Tandem Reports

Tandem Reports

Before we get into the details of the Tandem (NASDAQ: TNDM) earnings call a piece of advice to all the companies doing a call – please change the music that plays before the calls start. While waiting for the Tandem call to begin we were subjected classical music which may have been great years ago but not for 2016. As per usual Diabetic Investor has some free advice in this area, how about some country maybe some Luke Bryan or Florida Georgia Line. Or what about some Adele, Meghan Trainor, John Legend or the Weekend. Seriously this classical stuff has to go and time to get some good music.

Now onto business and by all outward appearances business for Tandem seems good. Sales continue to increase while the company has a healthy portfolio of new products and systems in the pipeline. Like Animas, a unit of Johnson and Johnson (NYSE: JNJ), Tandem should send a thank you note to Dexcom (NASDAQ: DXCM) as sales for the G4 t: slim, Tandem’s sensor augmented system which uses the Dexcom sensor reached 3857 units in the fourth quarter. As we have been stating all along sensor augmented systems are where it’s at and any pump company that doesn’t have one is in serious trouble. Speaking of which Insulet (NASDAQ: PODD) reports results tomorrow at 4:30 pm EST.

Tandem which already has the most patient friendly user-interface of all the existing pumps is diving deeper into the world of interconnected diabetes management (IDM). The company is not just using the cloud to help the patient but has expanded this help to physicians and CDE’s.

Now the not so good news, the company’s cost of goods is still too high and the impressive sales numbers are not necessarily related to increased demand rather more feet on the street. Or put more simply additional sales reps cost more money as it takes spending money to make more money. The fact that Tandem had to expand their loan facility and has already drawn from the facility shows just how capital intensive the insulin pump business is and why scale is critical.

This is not to say that Tandem isn’t on the right path. As we noted earlier their user-interface is not just patient friendly it also allows a smoother transition to smartphone pumping. Although Diabetic Investor believes it will be some time before the FDA approves any pump that’s run by the patient’s smartphone, the Tandem touch screen technology gives the company a competitive advantage with new product introduction. Just today the company talked about their new t:sport pump under development which seems to a cross between a patch and conventional pump. A system which would be controlled with a remote device.

The issue we see and this is not just for Tandem but the entire insulin pump market is competitive dynamics. As everyone knows Medtronic (NYSE: MDT) remains the 800-pound gorilla in this space. Animas, thanks to the Vibe is gaining share, Insulet even with all their current problems remains in the market plus there are exciting newcomers like BigFoot set to enter the market. Still the insulin pump market is not large enough nor is it growing fast enough to support all of these players. Or perhaps we should state this differently as it does not allow for everyone to make money in this market. Quite frankly the only company that has consistently made money in this market is Medtronic and that’s directly related to their huge installed user base.

Again as we have noted on several occasions even with all the mistakes made by Medtronic no one and we mean on one has been able to consistently make money in this space.  While Animas, Insulet and Tandem are making life more difficult for Medtronic none of the companies have yet to figure out a cost effective method for taking share away. Yes, these companies may be winning the battle for patients new to pump therapy but there just aren’t enough of this patients for a sustainable business. In order to make money Animas, Insulet and Tandem MUST get patients currently on a Medtronic system to convert to their system, not an easy task. Things have actually gotten worse for everyone as Medtronic finally seems to be getting their act together.

So what’s the path to success, simple consolidation. This is exactly what Tandem is hoping for as they know like everyone else the difficulties of this market. A market which like the BGM market is becoming a commodity market. The simple fact is while Tandem may have the best user-interface this not enough to change market dynamics, it will not help grow demand for insulin pump therapy, it will not make their competition less aggressive and it won’t abate increasing pricing pressure.

Tandem has done a fine job since they began selling the t:slim and there is much to like about the direction they are headed in. However, they like Animas and Insulet haven’t yet to find the path to financial success. The harsh reality is no matter how well they have done their long term survival rests on someone else recognizing the value the company would add.