This is getting nasty

This is getting nasty

Just in case anyone believes that this wacky world is not just wacky but also nasty we suggest they take a close look at what’s going at Insulet (NASDAQ: PODD). First the day before their investor day a report surfaced stating there was a link between OmniPod usage and patient deaths, specifically deaths of children.

As we noted after the event this subject, much to our surprise, never came up during the investor day. There was nothing in managements prepared remarks and astonishingly there were no questions from any of the analysts who attended the event. Analysts who we are certain had seen this report.

Insulet did issue the following response to these allegations;

“We are aware of a report being circulated by a short seller spreading unsupported rumors about the safety & efficacy of the Omnipod system (note: a short seller of a stock earns money when a stock goes down, not up).  It’s obvious that this individual has malicious intent to spread rumors about our product to drive the stock price down for the benefit of himself or the clients he serves.

The sources of information this individual is using to support his erroneous claims appear to be from a number of publicly available sources, including the FDA MAUDE website. These data, some of which date back as far as 2008, appear to have been taken out of context to deliver a false conclusion. All manufactures including Insulet are required by FDA regulations to routinely report product events that occur during commercial use. To utilize these data out of context demonstrates the malicious intent of this short seller.

We routinely monitor and report all adverse events we receive from the field to continuously improve the performance of our product for our users.  We take all product complaints we receive seriously and work to remain in complete compliance with FDA regulations concerning these matters. We are not aware of a single death caused by the Omnipod device and are completely confident that the OmniPod system is safe and effective for our users.”

Now we did note the day after the investor event that it was possible these charges were baseless and that Insulet was being attacked by short sellers, something we have seen many times. We also noted that based on the information we have received we were concerned that there may be some truth to these allegations.

Before we go any further we want to make clear that we have drawn no conclusions yet and are continuing to investigate. These are very serious allegations and given the possibility this could be a short attack on Insulet gathering quality information is critical. Additionally, we have contacted Insulet for comment but as of today, they have not responded to multiple requests.

This afternoon another report was issued and by our way thinking things are getting nasty and likely to get nastier. The full report cab be accessed at http://skytides.com/article/insulet-investors-being-led-slaughter-ceo-recently-accused-misleading-investors-illegal-acts. This report basically alleges that Insulet has been bribing physicians and has been hiding quality issues from the public. The report does identify a former Insulet employee, who they believe is a whistleblower.

A few quick thoughts here;

Had these allegations surfaced while the old management was in place we would say; what took so long. Having followed Insulet from its inception we were aware of some of the shenanigans used by previous management. Let’s just say this team was less than truthful about quality issues and booking revenue.

We know that Mr. Sullivan was brought in to clean up the mess left by previous management. Something he used quite effectively during the beginning of his tenure as he threw the old team under the bus on numerous occasions. He also brought in a team devoid of diabetes or insulin pump experience and threw them into the deep end of the pool. After several missteps, this new team along with Mr. Sullivan appeared to be getting their act together. That the company seemed to turning the corner. We were encouraged that Mr. Sullivan stopped blaming previous management and seemed to be taken ownership of how things were going.

Still we did have concerns given the reports we were receiving from the field, reports which centered around quality issues. Issues which caused Sanofi (NYSE: SNY) who was considering buying Insulet, to walk away. Listen as everyone knows we have not been kind to Sanofi but this is one time they should get credit for NOT doing something truly stupid.

Frankly we are not sure what to make of these new allegations. Besides being charged with cleaning up the mess left by previous management, Mr. Sullivan’s second task was to get the company sold. And let’s be honest for this to happen Mr. Sullivan not only had to clean up the mess but generate additional sales of the OmniPod.

Again, we want to be clear we have no idea if these latest allegations are true, however there is a precedent which adds to our concern. A precedent from the insulin pump world no less.

One of the told untold stories back when Johnson and Johnson (NYSE: JNJ) acquired Animas was just how bad things were at Animas. Like Insulet, Animas was not built for the long term, it was built to be acquired. Like Insulet, the company seemed to be doing well. Unknown to most was had JNJ not acquired the company it would have likely imploded. Had JNJ not been an investor in Animas, this deal likely would have never been done. Simply put JNJ did not want to be embarrassed so they spent $518 million to acquire Animas.

It wasn’t until JNJ took full control of Animas that they learned of the extent of the issues facing the company. Just as Mr. Sullivan had to clean up the mess left over from the previous management team so too did JNJ have to clean up the mess left over by the Animas team. A mess that has had reverberations to this day as Animas has NEVER made a profit for JNJ.  It is also the reason the company doesn’t want to buy Tandem (NASDAQ: TNDM). The last thing JNJ wants is to throw good money into another poorly run insulin pump company.

A word of caution as we move forward, there are basically two types of short sellers. Those who do their homework and those that are in it for a quick buck. The first group digs deep into every aspect of the company before making their attack. The second uses deception combined with innuendo believing the mere appearance of impropriety will drive shares lower allowing them to make a quick buck. We have no idea which type of short seller is going after Insulet, all we do know is they are under attack. An attack that will get increasingly nasty.

What we don’t understand is why Insulet has chosen to be silent. Why the statement we quoted earlier was not sent to a broader audience. Why when given every opportunity to tell their side of the story they have remained silent. Yes, we realize that there are legal considerations but they are not the first, nor will they be the last, company to come under attack by short sellers.

Right now, it appears from what we can tell that only one firm is attacking the company. However, should others in the short community jump in this going to get very, very ugly. Just ask anyone who worked at Amylin or the old team at MannKind (NASDAQ: MNKD), both of whom were attacked by short sellers.

What Insulet needs now is strong leadership, to tell their side of the story. There is blood in the water and the sharks are beginning to smell it. Anyone who has seen the movie Jaws knows what happens when that music starts playing and it’s not a pretty sight.