If you’ve been with Tandem Diabetes Care (NASDAQ:TNDM) since in the early innings of its massive rally in April, you really enjoyed the over 13 percent rally on Friday. The main cause was the FDA approval of Tandem’s t:slim X2 Insulin Pump with Basal-IQ.
But the company’s competitor also won the FDA’s approval for its implantable glucose sensor, further lifting Tandem’s stock in the process. Tandem will, without question, further benefit from this growth in diabetes care.
On June 21, the FDA approved Senseonics Holdings’ (NYSEAMERICAN:SENS) Eversense Continuous Glucose Monitoring (“CGM”) System. No other company has an implantable glucose solution on the market. Patients using Eversense will have continuous monitoring for up to three months. The product’s primary purpose is to give patients a way of continuously watching their glucose levels. Current sensor solutions suffer from improper use, lack of compliance, or a lack of access to the technology. Senseonics is betting that these people will choose this medical device because of its ease of use and the convenience it brings.
But of course, the FDA’s approval for Tandem’s t:slim X2 Insulin Pump with Basal-IQ on the same day was the primary stock driver.
The device uses predictive technology to help reduce the frequency and duration of hypoglycemia, a low glucose event. The pump automates the delivery of insulin and may be used by patients as young as six years of age. Tandem will launch this new product in integration with the DexCom (NASDAQ:DXCM) G6.
Existing t:slim X2 customers can acquire the Basal-IQ feature by simply updating the device over-the-air. This upgrade will be available in August of this year.
Tandem Stock’s Growth Isn’t Priced In
Tandem’s t:slim X2 has a moat: it predicts the glucose levels in patients and suspends insulin delivery when low glucose is predicted. When glucose levels start moving higher, the device resumes delivery.
When the TAM (total addressable market) of type 2 diabetes is $64 billion, double the level from the year 2016, Tandem’s revenue potential is clearly significant. At a recent intra-day high of around $25 a share, TNDM stock may keep trending higher.
Tandem is expected to grow its revenues by 36% this year and another 28% next year. But analysts are not yet on board with the stock just yet. The average price target (per Tipranks) is $18.67, which implies a downside of around 20% from current prices.
Still, the t:slim X2 offers patients a level of convenience that is not found in other solutions. Customers don’t even need to use finger sticks to calibrate the device. It is smaller than other devices on the market and holds 300 units of insulin.
In February, Tandem reported that subjects in the 103-participant study lowered their glucose levels by 31 percent compared to the control group. More importantly, patients cut the time spent in a low glucose event. Patients reported that because the solution was easy to use, it implied that Tandem contributed positively to keeping their glucose levels low.
The Bottom Line on Tandem Stock
Even though the average price target on TNDM stock is $18.67, that’s already up from 15.75 on Friday.
Fundamentally, Tandem’s valuation at 10 times sales could accommodate for a higher multiple, provided the company sells the device in growing numbers every quarter. A 5-year DCF Revenue Exit model assumes that at a terminal revenue multiple of between 5.8 times and 6.8 times, the stock has a fair value of around $22 a share.
As of this writing, Chris Lau owned no positions in the aforementioned securities.
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