Taking ownership

Taking ownership

Since Pat Sullivan has become CEO of Insulet (NASDAQ:PODD) he’s been beset by problems left behind by the previous management team. In previous earnings calls since he took the job he followed a fairly standard script, blame previous management for the problems. When Insulet delayed their second quarter earnings announcement all we could think of is here we go again. While the results they released which they characterized as preliminary looked good, this being Insulet we remained skeptical.

Well based on what we heard today when they company released true second quarter results it looks like Pat and his new team is beginning to turn things around. By nearly every measure the company appears to be doing quite well. Although we don’t believe the company is out of the woods just yet and we continue to believe the ultimate goal is to transform the company from an insulin delivery company to a drug delivery company; we are encouraged that finally this new team has taken ownership of results. That they did not blame previous management.

Looking down the road we continue to believe that as the company transitions from insulin to drug delivery the insulin pump unit will eventually be sold. As we have noted in the past before this could happen job one was to fix the many issues facing this unit. Given that drug delivery revenue for the quarter was just $7.5 and insulin delivery revenue was $52.4 million the company still has a long way to go before they can jettison insulin delivery.

A second possibility is Pat wants to stabilize the insulin delivery unit build the drug delivery unit and then sell the company. As we have noted many times from the day Insulet was formed their main goal was to get acquired. In the beginning everyone assumed it would be another insulin pump or diabetes device company that would come along and buy them. However for a wide variety of reasons this didn’t happen and the company actually had to be run as an insulin pump company. Something the previous management team didn’t do that well.

The reality is as much as we are heartened by these results the insulin pump market remains ultra-competitive. While it’s also gratifying that the company has repaired their relationship with Dexcom (NASDAQ:DXCM) they are now behind the curve when it comes to sensor augmented pumps. Another area where they company has fallen behind is the move towards interconnected diabetes management. A strange situation as the Personal Diabetes Manager which controls the OmniPod seems an obvious platform for adding this type of connectivity.

We found it interesting during the Q&A the company noted the increase in sales was directly related to sales force expansion not necessarily an increase in demand. With the expansion now over it remains to be seen if the company can maintain this momentum. A task made more difficulty given how well the Animas Vibe is doing, hence the reason they must get their sensor augmented to market. Should Medtronic (NYSE:MDT) the insulin pump market leader acquire Tandem (NASDAQ:TNDM) a tough task just gets tougher.

The biggest issue that has dogged the company since the OmniPod hit the market remains profitability. Nearly every company that has performed their due diligence comes to the same conclusion, yes the OmniPod is the only viable wireless/tubeless insulin pump but it costs too much to manufacture. Bottom line even after being on the market for 10 years the company isn’t making money. No one, not anyone who understands this market anyway, is going to buy Insulet unless it is immediately accretive to earnings. The days of buying a good idea are over market conditions just don’t justify this type of investment.

Insulet has a market cap of nearly $2 billion which means even with a lower than normal multiple an acquisition would cost at minimum that amount and likely higher. The harsh reality is given the current set of market dynamics and inability for the company to consistently turn a profit the return on investment for anyone who would acquire Insulet just isn’t there.

To use a phrase favored by the previous Insulet CEO at the end of the day things may be better at the moment yet the long term outlook remains cloudy.