No. of Recommendations: 3
Hey everybody,

Insulet Corp (PODD) reported its results today. Obviously, Insulet is NOT a HG recommendation, but is clearly breaking the rules of its industry. Here are my notes:




45 MM Est ---->44.6 MM actual (+75%) (+30% organic)

-0.24 Est----> -0.29 actual (vs. -0.30 in 2010)

Gross profit +60% to 18.6 MM

Operating loss of 9.8 MM

Cash 108 MM

Shares outstanding 47.32 MM vs. 40.15 MM in 2010 (YUCK!)

- 10 regional managers now

- New "am i covered" feature on our webiste

- Omnipod now available in canada through GlaxoSmithKline

- Ypsomed continues to grow (UK, netherlands)

- september production issue cost company 2 MM this quarter in non shipments, due to a faulty component, reorder backlog now up and running

- Q1 european launch of smaller Omnipod

- continue to qualify line in china of smaller omnipod

- 50 questions came back from FDA about smaller omnipod in august, additional test was required and resubmitted, will hear next by nov 21st, with decision update by end of year

- Neighboorhood +1500 new customers, and +2 plans in new geographic markets including texas

- focus on integration process, modifying payer contracts, on schedule, selling products to omnipod customers in early 2012

- increase salesforce with new omnipod, hiring 25 sales staff this quarter, hired in full by q1 next year

- artifical pancrease study for patients using OmniPod


GM down to 44% becuase of neighboorhood

2% GM drop due to supply distruptions

4.3 MM cash loss (1.5 MM in interest expense)

Plenty of cash to reach profitability

Lower international shipments in Q4 due to smaller pod

150-154 MM guidance for full 2011

GM guidance between 42-44%

OPEX remain flat

7-10 MM operating loss for Q4

1) Macro economic trends..see anything from economy? Best quarter in referrals, hasn't impacted our business
2) Next gen Pod, approval by year end? Same place with FDA, slipage in time slightly due to more questions as well as change in FDA 501k process, will begin manufacturing new Pod this quarter, get rid of old product by end of 2012, 2nd new pod line in q1/q2
3) Where are we today with next gen product? Producing subasemblies now, not final product, in the refinement process, not discovery, 6 sigma design!
4) FDA delay? FDA issued new guidance at end of august, additional testing was required due to new guidance,
5) Reduction in pods per patient? No, none seen
6) range of responses from FDA?
7) Neighboorhood revnue? 12MM, right in line
8) ASP? Drop off rate? ASP 600 starter kit, pods $28, atrition down to 9%
9) Why are the business accellerating? Canada, new reps & managements, top sales guy same, its bottom guys that are doing better
10) Gross margins during switch? GM neutral to us, becuase reorders of smaller pods are more profitable
11) GM of next gen product in mid 60's, but lower overall due to international & neighborhood
12) Add headcount to neighboorhood? salesforce +25 people in US insulet, growth in neighboorhood
13) Gen 4 sensor (from DEXCOM) holding up combined product


The core growth strategy remains on track. 30% year over year growth is nice, and would have been 37% year over year if it wasn't for a manufacturing "hickup" (don't you love management jargon?).

International growth remains a huge and untapped potential resource, and breaking into Canada for the first time should be nice. As a reminder, Insulet has outsourced sales, marketing, distribution and customer support to Yposomed (Europe & asia), and GlaxoSmithKline (Canada). While this is lower margin business (~20% GM), it is instantly profitable for the company from an operating perspective, and gives them instant scale. This is a good thing.

As for the Neighborhood (diabetes product distributor), things are moving slowly from an integration prospective. They add 1,500 patients this quarter (I have no idea is that is good or not, though it sounds good). They will begin to cross sell products in early 2012 (so, selling Insulin & test strips to their OmniPod patients). We will see if this adds to revenue growth.

The only problem with this is that Neighborhood is much lower gross margin (~30%). This puts the overall GM around 44%, which is VERY low for a medical device company. However, the next generation Pod will be in the mid 60's, which is much better.

Speaking of the next Pod, management is guiding for an approval in early 2012, and a goal of having it on every patient in by the end of 2012. This is a great goal to shoot for, as re-training 30,000 patients PLUS the growth will be no small task. They are giving the PDM away for free, and will make up for this with the much better gross margin (65% vs. 50%).

At $14.85/share, I think this is a fine place to start a 1% position. At around 5 times sales, you are getting a decent value. Having said that, this company is still unprofitable, and will be so (at least from an earnings perspective) until the full year 2013 (will be cash flow positive in 2012).

That, in my opinion, will be the inflection point that makes or breaks the company.

With 100MM in cash, they have plenty to get to break-even, and baring no more surprise acquisitions, the share count bleed should slow considerably.

On the competitive front, they still have at least a 2 year window before we see any other tubeless competitor, and at that point the smaller pod will be fully on the market, and (fingers crossed) a co developed product with dexcom will be submitted and awaiting approval.

If your going to buy, pair them with MAKO, ISRG, or even a MDT/JNJ. Do not go hog wild, but a small position is a smart move IMO>

Hit me with questions.

SA/RB Welcome Fool
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