Tandem Diabetes Care, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; fourth-quarter figures are noted separately where available. Amounts are in U.S. dollars.
Business context
Tandem develops and sells insulin pumps and related supplies for people with insulin-dependent diabetes. Its main product was the t:slim X2, including a version integrated with Dexcom G5 CGM. The company shipped 17,061 pumps in 2017, versus 16,938 in 2016; nearly 68,000 pumps had shipped in the United States since launch. Pump-related supplies are an important recurring-revenue stream.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Sales | $107.6 million | $84.2 million |
| Gross profit / margin | $44.1 million / 41% | $23.6 million / 28% |
| Operating expenses | $107.0 million | $101.6 million |
| Operating loss | $(62.9) million | $(78.1) million |
| Net loss | $(73.0) million | $(83.4) million |
| Cash used in operating activities | $(66.1) million | $(61.2) million |
| Cash, cash equivalents and short-term investments | $14.2 million, plus $10.0 million restricted cash | $53.5 million, including $2.0 million restricted cash |
| Working capital | $28.1 million | $60.6 million |
| Term-loan borrowings | $82.7 million | $81.1 million |
Sales rose about 28%; pump sales were $71.5 million and supply sales were $35.6 million. Improved gross margin reflected manufacturing cost efficiencies and higher infusion-set sales. Pump shipments were nearly flat year over year. The 2017 net loss included $11.3 million of interest and other expense, partly offset by a $1.0 million warrant fair-value gain.
Fourth quarter: Revenue was $40.3 million, gross profit $17.5 million, operating loss $(9.6) million and net loss $(11.4) million. Q4 2016 revenue was $28.9 million and net loss $(14.8) million.
The term loan is secured by company assets, bears interest at 11.5% cash or 9.5% cash plus 2.0% added to principal, and matures March 31, 2020. Interest-only payments run through December 2019; the loan has a $95 million annual revenue covenant from 2018 onward. The amended back-end fee increased to 6% of principal. Contractual obligations totaled $138.8 million, including loan payments and leases.
Material changes and unusual items
- Gross margin improved from 28% to 41%; 2016 included a $2.8 million inventory obsolescence charge and Technology Upgrade Program effects.
- The Technology Upgrade Program expired in September 2017. It added $5.0 million to 2017 sales and $3.1 million to gross profit; 2016 included $4.3 million of deferred sales and a $4.6 million gross-profit reduction. These effects complicate period comparisons.
- Infusion-set sales increased following the t:lock launch. The ratio of infusion sets shipped to cartridges approached 100% in December 2017.
- In February 2018, after year-end, Tandem sold 34.5 million shares at $2.00 per share, raising $69.0 million gross before offering costs. The financing satisfied a loan covenant; shares outstanding were 44.7 million as of February 23, 2018.
- A 1-for-10 reverse stock split took effect in October 2017; historical per-share data was restated.
Outlook, management commentary and risks
- Management targeted operating expenses below 10% annual growth in 2018 and cash-flow breakeven in the second half of 2019, assuming an installed base above 80,000 customers and gross margin of about 55%. These are goals, not guarantees.
- Planned launches included Basal-IQ, subject to FDA approval, targeted for summer 2018; Control-IQ targeted for the first half of 2019, subject to trial results and approval; and t:sport targeted for 2020 or 2021. The company also planned select international launches in 2018.
- Management expected operating losses and negative cash flows to continue for at least the next 12 months. The filing identifies substantial ongoing financing needs and uncertainty around reaching profitability. After the February financing, management believed available funds would cover at least 12 months.
- Key risks include sustained losses and cash burn; loan covenants and repayment; reimbursement access, including UnitedHealthcare’s preferred-provider restriction; dependence on distributors (75% of 2017 sales, with two distributors accounting for 35.5%); competition and customer retention; and reliance on Dexcom, suppliers and successful product approvals.
- The FDA issued a Form 483 with two observations after inspecting the new manufacturing facility. It said Tandem’s initial response did not fully address them and would review them at a future inspection; further regulatory action remains possible.
- The auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting. No material legal matter was reported as probable and estimable.
Most important facts for investors to verify
- Whether recurring pump and supply sales can grow enough to reduce cash burn, and whether the 2017 margin improvement is sustainable.
- Actual cash runway after offering costs, restricted cash, operating cash use and debt service; and compliance with loan covenants and the 2020 maturity.
- FDA review progress on Basal-IQ and the response to the manufacturing-site observations, as well as clinical and regulatory progress for later products.
- Renewal rates, infusion-set purchasing trends, distributor concentration and the commercial impact of Animas customers switching providers.
- The effect of the February 2018 equity issuance on dilution and remaining financing requirements.