Insulet Some Good News, Some Bad News
Just as Diabetic Investor predicted this past Thursday Insulet (NASDAQ:PODD) announced this morning they have entered into an agreement with Deerfield Management Company, to provide the company with up to $60 million in financing through a flexible credit facility. According to a press release issued by the company;
“Under the terms of the agreement, Deerfield will provide Insulet with $27.5 million within fifteen business days of signing and has committed up to $32.5 million in additional funding to be drawn by Insulet at its discretion over the next twenty months based on the achievement of certain financial performance milestones. Any amounts drawn will accrue interest until maturity at a rate of 9.75 percent per annum which is payable on a quarterly basis. Insulet will pay a 2.75 percent per annum interest rate on undrawn amounts. The funds drawn are repayable in September 2012.”
While this is good news for the company as they were in desperate need of cash, the company also disclosed some not so good news in the 8-K filed with the SEC. According to the 8-K, “On March 11th, 2009 Shawna Gvazdauskas resigned as Senior Vice President of Sales and Marketing for the Company.” Diabetic Investor sees this as major blow to the company as Ms. Gvazdauskas was instrumental in building Insulet’s sales team and overseeing the company’s marketing efforts. It’s unknown at this time what impact her departure will have on the sales force whose annual meeting is this week in Boston.
Replacing Ms. Gvazdauskas will be Greg Walker a seasoned executive who previously worked at Disetronic, which is now part of Roche. Although Diabetic Investor has not yet meet with Mr. Walker the mere fact that he was smart enough to leave Roche speaks well of his abilities. The question is did he leave one distressed company for another distressed company.
With just $57 million in cash at the end of the last quarter and a quarterly burn rate of near $17 million a quarter the company was headed for disaster if they could not find additional capital. Last week in an email alert Diabetic Investor stated; “In the long run Diabetic Investor believes Insulet will be able to raise the money they need but they will pay a steep price.” Given the terms of the agreement with Deerfield steep may be an understatement. Not only will the company pay 9.75% on any money drawn from the facility they will pay 2.75% on funds that are undrawn from the facility. But that’s not all.
According to the 8-K; “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. As noted above, pursuant to the Facility Agreement, the Company has the right to request from the Lenders one or more cash disbursements in the minimum amount of $6,500,000 per disbursement, and each such disbursement will be accompanied by the issuance to the Lenders of warrants to purchase an aggregate of 300,000 shares of common stock, at an exercise price equal to 120% of the average volume weighted average price of the Company’s common stock on the fifteen consecutive trading days beginning with the date following receipt by the Lenders of the disbursement request. If the Company, in its discretion, draws down the entire $60 million credit facility, the Company will have issued warrants to purchase a total of 5.25 million shares of its common stock. The number of shares into which a warrant is exercisable and the exercise price of any warrant will be adjusted to reflect any adjustments in the number of shares of the Company’s common stock.
Each Warrant issued under the Facility Agreement expires on the sixth anniversary of its issuance and contains certain limitations that prevent the holder from acquiring shares upon exercise of a Warrant that would result in the number of shares beneficially owned by it to exceed 9.98% of the total number of shares of Company common stock then issued and outstanding.
Absent a major transaction, the holder of a Warrant may exercise the Warrant on either a cash or cashless basis. In connection with a major transaction that constitutes a change of control of the Company, the holder also has the option to receive a number of shares equal to the Black-Scholes value of the warrant (based on the transaction price) divided by, in a cash transaction, the closing price of the Company’s common stock the day before closing or, in a stock-for-stock transaction, 95% of the closing price of the Company’s common stock the day before closing.
For the term of the Warrant, the Company has agreed not to sell shares of its common stock or securities exercisable or convertible into shares of its common stock, except in a registered public offering or shelf takedown, in a transaction that does not trigger Nasdaq’s shareholder approval requirements, to partners in connection with a joint venture, distribution or other partnering arrangement, upon the exercise of options granted to the Company’s employees, officers, directors and consultants, issuances of restricted stock to, or purchase of common stock under the Company’s employee stock purchase plan by, employees, officers, directors or consultants, or upon the exercise of the Warrants.”
Basically Deerfield knew Insulet was desperate for cash and used this fact to gain substantial concessions from Insulet. Besides getting interest payments from the company for money they haven’t even used, they gain more shares at near fire sale prices.
The real question here is the $60 million enough to get the company to profitability so they can achieve their desired objective which is to sell the company to an establish player within the industry. This has been Insulet’s mission from day one and many, including Diabetic Investor, believe the company will eventually be acquired. Looking at the insulin pump market Insulet fits well with Animas, a unit of Johnson and Johnson (NYSE:JNJ) or with Bayer. However neither JNJ nor Bayer will buy the company until they demonstrate they can be profitable on a regular basis.
This means actually running the company as if they will remain independent. This has been Insulet’s problem all along; you cannot manage a company just to be sold at a later date. The fact is the OmniPod is a great product with a bright future, there is no question that wireless pumping is here to stay. As noted above a wireless pump fits well into Animas’s strategy and would allow them to compete with insulin pump leader Medtronic (NYSE:MDT) head on. JNJ would also bring with them the manufacturing expertise which Insulet desperately needs to drive down manufacturing costs. The Insulet story has been and remains to be all about COGS.
However, until this occurs the company must be managed as if this event will not occur. Their focus must be clear; build their installed user base and lower their COGS. With this strategic focus the company will achieve its destiny and be acquired. Without this strategic focus an acquisition will also come just at a much lower valuation.
The situation at Insulet reminds Diabetic Investor of two very different diabetes device companies, Therasense and Amira Medical. For those with short memories Amira Medical was once the hottest company in blood glucose monitoring as they were the first company to pursue alternate site testing. Back in 2000 and 2001, many in the industry believed the company would revolutionize the BGM market. After several missteps the company was sold to Roche at the fire sales price of about $100 million.
Although coming to market after Amira, Therasense developed the FreeStyle line of meters which actually perfected alternate site testing and built a solid user base with insulin using patients. Like Insulet, Therasense had problems along the way but keep their eye on the ball and was eventually acquired by Abbott for $1.2 billion back in 2004.
The decisions made by Insulet today will go a long way towards determining if they will be the next Amira or Therasense.