The Big Mo
Years ago, before Exubera hit the market analysts were jumping on the Pfizer bandwagon writing glowing reports explaining why this drug would become a mega-blockbuster. Some projecting sales reaching $4 billion per year. Next came Afrezza and once again the initial analysts’ reports were very positive sending MannKind (NASDAQ: MNKD) shares into the stratosphere. Yep everyone seemed to believe that inhaled insulin was a guaranteed hit.
Today Exubera is a distant memory while Afrezza continues to struggle. We mention this as Tandem (NASDAQ: TNDM) a company that was on the verge of closing only a few short months ago now has the Big Mo in a Big Way. Over the past six months shares in Tandem are up an astonishing 353%. And reading the various analysts reports one would get the impression that Tandem is about to overtake Medtronic (NYSE: MDT) for supremacy in the insulin pump market.
Now before we go any further let’s get some of those pesky facts out of the way;
1. We are glad Tandem is for the moment financially secure, the last thing we wanted was another Animas situation.
2. We have nothing against the t: slim system and understand why patients like it.
3. Yes, the Tandem pipeline looks very promising no doubt about that either.
This as Momma Kliff used to say is the good news, now let’s look at the flip side:
A. The dynamics of the insulin pump market have not changed.
B. While Medtronic has stumbled recently they still own the insulin pump market and more importantly own the most important piece of real estate; formulary position.
C. Too much emphasis is being placed on the impact of a true closed insulin delivery system.
Still the analysts have fallen in love with Tandem and Tandem management CEO Kim Blickenstaff in particular is drinking the kool-aid. It’s no secret that Kim has had a running battle with us. As we have written previously he seems to believe our opinions are worthless since we do not have a fancy degree from a fancy school. Something we cannot argue with as yes, we have a lowly bachelor’s Degree from the University of Illinois home of the sometimes-Fighting Illini. And home to our favorite hangout Kam’s home of the drinking Illini.
Over the weekend Kim was at again emailing us the recent report written by Piper Jaffray. According to Kim; “I was just trying to keep you abreast of the changes at the FDA. Everything is changing. FDA, payors and effortless glycemic control. You don’t understand TypeZero either because it’s not public information.” More on TypeZero in a moment.
We explained to Kim what we said above, we’re glad for the moment the company is financially secure, we have nothing against the t: slim and yes, the pipeline looks promising. However, as we have written before other than becoming financially secure nothing else has changed. When we asked Kim to give us specifics as to why he so strongly believes Tandem has turned the corner his bluster turned to silence. Basically, we stated outline your case and we would listen. Or put more bluntly either put up or shut up.
So, lets take a look at this Piper Jaffary report which Kim believes states his case for him. The report states:
“After being on the road with management, we have better clarity into the upgrade/renewal cycle in front of the company and believe they are about to enter a “Goldilocks Period” where they have a superior closed loop system for several years. In looking at our model and consensus estimates, we believe upside exists to pump shipment with further room for multiple expansions. We are upgrading shares to OW with a $13 PT. While we missed the bottom, we believe this is just the beginning of share appreciation.”
Now we will state for the record we do not necessarily disagree with many of the points made in this report. However, where we part ways with the analysis is it does not consider the dynamics of the insulin pump market which have not changed all that much. While Medtronic may be having some issues at the moment they will fight like hell to protect their turf and the goose that lays the golden eggs. As we noted they own formulary position and can swing a very heavy bat with the people who count; payors.
Yes, we understand and have written about how there is some very real hate directed at Medtronic who as we keep noting is seen as the evil empire. As real as this hate is it does nothing to change the fact that the company will not roll over and just surrender share to any competitor. See Kim seems to think that payors will pay MORE for a way cool whiz bang closed loop system. We disagree as payors care about one thing and one thing only; cost.
One question we asked Kim, a question he did not answer, was what Tandem will do when they sit with a payor showing them their way cool whiz bang toy, extolling the virtues of effortless glycemic control when the payor says; “That’s very nice but Medtronic has pretty much the same thing and their system is cheaper than yours. Now if you want to beat that price we might have something to talk about.”
See nearly every key opinion leader believes as we do that when it comes to a true closed loop system the pump is the least important piece of the puzzle. The pump is basically a piece of hardware that does what its told to do. As we have stated before the algorithm and sensor are more important pieces of this puzzle. As we have written before if you took the TypeZero algorithm and the Dexcom (NASDAQ: DXCM) sensor put it with the OmniPod as the insulin delivery system you would see the same results as we witnessed with the Tandem pump.
In our opinion with so many sophisticated algorithms around the coming closed loop era will make pumps more of a commodity not less. We make a big deal out of the fact that Tandem does not have an exclusive agreement with TypeZero who we see as one of the best if not the best algorithm available. Have spoken with the fine folk at TypeZero we know for a fact they are free to make a deal with ANY company and there is NOTHING in their agreement with Tandem that prevents this from happening. As TypeZero noted if Medtronic came to them and wanted to do a deal they are free to do so.
Another possibility is Dexcom could go out and buy TypeZero and then license this technology. A technology that can be used not just with insulin pumps but also as Tyler. Such a move would help the company not only sell more sensors but also fend of Medtronic and Abbott (NYSE: ABT). As we have noted Medtronic is moving into the stand-alone sensor market and Abbott has just one insulin delivery partner with Bigfoot.
Let’s be very clear here Tandem does have potential but other than becoming financially secure nothing else has changed. And let’s be honest about this while the Piper analysis was well done they do have an ulterior motive as given Tandem’s track record of raising money Piper would like nothing better than getting a shot at the fees another offering would generate or becoming the dealmaker for a possible takeover.
Additionally, and this happens a lot as Piper doesn’t want to be the last firm to jump on the bandwagon. As they note in their report they may missed the bottom but they see upside ahead. As we noted when we started this post Tandem has the Big Mo right now and no one wants to be seen as missing the bandwagon so they all find new ways to jump on.
Now we don’t want to rain on this parade but we have seen this movie before. Again, as we noted in the very beginning Pfizer had the Big Mo with Exubera and MannKind did with Afrezza. One product is now dead and buried and the other continues to struggle. We have seen this play out in the insulin pump arena as well as way back in the day Deltec and Animas both had the Big Mo too and today both are in the insulin pump graveyard.
The key for Tandem is now that they are financially secure they MUST execute. They must find a way to fight and win against a formidable competitor in Medtronic. A company who when you look at their history has mis stepped before only to fix these mistakes and recover. When MiniMed was first acquired by Medtronic the new owners made some blunders which opened the door for Deltec and Animas. They fixed these errors with Deltec being the first casualty. A few years later they mis-stepped again costing the then management team their jobs.
Up until recently the new team had seemed to be getting it right but as recent events have shown they cannot escape the company’s history. As per tradition these recent missteps have cost some folk their job and yet another reorg. Yet through it all one thing hasn’t changed even with all these mistakes that goose continues to lay the golden eggs. Animas has now joined Deltec as a Medtronic casualty and their market share hasn’t budged.
Now here we are with Tandem being the most recent company to tangle with the evil empire. Yes, they have the latest way cool whiz bang lightsaber. Everyone wants the force to be with them and many seem to believe Tandem has the secret plans to blow up the Death Star. Yet as us Star Wars fans know that Death Star we all thought was blown up was fixed rebuilt and used again to destroy. We hope Tandem finds their Luke Skywalker and that the force really is with them.
We do not want another Disetronic, Asante, Deltec or Animas. Competition and patient choice are vital for continued innovation. However, this is a business and not a philanthropy and when it comes to insulin pumps the business is as cutthroat and difficult as any other diabetes market. This market isn’t, never has been and never will be about who has the coolest lightsaber.
This is about leadership, strategy and tactics. This is not some movie this is the real world.
What Tandem has proven so far is they are very good at raising money, that’s it. No disrespect to Kim and his team but it’s time to collect your nice severance package and move on. The Tandem Board of Directors should follow the example of the Insulet (NASDAQ: PODD) board who after witnessing the previous management fail in their mission brought in a new team who even after some initial mistakes has righted the ship. The same can said for the Dexcom board who replaced their CEO Andy Rasdal after some notable mistakes.
So, what are saying? What we always say anyone can build a way cool whiz bang lightsaber but there are very few Luke Skywalker’s.