Digging Deeper

Digging Deeper

Since we first speculated on Tandem (NASDAQ: TNDM) being acquired shares of the company have been on an upward climb. Back on November 15th when we first reported on this possibility shares closed at $1.90, since then shares have climbed almost 50% closing at $2.75 today. With the company’s market cap now at a little over $84 million, many have asked is Tandem still a bargain? The answer is a resounding yes, here’s why.

No matter who buys the company, Medtronic (NYSE: MDT) being the most logical candidate, it is safe to assume several things. First, it would be unlikely that a company outside of the market would buy Tandem as their entry into the market. This could happen but we view this as unlikely, quite frankly Bigfoot is a more logical choice for an entry into this market. Not only would Bigfoot be cheaper to acquire, they have a more compelling system and strategy.

Let’s say it is Medtronic here is what we see happening. First say goodbye to the t: slim platform and all the Tandem employees. Medtronic is already equipped to handle the additional patient add and while they may one day integrate the t: slim patient interface there is no need to keep the t: slim platform alive. Look for Medtronic to convert these patients to the 630G platform.

As we noted previously Tandem stated they have somewhere around 46,000 users, just for the sake of planning say 90% of these patients or 41,400 are active users. Let’s further assume it costs $750 to convert these patients to the 630 platform, which pegs the conversion cost at slightly over $31 million, a cost which will be recovered quickly given that each user spends approximately $2,750 per year in pump supply revenue, or for these patients that’s an additional $114 million PER YEAR in additional revenue for Medtronic.

Just as an FYI these patients will likely generate even higher annualized revenue when sensor revenue is added in. Additionally, since Medtronic is basically giving away the 670G to any patient who has the 630G the company gets to build a nice foundation for the 670G. Even if they do not extend this offer it’s safe to assume many of the patients converted to the 630G would upgrade to the 670G, which keeps them away from the competition.

This is the reason this deal would be done, not just to solidify Medtronic’s position in the insulin pump market, making life even more difficult for the competition. But also, blunting Dexcom (NASDAQ: DXCM) from gaining more CGM users. All the IP they pick up, the entire Tandem pipeline of new products is just gravy on top of the mashed potatoes. Medtronic won’t do this because they need a new pump, they’ll do this to extend their dominance in the insulin pump market, while holding off Dexcom and Abbott (NYSE: ABT) in the CGM market.

Even at its higher market cap plus a 20% premium, this deal is still chump change for Medtronic. Even when the conversion cost is added in, the company has everything to gain with little downside risk. The real question is will Medtronic continue to flex their muscles or will they let Tandem fall into the hands of a competitor. Heck Roche who is also in the insulin pump market could also afford to make the deal and instead of converting patients to the Roche platform, do the exact opposite making the t: slim their preferred platform. Roche is getting set to launch their CGM and could use the t: slim to build this unit.

Johnson and Johnson (NYSE: JNJ) could also afford to do the deal, they just don’t want to do the deal. For all practical purposes they have decided to let Animas sink or swim without any additional investment.

Some have asked why Dexcom doesn’t step in and protect their CGM franchise. It’s not like the management team doesn’t have the experience, heck the core of this team built MiniMed into the world’s number one insulin pump company. We can think of two reasons; first it is because of this experience they don’t want to touch Tandem. Second, their capital is better allocated towards building market share and developing new products. Given what Medtronic is doing, Dexcom is better off keeping as many partnering options open as they can. Owning Tandem would only close doors when these doors must remain open as the provide the pathway for future growth.

It would be ironic if Roche did end up with Tandem and this acquisition put the company back on the diabetes map. Still given the math and dynamics Medtronic is the more logical option.

The deeper we dig here the more one thing becomes clear Tandem will not remain independent for much longer. If the board spurns an offer in the hope they can turn things around it will only change the price from a deep discount to fire sale prices. Tandem cannot survive as it is today, they will run out of money and unless they pay for extortion financing it’s unlikely they could raise more capital. Sure, they can institute deep cost cutting but this will only delay the inevitable.

No when it comes to survival it’s do a deal or die, there isn’t a third option. At least not a viable third option.