The transformation continues

The transformation continues

When Patrick Sullivan took over as CEO of Insulet (NASDAQ: PODD) it seemed no matter where turned he found nothing but trouble. The company was floundering and was in desperate need of repair. Simply put he inherited a mess and it was his job to clean it up, or else.

As we noted in his early days as CEO it seemed that Pat had two goals in mind, blame the previous management for every problem imaginable while assembling his own team. A team which was devoid of diabetes experience let alone insulin pump experience. These people were thrown into the deep end of the pool and told to swim. And judging by their early performance it appeared they were sinking not swimming. Yet after some initial misstep this new team eventually found their sea legs and began to swim.

All along we suspected the goal was simple, transform Insulet from an insulin pump company to a drug delivery company. This we suspected was the only way they could achieve their ultimate goal, which from day on was to get acquired. This is one of the major reasons the board dumped the previous management team and put Pat in charge.

We further suspect that ultimately Pat wanted out of the insulin pump business. However, to accomplish this goal he had to fix what was a very messed up unit. The OmniPod may be the only commercially available tubeless insulin pump but given the many missteps made when the product was initially launched this advantage did not overcome quality issues. It also didn’t help that the Pods were too costly to make.

Fast forward to today and Pat continues to make some impressive gains. The last quarterly earnings report was better than anticipated. It was also very refreshing that the company has taken ownership of results and is no longer throwing the old team under the bus. The transformation which begun is not complete but continues to move forward. Just yesterday the company made three notable announcements.

First more management changes, according to a company issued press release;

“Insulet Corporation (PODD) (Insulet or the Company), the leader in tubeless insulin pump technology with its Omnipod® Insulin Management System (Omnipod System), today announced the appointment of Dr. Trang Ly as Insulet’s Vice President and Medical Director, effective September 12, 2016. In addition, Brittany Bradrick has been appointed Vice President, Strategy and Corporate Development, a newly-created position, effective September 2, 2016.”

Next also according to a company issued press release;

“Insulet Corporation (NASDAQ:PODD) (Insulet or the Company), the leader in tubeless insulin pump technology with its Omnipod® Insulin Management System (Omnipod System), today announced plans to establish an automated manufacturing operation in the United States and to build product beginning in 2019.

The new U.S. operation is intended to provide manufacturing redundancy and additional production capacity to support growth and new product launches. The new operation will enable further improvements of manufacturing reliability and the lowering of production costs, in line with the Company’s previously stated objectives.”

Finally;

“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, $250 million principal amount of convertible senior notes due 2021 (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 $37.5 million principal amount of Notes.

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, as well as investments in its manufacturing and supply chain operations.”

Taken collectively these announcements are just further evidence that this transformation continues. However, the company still has challenges ahead. The fact they are once again hitting the capital markets for more money isn’t a positive indicator. Diabetic Investor is aware that several companies have taken a look at Insulet but just can’t make the numbers work. This is not like the old days when an acquiring company would pay a handsome multiple on the promise of tomorrow. Today acquisitions must be quickly accretive to earnings.

Although the company has made major steps forward with its pipeline they continue to lag well behind Medtronic (NYSE: MDT) and Animas, a unit of Johnson and Johnson (NYSE: JNJ) in the hottest area; sensor augmented pumps. The longer it takes to get their sensor augmented system to market the more patient starts they will lose.

Nor does it help matters any that Medtronic the 800-pound pink elephant of the insulin pump world is getting more aggressive with payors. The last thing Insulet needs is a price war as this is a war they cannot win.

At the end of the day Pat should be commended for what he’s done so far. Quite frankly we weren’t sure he could overcome the many problems he inherited. However, it remains to be seen whether the repairs he has made will overcome the challenges that lie ahead. Whether the damage inflicted by previous management was just too severe to overcome. Time will tell we’re just not sure time is on his side.