Today is NOT April Fool’s Day
Reports are coming out of Israel that Medingo, makers of the Solo Insulin Pump, has reached an agreement to be sold to an unnamed buyer for $200 million. While no official announcement has been made it’s no secret that Medingo was for sale and this is not the first time reports have surfaced that a deal was in the works.
When these reports first surfaced many believed Roche to be the unnamed suitor, given recent events Diabetic Investor is neither sure that Roche is the buyer or that the sale will be officially consummated. About all we know for sure is that Medingo is for sale and someone will buy the company.
Watching these events closely are the folks at Insulet (NASDAQ:PODD), currently the only company with an actual disposable pump in the hands of real life patients. Some may wonder why anyone would buy an unknown company like Medingo who has yet to sell one system when they could buy Insulet and their installed user base of over 15,000 patients. This move might seem even stranger when you look at the Solo system which at present does not have a glucose monitor included with system. As Diabetic Investor has reported on many occasions insulin pump patients on average use eight or more test strips each day.
This is the reason why many believed Roche to be the unnamed suitor here. As everyone knows the Roche diabetes device unit has suffered mightily these past few years losing 11 share points in the BGM space here in the US, while their Disetronic acquisition could go down as one of the worst acquisitions in diabetes device history. Given their problems with diabetes devices and their recent acquisition of Genentech, Diabetic Investor does not see Roche spending even more money to acquire Medingo. An equally strong argument could be made that Roche is moving in the opposite direction and will sell this struggling unit. As we noted when the Sanofi-Aventis (NYSE:SNY) AgaMatrix deal was announced Diabetic Investor believes this is just the first step for Sanofi and it’s still quite possible Sanofi could continue their buying spree and go after Roche’s unit.
Diabetic Investor also doubts Abbott (NYSE:ABT) would go after Medingo as they already have a relationship with Insulet. (The OmniPod PDM contains a FreeStyle glucose monitor.) Like Roche, Abbott’s diabetes device unit has struggled and many believe they too would like to sell this unit.
While it’s possible Johnson and Johnson (NYSE:JNJ) or Bayer could be the suitor, Diabetic Investor also sees this as unlikely. Frankly, Insulet and their installed user base is a better strategic fit for either JNJ or Bayer.
A dark horse candidate here is Medtronic (NYSE:MDT) the worldwide leader in insulin pumps. While Medtronic does have a patch pump under development, the program has experienced several delays and has undergone several design changes. Medtronic sees Insulet gaining traction in the marketplace and realizes that without a patch pump sales will continue to suffer.
Finally a discussion of an acquisition in the diabetes device area must include Sanofi. Sanofi has been very public about their intentions here and as we noted the AgaMatrix agreement is just the beginning. Here too Diabetic Investor questions why Sanofi would buy a newcomer rather than someone with an established market presence.
The wild card here could be cost of goods. While Insulet has been successful at developing a solid market presence they continue to struggle with their cost of goods. Still Diabetic Investor believes in the hands of a larger player this cost of goods issue could be solved allowing for systems to be consistently sold at a profit.
However as we have seen before when it comes to diabetes devices deals common sense is not a requirement. Too often in this space acquiring companies are either desperate or blinded by factors that aren’t truly relevant to a product being successful in the market. This is exactly what happened to Roche when they acquired Disetronic. While company officials insist they were aware of Disetronic issues with the FDA before they acquired the company, Diabetic Investor finds it hard to believe anyone would proceed with an acquisition of any company if they knew the product they were acquiring could not be sold in the world’s largest market. No company, not even Roche, could be that stupid. The fact is Roche failed in their due diligence when investigating Disetronic and was so desperate to be in the insulin pump business they either over-looked or ignored what was going on at the FDA.
Finally looking at the Solo system there are several issues that will require millions to be invested just to become equal to the OmniPod. Keep in mind that whatever issues the OmniPod has with cost of goods; the system is already established in the market. This established market presence goes beyond their installed user base and includes customer support, managed care relationships and field sales staff. Anyone who buys Medingo will be basically starting from ground zero. Yes they will have an FDA approved system but as we have seen before making an insulin pump is just the beginning, selling and supporting insulin pump patients are when the rubber meets the road. Even using conservative estimates Diabetic Investor sees anyone who buys Medingo investing another $400 to$500 million to reach the level where Insulet stands today.
Lastly any discussions regarding the insulin pump market must take a realistic view of current market dynamics. The simple fact is the market is not growing fast enough to support the existing players already in the market let alone the many players who seek to enter the market. The demise of Deltec and their Cozmo system is proof that this market is difficult and the Cozmo was a very good system.
The bottom line here is that while it’s quite possible that there is someone out there who sees Medingo and their Solo system as the answer, Diabetic Investor believes whoever this unnamed suitor is they aren’t asking the right questions. As we have seen all too often in the diabetes device world when deals are made common sense is thrown out of the window along with solid due diligence. Insulet may offer a better long term value but as we have seen before just because something makes perfect sense this has nothing to do with how deals are made. Welcome to the wacky world of diabetes device deals.
