Timing is everything

Timing is everything

The headline that’s likely to come out of the Dexcom (NASDAQ: DXCM) earnings announcement is results were higher than anticipated. While this is true and obviously a good thing it’s not the big story by any stretch of the imagination. The fact is we look at Dexcom through a much different set of lenses then most traditional analysts who are focused on the short term and fail to see the bigger picture. This is one reason we have never been overly concerned with quarter to quarter performance fluctuations. We understand where Dexcom is going and had faith in their ultra-talented management team.

Well as it turns out thanks to timing this team is about to get its biggest test. Although we don’t see it happening anytime this year it’s looking more and more likely that they end up owning Tandem (NASDAQ: TNDM). A deal which will we believe has the potential to change the insulin pump landscape and give Medtronic (NYSE: MDT) their first serious competitor in years. A competitor who knows the Medtronic business intimately as they built this franchise into what it is today.

Why Tandem and not Animas, well several reasons and cost to acquire is just one. As everyone knows Tandem is imploding and perhaps has enough money to make it to the end of the year. And as we have stated before anyone who acquired the company would likely renegotiate with the Tandem lenders who likely would accept as something is better than nothing. Dexcom could save even more money as they could easily transfer manufacture Tandem system at their new facility in Mesa. As we noted yesterday Tandem spends almost $20 million on facilities alone.

Another reason to buy Tandem over Animas besides cost is Tandem has a better pump and has better products in their pipeline. Given Dexcom’s management past pump experience we believe they could easily fix the issues we have previously addressed with the Tandem system. The fact is Animas may have more patients than Tandem but the Animas system is becoming old and outdated as Johnson and Johnson (NYSE: JNJ) hasn’t invested in a new version of the pump. Besides their inflated valuation for Animas this is another reason they are having a problem selling the unit.

A third reason to own Tandem is that it fights fire with fire. As we noted previously the moves made by Medtronic are not just to increase their already dominate presence in the insulin pump market. They are also made to blunt Dexcom’s growth. With Tandem under their belt Dexcom could give payers another option, an option which will have the best sensor on the planet.

And let’s not forget about the recent Bigfoot Abbott (NYSE: ABT) alliance, an alliance which will not just combine the Libre with the Bigfoot pump but also their “smart” insulin pen. Well there is no doubt that Dexcom will also have a pen/cgm system that will compete as will Medtronic. Again, the main difference between the three being Dexcom has the best sensor. And although we should not have to repeat this we will, Dexcom is the only company that has demonstrated they can manufacture high quality accurate and reliable sensors on a massive scale. Something they will do even better and cheaper when the Mesa facility becomes fully operational.

The best part of this deal is Dexcom doesn’t need to do it. The company is already on a solid path to greater growth. The Verily partnership is proceeding as planned and all the trends are in their favor. Dexcom is like a sailboat with the strong tailwinds pushing them ahead of the competition. They have a strong balance sheet which as they noted “our strengthened balance sheet with our $400 million in cash we just raised and even more capacity for debt if we had a great opportunity; and by the strength of this management team that we continue to build. This opportunity remains exceptional and it’s got a lot of legs.”

Frankly we hope this deal does happen as it could set up some very intriguing possibilities. It could well force Abbott to go out and buy Animas which may seem strange given their recent deal with Bigfoot. While Bigfoot may be the future Animas has what Bigfoot does not, an installed user base and infrastructure.

This deal, if it happens, could also put Insulet (NASDAQ: PODD) in play. We have always speculated that if anyone wanted to compete with Medtronic why not have both a conventional wired pump and wireless offering both of whom by the way just so happen to work with the Dexcom sensor. Think of the leverage a Insulet/Animas tie up would have with payers.

The way we see it is that Dexcom does not need to be in the insulin pump business but circumstances could present an ultra-low-cost way to enter the market. Or as Momma Kliff used to say; “This deal is just too good to pass up.”

With their talented management team, a team rich in insulin pump experience, we have no doubt they would give Medtronic a serious run for their money. As we have stated all along when it comes to insulin pumps its not about technology its all about talent and talent is something Dexcom has in abundance.

Although 2017 is far from over it’s already looking like we could have another diabetes device deal announced at J.P. Morgan in early January.