What happened

In response to announcing that Medicare Part D may now cover the OmniPod System, shares of Insulet Corporation (PODD -2.47%), a medical device company focused on diabetes, rose 11% as of 1:55 p.m. EST on Monday.

So what

The tubeless insulin pump company said that the Centers for Medicare and Medicaid Services has finally issued new guidance that may allow Medicare patients to gain coverage for the OmniPod System through their Part D benefit.

This is huge news for investors because the OmniPod System has largely been unavailable to patients covered by Medicare Part D since the device became available for sale more than a decade ago. That fact makes the company's huge revenue growth up to this point all the more impressive.

Here's what Insulet CEO Patrick Sullivan had to say about the transformative news:

"We are incredibly excited about CMS' confirmation that Omnipod is eligible for coverage under Medicare Part D, which allows many additional people living with diabetes to benefit from Omnipod's freedom and ease of us. Gaining Medicare coverage of our Omnipod System was one of our top priorities, since individuals living with diabetes deserve the right to choose the product that will best help them manage their diabetes. We are thrilled more people will be able to choose our innovative and differentiated Omnipod technology, which delivers continuous insulin without the use of tubes and eliminates the stress and anxiety of multiple daily injections."

Mangement estimates that there are approximately 450,000 patients in the U.S. with Type 1 diabetes that will gain access to the OmniPod because of this CMS guidance change. 

Given the news, it is easy to understand why shares are flying high Monday.

People dressed in suits people giving the thumbs up

Image source: Getty Images.

Now what

The good times continue to roll for Insulet's investors. A few months ago news broke that Johnson & Johnson had decided to pull the plug on its insulin pump business. That move eliminated one of Insulet's biggest competitors and put roughly 90,000 patients in the market for a new pump. That represents a potential bolus of new OmniPod patients that could help to finally drive Insulet's bottom line into the black. Today's Medicare update only increases the company's odds of financial success.

It's a tough call as to whether this news makes Insulet's shares a buy at today's prices. On one hand, the company's competitive position, financial statements, and business prospects have never looked stronger. On the other hand, shares have more than doubled over the last 12 months and the stock currently trades around 10 times sales. That's a lofty valuation for an unprofitable medical device company and it amps up the pressure on management to continue delivering expectation smashing results.

My verdict is that investors can feel good about buying a few shares today as long as they own this stock with a multi-year time horizon. After all, Sullivan is targeting more than $1 billion in total sales by 2021. If he can deliver on that number, than it is reasonable to assume that shares will trade meaningfully higher. However, given today's lofty valuation and Wall Street's rising expectations, risk-averse investors might be best served by staying away.