Tandem Diabetes Care, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed July 30, 2015. Tandem develops and sells insulin pumps and related supplies. U.S. commercial sales of its second pump, t:flex, began in Q2 2015.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $15.7m | $10.3m | $28.0m | $18.3m |
| Gross profit | $4.8m | $3.4m | $7.6m | $4.3m |
| Gross margin | 31% | 34% | 27% | 24% |
| Operating expenses | $23.5m | $21.8m | $46.7m | $43.5m |
| Operating loss | $(18.7)m | $(18.3)m | $(39.1)m | $(39.2)m |
| Net loss | $(19.5)m | $(19.2)m | $(40.7)m | $(41.2)m |
| Basic and diluted loss per share | $(0.65) | $(0.83) | $(1.47) | $(1.79) |
Q2 pump shipments rose 49% to 3,331; first-half shipments rose 47% to 5,818. Q2 sales included $11.5m from t:slim and $1.4m from t:flex. Sales to distributors were 78% of Q2 sales, versus 71% a year earlier.
For the six months, operating cash use was $34.2m, similar to $34.3m in 2014. Investing cash use was $18.0m, largely reflecting net purchases of short-term investments and $2.4m of property and equipment. Financing provided $66.9m, principally $64.9m net proceeds from a public offering. Cash and cash equivalents increased $14.7m to $45.9m.
At June 30, cash, cash equivalents and short-term investments totaled $99.7m, including $2.0m restricted cash. Current assets were $124.1m and current liabilities $18.5m. Long-term notes payable were $29.5m on the balance sheet; the loan had $30.0m of principal outstanding. Stockholders’ equity was $87.8m, and accumulated deficit was $289.5m.
Changes and management commentary
- Sales grew 53% in both the quarter and first half, chiefly from higher pump shipments, expanded reimbursement access through distributor arrangements, and the t:flex launch.
- Q2 gross margin declined year over year, which management attributed mainly to product and channel mix, including more distributor sales; manufacturing scale-up, warranty and training costs also affected margins. First-half margin improved from 24% to 27%, helped by the prior-year cartridge recall charge and manufacturing efficiencies.
- SG&A rose 8% in Q2 and first-half periods, mainly from employee-related costs and sales commissions. R&D increased 5%, primarily due to higher headcount.
- Management expects continued losses for the next several years and says expenses are expected to rise as it expands commercialization, R&D and manufacturing. It believes existing liquidity will fund requirements for at least the next 12 months; no specific revenue or earnings guidance is provided.
Liquidity, debt, risks and notable items
- The $30.0m Capital Royalty term loan bears 11.5% annual interest, payable in cash. Interest-only payments run through December 31, 2019; principal is due March 31, 2020. The loan is secured by all company assets and includes covenants, including minimum annual revenue requirements. Tandem reported covenant compliance at June 30, 2015. The opportunity to draw an additional $30.0m expired unused.
- The company raised $64.9m net in a Q1 public offering of 6,037,500 shares at $11.50 per share. Shares outstanding were approximately 30.0m at June 30, up from 23.7m at year-end.
- Management identifies dependence on t:slim and related supplies, reimbursement coverage, competition, manufacturing and supplier execution, product acceptance, and continued access to capital as significant risks. Results may fluctuate seasonally and around product launches; customers may defer purchases ahead of anticipated products. The t:slim G4 remained subject to FDA review, adding uncertainty to second-half 2015 results.
- The 2014 voluntary cartridge recall was terminated by the FDA; Tandem reported no expected further direct financial impact. The warranty reserve increased to $3.0m from $2.0m at year-end.
- For the JDRF dual-chamber pump collaboration, Tandem cited technical and regulatory challenges and said it could not estimate project completion timing; further amortization of related liabilities was suspended pending an estimate.
- Tandem entered worldwide, non-exclusive development agreements with DexCom in Q2 to support integration of future pumps with DexCom G5 and G6 CGM systems. No material legal proceedings or probable and estimable material contingencies were reported.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether shipment growth and t:flex adoption translate into sustained sales growth and adequate reimbursement coverage.
- Whether channel and product mix, warranty costs, and manufacturing scale-up improve or pressure gross margins.
- Cash burn relative to the stated 12-month liquidity outlook, and the company’s potential need for further financing.
- Progress and timing of FDA review for t:slim G4, and development milestones and obligations under DexCom and JDRF collaborations.
- Compliance with the loan’s revenue covenants, including the $50.0m minimum revenue requirement for 2015.