Is history repeating itself?
Although they don’t play in the same market and there is really no other similarity between them other than both companies are in the diabetes space, Diabetic Investor sees many parallels between Amylin (NASDAQ:AMLN) who recently received FDA for their once-weekly GLP-1 Bydureon; and Insulet (NASDAQ:PODD) who reported earnings early this week and who has bet the company’s future on the approval and eventual success of their new Eros pod. A pod which is smaller than the existing pod and most importantly less costly to manufacture, which theoretically means the company would make a higher margin IF they are able to make enough of them and can sell them.
There are more reasons Diabetic Investor sees similarities between the two companies; both had innovative first generation products that did not live up to expectations- Amylin had Byetta the first FDA approved GLP-1 and Insulet had the OmniPod the first FDA approved wireless insulin pump. Both companies were rumored to be takeover candidates and for one reason or another these rumors never materialized into reality. Both have worked with “partners” who have been less than helpful – Amylin had Lilly (NYSE:LLY) and Insulet continues to dance with Abbott (NYSE:ABT); neither partnership has gone well – Amylin ending up in a messy divorce and Insulet’s looking like it’s headed that way.
Yet the most important similarity between them is both have bet their futures on new products – one of which has been approved by the FDA, the other awaiting FDA approval- new products that are generating lots of buzz and equal amounts of doubt. The worry for Amylin is; can this company successfully launch one of the most promising drugs to come along in diabetes since metformin? Will they be able to successfully withstand pressure from the main competitor, Novo Nordisk (NYSE:NVO) long enough so that they can get the Bydureon pen to the market? Will there be any unexpected hick-ups with Bydureon and if there are how will the company deal with them?
The same can said for Insulet and the Eros pod. Although Diabetic Investor believes the new pod will eventually be approved by the FDA we are not as optimistic as the company seems to be when they stated the new pod should be launched at the ADA conference in June. Nor are we as optimistic that the company has solved their manufacturing issues and they can actually make this new pod in the quantities necessary. Listening to the company last week Diabetic Investor felt as if we had tuned into the Republican Presidential race by mistake as the company like these men running for President, tried to give themselves wiggle room with every statement and answer to every question. Basically everyone wants simple answers to what seems like simple questions. Will the FDA approve the damn thing, can they make the damn thing and will the damn thing actually allow the company to make a real profit?
One area that went largely unnoticed by the analysts who asked questions on the call was the company’s statement that the new pod really won’t provide much in the way of margin improvement until it has been in the hands of patients for two or three months. The reason for this is that the new pod does not work with the existing PDM (the device that controls the pod) and once the new pod is approved Insulet’s existing 35,000 patients will receive a new PDM along with their new pods. Although Diabetic Investor does not know how much this new PDM costs to make most industry observers peg the number between $100 to $200 per unit, using $150 per unit that means the company will eat up over $5 million of capital to get the promised margin improvements of the new pod. But stranger still is what happened to the company’s previous statements that they were looking to possibly switch glucose meters for the new PDM and get this new meter company to pay for the new PDM- a move that at time showed Diabetic Investor that management was not asleep at the wheel as many had thought.
Based on statements made by the company it seems these discussions failed to yield fruit and now the company is stuck with a cost that really should have been picked up by someone else. And what it does say about the company’s negotiating skills or relationship skills that Abbott appears unwilling to pick up this cost, could it be that the relationship between the two “partners” has soured to such an extent that Abbott, who really needs the strip volume, has said thanks but no thanks.
Now Diabetic Investor isn’t the sharpest knife in the kitchen but it would seem logical that there is a glucose monitoring company out there who would like an additional 76.6 million test strips sold each year. It would also seem logical that a glucose monitoring company would be willing to spend $150 to acquire an insulin pump patient, a patient who on average tests six times per day. It would also seem even more logical given that the Insulet / Dexcom (NASDAQ:DXCM) integration is on hold. Looking over what was said both this past week and before, it seems the company has the same problem as Mitt Romney – an inability to stick with the same position. Insulet like Mr. Romney reminds Diabetic Investor of weather in the great city of Chicago, if you don’t like it wait ten minutes and it will be something completely different.
This inability by Insulet to find a new glucose monitoring partner or get their existing partner to pony up for the cost of the new PDM, is just one more example of managements inability to grasp the obvious – the Neighborhood acquisition was not only a stupid move, it’s a move that has consequences. Why in heavens name would any BGM want to help a company that sells a product that competes with their own? (As hard it may be to believe there are actually recent examples of this sort of stupidity as LifeScan used to be partnered with Medtronic (NYSE:MDT), even though Animas was also owned by the same company as LifeScan. A partnership that eventually disintegrated- are we seeing a trend here?)
Diabetic Investor also experienced flashbacks to Amylin earnings calls when they would say that the expected approval of Bydureon was adversely impacting sales of Byetta. This same sort of situation seems to be developing at Insulet as everyone seems to be waiting for the new pod and for some reason does not want to get on the existing system even though they have been assured that when the new system gets here they will get it and won’t have to pay for it. Could it be that Insulet’s previous blunders and poor quality are coming back to haunt the company and that potential customers don’t want to get on a unreliable system and have that unreliable system replaced by a new system form the same company that gave them the unreliable system? Would it not be logical that these patients would prefer instead to see that this new system is really better than the old one before making such an important decision?
This is why Diabetic Investor does not buy the company’s argument that sales will magically increase just because they have a new, smaller pod. This is why it’s critical that they don’t launch the new pod if there is any possibility that the manufacturing issues which are plaguing the company have not been solved. Management may be a little dense but even they know they will not get a second bite at the apple and they better get it right the first time or they will deader than Newt Gingrich’s presidential campaign.
Where Amylin and Insulet begin to separate themselves is in market expectations for their respective new offerings. Although there are some pockets of skepticism as to how Bydureon will perform in the market, most observers agree that Bydureon has the potential to change the paradigm for treating patients with type 2 diabetes. On the flip side the same optimism is not shared when it comes to the Eros pod and what it could do for Insulet. While the new pod is an improvement it is not a major advancement in technology as Bydureon is.
While both companies are trying to avoid mistakes made in the past, the Byetta launch for Amylin and the quality issues at Insulet, Insulet has a higher hurdle to clear given they own the quality problems associated with the OmniPod while the failed Byetta launch while partially Amylin’s fault lies mostly in laps of their now ex-partner Lilly. As Diabetic Investor has noted on several occasion insulin pump patients will excuse and put it up with many issues, an unreliable system is not one of them.
The simple fact is time will tell the story for both Amylin and Insulet and in another ironic twist they could both well end up being acquired when it’s all over. Yet as Diabetic Investor looks at them today we believe Amylin has the better product, more potential and a management team that understands what at stake. Whereas Insulet has yet to demonstrate that they not only grasp the situation that is before them but understand why they got where they are in the first place.
It has been said many times because it is true; history is destined to repeat itself when individuals fail to learn from it. From what we can see Amylin has learned a valuable lesson and will not allow history to repeat itself, where Insulet has not learned and without some serious changes is destined to repeat the same mistakes over and over.