Tandem Diabetes Care, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited; financial statement amounts below are in millions of dollars unless stated otherwise.
Business context and results
Tandem develops and sells insulin pumps, cartridges, infusion sets and related software for people with insulin-dependent diabetes. Its t:slim X2 platform accounted for all new pump shipments. The quarter included the U.S. launch of Control-IQ technology earlier in 2020 and continuing international expansion.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $123.6 | $94.7 | $330.8 | $253.9 |
| Gross profit / margin | $65.3 / 53% | $50.7 / 54% | $170.0 / 51% | $133.9 / 53% |
| Operating loss | $(1.0) | $(6.0) | $(26.6) | $(18.9) |
| Net loss | $(9.4) | $(2.9) | $(51.4) | $(27.4) |
| Operating cash flow | Not separately presented | Not separately presented | $9.4 | $22.5 |
Q3 sales rose 31% year over year, supported by 23% higher worldwide pump shipments (22,021) and 43% growth in pump-related supply sales. U.S. sales were $107.5 million, up from $78.8 million; international sales were $16.1 million, approximately flat versus $15.8 million. For the nine-month period, sales grew 30%, while international pump sales were lower than the prior year, partly because 2019 benefited from former Animas customer transitions and clearing prior-period backlog.
Q3 operating loss narrowed, but net loss increased, chiefly reflecting $4.9 million of convertible-note interest expense and a $3.6 million warrant revaluation loss; the prior-year quarter included a warrant revaluation gain. For the first nine months, the net loss also reflected a $19.9 million warrant revaluation loss and $8.0 million of note interest expense. These warrant fair-value changes are non-cash.
Financial position and liquidity
At September 30, 2020, cash and cash equivalents were $129.5 million and short-term investments were $335.0 million, totaling $464.5 million, versus $176.5 million combined at year-end 2019. Current assets were $592.3 million and current liabilities $105.5 million. Inventories increased to $70.6 million from $49.1 million.
The company issued $287.5 million principal amount of 1.50% convertible senior notes due 2025. Their net carrying amount was $199.1 million; stated fair value was $367.2 million. The notes have an initial conversion price of approximately $112.57 per share. Tandem paid $34.1 million for capped calls intended to reduce dilution above the conversion price, subject to a cap. Management said available cash and investments should meet liquidity needs for at least 12 months from the filing date.
For the nine months, operating cash flow was $9.4 million, investing cash flow was $(236.4) million, and financing cash flow was $305.2 million. Financing included note proceeds and stock-plan proceeds; investing activity included substantial purchases of short-term investments and $23.3 million of property and equipment.
Outlook, commentary and risks
- No specific numerical revenue or earnings guidance was provided. Management expects COVID-19 to continue adversely affecting sales and operating results, with unpredictable variability, including from restrictions and lockdowns in international markets.
- Management expects continued investment in sales and customer support, research and development, and manufacturing capacity. Longer-term margin improvement depends on growth, manufacturing efficiencies and product mix; near-term gross margin faced pressure from royalties, pandemic-related costs, and capacity investments.
- Development priorities include the t:sport pump, mobile-app enhancements, automated insulin delivery improvements, and integration work with Abbott CGM technology. Timing depends on development and regulatory clearances or approvals.
- In October 2020, Tandem said Australia’s Therapeutic Goods Administration intended to suspend pump sales beginning November 24, 2020, for at least six months unless the decision is reversed or delayed.
- Three California class-action lawsuits relate to a January 2020 phishing-related data breach. A court denied dismissal of the medical-information privacy claim and allowed amendment of other claims. A separate proposed employee wage-and-expense class action was filed in September. Loss amounts and ultimate outcomes are not estimable; no material loss was considered probable and estimable in the financial statements.
- Other significant risks include dependence on pump and supply sales, competition, reimbursement and regulatory uncertainty, supplier and manufacturing capacity, intellectual-property claims, and potential dilution or cash demands from convertible notes. The company reported no material off-balance-sheet arrangements; disclosure controls were considered effective.
Important facts for investors to verify
- Whether COVID-19 disruptions, international distributor ordering patterns and the Australia regulatory action affect future sales and product access.
- Whether Control-IQ demand and the installed-base growth translate into recurring supply revenue and improved gross margins after royalty and capacity costs.
- Cash use, capital spending and liquidity relative to management’s stated 12-month runway, including the notes’ conversion, repurchase and interest obligations.
- Progress on manufacturing capacity and inventory availability, particularly cartridges and third-party infusion sets.
- Developments in the data-breach and employment lawsuits, and any related financial or reputational consequences.