The clock is ticking

The clock is ticking

This morning Tandem (NASDAQ: TNDM) announced they would be drawing down $35 million from their credit facility with CRG. Per a company issued press release;

“Tandem Diabetes Care®, Inc. (NASDAQ: TNDM) today announced that it has initiated the drawdown of $35 million under the company’s previously announced term loan facility with Capital Royalty Partners II L.P. and its affiliated funds (“CRG”). The transfer of funds is scheduled to take place by December 31, 2016.”

In early trading shares of Tandem are down almost 5%.

To Diabetic Investor this move signals the beginning of the end for Tandem as an independent entity, that it is just a matter of time before one of three things happen. Either the company is bought before they run out of money, they are bought after they run out of money or they file for bankruptcy.

Our assessment of the situation is that Tandem will be acquired before they run out of money, more than likely within the next 6 to 9 months. That Medtronic (NYSE: MDT) is the most logical company to buy them.  That while Medtronic could wait it out and simply let Tandem implode they likely won’t take that chance fearing that someone else might come along and buy up Tandem’s installed user base. As we have noted Medtronic could easily afford to buy Tandem, convert their installed user base to the 630G, blunt the growth of Dexcom (NASDAQ: DXCM) and pick up the Tandem IP and pipeline as well.

Besides having the financial resources to buy Tandem Medtronic also has a ready-made existing infrastructure. This advantage cannot be understated. Many have speculated that Dexcom would benefit from buying Tandem, that this would help protect their growing sensor business. While there is some truth to this especially now that Medtronic is getting set to aggressively enter the standalone CGM market, Dexcom’s cost wouldn’t end with the cost of acquiring Tandem.

Yes, Dexcom does have a customer support team however this team would have to be expanded to handle insulin pump patients who have greater demands than CGM patients. But the additional cost does not end there. There is also the additional cost of sales and marketing. Simply put Dexcom would have to invest even more money and divert resources to rebuilding Tandem.

Medtronic on the flip side could buy Tandem, eliminate the entire Tandem team and go about business as usual.

Johnson and Johnson (NYSE: JNJ) who owns Animas could do the same thing but does not seem interested in protecting the Animas franchise. Abbott (NYSE: ABT) could also step in but given their association with Insulet (NASDAQ: PODD) we view this possibility as highly unlikely. Roche is also an option as they have the resources and infrastructure, additionally they have just launched their CGM and could use Tandem as the launching pad to build this unit.

More distant possibilities would be one of the Valley companies, Google, Apple or Samsung. Again, we view this as unlikely for as we have been stating if these tech companies really want to be in the insulin pump market Bigfoot is much cheaper option. Bigfoot may not have Tandem’s installed user base but they do have some way cool whiz bang technology combined with a unique pricing model which fits more easily into how these tech companies view the insulin pump market.

Of course, this being the wacky world of diabetes an outsider could come along and jump into the deep end of the diabetes pool. Let’s also not forget that Becton Dickenson (NYSE: BDX) is getting set to enter the insulin pump market so we shouldn’t discount the possibility that they will go completely off the reservation.  While we think, it would be nuts, BD could buy Tandem and use the existing Tandem infrastructure to help them build their insulin pump business.  Since BD has zero experience in the insulin pump business and has no idea what they are getting into buying Tandem as crazy as it sounds may not be a bad idea.

This is the reason we believe that Medtronic likely won’t wait too much longer to contact Tandem. They know they can not only easily afford Tandem but also put a virtual stranglehold on the insulin pump market. As a bonus, they will make Dexcom play defense.

By our way of thinking it is no longer a question of if Tandem will be acquired rather when they will be, by whom and for how much. They may have bought themselves some time by taking the additional capital but that is all they bought. The additional capital will not change the competitive dynamics of the insulin pump market.

The clock is ticking …..