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Tandem Diabetes (TNDM) made its public debut on Thursday, November 14. Shares of the medical device company focused on diabetes ended their first day with gains of 28.4%.

After witnessing strong returns, the market is valuing Tandem Diabetes a bit rich given the modest revenues and high losses. That being said, the company offers strong growth, but it depends on the duration and pace of growth, whether the current valuation is justifiable at the moment.

I remain on the sidelines.

The Public Offering

Tandem Diabetes is a medical device company focused on the design, development and commercialization of products for people suffering from insulin-dependent diabetes.

Tandem's flagship products is the t:slim. The technology platform features the patented Micro Delivery Technology, a small pumping mechanism which draws insulin from a bag within the pump's cartridge. This is opposed to relying upon a syringe and plunger mechanisms.

The US Food and Drug Administration has cleared t:slim in November of 2011, making it one of the first insulin pumps being cleared under the FDA's Infusion Pump Improvement Initiative.

Tandem Diabetes sold 8.0 million shares for $15 apiece, thereby raising $120 million in gross proceeds. All of the shares were being sold by the company, with no shares being offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $13-$15 per share. Shares were eventually sold at the high end of the midpoint of the preliminary initial public price range. Note that the company furthermore boosted the offer size from 7.1 million shares to 8.0 million shares.

Some 39% of the total shares were offered in the public offering. At Friday's closing price of $21.84 per share, the firm is valued at $448 million.

The major banks that brought the company public were Bank of America/Merrill Lynch (BAC), Piper Jaffray, Deutsche Bank and Stifel.

Valuation

Tandem Diabetes operates in a large market as in the US alone there are some 6.0 million people which suffer from type 1 or 2 diabetes and are insulin-dependent, requiring the daily administration of insulin.

After t:slim has been cleared in the third quarter of 2011, sales commenced in the third quarter of 2012. Ever since, Tandem Diabetes has shipped a cumulative 5,100 pumps.

The firm now employs 307 workers, and sees rapid expansion going forwards, thanks to the demonstrated benefits of the t:slim and the shortcomings of other therapies.

For 2012, Tandem Diabetes generated annual revenues of $2.5 million compared to none in 2011. Note that third quarter revenues totaled $0.2 million that year, and fourth quarter sales amounted to $2.3 million. Net losses for the year came in at $33.0 million.

Revenues for the first nine months of this year totaled $18.8 million, as net losses widened to $39.5 million.

The company operates with $15.5 million in cash and equivalents. Total debt stands around $29.3 million, resulting a net debt position of around $14 million.

Tandem Diabetes stands to receive $120 million in gross proceeds from the offering. The net proceeds of little over a $100 million are used to finance the ongoing losses and result in a net cash position of around $85 million.

With the equity in the business being valued around $362 million, Tandem Diabetes' equity is valued around 15 times 2013's annual revenues, assuming revenues of $25 million are within reach. This revenue guidance seems conservative given the strong growth throughout 2013.

Investment Thesis

As noted above, the offering of Tandem Diabetes has been a success. The company priced the offering at $15 per share, some 7.1% above the midpoint of the preliminary offering range. Ever since, shares have seen a decent first day jump, followed by strong price action on Friday. At this point shares are trading some 56.0% above the midpoint of the preliminary offering range.

Investors are cheerful. Not only do many people in the world suffer from diabetes, this number is expected to growth further into the future, according to the International Diabetes Federation, as found in Tandem's S1-Filing. Within this growing potential market, relatively few people are using insulin pumps, with most people relying on manual self-administration. This number is expected to grow sharply given the benefits of automatically-administered insulin.

There are some risks however. This includes the risk that Tandem's is a "one-trick-pony", operates in a competitive industry and relies on third-party distribution. Failure of the device and the relative high cost of around $4,000 per pump, could slow adoption.

That being said, shipments rose sharply from 852 in the first quarter to 1,851 by the third quarter. This implies a current annual run-rate of around $30 million in revenues, not enough to report profits, by a large margin. As such adoption would have to increase much further and at a continued high pace. Given that I have little visibility in these future trends, I remain cautious and stay on the sidelines.

I will keep a close eye on the first quarterly report, to monitor pump shipments, to possibly change my stance going forwards.

Source: Tandem Diabetes - Strong Debut Of This Medical Device Public Offering