Uncharted Waters

Uncharted Waters

Social distancing, bars and restaurants closed, schools closed, no sports of any kind and the elbow rub has replaced hand shacks. This as we all know is the new reality, we now live in. To say that states are taking extraordinary measures to combat the spread of the coronavirus is the biggest understatement of the century. Yes one day this will come to end, and life will get back to normal or whatever the new normal will be.

Looking at the business of diabetes we are entering uncharted waters as no one really knows the impact the coronavirus will have on these companies. Our own view is several of the companies we follow are getting killed by default, before the virus hit valuations were at sky high levels and this market selloff has brought valuations in line with more traditional metrics. Many subscribers have asked is this the time to take profits or is this an opportunity to add to their holdings.

Now before we go any further let’s get a few points out in the open;

1. We are not market prognosticators and have no clue when this will end, we know it will end but just when and how much damage is done we are as clueless as everyone else.

2. The reality is for many of these companies structurally nothing has really changed. Patients still need CGM sensors, insulin pumps and of course all the drugs they take.

3. Larger well capitalized companies will get through this as they have strong balance sheets and access to capital if needed.

4. However on the flip side smaller companies who were already in weak positions prior to the crisis will not make it.

5. The real impact of the crisis won’t be felt until 4 to 6 months from now.

That being said we have begun to formulate some standards that investors can follow when making decisions.

A. As Momma Kliff would say let’s get the bad news out of the way first before we look for good news. The company we see most at risk of failing is Senseonics with MannKind also a possible causality.

B. It’s difficult at this point to gauge the impact of the crisis might have on demand for devices or supplies. This is why we’ll be paying close attention to first and second quarter results with the second quarter being the critical quarter.

C. The major pharma companies – Lilly, Novo Nordisk and Sanofi – will suffer in the short term but likely will be the first to bounce back.

D. Dexcom – Tandem and Insulet – the Three Amigo’s – are well run well capitalized and should bounce back as well.

E. Abbott should be fine and could benefit should patients seek lower cost CGM. On the flip side we see this crisis delaying the Libre2 even longer.

F. Medtronic was already beset by issues before the crisis which won’t go away when the crisis is over.

G. On balance we see this as net negative for Livongo. With several companies either shutting down or having employees work from home, signing up patients will be more difficult. It also goes without saying that patients have other more important things on their plates.

The best advice we can give of course comes from Momma Kliff stay calm as eventually things will get better. When this happens, we don’t know but it will happen. We recovered after 9/11, we recovered after the 2008 financial crisis and we will recover after this crisis. These are uncharted waters we’ve entered.