It’s not where you start

It’s not where you start

While the analysts may have been disappointed with the first quarter results released by Tandem (NASDAQ:TNDM) yesterday, in early trading shares are already down nearly 7%, Diabetic Investor wasn’t. The simple fact is Tandem is following the insulin pump playbook and as a newcomer to the market it’s not surprising that they will have their share of ups and downs. This as they say is the nature of the beast.

As we noted yesterday the insulin pump market is dominated by Medtronic (NYSE:MDT), followed by Animas, a unit of Johnson and Johnson (NYSE:JNJ) and then Insulet (NASDAQ:PODD). If investors would go back and review the early earnings announcements from these established pump companies they’d likely find similar results to what Tandem released yesterday. The bottom line for insulin pump companies is it’s not where they start but where they finish that matters.

In Tandem’s case the company is actually off to relatively good start considering how competitive the market has become. The iPhone like design of the t:slim has created a fair amount of buzz among insulin pump patients seeking an insulin pump with a more patient friendly user interface. This is, pardon the play on words here, Tandem’s sweet spot. Take away that interface and the t:slim is just another wired insulin pump with really no distinct advantage over what Medtronic or Animas offers.

The key for Tandem is to continue to build share and innovate; for their long term goal like so many others who play in this sandbox is to be acquired. The issues their facing today, an unexpected recall, building a national sales team and getting on formularies are standard issues that all newcomers deal with. Anyone who doubts this Diabetic Investor suggests going back in time and review the first few earnings reports issued by Insulet. Just as Tandem is dealing with growing pains so too did Insulet when they first came to market. Like Tandem, Insulet also felt they would eventually be acquired.

Ironically a key indicator for how Tandem is really doing will come not through share data but the courts. Yes as sure as night follows day investors will know something good is going on at Tandem when they get sued by Medtronic. As we noted yesterday Medtronic owns a boatload of intellectual property in the insulin pump space and isn’t shy when it comes to protecting their turf. Again using history as guide way back in the day Medtronic waited for the Cozmo by Smith’s Medical to gain share in the market before going after them in court for IP violations. A court fight and settlement that eventually forced the Cozmo off the market.

Looking ahead it’s way too early to predict whether the company will ultimately be acquired or like Insulet be forced into actually running the company because an acquisition didn’t happen. The insulin pump market has changed dramatically since Medtronic acquired MiniMed, Roche acquired Disetronic and JNJ acquired Animas. Back then the market was growing 15% to 20%, today growth has slowed to the mid-single digits. Back then reimbursement was more liberal, today companies face continued pricing pressure. Back then there was no threat from competitive bidding, today competitive bidding is a very real threat. Back then there were really just two choices Medtronic or Animas, today you can add in Roche, Insulet and Asante.

One thing that hasn’t change is the high cost of running an insulin pump company. Another thing that hasn’t changed is that Medtronic practically owns this market. Again as we noted yesterday so far no one and we mean no one has found a successful strategy to take away significant share from Medtronic. It should send a very strong message to the investment community of just how difficult this market has become that JNJ is now looking to unload Animas; a message that should be reinforced by the fact that Animas was never profitable. One could easily conclude that if JNJ with all their financial and marketing muscle couldn’t give Medtronic a serious run for their money that no one can. Yes JNJ made their fair share of mistakes but still the fact they are exciting the insulin pump market is not a positive.

This is why Diabetic Investor is and investors should take a wait and see attitude with Tandem. So far the company is experiencing the normal growing pains of any newcomer to market. The real test will come later when they will likely face not just a legal fight from Medtronic but also dealing with increasingly competitive nature of the insulin pump market. The company is off to decent start but in this market it’s not where a company starts that counts, it’s whether they can actually make it all the way to the finish line.