Memorandum
Insulet announced earlier this week plans to divest its Neighborhood Diabetes supplies business to Liberty Medical for $5 million. The transaction is expected to close in 1Q16, and Insulet will incur a one-time $10 million charge in 4Q15 and further charges in 1Q16. This is a great price for Liberty, as Insulet’s original acquisition in 2011 was for ~$63 million (!), and the Neighborhood business has done ~$14-$18 million per quarter in sales for the past three years. This is an excellent decision by leadership and we’re very impressed that despite the low selling price, they are moving forward with the sale and will be able to focus more on the pump business and drug delivery more broadly – it’s a smart and necessary strategic decision for Insulet. The Neighborhood Diabetes supply business is a low-margin business that has not grown since Insulet acquired it, and its growth prospects are not nearly as good as those for the OmniPod or Drug Delivery. The free-fall in the SMBG market has not helped and we see this as a cool-headed move. We wonder who exactly drove in on the board – we suspect this has been CEO Pat Sullivan’s plan for awhile. The original rationale for the acquisition was to acquire Neighborhood’s back-office infrastructure and field sales reps, which were more important strategically prior to the launch of the second-gen OmniPod. The divestment will improve Insulet’s profitability (boosting annual gross margins “low- to mid-single digits”) and should give more focus to the higher margin OmniPod business. The astronomically low selling price reflects how much worse this business has become partly in wake of massive pricing pressure in SMBG, and we assume management had a hard time finding a buyer for a business with virtually no growth prospects. We also know Liberty is pretty cold blooded and we assume they bought Neighborhood's database for the value of the customer base (over 60,000 as of 2011 – we have no idea what it is today, but that’s not too high), as Liberty is still a large mail-order diabetes supplier. For context, Alere previously acquired Liberty Medical in 2013, though we believe at this time Liberty is no longer part of Alere – it appears that a private equity firm bought Liberty in 2014, and Insulet management has further confirmed that Alere does not own Liberty. We’re following up with Liberty for more details. To add to the complexity of course, Abbott now owns Alere – but as we said in a related note, that doesn’t stem at all from SMBG as FreeStyle Libre is really the growth engine of that business.