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Bull of the Day: Tandem Diabetes Care (TNDM)

Kevin Cook

Tandem Diabetes Care (TNDM) is a $2.7 billion medical device company that designs, develops, and commercializes products for people with insulin-dependent diabetes. The San Diego-based company is expected to have grown 2018 sales by over 60% to $164 million, while this year's forecast is for 37% growth to $225 million.

 

Tandem products include the t:slim Insulin Delivery System, which just got a big technology upgrade and an FDA approval last week. On Valentines Day, Tandem announced that the FDA classified the t:slim X2 insulin pump as the first in a new device category called Alternate Controller Enabled Infusion Pumps, or ACE pumps.

 

The approved indication for the t:slim X2 pump states that the pump is able to reliably and securely communicate with compatible, digitally connected devices, including automated insulin dosing software, to receive, execute, and confirm commands from these devices.

 

This new type of insulin pump is described as having "interoperable" technology for delivering insulin under the skin for children and adults with diabetes, meaning it can be used with different components that make up diabetes therapy systems, allowing patients to tailor their diabetes management to their individual device preferences.

 

Profits on the Horizon, After Shares Fall from $300 to $3

 

TNDM shares were already in the upper realms of the Zacks Rank before the expected announcement because the current sales ramp had analysts raising their earnings estimates with the 2019 consensus rising over 75% to a loss of just 77 cents.

 

This follows full-year 2018 EPS expected to come in near a loss of $3.22 (Tandem reports for Q4 on 2/26), which would also be 75% growth from 2017's loss of $12.87.

 

This acceleration in net income is a welcome event for TNDM investors, many of whom may have endured an uncomfortable ride in the past few years.

 

Five years ago, TNDM shares were trading over $300 after their November 2013 IPO. The company was also getting ready to post 3 consecutive years between 2015 and 2017 of average EPS losses near $25.

 

In that time, shares fell steadily all the way to under $3 in late 2017. You can imagine the pain for investors who were buying (and holding) all the way down based on analyst projections about future sales for the company's new insulin pumps.

 

But patient investors finally found some relief when the Zacks Rank spotted TNDM shares as having the potential of reversing the cash hemorrhaging.

 

As analysts re-worked their models, their estimates started rising in 2017 and forecasting a trough of losses. So TNDM became a Zacks #2 Rank Buy several times in the period from Q4 2017 through Q3 2018. And the stock rose from $2 to $52 by September.

 

Here's the Zacks proprietary Price & Consensus chart which plots changes in annual EPS estimates (lhs) against the stock price (rhs). I have circled the rising tide of estimates in 2017 for both that year (lower, darker blue line) and 2018 consensus (upper, lighter blue) which caused TNDM shares to become a Zacks Rank Buy...

 

 

Another weight on TNDM shares during the recovery was its battle against a Goliath of med-tech competition in diabetes, Medtronic (MDT). At one point, an equally-giant insurer's updated insulin pump policy, which expanded Medtronic's preferential agreement to patients age 7 and older, was seen as an enormous obstacle for our little David.

 

But some analysts believed the impact on Tandem's growing revenues would be temporary, as the prevailing cry from patients and physicians for more options, not less, would win the day. Those views are being validated now.

 

Investor and Analyst Reaction Since the FDA Approval

 

So far, the price action in the stock since February 14 has been solid, with strong buying volume pushing shares to within 50 cents of last September's 52-week high at $52.55. But actually, shares rallied all last week as some players obviously knew what was coming, with Feb 12 seeing 3.5 million shares trade on the move from $44 to $49.

 

Meanwhile, the analyst reaction has been light too. We should look forward to more investment banks starting coverage of TNDM this year. Here's what we've heard thus far, courtesy of TheFly.com...

 

Piper Jaffray analyst JP McKim kept his Overweight rating and $60 price target on Tandem Diabetes, calling the FDA announcement authorizing the first t:slim X2 interoperable insulin pump is a "nice win" for the company. The analyst says the decision allows the company to "go market as the world's first interoperable pump," adding that the feedback on Tandem also continues to be "very strong."

 

Robert Baird analyst Jeff Johnson raised his price target on Tandem Diabetes to $55 from $46 after the company received FDA approval of its t:slim X2 pump as an "alternate controller enabled," or ACE, infusion pump. Although the analyst did not raise his estimates, he believes the designation should further differentiate Tandem and de-risk the 2020 development timeline for t:sport, which he believes can help sustain the company's recent momentum. 

 

There has always been the risk that the insulin pump makers are made obsolete by a new oral diabetes medicine. Until those clinical trials are underway, we'll stick with good old-fashioned medical technology -- and its latest innovations -- to provide precision care and flexibility for diabetes patients.

 

Disclosure: I own TNDM shares for the Zacks Healthcare Innovators portfolio.

 

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