Something to consider

Something to consider

Yesterday shares of Tandem (NASDAQ: TNDM) closed at $2.05, on a year to date basis shares have fallen over 82%. The company now carries a market capitalization of just over $62 million. During the week, the company announced they would be drawing the remaining $35 million from their credit facility. Simply put the company is on life support and by most estimates has just 9 months or so left before the bottom falls out.

As we have noted given this desperate situation it would seem the company would be looking for a buyer. Also, as we have pointed out Medtronic (NYSE: MDT) is the most logical candidate to acquire the company. Besides having the financial resources Medtronic also has the infrastructure in place to easily absorb the installed Tandem user base. The only obstacle to such a deal would be the SEC and concerns over a monopoly in the insulin pump market. Acquiring Tandem would push Medtronic to near 75% of the pump market and even with Trump as President this may raise concerns at the SEC.

It’s also pretty clear that Johnson and Johnson (NYSE: JNJ) who owns Animas does not want to do any diabetes deals.  Many have approached Dexcom (NASDAQ: DXCM) about doing a deal but we see this as unlikely as the company would be better off allocating capital to their growing sensor business which is about to face increased competition. Roche is a long-shot possibility but given the precarious state of their diabetes business we don’t see this happening. Yes, there could be others but again as we have noted acquiring Bigfoot makes better sense for any newcomer to the insulin pump market.

Given this set of circumstances Tandem could be left twisting in the wind. Which just might be what Medtronic is counting on, as should Tandem be forced to cease operations it would be an all-out battle to pick up the Tandem installed base a battle Medtronic would likely win. A scenario which avoids any SEC concerns. As with so many situations in this wacky world history could be repeating itself.

Way back in the day when Animas was an independent company, there was an insulin pump called the Cosmo from Deltec which was part of Smith’s Medical. Just as the t: slim from Tandem is popular with patients and physicians because of its very patient friendly user interface, the Cosmo was popular too. Yet there was a slight problem as Medtronic brought an intellectual property lawsuit against the company, a suit which Deltec ultimately settled. A settlement which effectively killed the Cosmo forcing Deltec to cease operations.

This scenario could play out again with Tandem in a slightly different way. Today patients have multiple insulin pump options, besides Medtronic and Animas there is also the OmniPod from Insulet (NASDAQ: PODD). Take it to the bank that sales reps from these companies are casually reminding physicians and CDE’s of the problems facing Tandem. Why is this important, because these physicians and CDE’s don’t want another Cosmo on their hands. They understand that choosing a pump is not just about features and benefits but also on the company that stands behind the product.

The last thing they need is to put a patient on a Tandem pump, get them trained and then see the company go out of business. This problem inflicted Animas not long ago when rumors were rampant that JNJ was about to get out of the insulin pump business. Pump companies don’t just supply hardware they provide around the clock patient support. Support which would disappear if a company went out of business.

We see the problem as even worse for Tandem as unlike when the Cosmo died, there is a new way cool whiz bang pump that is captivating everyone’s attention, the 670G. Back when the Cosmo died, the remaining players all had very similar offerings, that is not the case today. It also doesn’t help Tandem that Medtronic is basically giving away the 670G for free, that any patient who selects the 630G will get the 670 when it’s commercially available if they want it.

But the hurt doesn’t stop there, the only weapon Tandem has is one they would rather not use but could be forced to use. The company could go nuclear and offer deep discounts, a move which might boost sales but absolutely kill margins. This might boost the installed base but in our opinion would not stop the company from running out of money.

And just who would provide Tandem with more capital? We suppose they could go back to the capital markets or find extortion rate financing. However, consider how much capital they need to make a go of it. By our estimates the company needs at minimum another $150 million and even with this additional capital there are no guarantees that it would do anything other than delay the inventible. Right now, the 670G is sucking the air out of the room and Tandem needs help immediately.

The fact that the company had to draw down their credit facility should send a warning to anyone who believes the company will have an easy time raising more money. As we noted the company has bought some time but nothing else.

Remember Medtronic can always step in if they see anyone making a play for the company. Until then they can take a wait and see approach. If no one steps in, if no additional capital is found they can let nature take its course and pick up the pieces after the company implodes. This just won’t be cheaper but avoids any issues with the SEC.

Something to consider.