Hope these investors have a high pain tolerance.
Yesterday Tandem Diabetes (NASDAQ:TNDM) announced they had closed the underwriting of their most recent offering. According to a company issued press release; “Tandem Diabetes Care®, Inc. (TNDM), a medical device company and manufacturer of the t:slim® and t:flex™ Insulin Pumps, today announced the closing of its previously announced underwritten public offering of 6,037,500 shares of common stock at a price to the public of $11.50 per share, which includes the exercise in full by the underwriters of their option to purchase up to an additional 787,500 shares. All of the shares in the offering were offered by Tandem.”
Looking over the history of how shares in other insulin pumps have performed one has to wonder what investors in Tandem are expecting. Over the past 12 months shares of Tandem have fallen almost 50%, while shares in Insulet (NASDAQ:PODD), another pure insulin pump play, have fallen over 36% over the same period. Go out even further and the picture isn’t much brighter, over the past 2 years shares in Tandem have fallen over 34%, while shares of Insulet have fallen nearly 17%.
Now we all know the old adage about buying low and selling high but just when will the high come for investors in either company. Tandem has not been a publicly traded company as long as Insulet but it is following a similar path as Insulet has been back to the capital markets numerous times since they initially went public. Which begs the question, are pure insulin pump plays a good investment or just sinkholes that destroy value.
Keep in mind this has nothing to do with the quality of the products they sell or whether or not insulin pump therapy is a viable therapy option. Both Tandem and Insulet make a quality product and the benefits of insulin pump therapy are well documented. What this is all about is whether or not investments in companies that do nothing other than sell insulin pumps are wise. We ask this as Asante another pure play in pumps has delayed their IPO and CellNovo, another pure play has filed for an IPO on the French stock exchange.
Now back in the day investing in an insulin pump company was almost a guarantee to make money. MiniMed even before it was acquired by Medtronic (NYSE:MDT) was an outstanding investment, Animas was acquired by Johnson and Johnson (NYSE:JNJ) and Disetronic was acquired by Roche. Yes back in the day it seemed as if all a pump company had to do was hang out a shingle, get some market share and then a larger player would come along and buy them. Well needless to say those days are long gone.
Today market dynamics are much different and the possibility that any of these pure pump plays will be acquired is a long shot and as anyone whose bet on longshots knows they are called longshots for a reason. Is it possible, of course, is it likely we think not. Therefore it makes sense that when investing in these pure pump plays investors should not invest solely on the belief that the company they are investing in will be acquired. They should instead ask given the current market dynamics can this company create value by being a well-run insulin pump company.
Therein lies the problem as even with ultra-talented management Diabetic Investor isn’t sure these pure plays can create value. While we hate to sound like a broken record we’ll say it again the insulin pump market is not large enough nor is it growing at a rate that supports not just the current players but the many who want to enter this market. Even if there wasn’t pricing pressure, which there is, or the prospect of competitive bidding, which is real or more intense competition there just isn’t an unmet need here.
Now we hate to dump on our good friends at JNJ but it speaks volumes when a company with JNJ’s resources cannot make money in the insulin pump market. The volume only gets turned up when one looks at a company like Insulet who came up with a truly innovative product offering yet can’t make any real money either. What have we said all along making a pump is the easy part, actually running a pump company is the hard part.
Yet time and time again investors continually invest in these pure pump plays. Why is what baffles Diabetic Investor. Do they believe, in spite of all evidence to the contrary, that market dynamics will suddenly turn positive? Do they seriously believe that demand for pumps will increase dramatically? Could it be that they see something that no one else sees and please if they do we want to know what that is?
Honestly we have nothing against Tandem or Insulet nor do we have any ill will towards Asante or CellNovo. We just want to know what investors see in these companies, what makes them a compelling investment. Other than having a high tolerance for pain we just don’t see it.