NVO - Tandem Diabetes Care: More Ozempic Roadkill

2023-11-06 06:26:33 ET

Summary

• Today, we take a look at Tandem Diabetes Care, whose shares have declined by 65% due to the belief new weight loss drugs will reduce the demand for insulin injections.
• The company develops and commercializes products for people with insulin-dependent diabetes, with its flagship product being the t:slim X2 insulin delivery system.
• TNDM's balance sheet is in good shape and management is counting on new product launches to drive sales growth and reduce losses going forward.
• Time to buy the shares or has the emergence of Ozempic and other GLP-1 drugs permanently damaged Tandem's story? An analysis follows below.

The three most harmful addictions are heroin, carbohydrates, and a monthly salary ." - Nassim Nicholas Taleb

Today, we put Tandem Diabetes Care, Inc. ( TNDM ) in the spotlight for the first time. The trigger for the 65% decline in its shares year to date is the growing belief that GLP-1 increasingly popular weight loss drugs such as Ozempic and Wegovy by Novo Nordisk ( NVO ) and Mounjaro by Eli Lilly ( LLY ) will significantly cut the demand for insulin injections in people with diabetes. The company just reported Q3 results at the beginning of this month. Is the recent dip in the stock a good investment opportunity? An analysis follows below.

Company Overview:

The medical device concern is headquartered in San Diego, CA. The company is focused on developing and commercializing various products for people with insulin-dependent diabetes both here in the United States and globally. Tandem's flagship product is the t:slim X2 insulin delivery system, a pump platform that comprises t:slim X2 pump, a 300-unit disposable insulin cartridge, as well as an infusion set. The stock currently trades just north of $15.00 a share and sports an approximate market capitalization of just over $1 billion.

Third Quarter Results:

Tandem Diabetes posted its third quarter numbers on November 1st. The company posted a GAAP loss of 51 cents a share as revenues fell just over nine percent on a year-over-year basis to $185.6 million. The loss was in line with the consensus, but revenues came in around $7 million light.

What send the shares much lower after the report was company guidance, however. Management now sees FY2023 sales of $765 million, $575 from the United States and the rest globally. The analyst FY2023 consensus at the time was a bit over $795 million.

The company is betting on new product launches like t:slim X2 with DexCom's ( DXCM ) G7 and Abbott's ( ABT ) FreeStyle Libre sensors and especially the launch of its Tandem Mobi, a much small and wearable insulin pump, to reignited growth in the coming quarters and years. The latter's release began last month in the U.S.

Analyst Commentary & Balance Sheet:

Since third quarter results were posted, Wells Fargo ($21 price target), Robert W. Baird ($20 price target, down from $32 previously) and Stifel Nicolaus ($17 price target, down from $33 previously) while Barclays ($39 price target, down from $62 previously), Lake Street ($60 price target), Piper Sandler ($25 price target, down from $40 previously) and TD Cowen ($22 price target, down from $34 previously).

Just over 13% of the outstanding float in the shares are currently held short. Four insiders including the CFO bought just over $500,000 worth of shares collective in May and September of this year. A different insider sold just over $410,000 worth of shares in early March.

The company ended the third quarter with just under $500 million worth of cash and marketable securities on its balance sheet after posting a GAAP net loss of $33 million for the quarter. The was an improvement from the $49 million GAAP net loss of 3Q2022. The company also has nearly $285 million in convertible senior notes on its books.

Verdict:

The company lost $1.47 a share in FY2022 on just over $800 million in revenues. The current analyst firm consensus sees similar losses in FY2023 as sales slip in the low single digits. In FY2024, losses are projected to be pared to just under a buck a share on 10% revenue growth.

As I noted in the summary of my recent article around Tandem's competitor Insulet Corporation ( PODD ) .

I have been most amused by the selloff in these names as well as such diverse economic sectors as snack food concerns on the belief that the new GLP-1 drugs like Ozempic and Wegovy are going to turn America into a much more svelte nation. In my opinion, that has as much chance of happening as a vaccine developed in record time against a quickly mutating virus being 95% effective ."

It should be noted that Insulet Corporation moved significantly higher Friday after posting its Q3 results and updating guidance .

What the emergence of Ozempic and other GLP-1 drugs did do it to reset the narrative around insulin pump concerns. Investors are likely to be less tolerant investing in names that are posting losses than they once were, and the spike in interest rates over the past year also has been a headwind for these profitless small cap names. Insulet, it should be noted, is profitable.

I don't see that changing and Tandem Diabetes at least a couple of years away before it possibly becomes profitable. Management is also projecting $95 million of non-cash, stock-based compensation expense in FY2023 which seems exorbitant for a company with just over a $1 billion market capitalization. Therefore, I am passing on any investment recommendation on TNDM, despite the stock's large recent pull back.

Sweetness is not in itself unhealthy, we simply eat only the most unhealthy kind of sweetness. " - Giulia Enders

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