Before we get into why TCMD is fundamentally a broken company that is a short, we’d like to point out a massive red flag: ~40% of the company is owned by 2 venture capital firms: Galen and Radius. Based on our diligence, one has been invested in TCMD for ~4 years and the other for ~9 years. Here’s the red flag: in November 2016, TCMD filed a S-1 to sell more equity. The company has publicly told investors they were seeking to sell ~2M shares. Of these ~2M shares TCMD wanted to sell, a significant amount of it were shares owned by the insiders. Just to be clear, the insiders are likely Galen and Radius, both with board seats and theoretically perfect information of how TCMD is doing. Less than 1 month of the S-1 filing date, TCMD withdrew this equity financing because there was not enough interest. Here’s the set up: if Galen and Radius were able to strong-arm TCMD to sell their shares in November 2016 but could not because there was minimal demand or interest from the public markets, then what do you think happens when Galen and Radius are able to sell their shares after their window opens? Earnings occurred recently 2/27/17 and the window should be open soon if not already. And giving the liquidity of this stock, it won’t take a lot for the stock to be crushed.
Outside of this red flag, here are the fundamental reasons why we are short TCMD:
It sells an undifferentiated product called Flexitouch that is a commodity (an ultra-expensive air compression wrap that you Velcro around your legs or arms)
Patents expire this year (2017)
Even without patents, the barriers to entry are incredibly low: look at the number of competitors in this space!
The actual product itself has a lot of product design issues
Even worse, payors are pushing back and don’t want to pay for this product (this driver is what we think will ultimately cause TCMD to miss guidance)
Revenue growth is already declining and we expect it to go down even more
Margins (profitability) are low and margins (profitability) will not improve because TCMD needs to keep its large back office to cram every sale they can get
The actual market size is much smaller (TCMD inflates the market size)
We think the stock is worth less than $6, which is 60%+ downside
Issues #1-3: TCMD sells an undifferentiated product called a Flexitouch, which has patents that expire this year. Even with the patents intact, Flexitouch already has a ton of competition. Imagine the competition that occurs when the patents do expire!
TCMD sells Flexitouch, which is a wrap you put on your legs or arms that fills with air. Simply, the pump causes the wrap to fill with air, which then pushes the fluid in your legs or arms. It is used primarily for lymphedema, a swelling of your extremities caused by variety of disease (surgery from cancer, obesity, vascular disease, etc.).
This is what the Flexitouch product looks like:
TCMD clearly states all of the Flexitouch patents expire this year from page 19 in its corporate presentation:
We know what happens when patents expire: competitors will come in and copy what TCMD has spent so much time and money developing. We just want this to be clear even though it is obvious: patent expiration for TCMD’s primary product will be very bad for TCMD.
However, the story only gets worse. Even before TCMD’s Flexitouch patent expiration this year, there are already a ton of competition! This shows that the squeezey-leg-wrap product is really undifferentiated. And we know that undifferentiated, or commodity-like, products compete by lowering prices. Lower and lower prices is never good for business.
Here’s just a few of the competitors that we found: