is coming down to a two horse race between market leader Medtronic (NYSE:MDT) and Insulet. However, with Animas now part of Johnson and Johnson (NYSE:JNJ) and more disposable or semi-disposable systems coming online Insulet’s competitors will not just sit back and allow them to take share. As Duane DeSisto, Insulet’s President and CEO accurately pointed out today it’s critical that the company take full advantage of being first to market with a disposable system. A system which he also pointed out is actually expanding the pump market as 75% of new patient starts are patients switching from MDI to pump therapy.

Should the company succeed and be able to reach the 13,000 or so patient level this year or shortly thereafter, there’s no question Diabetic Investor’s prediction that the company will be acquired will come true. There is no question that the pieces are in place for the company to move into the number two spot in the insulin pump market. However, it’s also true that their well heeled competitors will do everything they can to prevent this from happening.

When it comes to the insulin pump market two words sum it up: GAME ON!!!!

David Kliff
Diabetic Investor
847-634-4646 fax
224-715-3761 mobile