DexCom - Insulet buyout deal unlikely, Bank of America says
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Commenting on the reports that the medical device company DexCom (NASDAQ:DXCM) is in talks to acquire the insulin pump maker Insulet (NASDAQ:PODD), a group of analysts at Bank of America argues that a deal between the two diabetes players is unlikely.
The Bloomberg report about discussions between the firms sent Insulet (PODD) shares sharply higher, while DexCom (DXCM) fell in the post-market Monday. However, none of the companies commented on the news.
Maintaining the Overweight rating and $600 per share target on DexCom (DXCM), BofA analysts led by Travis Steed question why the company would risk executing such a massive and costly deal that would potentially dilute its equity.
The analysts note that only about 8 million patients make up the insulin delivery market in the U.S., compared to DexComâs (DXCM) potential market opportunity of more than 100 million patients.
Therefore, they argue that the transaction could signal a distraction from DexComâs (DXCM) long-term market opportunities outside insulin patients, which according to them, âare becoming more important over the next 5 years.â A deal would indicate that the company was less bullish on the long-term prospects, the team added.
Wells Fargo analysts led by Larry Biegelsen agree, pointing out that the vertical integration in the diabetes device space has not worked well for the rival device maker, Medtronic (MDT).
âWhile we donât see this as a near-term risk for a combined DXCM/PODD, it could be in the future if their technology falls behind in one key area,â the team added, noting that in the past, DexCom (DXCM) has been ambivalent about which pump manufacturers to partner with.
As for the positives of a likely deal, Wells Fargo highlights the synergistic benefits, potential to raise bargaining power with payors, opportunities to increase international sales growth, and chances for diversification.
Meanwhile, Canaccord Genuity argues that the deal comes ahead of the new product cycles for both companies: Omnipod 5 for Insulet (PODD) and G7 for DexCom (DXCM).
Noting that the deal would impact DexComâs partnership with Tandem Diabetes (TNDM), the analysts highlight the potential of the deal to drive synergies between the companies ahead of the launch of Insuletâs (PODD) O5 Automated Insulin Delivery System.
âIn sum, at first glance, we think the reasoning for a deal here passes the sniff-test,â they added, reiterating the Buy ratings on Insulet (PODD) and DexCom (DXCM), given the current market backdrop and opportunity for new product launches.
DexCom (DXCM) is trading ~8% lower in the pre-market, while Insulet (PODD) has added ~11%. The rival pump maker Tandem Diabetes Care (TNDM) is trading flat.
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