Diabetes Device Makers May Pump Profits
Cutting-edge companies like Insulet Corp.are making a challenging disease easier to live with. Success would boost profits.
The proper management of Type I diabetes is complicated, and can entail five or six insulin injections a day depending on factors such as diet and exercise. Maintaining the regimen can be challenging for adults and devastating for young, active children who don't understand why they can't do the same things their friends do.
Insulin pumps, devices worn under clothing that deliver automated doses of insulin, are one potential solution to that problem, though they can add a substantial layer of complexity.
Traditional insulin pumps are bulky devices with a lot of tubing that can be difficult to set up and maintain. As a result, insulin pumps have been slow to gain acceptance among all but the most severe diabetics, with only about a quarter of those suffering with diabetes opting to employ them.
Enter Insulet Corp. (PODD), which developed and manufactures OmniPod, the first - and currently only - tubeless insulin pump on the market. OmniPod is a fraction of the size of a traditional pump and only about half the weight.
The device consists of two parts: The first part is a small, waterproof pod that affixes directly to the skin and contains the pump mechanism and the insulin reservoir, while the second part is a wireless device that enables diabetics to control their insulin delivery remotely.
The device's design allows for the discreet management of diabetes and lets diabetics participate in activities that are generally precluded by traditional pumps. OmniPod's flexibility and ease of use has helped the firm build a base of about 35,000 users.
With the increasing popularity of the OmniPod system, Insulet's revenue has grown from just $4 million in 2006 (its first full year of operation) to $152 million last year. This year, management forecasts further revenue growth of about 45%. Still, the company has yet to turn profitable and is burning cash to maintain and grow its operations.
Nevertheless, this could be a watershed year for Insulet. For one, Insulet recently partnered with Ypsomed to distribute OmniPod in Europe and with GlaxoSmithKline (GSK) to distribute the device in Canada. These distribution agreements should boost Insulet's international sales this year.
Additionally, Insulet acquired diabetic supply distributor Neighborhood Diabetes last June. The acquisition broadened Insulet's reach by adding 60,000 people to its existing customer base, and transformed the company into a one-stop shop for diabetic treatments and supplies.
Later this year, the US Food and Drug Administration is expected to approve Insulet's next generation of OmniPod, which is smaller and lighter than its current product. This newer system is also one-third less expensive to produce, which is a critical factor for a company looking to lower costs and improve efficiency.
Management estimates that it should be able to achieve gross margin of about 60% to 65% with the new device. The next-gen OmniPod is already being marketed in Europe, and Insulet expects to transition US OmniPod users to the new model in the second half of this year.
The efficiencies gained from the transition to the new OmniPod system as well as the ramp-up of a new production line in China will boost the company's margins significantly. That should enable Insulet to finally become profitable within the next two to three years.
Although Insulet is an aggressive play, it's made tremendous strides with its revolutionary technology, and that should spur wider adoption of its devices.
Editor's Note: This article was written by Benjamin Shepherd of Investing Daily.
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