For a company that has saddled stockholders with over $477 million in losses, Tandem Diabetes Care (TNDM) appears to be seriously overvalued.
The San Diego-based company has not been able to turn a dime’s profit despite introducing five different insulin pumps since inception in 2006. Nevertheless, the stock recently shot up 27% virtually overnight, following an earnings pre-announcement.
Let’s take a look at the risks of this stock, which appears to be positioned to plunge.
First, check out the company’s website, here, since the CEO deferred comment to TheStreetSweeper because of the quiet period before the financial report coming out April 26.
*CEO Sells Stock
The high stock price and warrant opportunity have apparently enticed the CEO to sell stock. In a cashless warrant exercise on Monday, the Kim Blickenstaff Revocable Trust sold 132,444 shares.
The CEO shouldn’t have been hurting for cash. He earned $749,167 in total compensation in 2017, compared with $1.4 million in 2016 and $2 million in 2015.
Such warrants are just part of the potential dilution lying ahead…
*Warrants Exercisable: Dilution Looms
Shareholders face potential dilution in the form of warrants exercisable at $3.50 apiece for more than 9 million shares. Those shares can then be sold into the market. While the Series B warrants have a six-month life span that ended April 17, there’s plenty of time left on the Series A warrants, which have a contractual life of five years.
“In October 2017, we completed a registered public offering pursuant to which we sold 4,630,000 shares of our common stock, Series A warrants to purchase up to 4,630,000 shares of our common stock and Series B warrants to purchase up to 4,630,000 shares of our common stock at a public offering price of $3.50 per share and accompanying warrants, which we refer to as the October Financing.”
“The Series A warrants to purchase 4,630,000 shares of the Company’s common stock have a contractual life of five years with an exercise price of $3.50 per share. The Series B warrants to purchase 4,630,000 shares of the Company’s common stock have a contractual life of six months with an exercise price of $3.50 per share.”
Exercised warrants stand to increase the market valuation above the current $337 million.
And with the stock priced at these levels, what owners wouldn’t want to exercise their cheapo warrants?
Dilutive events don’t surprise David Kliff, 20-year investment advisor, Forbes contributor and editor of Diabetic Investor, who rather liked the stock … at $2…
* “Dilute The Sucker”
Mr. Kliff told TheStreetSweeper in a phone interview that Tandem was on death’s doorstep, trading around $2 to $3 per share, when he encouraged stock purchases from investors who were willing to take a big gamble.
“You don’t make money in this business knowing when to sell,” Mr. Kliff advised, “you make money knowing when to buy.”
Investors weren’t particularly interested. So, Ka-boom! the investment bankers took what Mr. Kliff called the nuclear option.
“The only available option was to dilute the sucker. And that’s what they did,” said Mr. Kliff, a diabetic who uses a competing insulin pump, OmniPod, a product of Insulet (PODD). (He said he does not own shares in any stock mentioned in this article.)
On February 8, 2018, Tandem publicly offered 34.5 million shares at $2 per share. This followed three offerings last year, totaling 11.57 million shares (page 82), 80% of which were the aforementioned $3.50 per share variety.
“Now everybody makes the assumption,” Mr. Kliff said, “that this ugly duckling is going to become a swan!”
*Analysts Hold Back
It turns out that Mr. Kliff isn’t the only one who considers the stock risky at $7.
Right after Tandem announced preliminary results of sales growth on April 10, brokerage firm Stifel issued a report that held with its “Hold” rating on the stock and $4 price target … implying a 47% downside.
Stifel cited “uncertainty around potential upcoming tailwinds and the company’s ability to reach profitability with recently acquired financing.
Stifel broke down the concerns this way:
Also the day of the pre-earnings announcement, Oppenheimer issued an outperform recommendation and a $7.50 price target. But Oppenheimer is a major cheerleader because the firm acted as sole book-running manager for Tandem’s February 2018 offering and October 2017 offering. Wedbush, a 2017 offering co-manager placed an outperform and $8 price target over 12 months, back in September 2017.
Maybe the biggest analyst surprise came from Piper Jaffray & Co. The manager of the March 2017 offering, kept a “neutral” recommendation and a $4 price target … on Tuesday, April 17, a week after the positive pre-announcement.
We believe the combined $5.70 price target is high, considering the issues coming out of the insulin pump field…
*Getting Squashed By An 800-Pound Gorilla
Tandem is an underweight, in our view, with a product not much different than that of the great, chest-pounding beast, Medtronic (MDT).
“Medtronic is the 800-ton gorilla when it comes to insulin pumps,” said Mr. Kliff.
Medtronic owns about 80% of the market, he said, adding that the gorilla is just getting bigger as J&J’s subsidiary transitions its business to Medtronic.
Animas Corporation, a Johnson & Johnson subsidiary, handed Medtronic the keys to its kingdom as it began exiting its insulin pump business in the fall of 2017, according to J&J’s announcement:
“Animas has selected Medtronic plc (NYSE:MDT), a world leader in diabetes, as its partner-of-choice to facilitate a seamless transition for patients, caregivers and healthcare providers.
“Patients using an Animas insulin pump will be offered the option to transfer to a Medtronic pump.”
*Another Major Medtronic Win Amid Rising Competition
In another win for Medtronic, Roche Diabetes Care discontinued insulin pump sales in the US in 2016, and designated Medtronic as the preferred partner.
All the pumps do basically the same thing in the same way, anyway, said Mr. Kliff.
Meanwhile, the market is a tough one because it isn’t growing enough to comfortably accommodate all the competition, as demonstrated by J&J’s exit amid rising competition.
Mr. Kliff said Medtronic offers a huge advantage with payors because it’s at the top in the formulary – the list of prescription drugs/devices covered by insurance.
Tandem is disadvantaged, noted Stifel, because it doesn’t have contracts with major providers like Aetna, United Health and Cigna.
While the company is excited about its next generation product, t:slim X2, filings also note one of Tandem’s competitors recently announced two new products coming out that have financial incentives for adoption.
Importantly, Tandem is investing in more sales people and commercialization, which will require fresh infusions from more dilutive financing. Any prospect of profit appears to be years in the future.
Meanwhile, the institutions aren’t given Tandem much respect …
*Institutions To Tandem: No, Thanks
Big banks, retirement funds and other institutions show very minimal interest in the stock .. and positions are plunging by a whopping 7.7 million shares:
TheStreetSweeper agrees with Mr. Kliff, when it comes to Tandem.
“Tandem to me is like the Cleveland Browns in football … Yes, they play in the NFL. And yes, they play in the stadium and all that stuff,” he said. “But they don’t win.”
There’s just too much going against Tandem at this point to warrant sky-high prices. We expect this stock will drop to around $5 short-term, still a very generous valuation.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in TNDM and stand to profit on any future declines in the stock price.
* Editor’s Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to firstname.lastname@example.org.