A scary thought

A scary thought

One of the scarier thoughts this Halloween is the state of the insulin pump market. As it stands today we have three players – market leader Medtronic (NYSE: MDT) who by our estimates will control almost 90% of the market – Insulet (NASDAQ: PODD) and Tandem (NASDAQ: TNDM). Given the way things are going at Tandem it won’t be long before the insulin pump market becomes the domain of just Medtronic and Insulet.

Yes, Bigfoot is still here but they are still a few years away from bringing their system to market. And yes, there are a host of insulin pump wannabes but like Bigfoot they are also years away. The simple fact is for the foreseeable future when it comes to patient choice it’s down to Medtronic or Insulet.

What’s even scarier is that Tandem patients could well be blindsided by the company. While the company insists they will do right by their patients they may not be in control. As we have noted the company is carrying almost $80 million in debt a situation which has forced them to hold $10 million of their cash in reserve. Although they have approximately $30 million in available cash now the prospects of their lenders allowing them to continue operating are diminishing by the day.

At some point, a point we see coming sooner than later, the debt holders will look at the numbers and decide better to shut the company down, collect what they can and move on. They know better than anyone that it’s highly unlikely anyone will come along and buy the company. The fact is everyone who’s looked has said no thank you. The one hope they had was that whoever bought Animas would then come buy Tandem. Well now that Johnson and Johnson (NYSE: JNJ) has decided to shut down Animas that scenario is no longer possible.

Think about this just for a moment, think as if you are the company interested in acquiring Tandem. On the plus side the company has a decent installed user base and nice system that patients and physicians like. Also on the plus side many patients see Medtronic as the evil empire and will only go to them as a last resort. These patients aren’t stupid, and they are aware that Tandem has serious financial issues. They understand that Tandem could join Animas in the insulin pump graveyard and they would be forced to switch yet again. Yet they still will choose Tandem, this is how deep their dislike is for Medtronic.

On the other side however, the issues run deep and not just the $80 million in debt or the fact they are now up against an even stronger market leader. The fact is once a Tandem system leaves the factory the company loses money, yes, they lose money on every system they sell. Now we’re not sure what everyone else was taught in business school but at the University of Illinois our professors noted that it’s not a winning business model when you lose money on every system you sell.

Sure, this can be fixed but fixing the problem will take two things the company does not have, time and money. And we’re not talking about a small amount of money either, by our estimates Tandem needs at least $200 million AND THIS DOES NOT INCLUDE THE $80 MILLION IN DEBT.

So, the lenders are faced with a dilemma. Do they continue to be patient hoping someone will come along and the save the day? Or do they cut their loses? Unlike JNJ they may well decide it’s better to something than nothing. And to be honest from a business perspective this is what they should do.

The problem is Tandem patients will be left out in the cold. Tandem’s lenders have no obligation to Tandem patients. They are not beholden to anyone, not management, not the board of directors or patients. They lent the company money, have been very patient but they want to get paid. Taking a realistic view and looking at the assets held by the company their most desirable option is to shut the company down, take the cash and perhaps work out a deal to sell the installed base.

There is a VERY realistic possibility that Tandem patients could have just a few months, if that, to find another system. That unlike JNJ who made an arrangement with Medtronic, they will not have somewhere to go where they can switch at no cost. Think about that just for a moment as this could happen, this is not a dream more like a nightmare.

Tandem management continues to insist everything is just fine when it clearly is not. But the fact is it really doesn’t matter what they say as they are no longer in control. The fate of Tandem and their patients now lies in the hand of the company’s debt holders. Debt holders who could at any moment take control and shut the company down without any advanced warning. Think about that as this is VERY possible.

A very scary thought indeed.