Watch Out Below

Watch Out Below

What happens when you’ve shopped your company to anyone and everyone but have yet to find a buyer? What happens when no one wants to lend you any more money? To add insult to injury market conditions aren’t getting better they are getting worse. The competition isn’t just getting bigger gobbling up more market share they are also making it more difficult for you to gain market share. Well if your Tandem (NASDAQ: TNDM) you try and go back to the capital markets and dupe more investors into thinking you can make it while screwing your existing stakeholders.

In an astonishing show of chutzpah, the company this morning filed an S-1 as they intend to sell more shares. In very early trading shares are down almost 10% a trend we see getting worse throughout the day as more information becomes available as the S-1 does not contain how many shares will be sold or how much they intend to raise. But let’s look at what it does say;

“Our cash, cash equivalents, short-term investments and restricted cash as of December 31, 2017 was approximately $24.2 million, of which $10.0 million was restricted.” – This basically means the company has just $14.2 million of cash they can use.

The company has begun to find ways to conserve cash by extending the leases on many of their properties and terminating the lease on one building. However, these savings do not seem material as they are spread out over time, so yes there are some savings but not that much.

“At the date the most recent financial statements in this prospectus were issued, our management believed that we did not have sufficient cash to fund our operations for the next twelve months without additional financing and, therefore, we concluded there was substantial doubt about our ability to continue as a going concern within one year after the date the most recent financial statements were issued.”

“Our goal is to reach the milestone of cash flow breakeven in the second half of 2019 when we expect to have an installed base of more than 80,000 customers and a gross margin of approximately 55%. We believe this will require us to raise $50.0 million – $60.0 million through this offering and the exercise of our outstanding warrants. However, there can be no assurance that our warrants will be exercised.” – It’s nice to have goals but Tandem talking about 2019 is like the Chicago Bears saying will be a Superbowl contender next year.

“At September 30, 2017, we had $82.3 million in aggregate borrowings outstanding under the Term Loan Agreement.”

Believe it or not one company that wants Tandem to get this additional capital is Medtronic (NYSE: MDT) and no we are not kidding. As we outlined during JPM the company has their hands full already with the coming influx of Animas patients. If Tandem is unable to complete this raise they are headed for the insulin pump graveyard with most patients moving to Medtronic. Simply put Medtronic could not handle the additional patient load at this time.

No disrespect to our friends at Insulet (NASDAQ: PODD), a company which is doing a much better job of late, but when a patient is used to a tethered pump the easy conversion is to another tethered pump. This is not say Insulet will not pick up some Animas patients or Tandem patients when the end finally comes, it’s just to say they won’t get as many as Medtronic.

By the way will someone please send this S-1 to Lilly (NYSE: LLY) CEO Dave Ricks.

Anyway, Tandem does have some positives as sales in the fourth quarter were strong, but they should be in the fourth quarter. And yes, as they note with Animas closing they are only other tethered pump on the market but as the S-1 states;

“We continue to be subject to negative perceptions regarding our financial stability relative to that of our competitors, including concerns among healthcare providers and potential customers regarding our ability to sustain our business operations on a long-term basis. In some cases, these perceptions and concerns have caused potential customers to delay the purchase of our products or purchase competitors’ products and have negatively impacted the willingness of healthcare providers to recommend our products over those of our competitors.”

As we have been saying all along physicians and CDE’s aren’t dense and are aware of what’s going on. Tandem may be whiz bang and way cool, but stability and support are more important than whiz bang way cool.

The reality is that Tandem had no other option here. With just $14 million in available cash and no additional capital added they would not make it past the next quarter. A move which even if successful only delays the inevitable. Tandem does not need a little money they need a lot of money. Raising another few million is like using a Band-Aid to cover a cut to the jugular vein.

So once again the underwriters of this offering will collect their fee. When this move doesn’t pan out the bankruptcy attorneys will collect their fee. Tandem patients on the other hand will get the short-end of the stick. Medtronic will get even bigger and patient choice in the insulin pump market will shrink to just two players.

We say it all the time because its true any idiot can build an insulin pump, but it takes real talent to run a commercially viable insulin pump company. Tandem management and the company’s board of Directors have proven this point once again.