Let’s belly up to the bar

Let’s belly up to the bar

Since this is the holiday season let’s try and find some good news for two insulin pump companies, Tandem (NASDAQ: TNDM) and Insulet (NASDAQ: PODD). Rather than a lump of coal let’s fill their stockings with real goodies or what they need most someone to come along and buy them. Of the two Tandem is in the most desperate need of a buyer as by our back of the napkin math they have maybe 6 months until the well runs dry.

Rather than dwell on the negatives let’s be full of good cheer and look at the what Tandem has to offer, an estimated installed user base of 46,000 patients. Let’s also down another eggnog and say the purchase price comes in at $100 million. Just for good measure let’s hit the bar again and assume whoever buys the company actually knows what they are doing. Come to think of it better make that last cocktail a double for right now when it comes to insulin pumps only Medtronic (NYSE: MDT) knows what they are doing.

Just for grins and giggles lets also assume that Medtronic DOES NOT buy the company. Yes, they are the most logical choice but heck we’ve had a few so just go with it. Let’s also assume, yes, I know we’re making lots of assumptions but heck it’s the season, and further assume that Johnson and Johnson (NYSE: JNJ) who needs these patients desperately to keep Animas a viable insulin pump company stays on the sidelines.

Time to belly up to the bar again as this is where things are going to get interesting. The average insulin pump patient spends $2,500 to $3,000 per year on pump supplies. Split the difference and peg the number at $2,750 and what happens. $126,500,000 per YEAR in pump supply revenue. Even if we assume the 46,000 base is inflated, which has been known to happen in the insulin pump world, if the number is closer to 40,000 that’s still $110,000,000 per YEAR in supply revenue.

And people wonder why the folks at Medtronic do whatever they can to protect their users from converting to another system, their huge installed base is the gift that keeps on giving. But we digress and it’s time to hit the bar again.

Insulet may have a higher number of patients but what they don’t have is an annuity. Unlike a conventional pump company, they are 100% dependent on pod revenue. Pods retail for $30 each and the average patient uses 122 pods per year, which means each patient generates $3,660 in revenue. Although Insulet stated that 100,000 patients have used the OmniPod they did not state their installed user base is 100,000. Given their higher than average attrition rate we believe the number of active users is closer to 80,000. Which means $292,800,000 in annual pod revenue.

Ok before we go back to the bar and got tipsy, pay close attention here ALL REVENUE IS NOT CREATED EQUALLY. While pump supplies carry very nice margins, made for pennies sold for dollars. Pods are not so fortunate which is why Insulet is working so hard to improve margins. The biggest problem with Insulet has always been pods are just too costly to make. Tandem may have less patients and lower overall revenues but one thing they do have is a nice little very profitable supply revenue.

The people at Medtronic are really smiling now as think of how fat and happy their margins are, but again we digress.

Conventional insulin pumps may not be 100% the razor/razor blade model but pretty damn close. The reality is it doesn’t cost upwards of $7,000 to make an insulin pump, new pumps cost that much because it cost a fortune to run an insulin pump company. The real money, the real profits come the sale of pump supplies and Insulet doesn’t have that luxury. Simply put there are only two ways the company can make more money, make pods cheaper and add more patients. While it’s possible to make pods cheaper adding new patients isn’t so easy.

Let’s go back to the 100,000-patient thing, it took Insulet 11 years to reach that number, by way of contrast it took Tandem only 4 years to get to the 46,000 level. Now we know we have hit the bar pretty hard but we ain’t hammered yet and 100,000 over 11 years still doesn’t sound impressive. Maybe after a few fireball shots but not now.

Oh, and did we mention that Tandem also has something Insulet doesn’t, a sensor augmented pump, which just so happens is the hottest thing going in the insulin pump market.

Now before we start downing those fireball shots let’s see if we got this straight. Insulet has been selling the OmniPod for 11 years, has just 100,000 (ok we now this number is inflated but just go with it) and won’t have a sensor augmented system until 2018 (maybe). Tandem has been selling the t: slim for 4 years, has 46,000 patients and a sensor augmented system today. Oh, and we should mention that Tandem also has the most patient friendly user interface in the insulin pump world.

Ok we’re also most ready for shots.

So, someone can spend $100 million for Tandem or a few billion to acquire Insulet. (Insulet’s market cap is slightly over $2 billion) Given we’ve been doing a fair amount of drinking there is likely someone out there drunk enough to believe that Insulet is the better option. However, we are still somewhat sober and see Tandem as the more attractive option.

Drink up everyone and remember not to drink and drive, thank goodness for Uber.