Tandem Diabetes Care (TNDM): Value Play in Insulin Pumps

Edward Kim  |

Regular readers will know that we're always looking for microcap companies that typify the innovation economy and present a healthy risk-reward balance. We've been tracking a medical device company that's been punished by the market so severely over the past two years that it's now trading at a level that is below the cash on the balance sheet. In other words, at current prices, you'd be getting all of the proven, commercial, innovative technology for free.

The company is Tandem Diabetes Care (NASDAQ: TNDM), which reported better than expected Q1 results yesterday after the close. We listened to the conference call and came away encouraged, particularly at these prices. Investors can listen to an archived webcast of the call on the company's investor relations site.

Fastest Growing Insulin Pump Company in the US

According to the dQ&A Connections Survey in Q4, 2016, Tandem is the fastest growing insulin pump maker in the country, with compound annual sales growth of over 45% since 2012. dQ&A is a leading patient-centric diabetes market research company whose clients include Fortune 500 pharmaceutical companies and medical device companies.

Tandem has shipped over 50,000 pumps in the past four years, with about half of customers being new to pumps after converting from the nightmare of multiple daily insulin injections. Tandem is the leading pump manufacturer in user satisfaction, with the #1 rated customer support experience by users since 2013, according to dQ&A.

The company's Device Updater is the first and only tool on the market that enables customers to remotely update their insulin pump software through their computers - meaning new innovations can be adopted as they are approved by the FDA. Tandem has three new product launches planned in the next two years, integrating automated insulin delivery algorithms and continuous glucose monitoring technology from DexCom (NASDAQ: DXCM).

Source: Tandem Diabetes Care Company Overview, March 8, 2017


Q1 Conference Call and Financing History

As mentioned above, we liked what we heard on the conference call, which was led by Kim Blickenstaff, CEO since 2007, and CFO John Cajigas. Mr. Blickenstaff was previously CEO of Biosite, a provider of medical diagnostic products, until its acquisition by Inverness Medical Innovations, now known as Alere (NYSE: ALR). He was also a director of Medivation until its acquisition by Pfizer (NYSE: PFE) and was a director of DexCom.

Of particular note was that the Q&A segment of the call involved four research analysts: Matt O'Brien of Piper Jaffray (NYSE: PJC), Tao Levi of Wedbush, Rick Wise of Stifel (NYSE: SF) and Ryan Blicker of Cowen (NASDAQ: COWN). It's rare for a $52 million market cap company to attract the interest of three senior medical device analysts. We're not familiar with Mr. Blicker but surmise that he is the junior associate working with senior analyst Doug Schenkel at Cowen, who downgraded the stock a few weeks ago to "market perform" from "outperform."

To put the analysts' participation in context, it may be instructive to look at Tandem's financing history:

  • IPO in November 2013 at a post-money valuation of $321 million via BofA Merrill Lynch and Piper Jaffray.
  • Follow-on in February 2015 at a post-money valuation of $332 million with the same banks.
  • Follow-on just last month, March 2017, at a post-money valuation of $61 million via Piper Jaffray. We note that Mr. Blickenstaff participated directly in this offering, buying 1.6 million shares at the $1.25 public offering price. He now holds 6.5% of Tandem.

So, the company and Piper are still together, with BofA either being booted or declining to participate at this market cap. We note also that Wedbush was a new co-manager on the most recent deal, while Stifel was a co-manager on the first two deals but not on the most recent one.

Tandem is obviously no stranger to the capital markets, and the banks may just be trolling for the next deal. But our observation of the Q&A segment - which lasted over 20 minutes - is that the analysts were generally pleased with the Q1 results.

A quick look at the chart since it's been public tells a grim story, from the $15 per share IPO four years ago, to $30 just a couple of months afterward, followed by a long downward slope since then. A big whack came this past November, when the company revised down guidance for the full year 2016 when it reported Q3 results. The market promptly cut the stock by 60% the next day. We therefore are encouraged that management reaffirmed the company's guidance for the full year 2017 on yesterday's conference call.

Stock is trading at its cash value

Tandem's stock closed at $1.05 yesterday, for a $52 million market value. As of March 31st, Tandem had:

  • $44 million in cash, cash equivalents and short term investments
  • $10 million in restricted cash in connection with a term loan from Capital Royalty Partners

There's no debating that it's been an ugly chart, but we like the risk-reward at a price level where you're essentially getting a free call on the fastest growing insulin pump maker in the country with an experienced CEO who has skin in the game.

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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
PFE Pfizer Inc. 42.80 0.05 0.11 9,428,889 Trade
DXCM DexCom Inc. 149.61 -1.50 -0.99 445,202 Trade
COWN Cowen Inc. 15.29 -0.16 -1.04 164,670 Trade
SF Stifel Financial Corporation 59.56 0.30 0.51 132,755 Trade
PJC Piper Jaffray Companies 76.99 0.16 0.21 41,859 Trade
TNDM Tandem Diabetes Care Inc. 62.83 -1.58 -2.45 684,105 Trade

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