MannKind and Insulet Report
It’s becoming increasingly difficult listening to MannKind (NASDAQ:MNKD) earnings calls without thinking that the company is giving snake oil salesmen a bad name. With Afrezza™ in limbo the company as has become its custom is changing its tune and promoting yet another revolutionary application for their technology. Although the company is hanging on by a thread and barley has enough capital to fund its existing operations according to the company their cancer project will ride to the rescue with the next multi-billion dollar product.
It’s appropriate that the inhaler for Afrezza is called the Dreamboat, as only in in their dreams does this product or company stands a chance in the long term. The bottom line for MannKind really hasn’t changed all that much as the death march has begun and the question is no longer if they will go down but when they go down.
The long term prospects are much better for Insulet (NASDAQ:PODD) but the company still has issues it must deal with. First and foremost the company needs to build their patient base well beyond where it stands today. As the company noted during today’s call they now hold 7% of the US insulin pump market. While that may sound impressive, keep in mind that Insulet is not a newcomer to the market and has been around for over 10 years. That number alone speaks volumes as just how difficult it is to build market share and should send a clear message to all the newcomers looking to enter the insulin pump market.
One the positive side of the ledger the company has submitted their new smaller pod to the FDA. Besides being smaller the company notes that the new pod comes with lower COGS. Yet the company noted that the new pod will not work with the current personal diabetes manager (PDM) and that they will need to replace old PDM’s with new PDM’s when the new pod is approved. When asked who would pay for this conversion, Insulet or Abbott (NYSE:ABT) as Abbott’s FreeStyle glucose meter is embedded in the PDM, the company noted they would pick up this cost. According to the company the cost of the new PDM will be more than offset by the higher margins on the new pod. Still Diabetic Investor wonders why they did not work with Abbott to offset this costly move, especially since Abbott desperately needs the volume generated by OmniPod users, patients who on average use six test strips per day. One would think that Insulet knows they have some leverage here and that Abbott has been known to capitulate to demands when volume is at stake.
Looking into the future even with improved COGS the company still must build market share and the only way that will happen is to spend more on sales. As Diabetic Investor has been stating with greater regularity until someone, anyone figures out a way to take away share from Medtronic (NYSE:MDT) not much will change in the insulin pump market. Insulet is actually a perfect example of the difficulties facing everyone in the insulin pump market who is not named Medtronic. There is no question that the OmniPod is solid product with numerous patient benefits. To their credit Insulet has proved there is a market for tubeless pumping. Yet as good as the OmniPod is its market share remains below 10% and this for a product that has been on the market for seven years and a company that has been around for ten years.
It’s also somewhat disheartening that it has taken 10 years for the company to expand their reach into Canada and other international markets. While Diabetic Investor has no issues with either market, the real question is why it took so long to get these agreements in place.
Frankly the company has been pretty lucky that they have yet to face serious competition and this also makes one wonder why share isn’t higher. Insulet literally owns the wireless pumping space and market research combined with Insulet’s own sales data prove that there is strong interest in wireless pumping. A pump may be just a pump but there is a clear and very marketable difference between Insulet and their two main competitors. The question needs to be asked; why with this clear product differentiation and no other wireless pumps on the market does the OmniPod hold only 7% of the market?
It should also be noted that this luck will not continue forever and that someday Medtronic may actually have a patch pump or Roche will figure out how to fix the Solo or someone else will come along and build a better mouse trap. But maybe Diabetic Investor has it all wrong and Insulet’s strategy all along was to count on the ineptitude of their competitors. Perhaps they were smarter than all of us and knew that Medtronic would never be able to get their patch pump to market or that Roche would be dumb enough to spend $200 million to acquire Medingo and never launch the Solo. Maybe just maybe they sensed that the FDA would become a virtual hell hole for newcomers to the insulin pump market, creating even higher barriers to entry.
While Diabetic Investor has known from day one the company’s primary goal was to be acquired, we stupidly assumed they would do it the old-fashioned way and build a solid company. Obviously we were wrong as the way things are going they could be the only wireless pump company around with an approved product for the foreseeable future. While their marker share may not be where it should they do have market share which could prove valuable. Let’s face facts; Medtronic is going nowhere with their patch pump and given their recent cutbacks they just might decide it’s better to buy their way into this market than start from ground zero. Animas could also decide that if they are ever going to seriously threaten Medtronic for market leadership or at minimum come within shouting distance, they cannot get there selling the exact same product as Medtronic. It’s also well known that Sanofi-Aventis (NYSE:SNY) has a strong interest in entering the market. Heck, Medtronic or Animas just might buy Insulet so that it doesn’t become part of Sanofi.
Using history as a guide the one thing you can count on in the diabetes device world, insulin pumps in particular, never underestimate big companies rationalizing why they need to spending millions, even billions, to do a deal. As an experienced industry executive once noted; “You can steal more money with a good PowerPoint presentation than you can with a gun.” The way things are going it looks like Diabetic Investor was right and wrong. Yes one day Insulet will be acquired. However this acquisition won’t be directly attributed to Insulet building a solid, well-run company as we originally thought, but more by default as they will be the only wireless pump company remaining at the dance.