Tandem Diabetes Care

Tandem Diabetes posted second-quarter revenue growth of 6% and approximately halved its negative earnings year over year. Management maintained its outlook, and shares barely bobbled.

Why it matters: Though the quarter was largely uneventful, we think Tandem continues to make progress on key initiatives that should support growth into the midterm, including integration with the DexCom G7 15-day continuous glucose monitor. The firm has also grown the proportion of sales running through the pharmacy channel to roughly 10% of US revenue in the quarter. Gaining familiarity and building a footprint in this channel is fundamental to the launch of tubeless Mobi in the future. As for tubeless Mobi, Tandem has submitted its application with the Food and Drug Administration and could receive approval by the end of year.

The bottom line: With Tandem firmly on track with our full-year expectations, we haven't changed our underlying assumptions, and our $20 fair value estimate is unchanged. With shares trading around $19, the stock is fairly valued from our perspective. We still haven't awarded a moat to Tandem, as we don't expect the firm to operate meaningfully in the black until 2029. Nonetheless, we see inklings of a moat in the form of intangible assets, including the proprietary data and algorithms that govern Tandem's automated insulin delivery system, Control-IQ.

Coming up: We think there's potential for Tandem to accelerate growth in 2027 once the tubeless Mobi is commercialized. However, it remains an open question in our minds whether the two-piece Mobi with rechargeable battery will offer a compelling user experience. If using tubeless Mobi is similar enough to Insulet's Omnipod, then Tandem would be in a strong position to challenge Insulet and convert more patients from multiple daily injections. If the user experience doesn't meet that offered by Omnipod, we'd expect 12 to 18 months of accelerated adoption before patient interest wanes.

We're reiterating our fair value estimate of $20 per share. We hold moderate expectations for the impending rollout of tubeless Mobi and the rechargeable Sigi patch pump. On one hand, these tubeless pumps could attract more users in the near term, especially as tubeless Mobi will offer seven-day wear. On the other hand, based on what we know of tubeless Mobi to date, Insulet's Omnipod franchise still offers a differentiated user experience that's particularly appealing to type 2 patients, and the company is expected to introduce its own longer-wear Omnipod in 2028.

We project average annual top-line growth of 7% through 2035, reflecting steady conversion of type 1 patients and improved penetration among type 2 patients—a segment that is extremely underpenetrated—along with the launches of the tubeless Mobi and Sigi by 2029. We expect the firm to deliver meaningful positive earnings beginning in 2029. While the rollout of tubed Mobi helped put Tandem back on a positive growth trajectory in 2024, we're wary of underlying demand in the type 1 market and the relatively weak conversion of de novo pump users--issues that could worsen as MiniMed introduces its significantly smaller Flex in 2026. We expect Tandem will once again find competitive conditions challenging whenever Insulet or MiniMed introduces innovative features.

As with other device makers still in the early innings of commercialization, we expect Tandem to continue investing in its commercial organization, especially as its pump portfolio expands. We currently project operating margin to hit 10% in 2035, driven by an estimated 720-basis-point gain in gross margin and an 840-basis-point improvement in selling, general, and administrative spending as a percentage of sales. Given that the firm appears to have sufficiently stocked its pipeline with new pump platforms, we don’t anticipate any further large acquisitions through the midterm. However, we have baked in a slight increase to capital spending starting in 2026, as we expect the firm will need to expand capacity to accommodate new products.

Despite the solid commercial adoption of Tandem’s t:slim pump franchise and increasing adoption of Mobi, we think the firm has yet to dig an economic moat. The firm remains a distant third in the pump market where MiniMed has dominated through its ability to pioneer meaningful innovation (especially its algorithms), and Insulet has been able to attract a greater proportion of new pump users through its disposable, tubeless format available through the pharmacy. Tandem has demonstrated that it can generally offer comparable durable pump technology and nip at the heels of MiniMed, but it needs more time to enlarge its base of users across its selection of pumps such that the firm can become profitable.

Different medical devices often enjoy high switching costs that provide a basis for economic profits over the long term. However, we think insulin pumps have not developed switching costs partially because users can measure how well their pumps keep their blood glucose within healthy ranges on a daily, and even near real-time, basis. In order to use an insulin pump, many patients (especially type 1 diabetes patients) pair it with a continuous glucose monitor to provide real-time readings on a smartphone or smartwatch. Current CGM systems also offer alerts that are triggered when blood glucose levels exceed or fall short of the healthy range at any time during the day or night. Thus, this reliance on CGMs offers patients a mechanism to constantly and objectively evaluate just how well the pump is controlling blood sugar. This ability to constantly “grade” pump performance and the fact that no pump can keep patients within healthy ranges all the time gives rise to users commonly switching between pump brands in a search to find one that works better. There is also nothing specific about the learning curve associated with pumps or the physical attachment to the body that gives rise to switching costs.

Reimbursement policies typically will cover one durable pump every four years, which fails to impose financial switching costs that would get closer to the 10-year time frame of economic profits that we’d expect to qualify for a narrow economic moat. At the end of the four-year period, users may also be interested in trying out some of the new innovations that have emerged since the purchase of the last pump. We think both of these dynamics contribute to the switching behavior that characterizes the pump market, even if reimbursement concerns may keep switching at bay during the four-year replacement cycle.

Despite the lack of a moat now, we believe Tandem may have the seeds of intangible assets that might eventually develop into a moat. The firm holds patents in the US as well as in other regions of the world. However, with insulin pumps and other engineered medical devices, competitors can often find ways to engineer another solution that sidesteps intellectual property boundaries. For example, we think a rival could also develop its own color touchscreen or a form factor to accommodate a smaller insulin reservoir without too much trouble. For this reason, we don’t view intellectual property as a particularly strong shield against competition in the medical device market.

Perhaps more importantly, Tandem has the potential to cultivate another intangible asset that is more defensible, in our view, 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. We contend that MiniMed, as the dominant pump leader, has already accumulated the most data since its pumps have been marketed since the mid-1990s, and we estimate significantly more type 1 diabetes patients have used MiniMed’s pumps over the years compared with Tandem and Insulet, which only entered the market in 2012 and 2005, respectively. We think this is a key reason why MiniMed has been able to consistently introduce new features that get the pump’s function closer to that of a native pancreas ahead of competitors—including the latest advance in closing the loop to automate mealtime boluses.

Nonetheless, if Tandem can continue to expand its base of pump users over time, we anticipate it could also use its collected data to improve its algorithms and enhance functionality to more closely resemble that of the pancreas.

From an environmental, social, and governance perspective, we think Tandem faces the greatest risk in product governance. Defective or malfunctioning pumps can potentially lead to serious, acute conditions such as diabetic coma among type 1 patients. Poor patient outcomes can also arise from misuse of the device, and this means Tandem must invest in resources to help educate patients on appropriate use. Outside of product-related issues, Tandem may see human capital risks as the firm, similar to other medical device makers, needs to hire and retain skilled engineers.

Tandem’s t:slim X2 features a low-profile, color touchscreen that is very user-friendly for patients new to insulin pumps.

Tandem has bulked up its product pipeline with its smaller, lower-profile tubed Mobi and is set to roll out a tubeless version of Mobi soon.

Outside of the type 1 diabetes market, there are also significant opportunities for growth in the insulin-dependent type 2 patient pool.

MiniMed arguably enjoys more accurate and advanced algorithms thanks to its far larger patient user base and proprietary data—a major reason why it remains a step ahead of Tandem in closing the loop.

Tandem is still struggling to move into the black a decade after launching its first pump.

Tandem has fielded several recalls over the last two years, raising questions about quality and product governance.