At the end of 2012, a federal report about health trends in the United States revealed that the number of people who have diabetes has skyrocketed. More than 15 years of data was studied for the report, and the results showed that 18 states saw their diabetes rates double. Furthermore, in 42 states the number of people with diabetes rose 50%. In six states and Puerto Rico, 10% of the population now has diabetes; if historical trends continue, this will be 20% by 2028.
What's more shocking is the fact that this trend is set to continue. Approximately 40% of the U.S. population is now estimated to be obese, and obesity is a leading cause of diabetes. Unfortunately, the outlook is gloomy.
Constant treatment While type 2 diabetes is the most common form of the disease, type 1 is still prevalent and requires constant insulin injections.
Insulet Corporation (NASDAQ:PODD) sells the only commercially available insulin infusion system, Omnipod. It is a handheld device that can be worn on any part of the body to hold and deliver insulin. Unfortunately, the company has not been profitable since its inception. Things could be starting to turn a corner, however.
Insulet's sales expanded 12.5% during the recent third quarter after four quarters of decline. On a cash flow basis, the company produced a positive operating cash flow of $3.2 million during the first six months of the year; this was up from negative $20 million during the same period last year. After excluding CAPEX spending, the company was cash flow positive.
Insulet's gross margins were positive during the quarter. The margins came in at 55%, but admin and selling costs were high as you would expect with any company that was ramping up production. This hit overall net profit. The company is significantly ramping up production as sales of the Omnipod are expected to be around 1.5 million during the quarter. The company's manufacturing capacity is only about 500,000 units per month, so Insulet appears to be struggling to keep up with demand.
Teaming up During the first half of this year, Insulet announced a partnership with Eli Lilly & Co. (NYSE:LLY) to combine Insulet's Omnipod technology with Eli Lilly's new drug, Humulin R U-500. Humulin is a form of insulin that is highly concentrated, designed to treat people with highly insulin-resistant type 2 diabetes.
As the number of people with diabetes rises, so does the number of people with severe insulin resistance. This means that diabetes sufferers require a higher dosage of insulin to control their blood glucose.
Currently, there are no insulin pumps designed to deliver the Humulin R U-500 insulin. Because of this, Insulet's development work with Eli Lilly is crucial.
Insulet's rising sales, the partnership with Eli Lilly, and manufacturing facilities operating at full capacity have led analysts to forecast that Insulet will produce earnings before interest and tax of $18.3 million during 2014. The company will still show a loss for the full year in 2013, however. That said, earnings per share are set to explode by 875% to $0.39 by 2015.