Tandem Diabetes: Top-Line Growth Remarkable, Not At 0.04% FCF Yield (NASDAQ:TNDM)

Funding Abstract

As the brand new yr pushes ahead, I’ve maintained publicity to selective names with the diabetes administration pocket of the med-tech sphere. My scores on Insulet (PODD) and DexCom (DXCM) and Medtronic (MDT) [via its MiniMed device] stay unchanged. Try protection on the previous two right here:

• Insulet [Rate buy]
• DexCom [Rate buy]

On the similar time, I had debated advert nauseam in FY22′ on the way to doubtlessly allocate in direction of Tandem Diabetes Care, Inc (NASDAQ:TNDM). Within the publication, titled “Overpriced, Underdelivering” I advisable a impartial view and opted to attend on the sidelines, till the corporate demonstrated significant upsides in its put in base and affected person base and the way this transformed by way of to the highest and bottom-lines. The corporate posted its This autumn and FY22′ numbers final week, and quoting the CEO’s language on the decision, “gross sales efforts targeted on increasing the worldwide insulin pump market in addition to introducing the good thing about TNDM’s expertise to current pumpers”. The corporate’s newest numbers have been one other repeat of this, with a higher share of complete income obtained from its worldwide markets, with margin compression all through the P&L. Internet-net, while top-line momentum has been exceptional for TNDM, with a rising value of capital, mixed with unsupportive valuations, I charge TNDM a maintain.

Fig. (1) TNDM Weekly Value Motion, FY21–date

TNDM FY22 analytics

To additional elaborate on TNDM’s FY22′ numbers, it was one other blended consequence all through the P&L and money flows. It clipped full-year gross sales exceeding $801mm, reflecting a doubling in top-line gross sales during the last 3 years. Underscoring the upside, TNDM’s pump merchandise have been the important thing driver of development, accounting for ~54% of turnover. Up to now, the corporate has been increasing its presence within the insulin pump market, which it says is “simply over 35% penetrated within the U.S. and usually solely 10–20% within the geographies [it] serve exterior the U.S.”. Seeking to This autumn particularly, it clipped top-line gross sales of $221mm, booked from 36,000 pump shipments worldwide, a 12.5% quarterly improve from the final publication.

Breaking down the corporate’s 2022 gross sales by geography, the next factors are noteworthy:

• TNDM’s U.S. gross sales have been $589mm, underscored by development in provide gross sales that witnessed a 20% YoY improve within the U.S. put in base, now totalling 290,000 sufferers. TNDM can also be seeing robust renewal numbers, with a c.60% improve in renewal shipments for the yr. Added to that, >50% of shoppers whose warranties expired in FY22′ already renewed, creating a possible tailwind for the next durations. Total, the corporate shipped 84,000 pumps within the U.S. in 2022, representing a mean sale worth (“ASP”) of $6,848.80. Importantly, on its $166mm in U.S. revenues, it shipped 24,000 items, subsequently at an ASP of $6,916 [above $6,250 in Q2 FY22′]. Therefore, the unit economics started to enhance in direction of the again finish of FY22′, illustrating momentum in that regard.
• Outdoors the U.S. (“OUS”), TNDM’s gross sales in FY22′ got here to $212mm, rising 19% YoY. This development was additionally underlined by a 35% improve in provide gross sales, the place the OUS put in base reached 130,000 by the tip of the yr. Moreover, TNDM benefited from total worth will increase right here as properly. Nonetheless, while placements grew ~20% YoY, precise pump shipments have been flat YoY. Administration say the distinction pertains to the variation and timing of orders from TNDM’s distributors, whose ordering patterns have been impacted considerably by logistics challenges with the availability chain headwinds from final yr. Up to now, the corporate expects to see larger order fulfilment relative to demand when it transitions to its European distribution centre, which started in late Q3 FY22′. Moreover, TNDM has been rising its OUS income market, with the income share from ex-U.S. gross sales rising since FY18′ [Figure 2].

Fig. (2)

Trying on the marginal evaluation, full-year gross margin compressed by 200bps to 52%. That is shocking given the upper ASP proven above, and, given the corporate’s liquidity preservation measures all year long. Alas, it wasn’t resistant to inflationary pressures, and this could possibly be a significant headwind to income and NOPAT upside trying down the road, ought to the price of uncooked supplies stay excessive this yr. Transferring down the P&L, working margin pulled to adverse 12%, pressured by a $31mm cost in Q3 tied to the closing of the Capillary Biomedical acquisition, together with a $12mm outflow acknowledged for facility consolidation prices. Backing these out, I got here to an adj. EBITDA margin of seven% for the yr.

In the meantime, with respect to money flows, TNDM generated $50mm in CFFO for the yr, and, adopted by $17mm from its worker inventory applications, was in a position to allocate $35mm in direction of financing its strategic development initiatives. It is necessary to reconcile TNDM’s GAAP earnings to replicate a more true measure of the place it’s investing for future development, particularly in its R&D, after which evaluate this to the adj. working earnings afterwards. Doing so, we see the corporate has exhibited a constructive ROIC since FY19′ onwards [Figure 3], however the problem in FY22’–date has been the rising value of capital, given the macro local weather. Because of this, the corporate’s financial revenue for FY22′ [ROIC – WACC hurdle] was adverse 86 foundation factors, beneath a formidable 8.86% the yr prior.

Fig. (3)

Waiting for the approaching yr, TNDM expects to generate revenues of $900mm on the higher vary, calling for a development charge of ~12% on the prime line. I might observe this development charge would not embody gross sales from anticipated new product launches, so we may see some upside on this if the corporate converts on its pipeline. I might additionally spotlight that the steerage vary additionally takes under consideration some timing impression associated to its distribution centre in Europe increasing. U.S. non-GAAP gross sales are projected at $650mm–$660mm, assuming that the macro atmosphere would not flip bitter. In the meantime, OUS are forecast for $240mm on the higher certain, baking in a $25mm headwind for its Europe distribution centre mentioned above. It appears to those top-line numbers on an adj. EBITDA margin of~ 5%–6% of turnover. Importantly, the R&D funding for its new acquisitions is anticipated to come back in at ~300bps of gross sales.

Future development levers in TNDM’s development engine

Seeking to the approaching durations, there are two major speaking factors that have to be factored into the funding debate:

1. TNDM not too long ago introduced a pipeline of latest improvements which can be scheduled to maneuver from growth part to potential commercialization. The corporate is at present targeted on the business launch of the t:slim X2 with G7 integration, which is predicted to be obtainable worldwide within the latter half of Q2 this yr. With this integration, TNDM goals to have first transfer benefit with G7 integration in an AID system. Oftentimes, I’ve seen diabetes administration units incur notable delays by way of the FDA course of. So if it will probably roll this out, it will likely be a significant tailwind in my estimation. The corporate plans to ship the software program replace to its current in-warranty t:slim X2 prospects, for no cost.
2. Along with its near-term development initiatives, TNDM has scientific momentum in FY23′ price mentioning. The corporate has began enrollment in its 2nd feasibility research for Management-IQ 2.0. Additional, the corporate can also be within the woks to start a pivotal research to help a kind 2 diabetes indication for its Management-IQ phase. It is also price noting that the corporate’s work with Abbott (ABT) to combine the t:slim X2 with its FreeStyle Libre phase. As a aspect observe, ABT is at present awaiting FDA clearance for Libre for an automatic insulin supply indication, so this can be a level to observe going ahead.

Valuation and conclusion

Any hope of a purchase name falls aside with the valuation debate for TNDM in my estimation. The inventory trades at >5x guide worth and is priced at greater than 46x trailing CFFO, while buying and selling at a FCF yield of simply 0.04%. But, it’s priced at a reduction to the trade at 2.4x ahead gross sales, and I’d anticipate to see TNDM develop gross sales by ~2.5x over my 3-5 yr funding horizon. Nonetheless, these aren’t enticing numbers on face worth, and I might anticipate TNDM to face continued pressures with respect to valuation upside, till it will probably begin to feed extra down the P&L and enhance its bottom-line fundamentals. Additional, that its ROIC was behind the hurdle charge this yr, the expansion TNDM achieved wasn’t accretive to shareholder worth. Lastly, the quant system has it rated as a maintain as properly, additional supporting a impartial view.

Fig. (4)

Internet-net, TNDM’s dedication to innovation and growth of latest merchandise within the diabetes care house bodes properly for the corporate’s future development prospects. While momentum garnered so far has been exceptional on this date, I consider the corporate has extra to do to exhibit its propensity as a viable funding case given the abundance of selective alternatives obtainable to buyers proper now. Clamping the purchase case are present valuations, and the shortage of long-term profitability while the price of capital continues shifting larger. Internet-net, this warrants a maintain.