The wacky world of diabetes devices just got wackier
This morning Insulet (NASDAQ:PODD) announced they had acquired Diabetes, Inc., a durable medical equipment distributor, for approximately $63 million in cash and stock. According to a company issued press release; “Neighborhood Diabetes is based in Woburn, Massachusetts with offices in Brooklyn, New York and Orlando, Florida and serves more than 60,000 customers with Type 1 and Type 2 diabetes primarily in the northeast and southeast regions of the country with blood glucose testing supplies, insulin pumps, pump supplies and pharmaceuticals. More than 15,000 of Neighborhood Diabetes clients are insulin dependent with the majority of these clients using multiple daily injection (MDI) therapy.”
For a company, that according to their most recent SEC filings, has a cumulative loss of nearly $400 million and has been in business for nearly ten years and has captured less than 10% of the insulin pump market to say this is a strange acquisition, is the understatement of the century. It also seems somewhat strange they would spend $63 million, $31 million of which is cash to make this acquisition. Maybe we’re just crazy but it seems to Diabetic Investor that money would have been better spent on building the Insulet sales force, enhancing their marketing efforts or lowering COGS. Even if one believes that Insulet can convert Neighborhoods 13,000 following MDI therapy to OmniPod patients (something that isn’t as easy as the company seems to believe it will be), the company is paying a very heavy price for these patients.
Diabetic Investor also does not buy the argument that Insulet will see greater revenues from the sales of test strips or other diabetes supplies. Doing some simple back of the napkin math, Insulet is paying approximately $1,000 for each customer, again a hefty price.
Financial considerations aside the real question is why do this now and why Neighborhood? As the company acknowledged during this morning’s call they are facing a tough fight when it comes to getting attention in the physician’s office; which is a roundabout way of saying that sales aren’t performing as anticipated.
While the company seems to believe there are synergies between running an insulin pump company and running a DME, in reality these are two diametrically different businesses.
Frankly Diabetic Investor isn’t buying what Insulet is selling here. We don’t see how owning a DME helps them increase market share and actually believe owning a DME will divert resources away from their key product line. To Diabetic Investor this deal shows just how difficult the insulin pump market has become and in spite of having an innovative platform Insulet is struggling to secure enough users to reach profitability.
It also seems strange, which is becoming redundant here, that it wasn’t that long ago the company was fighting with Dexcom (NASDAQ:DXCM) over spending money so that they could finally integrate the Dexcom continuous monitoring system with the OmniPod. Ironically this morning Animas announced they have received CE Mark approval for Animas® Vibe™, the first and only continuous glucose monitoring (CGM)-enabled insulin pump system with Dexcom G4™ CGM technology, that is also waterproof and offers a color screen. Given the choice of buying a DME or putting $31 million into improving the OmniPod there is no question the money would have been better spent on improvements.
To Diabetic Investor this move seems more like an act of desperation rather than a sound business strategy. Why the Insulet Board of Directors approved this move is a mystery. As Diabetic Investor has stated on numerous occasions no one at Insulet expected the company to remain independent after ten years. Everyone, including Diabetic Investor, believed that the company would have been acquired long ago. For a wide variety of reasons this has not happened and the company is now forced to make it on their own. It’s one thing to build a company and then sell it; it’s quite another thing to actually run a profitable insulin pump company.
Diabetic Investor has come to expect wacky things in the diabetes device world where anything can happen and usually does; however this is one the wackiest deals we have ever seen and that’s saying something.