Tandem Diabetes Care, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Tandem Diabetes Care, Inc. is a medical device company focused on the design, development, and commercialization of innovative technology solutions for people living with diabetes, primarily using its insulin pump platform.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Tandem Diabetes Care, Inc. (TNDM) operates in the dynamic and highly regulated medical device industry, primarily focusing on the development, manufacturing, and commercialization of insulin pumps and related technologies. The company is primarily known for its touchscreen t:slim X2 Insulin Pump, a product which they continuously improve and upgrade.

Business Overview

Tandem Diabetes Care operates primarily in the U.S. but also has a growing presence in international markets, including Canada, Australia, parts of Europe, and New Zealand. It designs and manufactures advanced insulin delivery systems aimed at improving the lives of people with diabetes. Its key products include the t:slim X2 insulin pump, related infusion sets, and continuous glucose monitoring (CGM) systems integration.

  • Revenue Distribution:
    • The majority of TNDM’s revenue comes from sales of its insulin pumps, primarily the t:slim X2.
    • Recurring revenue is generated from the sales of consumables, such as cartridges and infusion sets, which are necessary for the ongoing operation of their pumps.
    • The company also generates revenue from sales of software and related technology solutions, like the t:connect mobile app which is used for remote monitoring.
    • International sales are increasingly becoming a larger part of revenue
  • Industry Trends:
    • The diabetes device industry is witnessing continuous advancements in technology, such as closed-loop systems, which automate insulin delivery and better integration with CGM systems.
    • Digital health solutions and remote monitoring technologies are also becoming increasingly important for improving diabetes management.
    • The market is experiencing a global increase in diabetes prevalence, especially type 2 diabetes, driving higher demand for medical devices.
    • Regulatory requirements are complex and constantly evolve, and companies must dedicate resources to compliance.
    • There’s a trend toward personalized diabetes treatment approaches, which increases demand for highly effective and convenient delivery methods.

Competitive Landscape

Tandem competes in the dynamic medical devices industry and specifically with other insulin pump companies. Competitors range from Medtronic (MDT) to Insulet (PODD). Each company has its own advantages, such as product design and innovation as well as market presence and economies of scale. The competitive advantage in this business has been: - Brand Name. Brand name is very important for medical devices, but as the technology is relatively new, so branding is still forming. Currently, it does not present a strong barrier to new entrants. - Innovative Products. Innovative products, such as interoperable systems, that require FDA approval. Once FDA approval is granted, there is a “mini-monopoly” advantage due to the barriers to entry and complexity in the industry. This is a good barrier, but it is not permanent.

  • Quality of support. Companies that offer better service, training, and support services tend to garner a bigger customer base.
  • Economies of Scale. Larger companies might be able to spread cost over greater volume of production.

Financials

Tandem’s financials reveal a company in a transition from hyper-growth to a more sustainable growth. - Revenue: Tandem’s revenues have demonstrated substantial growth over the last few years. For example, revenues increased 43% from 2021 to 2022, and 27% from 2022 to 2023. This reflects strong demand for its pumps and related technologies. Much of the recent revenue comes from growth in United States due to launch of the newer technology pumps, while international revenues increased due to broader geographic presence.

  • Margins: The company’s gross profit margins have been fairly stable around 50% which is a decent number. A higher cost of goods sold that include manufacturing costs and component costs are a big factor in their gross margins. - Operating Expenses: Operating expenses, particularly R&D and SG&A, have been increasing over the years to support innovation and market expansion. To improve and increase efficiencies, TNDM is currently reducing costs via production efficiencies and better bargaining power with its suppliers. They are also reducing costs through digitalization and automation to reduce human costs. - Net Income: TNDM is currently not profitable. The company has had a trend of decreasing net losses over the past years, however, it is still not turning a profit. The latest earnings report (September 2024), however, showed a positive income of 0.21 dollars EPS, signaling a possibility of turning profitable in the near future. They are also guiding for profitability by 2026. - Balance Sheet: - TNDM has current assets of $737.3 million (cash $582 million), while short term and long term liabilities of 816 and 1767 million, respectively.
    • Equity is at -819 million, signalling that the company is not yet profitable. It does show improvement, however, as it previously was at $-1.2 billion.
    • TNDM is working to refinance part of its debt, which is currently a combination of long-term and convertible debt.
    • Cash Flow: Even though TNDM isn’t profitable, it is a cash generating company. Free cash flow in 2022 was around -17 million, while in 2023 it showed 77 million and the guidance for 2024 is to more than triple that, indicating strong operational performance.
- **Recent Developments**: Management has focused on improving efficiency and cost structure with a goal to reach profitability. For example, they mentioned "Project Fusion" which targets improving margins by at least 10%. The latest earnings report showed positive developments in net income. Additionally, international expansion has continued. Management is positive and bullish about long-term outlook, especially with their innovative products. 

- **Risks**: A big threat for TNDM is the regulatory environment, and the complexity for approval from regulatory bodies. There is also the risk of competition, where many major competitors are trying to take market share and create better or cheaper insulin pumps. There are risks from currency fluctuations and the fact that the company operates across many countries. The risks that are mostly associated with smaller companies are also valid for TNDM: the risk of management not executing on strategies, the risk of capital allocation, and the risk of the company not growing in revenues.

Moat Assessment: 2 / 5

Tandem’s moat is currently quite small, not enough for a good rating. It is mainly a combination of:

  • Innovative Products: TNDM’s product development efforts allow them to continue upgrading their products and have unique features. The fact that their product is considered one of the best in the industry by experts does help the moat. But since the market is quite fast-paced, this advantage can be relatively short-lived, thus, it will not be sufficient to earn a good rating.
  • Customer Lock-In: Once a customer has gone through training and used the platform, it can be a big deterrent for them to switch to other products. The cost of switching would include not only time but the need for learning how to use a new product, potentially making the company’s product more sticky.

Understandability: 3 / 5

The company’s products and business model are easy to understand. They focus on manufacturing and selling insulin pumps. However, valuing TNDM requires some financial and analytical understanding, which makes it slightly more complicated than a standard business.

  • 1: Company that sells one product. Very easy to understand
  • 2: Company that provides simple, easy-to-understand services.
  • 3: Company that is easy to understand, but has a bit of complexity due to the market/products/customers
  • 4: Company that has many moving parts, making it very hard to track performance and profitability
  • 5: Company is very technical and/or complicated to understand from an industry/products standpoint.

Balance Sheet Health: 4 / 5

TNDM’s balance sheet shows it is not a very profitable company yet, because equity is negative. However, it does have lots of cash, which allows it to easily fund its operation while they reach profitability.

  • 1: Company is a zombie, not earning revenues, not capable of repayment
  • 2: Company is having many difficulties due to debts or other obligations, the future of the company is in doubt
  • 3: Company is having a decent balance sheet, however, has concerning liabilities/obligations and could require some form of restructuring/funding
  • 4: Company has a healthy balance sheet, with limited liabilities and strong financial backing.
  • 5: Company is a financial powerhouse with plenty of assets, revenue, cash, and zero or minimal obligations

Risks to Moat and Business Resilience

Tandem faces several risks that can erode its competitive position and threaten its resilience:

  • Technological Obsolescence: The diabetes technology landscape is rapidly evolving, and a better or cheaper pump from a competitor could quickly displace TNDM’s offering. TNDM needs to make sure that its technology is still relevant and superior to others.
  • Pricing Pressure: As the market becomes more competitive, pricing pressure can reduce margins and profitability.
  • Regulatory Hurdles: The complex and ever-changing regulatory landscape can create delays and impact the adoption of new products. Furthermore, regulatory changes can significantly increase the cost of operation and thus hinder profitability.
  • Increased Debt: TNDM currently has high debt levels, which it is trying to alleviate. If interest rates increase, or if they face trouble in rolling over current debt, they might be facing big troubles.
  • Manufacturing and Supply Chain Risks: Disruption to the supply chain for microchips, batteries, and other components, would have a big effect on company’s operations. TNDM sources from multiple locations and suppliers, which does help in minimizing the risk but might not completely eliminate it. * Competition: As previously stated, the medical equipment industry is very competitive and big players like MDT and PODD could push smaller players like TNDM out of the market by innovating at a faster pace and undercutting on prices, making it very hard to compete.
    • Management/Execution: Even if TNDM has better products, if their management team fails to execute their plans or allocate resources, they might be unsuccessful in the long run.

Despite these risks, TNDM has a decent level of business resilience due to:

  • Recurring Revenue Stream: A large part of TNDM’s revenues comes from recurring sales of consumables, making revenue more stable.
  • Technological Expertise: TNDM has developed leading diabetes technologies, and have shown that they are capable of innovation and staying abreast of the industry trends.
  • Growing Market: The market for insulin pumps is poised for growth because of the growing rates of diabetes and better technologies for treatment of diabetes.