Insulin pump maker Tandem Diabetes Care (TNDM 5.05%) has secured an FDA OK that puts it on track to challenge Medtronic (MDT +0.26%) for the lead in the emerging market for closed-loop insulin systems. Is Tandem Diabetes stock a buy?
A little background
Produced by beta cells in the pancreas, insulin is necessary for removing glucose from the bloodstream so it can be stored in the liver and muscles for energy.
Image source: Getty Images.
With diabetes, patients either don't produce insulin (type 1) or they develop a resistance to the insulin they do produce (type 2).
Type 1 diabetes is normally diagnosed in childhood and is thought to be caused by genetics or environmental factors that result in the immune system attacking beta cells. Occurring later in life, diet and smoking is thought to contribute to the onset of type 2 diabetes.
Although type 1 diabetes is less common than type 2 diabetes, it still represents a 1.5 million addressable patient population in the United States. Currently, there are about 30 million Americans with type 2 diabetes and by 2030, the number of Americans with diabetes is expected to reach 55 million.
Because type 1 diabetics don't produce insulin, they require more intensive insulin treatment. Historically, managing type 1 diabetes has involved multiple finger sticks per day to measure blood sugar levels, followed by insulin injections when necessary. Although type 2 diabetics don't always require insulin at first, most patients will need insulin injections eventually.
A new approach to managing diabetes
Increasingly, type 1 patients are turning away from traditional finger sticks and insulin injections. Instead, they're embracing continuous glucose monitors (CGMs), such as those made by DexCom (DXCM +1.28%), and insulin pumps, such as those made by Tandem Diabetes Care.
CGMs track blood sugar over time, providing diabetics with greater insight into changing trends in their blood glucose levels. Insulin pumps can be affixed to the body to provide insulin at regular intervals based upon glucose readings.
The two devices have been used by patients separately to manage their disease for years, but technology is advancing that's allowing these devices to work together in a system that automates glucose measurement and insulin dosing.
In 2016, Medtronic's MiniMed 670G became the first of these coordinated, closed-loop systems to secure an FDA go ahead. The MiniMed 670G, which includes a Medtronic CGM, insulin pump, and software, can suspend insulin if predicted blood sugar levels appear too low.
The MiniMed 670G was officially launched in the summer of 2017 and demand for it is accelerating. Exiting the most recent quarter, there were over 70,000 people using the MiniMed 670G, up from 20,000 people in the prior quarter.
Let the competition begin
Medtronic's monopoly of the closed-loop system market is quickly coming to an end.
In August, Tandem Diabetes plans to make a new feature called Basal-IQ available to users of its t:slim X2 insulin pump that will stop the pump from delivering insulin when CGM readings predict insulin levels in the future will be too low. Once this feature is available, users will be able to create a system like the MiniMed 670G that combines DexCom's latest CGM, the G6, with the t:slim X2 to eliminate finger sticks and automate monitoring and insulin dosing.
It remains to be seen if Tandem Diabetes can outsell Medtronic, but Tandem's system does have some advantages. Tandem Diabetes t:slim X2 pump is 38% smaller than the MiniMed 670G and the sensors for DexCom's G6 can be worn for 10 days, rather than seven days for Medtronic's CGM. Also, Tandem Diabetes solution essentially does away with fingers sticks, while finger sticks are still necessary to calibrate the MiniMed 670G.
What it means to investors
Medtronic doesn't reveal exactly how much money it's making on the MiniMed 670G, but the system costs thousands of dollars and growing demand for it is one reason why Medtronic's expects double-digit diabetes revenue growth this fiscal year. For perspective, that division contributed $2.1 billion to Medtronic's top-line last fiscal year.
Tandem Diabetes Care is a much smaller company. In Q1 2018, it shipped 4,444 insulin pumps, up 58% year over year, and its sales totaled $27.3 million, up 44% year over year. Over the past 12 months, Tandem Diabetes sales were $116 million.
TNDM Revenue (TTM). Data source: YCharts.
Since Medtronic exited last quarter with 70,000 MiniMed 670G users, winning away even a little market share could be financially significant to Tandem Diabetes; especially because it's still losing money. Despite its sales growth, Tandem Diabetes reported a net loss of $32.7 million in the first quarter of 2018.
Tandem Diabetes is guiding for sales of between $132 million to $140 million, up 23% to 30% from 2017, but I suspect that forecast will increase now that the FDA's given its automated insulin system the OK.
In the past, management has said it can break even on a cash flow basis once it reaches 80,000 installed pumps, which is something it hopes to achieve in the second half of next year. A good launch of its new system this summer could allow it to pull that timeline forward and if so, investors could be rewarded with profits sooner than previously expected.
Overall, Tandem Diabetes' opportunity is big enough to have me thinking it's a stock worth buying, however, it and Medtronic won't have this market all to themselves forever. New closed-loop systems from Insulet and Bigfoot Biomedical could be available in a year or two, so investors will want to pay close attention to their progress.
