Tandem Diabetes Care, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless otherwise stated, financial amounts are in U.S. dollars; statements are unaudited. Tandem develops and sells insulin pumps and related supplies, primarily through its t:slim X2 platform.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $66.0 million | $27.3 million |
| Gross profit / gross margin | $33.4 million / 51% | $11.4 million / 42% |
| Operating expenses | $44.4 million | $26.9 million |
| Operating loss | $11.0 million | $15.5 million |
| Net loss | $23.0 million | $32.7 million |
| Net loss per share, basic and diluted | $0.40 | $1.82 |
| Cash used in operating activities | $4.1 million | $12.3 million |
Revenue increased 142%, primarily reflecting higher pump shipments and sales of the Basal-IQ-enabled t:slim X2 in the U.S. and international sales. Worldwide shipments were 14,732 pumps, up 232% from 4,444; reported U.S. and international shipments were 9,669 and 5,063, respectively. Pump-related supplies revenue also grew, supported by a larger installed customer base.
Gross margin improved with higher production volumes and manufacturing efficiencies, partly offset by excess and obsolete inventory costs. Operating expenses rose as Tandem expanded personnel and product development and recorded substantially higher non-cash stock-based compensation. The net loss included a $12.7 million non-cash loss from remeasuring stock warrants; this liability’s fair value was $29.8 million at quarter-end.
Liquidity, cash flow and debt
- At March 31, 2019, cash and cash equivalents were $40.4 million and short-term investments were $85.2 million, totaling $125.6 million. Management said these resources were expected to meet liquidity needs for at least 12 months from the filing date.
- Cash and cash equivalents declined by $1.4 million during the quarter. Investing activities provided $0.8 million, including net investment maturities; financing activities provided $2.0 million, mainly from employee stock-option exercises.
- Tandem reported no outstanding borrowings under its former term loan, which it repaid in August 2018. The balance sheet included operating lease liabilities of $14.4 million, including current and long-term portions.
- Current assets were $186.0 million and current liabilities were $76.7 million. Stockholders’ equity was $121.0 million; accumulated deficit was $623.1 million.
Material changes and notable items
- Compared with Q1 2018, revenue more than doubled, gross margin rose 9 percentage points, and net loss narrowed by $9.7 million. Operating loss also narrowed despite higher operating expenses.
- International sales contributed $11.3 million, compared with none in the prior-year quarter, following market launches beginning in 2018. Tandem began direct Canadian sales in late 2018.
- Stock-based compensation increased to $9.8 million from $1.2 million, with management expecting higher expense to continue. Q1 2019 SG&A included $7.0 million and R&D included $1.7 million of stock-based compensation.
- Tandem adopted the new lease accounting standard in Q1, recognizing right-of-use assets and lease liabilities. It also signed leases for additional office and operations space; one lease was expected to commence in Q2 2019.
Outlook, commentary and risks
- No numerical revenue, earnings or cash-flow guidance was provided. Management said Q4 2018 was the company’s first profitable quarter but cautioned that profitability may not be sustained in the near term. It expects expenses, including R&D and SG&A, to rise as the business expands.
- Management’s stated goal was to begin U.S. commercial sales of t:slim X2 with Control-IQ in the second half of 2019, followed by an international launch in 2020. A six-month clinical study supporting development was completed in April 2019; planned pediatric work and regulatory clearance remained dependencies. A first-generation mobile application was also intended for U.S. launch in 2019, subject to FDA approval.
- Key risks include dependence on t:slim X2 and related supplies; intense competition; reimbursement and payer access, including UnitedHealthcare’s preferred-provider arrangement with a competitor; successful product development and regulatory approvals; manufacturing capacity and quality; and reliance on Dexcom CGM collaboration and third-party suppliers.
- The filing disclosed prior FDA Form 483 observations concerning the Barnes Canyon facility and related corrective actions. It also noted that a voluntary recall of 55 t:slim G4 pumps, initiated in April 2018, was closed in August 2018.
- Tandem reported no legal proceedings or other claims for which a material loss was considered probable or reasonably estimable. It stated that it had no off-balance-sheet arrangements. Disclosure controls were assessed as effective as of March 31, 2019.
Important facts for investors to verify
- Whether pump shipment growth and international sales continue, and how much growth is recurring supplies versus new pump sales.
- Whether gross-margin gains persist as volumes, product mix, inventory costs and warranty costs change.
- Cash burn and liquidity relative to continued operating losses, expansion spending and management’s 12-month liquidity assessment.
- Timing and regulatory progress for Control-IQ, the mobile application and other products under development.
- Exposure to payer coverage decisions, Dexcom relationship terms, supplier capacity and manufacturing quality; also monitor warrant remeasurement effects and continuing stock-based compensation.