Tandem Diabetes Care, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and reporting period
Tandem develops and sells insulin pumps, cartridges, infusion sets and related digital tools for people with insulin-dependent diabetes. Its t:slim X2 platform accounted for all new pump shipments. The period included the U.S. launch of Control-IQ, an expanded FDA indication for children age six and older, the Sugarmate app acquisition, and an agreement with Abbott to develop integrated diabetes solutions.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $109.2 | $93.3 | $207.2 | $159.3 |
| Gross profit / margin | $54.4 / 50% | $49.9 / 54% | $104.7 / 51% | $83.3 / 52% |
| Operating expenses | $66.4 | $51.8 | $130.3 | $96.1 |
| Operating loss | $(12.0) | $(1.9) | $(25.6) | $(12.9) |
| Net loss | $(27.1) | $(1.5) | $(42.0) | $(24.5) |
| Basic and diluted loss per share | $(0.45) | $(0.03) | $(0.70) | $(0.42) |
Q2 sales increased 17% year over year; first-half sales increased 30%. Domestic pump shipments were 14,735 in Q2, up 15%, and 27,893 in the first half, up 24%. Domestic sales growth was partly offset by lower international pump sales. First-half pump-related supplies sales benefited from growth in the installed customer base.
Cash and cash equivalents were $222.5 million and short-term investments were $203.8 million at June 30, for total cash and investments of $426.3 million, versus $176.5 million at year-end 2019. Operating cash use was $5.1 million in the first half, compared with $0.6 million a year earlier. Investing cash use was $98.6 million, largely reflecting purchases of short-term investments and capital spending; financing provided $275.3 million, principally from the convertible notes.
In May, Tandem issued $287.5 million principal amount of 1.50% convertible senior notes due 2025. Their net carrying amount was $195.3 million; disclosed fair value was $329.4 million. The company also paid $34.1 million for capped calls. Management said available cash and investments should fund liquidity needs for at least 12 months from the filing date.
Material changes versus the prior comparable period
- Revenue grew, led by U.S. demand following the Control-IQ launch and higher supply sales. Q2 domestic sales rose to $89.3 million from $70.4 million, while international sales fell to $20.0 million from $22.9 million.
- Gross margin declined to 50% in Q2 from 54%. Management cited higher royalties and stock-based compensation, COVID-related operating costs, manufacturing capacity expansion, and lower pump sales as a share of revenue.
- Operating expenses rose substantially: Q2 SG&A increased 24% and R&D increased 43%. First-half SG&A and R&D rose 33% and 46%, respectively, reflecting staffing and development investment.
- Net loss widened, particularly in Q2, with $14.3 million of warrant fair-value expense and $3.2 million of note-related interest expense contributing to the period’s other expense.
- Cash and investments increased following the note financing. Long-term convertible notes of $195.3 million net were added to the balance sheet.
Outlook, commentary, risks and unusual items
- COVID-19: The company reported a more pronounced sales and operating impact in Q2 than in Q1 and anticipated continued adverse effects. Remote selling and training, delayed development studies, and uncertainty around customer purchasing and physician prescribing were noted.
- Supply and execution: Management described inventory constraints at the primary infusion-set supplier and below-target cartridge inventory, while stating that pump and cartridge supply was not then expected to be disrupted. It was building supplies inventory and expanding cartridge manufacturing capacity.
- Development and commercialization: Priorities include mobile health capabilities, the t:sport pump, AID enhancements and additional CGM integrations. International Control-IQ rollout was planned for the second half of 2020, subject to regulatory and reimbursement approvals. No numerical revenue or earnings guidance was provided.
- Profitability: Tandem had incurred losses since inception, despite achieving profitability in Q4 2018 and Q4 2019. Management’s longer-term aim is sustained profitability through growth, manufacturing efficiencies and use of existing commercial infrastructure; timing is uncertain.
- Convertible notes: The notes carry conversion, potential cash settlement, repurchase-on-fundamental-change and dilution risks. Accounting separation of liability and equity components generated non-cash interest expense; the company expected interest expense to rise in Q3 as the notes would be outstanding for the full quarter.
- Data breach litigation: Four federal class actions relating to a January 2020 phishing incident were voluntarily dismissed. Three California state class actions remained pending; the company could not estimate potential losses and intended to defend them.
- Other items: Sugarmate was acquired in June, with substantially all purchase price allocated to a technology intangible asset. Management reported no material legal loss accrual at quarter-end and stated disclosure controls were effective.
Important facts for investors to verify
- Whether COVID-19-related sales disruption and delays persisted, and how demand developed after the Q2 period.
- Whether cartridge and infusion-set supply constraints were resolved and inventory targets restored without further margin pressure.
- Subsequent trends in gross margin, operating expenses and losses, including the effects of stock-based compensation and warrant revaluation.
- Cash use, liquidity runway, and the terms and potential dilution or cash-settlement effects of the 2025 convertible notes and capped calls.
- Progress on pending data-breach lawsuits, the Abbott collaboration, international launches, and planned product development and regulatory milestones.