What this really means

What this really means

Yesterday Dexcom priced their “upsized” convertible note offering to a little over a billion bucks. Originally the company was seeking a puny $850 million. Also yesterday Insulet priced their $500 million stock offering and for good measure this morning Tandem priced their $250 million of convertible senior notes. Between these offerings the Three Amigos will have collectively raised over $1.7 BILLION hence the happy dance by all the various underwriters.

Going into trading today here’s how the Three Amigos are doing on a year to date basis;

Dexcom is the lead horse up almost 82%, Tandem is next in line up almost 42% followed by Insulet up a respectable 24%. All three are trading at or near new all-time highs. According to their latest quarterly results Tandem had $160 million of cash on hand, Insulet $382 million and Dexcom $1.5 Billion.

So why the rush to raise even more money? Why now in the midst of COVID? Ok the money is very cheap, and terms are favorable and as Momma Kliff used to say it’s hard to turn down cheap money when the terms are in your favor as it doesn’t happen every day.

What this tells us is that the Three Amigos are not just incredibly smart, but they see difficult days ahead. Not that business is bad, far from it, but the second and third quarters are shaping up as difficult. Of the three only Insulet went out on a limb providing perhaps the most detailed outlook of what the future will look like an outlook while not pretty but very realistic. Raising additional capital is prudent as it will allow the Three Amigos to weather the storm.

Our guess and honestly, it’s only a guess is that all three are beginning to see the numbers coming in for the second quarter and hearing from the field what the third could look like. This once murky picture of how COVID would impact results is becoming less murky. What they likely see is that new patient adds, a critical number will be down until patients feel comfortable enough to venture out of lockdown and into their doctor’s office. Virtual visits while practical in times of social distancing will not make up for real in person visits.

Additionally they are likely seeing the same thing we and many others are seeing in that the economy will not have a V like recovery. That layoffs are becoming permanent; employers will not be quick to rehire, and additional cutbacks are coming. Simply put the consumers of their products are very nervous and unlikely to spend the money they have on a new insulin pump or CGM. When you’re worried about paying the rent/mortgage and putting food on the table new toys fall by the wayside.

Of the three Dexcom is the most susceptible to seeing existing patients delay purchases as CGM for as valuable as it is to the patient the CGM is seen as more of a luxury and not as an essential tool. Yes, an existing insulin pump patient could switch back to multiple daily injection (MDI) therapy to save money, but this isn’t as likely as once on a pump most patient remain on one even during periods of economic unrest. This does not mean we see a mass exodus from Dexcom rather that reorder patterns could change.

Seeing this just further reinforces our view that Livongo was overly aggressive perhaps reckless with their full year revenue guidance. That management in attempt to capitalize on the misguided belief that their platform somehow helps patients with diabetes deal with COVID combined with the heightened interest in telemedicine and remote patient monitoring is swinging for the fences when looking for hit would have been good enough. The simple fact is you cannot collect revenue when new members aren’t signing up and existing members are being laid off.

The harsh reality with COVID is this crisis will not end until a vaccine is developed and widely available. All this talk about the impact reopening our economy will have, how the virus is now spreading from densely populated areas to rural communities, how some states are extending their lockdowns while others are easing restrictions is just white noise. This crisis will not end until people feel 100% safe and that only happens with a vaccine.

Like everyone unless under lockdown we understand that people are getting impatient. That being stuck at home isn’t fun, social distancing while prudent sucks and wearing a facemask sucks as well. We all want to get out, go back to work, be with our friends and family. Even when things reopen, and we all run out to get haircuts this reopening won’t bring life back to what it was before COVID. Reopening will be a slow process with capacity restraints and lots of new rules.

Think of it this way, as the economy begins to reopen people will get out and party. But after the party is over as good as it may feel at the time it will come with one hell of a hangover. Yet this hangover won’t go away with a good night’s sleep as for many when they wake up, they will still be out of a job or worried what will happen when their unemployment benefits run out. Those with a job will still be worried about keeping it.

Until a vaccine is developed and widely available COVID will not go away. Until then it’s impact will continue and even after there will be a long-term impact. Many experts believe it will take years not months before the economy gets back on its feet again.

The bottom line here is that these moves by the Three Amigos are both wise and prudent given the circumstances. While the statements from Livongo seem reckless and dangerous. As Momma Kliff used to say there are times to move aggressively but there are also times to move cautiously. Looking at the situation today Mom again is offering sound advice.