The Double Whammy

The Double Whammy

There is no question that shares of Tandem (NASDAQ: TNDM) have been on an astonishing run of late. Right before Valentine’s Day on February 9th shares closed at $2.35 but since that time shares have been feeling the love closing at $5.72 yesterday an increase of 137%. Yes, this company once on the verge of bankruptcy is now flush with cash and has the coolest toy in the toy box awaiting approval at the FDA. Yes, the folks in beautiful San Diego are most certainly doing the happy dance.
Not to content to rest on their laurels Tandem is pushing the pedal to the medal announcing preliminary first quarter results this morning which per a company press release;

• Pump shipments increased by 56 percent to approximately 4,400 pumps in the first quarter of 2018 from 2,816 pumps in the same period of 2017.

• Sales increased by 42 percent to approximately $27.0 million in the first quarter of 2018 from $19.0 million in the same period of 2017. The first quarter of 2017 benefited from $1.5 million in previously deferred sales that were recognized during the period.

As of March 31, 2018, the Company had approximately $81.9 million in cash, cash equivalents, short-term investments and restricted cash. This includes approximately $64.2 million in net proceeds from the equity financing completed in February 2018 and $6.5 million in net proceeds from warrants exercised in the first quarter of 2018. The Company anticipates that outstanding Series B warrants to purchase common stock will continue to be exercised before they expire on April 17, 2018.

Pay very close attention to that last line as this is the reason Tandem pulled the double whammy – not only did they release preliminary results they released them before the market opens. Listen let’s call this what it really is as no company prereleases results if they believe their bad nor do they do it before the market opens if they don’t feel the news will be well received and push shares higher.

See the goal for Tandem is to get those Series B warrants exercised before they expire they expire next week. This will generate even more cash for the company cash they are going to need in the future. Here’s why;

One of the biggest problems for any insulin pump company is how to handle the introduction of a new platform. Do they give this platform away for free to existing customers or do they charge them some sort of upgrade fee? Keep in mind payors will not pay for a new pump when a customers existing pump is not out of warranty. While free is certainly better than any fee, free isn’t free for the pump company as they do have costs associated with the upgrade.

Medtronic (NYSE: MDT) is about to face this problem in a big way when they launch the upgrade to the 670G which among other things adds Bluetooth technology. This is NOT a simple software upgrade but a complete hardware upgrade, the most expensive upgrade of all. Besides deciding how much to charge for this upgrade Medtronic must prepare for the inevitable customer backlash. Think of how a patient who just got the way cool whiz bang 670G will feel when suddenly, they learn that pump they just bought isn’t as way cool as they thought it was.

The problem is even bigger than Medtronic realizes as unlike when the 670G came out and the had the $300 rebate debacle, patients have alternatives this time around. Back when the 670G came out and a Medtronic customer got pissed off they had no real options; Tandem was on the brink of bankruptcy and Animas was being shut down. Today Tandem is flush with cash and is about to have the coolest toy in the toy box that works with the latest greatest sensor from Dexcom (NASDAQ: DXCM). Should Medtronic follow tradition and piss off their patient base these patients will take their business elsewhere without worrying whether their new pump company will remain in business.

Now before all the Tandem stakeholders start doing the hippy hippy keep in mind that life is not all kibbles and bits for the company as they must do something they have never done, execute. They must do this with a management team that so far has proved only one thing; they know how to screw things up. Sure, it’s possible that management has learned from their past mistakes and have turned over a new leaf and it’s also possible that my beloved Chicago White Sox will win the World Series this year.

This is one reason we believe the run up in Tandem shares is a bit premature. We can understand it, but we just think many of the new investors have bought into hype and have failed to understand that anyone idiot can build an insulin pump, but it takes real talent to run a commercially viable insulin pump company. They see the new way cool stuff but fail to recognize that the reason the company was on the verge of bankruptcy was because the management team put them there.

Listen we are not data geeks by any stretch of the imagination but the data we witnessed at ATTD was truly outstanding. Yes, for the MOMENT the Tandem/Dexcom/TypeZero combination looks to be the best of the bunch. Yet we also know this Tandem does not have an exclusive with TypeZero which means anyone can come along and buy TypeZero or do a deal with TypeZero.

After talking with all the experts, we have come to realize the pump is the least important part of a closed loop insulin delivery system. The pump just needs to work to do what it is told to do. The real keys are an accurate reliable sensor combined with a good algorithm. We firmly believe, as do many of these experts, that the data we witnessed at ATTD could be easily replicated using a Medtronic or Insulet (NASDAQ: PODD) insulin pump combined with a Dexcom sensor and TypeZero algorithm.

This is not the only problem that will face Tandem as Tyler looms on the horizon. (Just as a reminder Tyler is our term for a “smart” insulin pen/CGM/App system.) Right this very moment Dexcom and Novo Nordisk (NYSE: NVO) are running Tyler trials and you can take it to the bank when they are done they will show that patients obtained pump like outcomes. (And no, we don’t remember which insulin dosing algorithm they are using but it almost doesn’t matter as even if its not TypeZero there are other excellent algorithms out there.)

The point here is Tyler will not just deliver solid outcomes he’ll do it at a fraction of the cost of what an insulin pump system costs. So Tandem, Insulet and Medtronic are not just competing against each other they will soon be competing against Tyler and our money is on Tyler as payors will favor any system that provides pump like outcomes but does not cost them an arm and leg. While pump companies will do everything in their power to prove they are better than Tyler the fact is insulin pump therapy is not an outcomes choice it’s a lifestyle choice.

Let’s be honest here if insulin pump therapy was the best therapy why then are only 30% of Type 1 patients using a pump? Keep in mind these patients MUST take insulin. So, if pumps really are the best when it comes to outcomes why aren’t more Type 1’s using a pump? Yes, we know that cost and coverage factors in, but these two factors alone do not sufficiently explain why only 30% of Type 1’s use a pump and why this number really hasn’t changed all that much over the last 10 years.

Listen up folks the days of double digit growth in insulin pump market are gone forever. It’s time for insulin pump companies to start thinking strategically. The path to profitability will not come from selling more systems for as we have said many times the insulin pump market is not large enough or growing fast enough for that. Of all the pump companies Medtronic is about the only one who can adapt to this as they have the advantage of scale. The reality is if Medtronic can hang on to their huge installed base they will make a ton of money from the continual sale of pump supplies.

Tandem and Insulet do not have this advantage and the fact is it will cost them a ton of money to take share away from Medtronic which is the only way they can achieve real growth.

So, to all the Tandem stakeholders who are doing the happy dance allow us to provide some words of wisdom from our friend Loopy Lou who when it looked like people were getting ahead of themselves used to say it’s time to slow your roll. Or as Momma Kliff used to say, “Enjoy the ride while it lasts for as sure as the sun rises in the east and sets in the west no ride lasts forever.”