Who’s winning here?
See if this sounds familiar – a company beset by financial issues created largely by mismanagement needs capital desperately cannot find a buyer for the company so in a last desperate attempt to raise the money they need decides to destroy shareholder value by diluting the sucker. For reasons no reasonable person can understand investors pony up more money falsely believing that this management team that created the mess in the first place deserves a second chance. And it goes without saying that this management team which screwed things up in the first place has been very well compensated during their tenure.
Now if this sounds like Tandem (NASDAQ: TNDM) it could be but in this case it’s not Tandem but another insulin pump company Valeritas (NASDAQ: VLRX) who has taken a page from the Tandem playbook. Yesterday the company completed a $24 million offering which sent shares plummeting almost 36%.
Yet Valeritas has more in common with Tandem according to the S1 filed for this latest offering look at the money management is making;
John E. Timberlake CEO and President total comp the last two years $4,010, 102 of which $803,845 is salary
Erick Lucera CFO total comp the last two years $1,377,814 of which $361,250 is salary
Geoffrey Jenkins Executive Vice President, Manufacturing, Operations and R&D total comp the last two years $2,284,784 of which $670.206 is salary
These three gentleman combined have “earned” nearly $8 million over the last two years and how has the stock done – DOWN ALMOST 97%, which when you think about it is fitting as Tandem shares over that same two year time frame are DOWN 91% – so naturally it goes without saying that these management teams and their Board of Directors should be given more money.
Now we may not have a fancy degree from an Ivy League school but even a kid who went to the University of Illinois who occasionally went to class when he wasn’t at Kam’s home of the drinking Illini understands that the goal is to create shareholder value not to destroy it. Yes, even we understand there is something seriously wrong when executives are handsomely rewarded for running a company into the ground. We may be dim, but it does seem wrong that the Board’s of these companies allow the people who have run these companies into the ground to have a job.
Where Tandem and Valeritas diverge is that Tandem with the right management team may have a future, Valeritas and their V-Go patch pump has none. We have always looked at the V-Go as a solution looking for a problem to solve. We have never and will never understand where these dumb patch pumps fit in. And anyone who says they eliminate the need for patients to inject themselves multiple times per day has no clue as that just doesn’t fly.
Under this theory the I-port should have been a huge hit and where is it today – at Medtronic (NYSE:MDT) doing what it has always done – NOTHING.
To fully appreciate how crazy this is consider that the V-Go does not fall into the whiz bang way cool category. Being a dumb patch pump it does not communicate with the cloud. It does not have a way cool whiz bang app which helps patients more effectively manage their diabetes. Understanding they could not succeed without being way cool or whiz bang the company has something called the V-Go Sim under development which turns the V-Go into way cool whiz bang which is why they just signed a deal with Goolko.
So maybe this is what investors are banking on, which is too bad for if it is the reason they invested they will be sorely disappointed. That poor dead cat is here again and this time swinging away at the multitude of companies that have the exact same thing.
Th sad reality is what these investors are banking on is history –
Roche paid a billion or so bucks for Disetronic then another few hundred million for Medingo
Johnson and Johnson (NYSE: JNJ) paid some $600 million or so for Animas
Lilly (NYSE: LLY) is developing their own insulin pump
Bigfoot bought the assets for Asante out of bankruptcy to form the foundation of their effort
Abbott (NYSE: ABT) has been in and out of the insulin pump business so many times we’ve lost count
Novo Nordisk (NYSE: NVO) and Sanofi (NYSE: SNY) have both considered entering the insulin pump business but being Novo and Sanofi, they just can’t seem to make up their minds whether they want to lose a few hundred million or not.
We could go on here, but we think even the Ivy Leaguers get the point, what investors in diabetes devices count on most is the greater fool theory. Mundane things like management talent or market dynamics just don’t seem to matter for if they did neither Tandem nor Valeritas would have been able to scam investors out of more money.
Listen I dare anyone to name one insulin pump company, smart or dumb, who has the combination of talent, product and resources to take on Medtronic and win. Insulet (NASDAQ: PODD) would be the closet but even Insulet would have to acknowledge as well as they have done lately going after Medtronic head on would be a waste of capital. Medtronic owns the insulin pump market and that FACT hasn’t changed in 20 years and is unlikely to change soon.
We’ll also double dare anyone to explain to us how any of these stupid patch pumps will find a place in the market. Keep in mind we aren’t going to buy this argument its about fewer injections that argument has been tried more times than the Cleveland Browns have changed head coaches. What problem are these dumb pumps solving? Now if you state they are helping separate investors from their money or enrich incompetent management teams you’d be spot on.
But what the heck do we know we’re just some dumb guy with a simple bachelor’s Degree from the University of Illinois. We do not have an MBA, CPA or CFA attached to our name. Nope all we have is 20 plus years of watching how this wacky world operates. As Momma Kliff used to say; “There’s a reason some very smart people are continually ripped off as their more impressed with titles or fancy colleges than they are with the school that counts most; the school of hard knocks.”
