TNDM is David to Medtronic’s Goliath

I am not a religious man, but I remember way back to my days in Sunday School, during one of the times that I was between obnoxious outbursts, when the teacher told us about David and Goliath.  Long story short, against all odds, the tiny, overmatched David defeats the gargantuan, villainous Goliath in a 1 on 1 battle to the death, and is hailed a hero by his people.  This very same narrative is being played out today, in the much more boring world of Insulin Delivery Devices for Type 1 Diabetics, between Medtronic and “everyone else.”  I am going to spend this article talking about the most likely “David” company to beat the Goliath “Medtronic,” and that company is Tandem Diabetes Care Inc. (TNDM).

TNDM came in relatively recently, to an industry that was completely dominated by Medtronic.  The Medtronic insulin pump was considered the most reliable, durable, and accurate insulin pump on the market.  They had tremendous success being one of the first to market with this type of product, and over many years have become a household name to most type 1’s.  They have been very innovative with the delivery mechanism, but over the years their consistent success started to get to them.

From my experience as a Type 1 Diabetic, and from conversations I have had with many Type 1’s, Medtronic’s customer service was the first to go.  It no longer felt like people were hired to fix issues customers were having.  It had instead shifted to treating each customer rapidly, and finding the cheapest solutions.  It was a bottom line move, and there was no intention behind it to treat the customers differently.  But it certainly came across that way to many of us, as it always does when a company cuts costs.

Secondly, Medtronic completely disregarded design and ease of use, when it came to the pump innovations.  They had developed a machine that was accomplishing it’s objectives very well, but the team at Medtronic seemed to determine that “function” was the only important element in the pump.  Every Type 1 who has used a Medtronic pump in the last 10 years has heard the comment: “why do you carry a beeper around? I didn’t even know those still existed!” It sounds a little trite, but the one of the big draws of an Insulin Pump was not having to whip out a syringe in front of people to take your meds because you always had to explain what you were doing.

When the pump came out, people got to be a little more discreet about their diabetes, and that was a big bonus.  But then the 90’s ended, and beepers went with the times. So when people saw you pull out this 1990’s looking diddy that beeped and buzzed, everyone assumed that you were a nostalgic drug dealer who couldn’t escape from the year 1999.

Tandem caught on to this in a big way.  They started collecting patents and built an insulin pump that had the same accuracy, durability, and effectiveness of the Medtronic Pump, but with an extra few design elements that really changed the game.  They made it touch screen, and made the screen have color.  They dropped the size of the device, and made it look as similar to a Smart Phone as is possible.  It was a god send at the time, and Medtronic new it.  Even today, a side by side comparison shows that, admittedly subjectively, the TNDM pump looks like a Tesla, and Medtronic’s Paradigm pump looks like a Volvo.

Screen Shot 2018-03-03 at 10.11.22 AM
Medtronic from Google Images
Screen Shot 2018-03-03 at 10.10.42 AM
Tandem from Google Images

It was around this time that Medtronic started taking advantage of the 4 year cycle that insurance companies have on insulin pumps.  Type 1’s are allowed to get a new pump every 4 years that is covered by insurance.  After you have entered that 4 year cycle, you are stuck with that decision unless your pump breaks, or you want to pay the $6000 out of pocket to switch to a new one.  If a type 1’s Medtronic pump broke, for example, they would happily ship you a new one!  Then, if you didn’t tell them within a very short time frame that you planned to give it back, they simply called your insurance company and got them to pay for it–which would enter you back into a brand new 4 year cycle.  Under the guise of making it easy for their customers they were preventing their customers from experiencing alternative products. It was as sneaky as it was effective (for the short term)!

People like me got fed up.  I saved for an entire summer and paid out of pocket to switch to a Tandem Pump, and I have never looked back.  More and more people are doing the same thing.  Tandem has become the fastest growing pump company in the US and is making headwinds in Europe and Canada to bring their pump to those markets too.

Tandem also has some HUGE innovations that are very close to coming to market.  They recently got FDA approval for the only insulin pump on market that can update the software remotely from home (Link to Seeking Alpha).  This saves their customers a lot of money, and allows TNDM to give all of their customers upgrades anytime–which will come in very handy late this year when they get their next huge innovation approved!

Before I tell you about the innovation that they are working on for late this year, it is important to note that TNDM works with the Dexcom continuous glucose monitor, which is another huge innovation in the Type 1 world that allows diabetics to monitor their sugars all day, every minute, without using needles to poke their finger.  They took it a step further last year when Tandem received FDA approval to allow insulin dosing decisions without taking a manual blood sugar (link to Seeking Alpha article).  That means a LOT less needles for people like me, which is always a big plus.

The next step in their plan to create the ultimate machine is to make it so that their customers don’t have to adjust to blood sugar extremes.  By the end of this year, Tandem plans on attaining FDA approval for a machine that is “closed loop,” meaning that it will monitor a persons blood sugar, and adjust the amount of insulin it is giving to ensure that the persons sugars consistently stay in a tighter range.

This is going to be gigantic.  All type 1’s have a useless paper weight as a pancreas.  Turning the insulin pump into a makeshift pocket pancreas is akin to curing the disease as far as I am concerned.  They already have a patent covering the function of having the pump stop giving insulin if a diabetic is having a low blood sugar (link) and are working on FDA approval of predictive low technology, where the pump prevents lows from even happening in the first place (link).

When TNDM gets this approved, Medtronic is going to have to make a drastic move.  Honestly, I would not be surprised if Medtronic tried to buy Tandem.  They have collected many important patents, on both design and function, as well as patents on infusion sets (parts that diabetics have to switch out every 3 days when using a pump) and other mechanisms on the pump itself.

Everything I have said up until this point has been a more long term bull thesis.  But short term there is a story brewing too.  Revenue from sales for TNDM have been growing at a mind numbing pace, and after a $40 million offering in January (S1 filing here), TNDM is flush with cash.  There is growing consensus that after the last dilution TNDM may not need more cash to reach profitability (that is not an objective statement, it is an opinion that many people and analysts hold).

A big part of my bull thesis is the longtime suffering TNDM has already endured, and how it seems pretty obvious that the story is turning into a fairy tale instead of a nightmare.  They have put long term investors through the ringer up until this year.  They have filed for many many offerings, and preformed two reverse splits in their short tenure.  People who have been holding shares for 5 years are down so much that I doubt it will be recovered within the next 10.  Look at their 2 year, 6 month, and 1 month charts and I will explain some key dates and explanations for the price variances.

First, I mentioned earlier that they have reverse split twice. That’s why the charts show such a tremendous drop. In real world terms, it never showed 90 dollars, but adjusting for r/s thats what a shares value was worth in today’s terms.

On the 6 month chart you see an amazing drop. That was due to an EA that, get this, a bottom line beat by 65 cents. Traders seemed laser focused on the idea that, despite the beat, revenue increases were not substantial enough to ward off further dilutions because the company needed cash, and they were not dancing around the facts. Their honesty was noble, but traders punished them for it nonetheless.

The earnings story has actually, generally, been consistently positive. They typically beat, as evidenced by the following table from StocksLive

The real problem is that up until the last two EAs, traders have not reacted positively. Even on the last two announcements their stock price dropped significantly premarket before driving well into the green over the course of the trading day.

This last EA was a relatively good one, although with shortages at Medtronic the smaller pump companies were all expected to see small increases in sales (Link Seeking Alpha). The big things to get excited about are the growing revenues from sales of pumps and infusion sets, growing market share, and their cash position.

One of my favorite metrics to determine if a stock is really worth holding is if there have been recent increases in ownership from insiders, especially for small companies. Here, we have that in spades. Many officers and the CEO all made huge purchases on the same day, on February 9th, according to yahoo finance. The CEOs purchase was worth 1.5 million dollars that day, and substantially more today.

I can make no clearer bullish argument then the one that can be made with this chart of insider transactions in Tandem stock over the last year, and especially over the last 3 months. Notice the lack of any red in this graphic, and the big goose egg next to “sales.”

The Management team at TNDM clearly stands behind their product, and although they require FDA approval for their new innovations to take hold, they are doing everything right to get these things passed soon. The only thing more important to Tandem then alacrity is their quality of work. They have had very few hiccups with the FDA in the past and they will likely have very few problems in the future. The things they are trying to prove just need enough observations at this point, because insulin dosing is not a new science at all. The effects that insulin has on a diabetic are completely objective and quantifiable. I fully expect FDA approval on their first run around for PLGC and the “Closed Loop” system.

I am already benefitting from their technology at a very personal level. I rely on my pump to literally keep me alive. I love the design, and that the people at Tandem even thought that was an important feature on a pump. The patents they continue to collect are impressive and add to their stature. Like the mighty David, Tandem has this amazing slingshot of a product and although it may not take Goliath (Medtronic) to his death, David is setting many spots at the table for his kin. I plan on also reaping the benefits of TNDMs success in my pocketbook, and you better believe I am long this company!

You can subscribe to LIVE Stock Alerts ($9/month), 1 on 1 Chat ($6/month), and/or Early Access to my articles ($3/month) by emailing theblackinkeconomist@gmail.com to inquire!  I use the Remind platform to send alerts, which you don’t need anything other then a phone number to receive!

Disclaimer: Nothing I say is investment advice.  Everything in this article is subjective, i.e. my opinion.  I have a lot of questionable opinions, as you may know.  For example, it’s the middle of winter in Colorado and I sleep with the window open.  My point is, don’t buy TNDM stock because I wrote this.  Do more research, and make your own decision!

Disclaimer: I have a small long position in TNDM, and will actively trade it throughout the year and next.  I will maintain a small position in the company for many years to come, since I am a satisfied customer of theirs.  It is one of my very few financial holdings that I would consider an “investment” instead of a “trade.”

2 thoughts on “TNDM is David to Medtronic’s Goliath

  1. I also look at this through the eyes of a diabetic. Although I feel Insulet (omnipod) is superior to medtronic, I agree that they have a weird strangle hold on the competition. Anything passing tests with closed loop technology is going to be huge. And dexcom has made such a name for themselves that when they put their tech in someone’s device AND buy 2.5m shares, that seems to be a good sign.

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    1. Absolutely. Omnipod is actually the only pump I have no experience with but I have heard great things about them! I’m sure there’s room in the market for both but I wouldnt be surprised if medtronic tried to buy one of them before they get so big that there’s anticompetition issues.

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