Opposite Directions

Opposite Directions

This afternoon Dexcom (NASDAQ: DXCM) and then Tandem (NASDAQ: TNDM) reported third quarter results. Not unexcepted Dexcom continues to move forward while the situation at Tandem is worse than we anticipated. Basically, these are two San Diego based companies which are moving in opposite directions. Dexcom has a very bright future, while Tandem may not have a future or at least not as a stand-alone entity.

The best way to describe Dexcom’s results is the company has hit some headwinds. The receiver recall and replacement program adversely impacted not just third quarter results but will also impact fourth quarter results. In countries where CGM is not reimbursed the FreeStyle Libre is limiting sales. The approval of the 670G is also impacting sales as patients seem to be waiting for its commercial launch before making a CGM system decision. Because of these factors the company noted that fourth quarter results will hit the mid to high point of previously provided guidance which will not be revised upwards as has happened in the past.

Now none of these factors were not anticipated, nor do we feel these headwinds will prevent the company from achieving their long-term goals. It may slow things down a little but ultimately won’t change the overall narrative. When it comes to CGM it’s all about accuracy, ease of use and systems. As it stands today Dexcom still has the most accurate system which is getting better with each new version. The system is getting easier to use and soon will not require calibration. Add in the Google partnership and the future looks just fine.

It would have been foolish to believe that Dexcom’s path would be smooth sailing without hitting choppy waters or headwinds. As any experienced sailor knows the difference between success and failure is how these anticipated conditions are planned for and dealt with. Simply put it comes down to strong leadership and the ability to execute. Given their strong management team and historical performance of being able to execute we see no reason for concern. It won’t be a straight line to the top but that’s were Dexcom will be.

Unfortunately, the same cannot be said for Tandem as the company continues to struggle financially and per the results released today shows cash at just $35 million. Being realistic the company has revised guidance downward noting in the release;

“The short term challenges that we face do not overshadow our expectations for long term success,” said John Cajigas, Executive Vice President and Chief Financial Officer. “However, after considering our third quarter results and evolving market dynamics, we believe it is appropriate to reduce our 2016 guidance.”

As we’ve been stating all along Tandem’s problem is their main selling proposition, a more user friendly interface, is just not enough to overcome the many structural obstacles of the very competitive insulin pump market. Obstacles which have gotten higher as Medtronic (NYSE: MDT) continues to flex their already large muscles. In many respects this isn’t even a fair fight but Tandem did choose to enter the ring. Simply put they just weren’t ready to take on the reigning champion.

Ironically it could be the champ who saves the day, for if things don’t get better in a hurry the company will likely be owned by the champ. A possibility that is becoming more real given that Johnson and Johnson (NYSE: JNJ) has decided to sit on the sidelines.

Frankly it is difficult to foresee a scenario where Tandem remains an independent entity over the next year.  Even if they tap the $35 million available under their existing loan facility with CRG, that won’t change the dynamics of the insulin pump market. It may buy them a little time but not much else.

Shares of the company are already down nearly 50% on a year to date basis and given the results released this afternoon will get hammered again tomorrow. The bottom line here is not whether the company is acquired but who will acquire them and at what price. Unless JNJ has a major change of heart Medtronic looks to be the winner. Is it possible a third party could step up the plate, a Google or perhaps Apple, possible but not likely.

Tandem will go down as the posterchild of how way cool whiz bang technology just isn’t enough. That yes the user interface is the best in the business but this just isn’t enough to overcome the dynamics of the insulin pump market. That as we have said all along anyone can build an insulin pump but it takes real talent to run an insulin pump company. And as Tandem proves, as they did have talent, this has become one tough market that is only getting tougher.

All we can say is that whoever decides to enter the ring next better be prepared as the champ isn’t going down easily. They have shown they can take a punch, even get knocked down only to come back to knock the stuffing out of their opponent.