Tandem Diabetes Care, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an audited annual report, not a standalone fourth-quarter filing; quarterly figures are included below. Financial amounts are in U.S. dollars.
Business context and reporting period
Tandem develops and sells insulin pumps and related supplies in the United States. In 2015 it launched the higher-capacity t:flex and the DexCom-integrated t:slim G4, alongside its flagship t:slim. The company reported nearly 34,000 pumps shipped since its first commercial launch in 2012. Pump sales were 83% of 2015 sales; pump-related supplies accounted for most of the remainder.
Key financial metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Sales | $72.9 million | $49.7 million |
| Gross profit / margin | $26.6 million / 36% | $15.2 million / 31% |
| Operating expenses | $95.6 million | $90.9 million |
| Operating loss | $69.0 million | $75.7 million |
| Net loss | $72.4 million | $79.5 million |
| Net loss per share, basic and diluted | $2.50 | $3.42 |
| Net cash used in operating activities | $58.8 million | $61.4 million |
Sales increased approximately 47% year over year, while pump shipments rose 43% to 15,483. Management attributed the gross-margin improvement principally to higher production volume and manufacturing efficiencies. SG&A rose 5% and R&D rose 7%; operating expenses remained greater than gross profit, and the company continued to incur substantial losses.
Q4 2015: Revenue was $29.1 million, gross profit $13.5 million, operating loss $11.2 million and net loss $12.1 million. Revenue was $17.9 million and net loss $18.5 million in Q4 2014. The filing says t:slim G4 made up the majority of Q4 2015 pump shipments.
Liquidity and debt: At year-end, cash and cash equivalents were $43.1 million, short-term investments $28.0 million, and restricted cash $2.0 million; reported working capital was $80.5 million. The company used $58.8 million of operating cash during the year. Long-term notes payable were $29.7 million on the balance sheet, with approximately $30.2 million of aggregate loan borrowings reported. The Capital Royalty Partners loan bears 11.5% annual interest, with an option to pay 9.5% in cash and capitalize 2.0% as PIK interest; principal was due in 2020. In January 2016, Tandem borrowed another $15.0 million and obtained an option to borrow up to $35.0 million more. The 2015 public offering generated approximately $64.9 million net proceeds.
Material changes versus the prior comparable period
- Sales grew from $49.7 million to $72.9 million, with new 2015 product launches contributing to the mix.
- Gross margin improved from 31% to 36%; gross profit increased by $11.3 million.
- Net loss narrowed by $7.1 million, while operating expenses increased by $4.7 million.
- Cash and cash equivalents rose to $43.1 million from $31.2 million; the 2015 equity offering materially supported financing cash flow.
- Accounts receivable increased to $14.1 million from $7.7 million, and inventory increased to $17.5 million from $11.9 million, reflecting higher activity and production needs.
- Sales to distributors were 77% of total, versus 75% in 2014. The two largest distributors together represented approximately 35% of 2015 sales.
Outlook, commentary, risks and unusual items
- Management expected 2016 sales growth to outpace growth in sales and marketing costs, but expected sales to be weighted toward the second half of the year. It also expected continued net losses for several years and higher R&D costs as development and clinical work advanced. These are expectations, not quantified revenue or earnings guidance.
- Management stated that available cash, operating cash generation, financing available under the amended loan and other expected proceeds would cover liquidity needs for at least 12 months. This outlook is subject to significant cash burn, sales uncertainty, and loan covenants, including a minimum 2016 revenue covenant of $65 million. Tandem reported compliance with covenants at December 31, 2015.
- Key risks include sustained losses and financing needs; reimbursement and regulatory uncertainty; competition; reliance on pump sales and independent distributors; manufacturing scale-up and supplier concentration; and dependence on DexCom for the t:slim G4 CGM integration. The DexCom agreement was scheduled to run through January 2018, subject to its terms.
- The t:slim G4 launch included a limited exchange program. A total of 150 prior t:slim or t:flex pumps were exchanged for t:slim G4; related estimates affected third-quarter sales and cost of sales.
- The January 2014 voluntary cartridge recall, related to potential leaking, had total direct costs of approximately $1.7 million and was terminated by the FDA in September 2014.
- In February 2016, Tandem and JDRF terminated their development agreement; Tandem agreed to repay $0.7 million and had accrued the amount at year-end 2015. Tandem also filed a 510(k) for its Device Updater in early 2016 and anticipated an IDE filing for an initial partially automated insulin-delivery study.
- The company reported no material legal proceedings and no material contingencies for which a loss was considered probable and estimable. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not express an opinion on internal controls.
Important facts for investors to verify
- Whether pump and supply growth, especially t:slim G4 adoption, can continue and support improving margins without materially higher operating costs.
- Cash burn, the timing of any additional borrowing or equity financing, and compliance with the loan’s revenue and other covenants.
- Distributor concentration, including the 77% distributor sales share and dependence on the two largest distributors.
- Reimbursement access and rates, particularly for newer products and customers with type 2 diabetes, and the effect of Medicare bidding or payer policy changes.
- Manufacturing capacity, supplier continuity, warranty experience and the adequacy of the $3.5 million year-end warranty reserve.
- Regulatory and development milestones, including Device Updater clearance, future CGM integration and automated insulin-delivery studies; also confirm the status and terms of the DexCom relationship.
- The impact of the JDRF repayment and whether the March 2015 ownership change limits use of the company’s reported $226.3 million federal NOL carryforwards.