The money cycle continues
Yesterday Insulet (NASDAQ: PODD) announced they are once again hitting the capital markets. Per a press release;
“Insulet Corporation (NASDAQ: PODD) (Insulet or the Company), a leader in tubeless insulin pump technology with its Omnipod® Insulin Management System (Omnipod System), today announced its intention to offer, subject to market and other conditions, $300 million principal amount of convertible senior notes due 2024 (the Notes) in a private placement. Insulet also intends to grant the initial purchasers of the Notes an option to purchase up to an additional $45 million principal amount of Notes.”
Given that by default Insulet is about to become the only competition to Medtronic (NYSE: MDT) and they reported strong earnings we are not surprised by this move. Yet this move also points out just how difficult it is to make money in the insulin pump market. Yes, the company is doing well but what gets lost on everyone is after being around for over 11 years now the company really should be further along.
Although Tandem (NASDAQ: TNDM) is sinking it should be noted that company has an installed user base of over 54,000 patients and reached this level in just five years. By way of comparison it took Insulet over 10 years to reach the 100,000-patient threshold.
Insulet also has another issue as unlike Medtronic they do not have a reoccurring high margin predictable revenue stream. Insulet ability to make money is almost 100% dependent on the sale of pods. As we have noted many times the company must do two things to reach real profitability, lower the cost to make each pod and increase their installed user base. Yes, the company has taken steps to improve margins, but these have been the easy steps, they have yet to prove they can achieve the scale they need to get the rest of the way.
Medtronic by comparison has multiple revenue streams and huge scale. Their first revenue stream is the pump itself. As we have noted many times it does not cost Medtronic $8,000 to make a pump. But that’s just the beginning the real money comes from the sale of pump supplies and now sensors. Pump supplies are a cash cow as they are very cheap to make. Think make them for pennies and sell them for dollars. Yes, with their scale Medtronic has higher sales and support costs but these costs are more than offset by the profits made selling pump supplies. Simply put the sale of pump suuplies helps make the nsulin pump business very profitable for Medtronic.
Medtronic has another advantage as they sell other things besides insulin pumps, Insulet although starting to diversify is dependent on the sale of pods to make money. This is why many thought when Johnson and Johnson (NYSE: JNJ) bought Animas they would be able to compete with Medtronic, that just as Medtronic wasn’t 100% dependent on insulin pumps to make money neither was JNJ. The troubles at Tandem show just how difficult it is for a stand-alone insulin pump company to make money.
Scale is critical in the insulin pump business and even more so today as growth in the sale of new systems has stagnated. The reality is the insulin pump market has pretty much plateaued. Try as they might only about 30% of Type 1 patients use a pump and less than 5% of insulin using Type 2’s uses a pump, and these numbers haven’t changed all the much over the past 5 years.
We’ve said it before and will say it again because it’s true the only way for any company to make money in the insulin pump market is take share away from Medtronic. Something that is not just difficult to do but also very expensive to do. This is not like the conventional glucose monitor market where you give away the hardware for free and make money from the continual sale of test strips. Pumps may not cost $8,000 to make but they aren’t cheap to make either. And as we keep noting it’s not cheap selling and supporting these systems once sold. Bottom line is without massive scale it’s cost a ton of money to run an insulin pump company.
The fact is the analyst who cover Insulet fail to grasp any of this and quite frankly are giving the company too much credit for their recent performance. Looked at objectively Insulet should be much further along given they have been around over a decade. The OmniPod is still not covered by Medicare, the system is not yet integrated with a CGM and the DASH is behind schedule.
Listen if the company was really doing that well, was really making money why then are they continually going to the capital markets for more money. Yes, we understand that companies do this all the time but Insulet should be well past the stage where they need capital to fund normal operations. As the press release states;
“The Company intends to use the net proceeds from the Notes offering for general corporate purposes, which may include financing redemptions, repurchases and/or the settlement of conversions of Insulet’s existing 2.00% convertible senior notes due 2019, and investments in the Company’s manufacturing operations and international expansion.”
The reality is this is the money cycle of diabetes – Insulet gets the money they need, the investment bankers make their fee, management will cash in their options while the stock is soaring while patients continue to wait for an integrated OmniPod.
Yet what no one wants to see is that things aren’t as rosy as they appear. That Insulet did not earn their way into the number two spot they got there because everyone else screwed up. No one talks about that after more than 11 years the company has just passed the 100,000-patient threshold. No one talks about that this market is going to get even more difficult or about the coming threats to the market. Threats which will hurt Insulet much more than Medtronic.
No, this willful blindness is typical as it allows the money cycle to continue. A cycle where everyone but the patient comes out ahead. The executives make their money, the investment bankers make their fees and the analysts continue to be feed the beast by not being objective. Insulet isn’t the only example of the money cycle just look at Tandem, a company that for all practical purposes should have been gone by now.
Rather than tell the truth the analysts continue to push the myth that Tandem will survive and prosper. The investment bankers could care less as long as they make their fees. And of course, Tandem management gets bonuses they did not earn. Meanwhile Tandem patients will get screwed when the company’s creditor cry uncle and shut the company down, so they too can collect part of what they are owed.
We have no problem with this money cycle IF patients were getting better, if patients got something out of the deal. But this isn’t what’s happening. The fact is everyone, BUT the patient is coming out ok. It’s the patient who’s last in line when it’s the exact opposite that should be true.