What has changed?
Back on February 9th shares of Tandem (NASDAQ: TNDM) closed at $2.35 and at the time the future did not look very bright. Fast forward to yesterday with shares closing at over $11. Talk about a happy dance. Yes, suddenly, this company which was on the verge of declaring bankruptcy is now flush with cash and its stock is skyrocketing. Yet when looked at without rose colored glasses what has changed if anything?
The same management team which pushed the company to the brink of going under is still in place. The product line up isn’t all that different. There major competitor Medtronic (NYSE: MDT) hasn’t gone out of business. Insulin pump usage is not increasing at a substantial rate. Insulet (NASDAQ: PODD), another competitor, hasn’t gone away either. Payors have not suddenly fallen in love with insulin pumps nor have they stripped Medtronic of their formulary advantage.
Listen we understand that we may not be the sharpest tool in the shed but please explain, and do it slowly, what has changed here.
Yesterday an analyst at Piper Jaffray JP McKim upgraded the stock because he believes that Tandem will have a “superior closed loop system for years to come”. It seems Mr. McKim whom we do not know but have reached out to thinks this superior system will allow Tandem gain more market share. This may or may not happen and we would state for the record that when it compared to the 670G from Medtronic which is a “hybrid” closed loop system it’s a low hurdle to jump over.
We have nothing against the 670G as when it functions as designed it gets the job done. What we have found through interviews with 670G users is there is no middle ground, the user either loves it or hates it more than the sound of nails being dragged across a blackboard. We have also noted before that Medtronic’s insulin dosing algorithm, the straw that stirs the closed loop cocktail, is very conservative and that the TypeZero algorithm which Tandem uses is for the moment the superior algorithm. We will further state that we and also many others believe the Dexcom (NASDAQ: DXCM) sensor which works with Tandem system is superior to the Medtronic sensor.
Yet even with these “advantages” Tandem still has some huge hurdles to overcome. But what gets lost in all this let’s say that they actually overcome these very large hurdles. Please tell us what’s the prize, the payoff? Will Tandem add 10,000 new patients, 50,000 will they double their installed user base?
Time for some pesky facts;
1. Insulin pump therapy is the LEAST used therapy to deliver insulin.
2. For all the hype surrounding closed loop the 670G has an installed user base of less than 50,000 and these are NOT new users. Medtronic has simply switched users that were using an older Medtronic system to the 670G. The 670G for all its hype has NOT expanded the market for insulin pump therapy.
3. The insulin pump market is barley growing. Even the most aggressive estimates puts growth in the low single digits.
4. Medtronic owns the most valuable piece of real estate when it comes to new pump starts and until someone comes along and knocks them off this prime formulary position advantage it will be tough sledding.
5. Yes, the Type Zero algorithm is great but Tandem does not have an EXCLUSIVE with TypeZero and there is nothing preventing TypeZero from working with Medtronic who just happens to have a boatload of money to spend should they decide to do so.
6. Yes, the Dexcom sensor is widely acknowledge as the best sensor on the planet but here too there is nothing other than pride standing in the way of Dexcom providing sensors for Medtronic. Crazy as this may seem keep in mind this is the wacky world of diabetes where anything can happen and usually does.
7. We know this is a minor point but Tandem DOES NOT YET HAVE A CLOSED LOOP SYSTEM, THEY DON’T EVEN HAVE A LOW GLUCOSE SUSPEND SYSTEM YET. They will on the later, but the former hasn’t even made its way to the FDA.
8. Another minor point but no one and we do mean no one has ever been able to take substantial share away from Medtronic and like it or not this is the only way Tandem can see real and considerable growth in their installed user base.
9. While its true that Tandem and Insulet for that matter are garnering more Animas patients than we anticipated the fact remains Medtronic will still get most of these patients for the simple reason that FREE is better.
10. As we noted yesterday talent is the most important factor when it comes to running a commercially viable diabetes device company. Other than push the company to the brink of disaster, other than dilute stakeholder value, other than get paid handsomely what has the Tandem management done. The way people talk about Tandem these days you would think that this nag has suddenly transformed into Secretariat, the greatest racehorse in our lifetime.
Now we know it’s a crazy concept to reward a company on actual performance but given Tandem’s dubious track record, their lack of accomplishment perhaps its ok to go just a little crazy. As we noted with Dexcom reports of their death were greatly exaggerated. Yet with Tandem the exact opposite is happening as everyone is out declaring victory and the race hasn’t even been run yet. What’s even crazier here and believe us that’s saying a lot with all the craziness going on here is the Tandem has a losing track record.
So, let’s think this through for just a minute. A team that has proved nothing is being given the keys to the kingdom because why? Listen we’re delighted Tandem didn’t go under as after seeing what Animas patients are going through that’s the last thing we wanted to see. However Tandem is not out of the woods by any stretch of the imagination. Yes, the situation is brighter than it was only a few short months ago but that’s like saying sunshine and 80 degrees is better than 30 and snow.
Folks we know this won’t happen buts its time to think. Time to look at things as they really are not what many wish them to be. This whole situation reminds us of a frat party which looked to be over because the beer was running out when all of sudden a new keg gets opened and the party starts all over. With Tandem as good as it is now this keg will also run dry if they fail to execute, if they continue to drink like they have in the past.
For if past is prologue this is going to be one hell of a hangover. Dilly Dilly