Tandem Diabetes: Initiating Coverage With No Moat and $34 Fair Value Estimate

In initiating coverage on Tandem Diabetes TNDM, we peg its fair value estimate at $34 per share. Despite the solid commercial adoption of Tandem’s t:slim pump franchise, we think the firm has yet to dig an economic moat. The firm remains a distant third in the pump market where Medtronic has dominated through its ability to pioneer meaningful innovation and Insulet has been able to attract a greater proportion of new pump users through its disposable, tubeless format. Though Tandem has made a splash in the insulin pump market as the latest entrant, the firm is still endeavoring to establish itself as a major competitor and reach profitability. Also, on its rather lengthy path from the initial 2012 launch of its original t:slim pump to consistent positive earnings, Tandem still has a few years to go, from our perspective.

Similar to other pump makers, Tandem seeks to introduce new innovation every few years. On the whole, the firm has done a credible job of rolling out some meaningful improvements to its pumps over the last decade. In particular, it has made its pumps smaller and more discreet, incorporated a user-friendly color touchscreen, and integrated the pump function with continuous glucose monitors from Dexcom. However, the firm’s innovations have primarily kept pace with the competitive set and have less often leapfrogged ahead to offer the truly novel.

Nonetheless, we believe Tandem may have the seeds of intangible assets that might eventually develop into a moat. In particular, Tandem could cultivate a defensible intangible asset through its collection of proprietary insulin pump data that is ultimately used to create more accurate and predictive algorithms that govern the automatic dosing of insulin. Delivering more accurate blood glucose management along with an easy user experience could give Tandem firm footing in the pump market. However, it needs more time to enlarge its base of users such that the firm can become profitable.