Tandem Diabetes Care, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; filed November 1, 2023. Tandem develops and sells insulin pumps, supplies, and related diabetes-management technology. Its flagship platform is t:slim X2; FDA clearance for Tandem Mobi was received in July 2023.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $185.6 | $204.5 | $550.9 | $580.7 |
| Gross profit / margin | $89.8 / 48% | $104.4 / 51% | $274.4 / 50% | $297.5 / 51% |
| Operating loss | $(31.5) | $(47.5) | $(198.2) | $(75.1) |
| Net loss | $(33.0) | $(49.0) | $(192.6) | $(78.7) |
| Net loss per share, diluted | $(0.51) | $(0.76) | $(2.97) | $(1.23) |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $(24.6) | $44.6 |
- Q3 sales declined about 9% year over year; nine-month sales declined about 5%. U.S. sales were $130.2 million in Q3 and $404.0 million for nine months; sales outside the U.S. were $55.4 million and $147.0 million, respectively.
- At September 30, cash and cash equivalents were $79.6 million and short-term investments were $418.5 million, totaling $498.2 million. Cash and cash equivalents were $172.5 million at December 31, 2022. Current assets were $758.1 million and current liabilities $187.1 million.
- Convertible notes had $287.5 million principal and a $284.6 million net carrying amount, due May 2025. No amounts were drawn on the revolving credit line; the company was not then entitled to borrow under it.
Changes and drivers
- U.S. pump sales fell 18% in Q3 and 12% for the first nine months; pump shipments fell 17% and 12%, respectively. Management cited difficult market and economic conditions and customers delaying purchases ahead of Tandem Mobi and Dexcom G7 integration availability.
- Outside the U.S., Q3 pump shipments declined 34%. For the nine-month period, management attributed lower pump and supply shipments in part to distributor inventory adjustments following the launch of a centralized European distribution center.
- Supplies sales rose in the U.S. by 10% in Q3 and 12% for nine months, supported by growth in the estimated installed customer base. Management reported worldwide installed-base growth of approximately 11% year over year.
- The Tandem Choice program deferred $8.2 million of Q3 sales and $12.6 million for nine months, following a Q3 price reduction that increased the estimated customer participation rate. Management said the program’s revenue and margin effects may fluctuate through its December 2024 expiration.
- Nine-month operating expenses included $78.8 million of acquired in-process R&D related to the AMF Medical acquisition, a $14.1 million facilities impairment, and $2.7 million of severance costs. The prior-year period included $31.0 million of acquired in-process R&D. Q3 operating expenses were lower year over year primarily because the prior-year quarter included the Capillary Biomedical charge.
Outlook, risks, and contingencies
- A limited U.S. release of Tandem Mobi began in Q4 2023; full commercial availability was expected in early 2024. Tandem expected the upcoming launch and Dexcom G7 integration to affect the timing of customer purchases. No specific financial guidance or quantified forecast is provided in the filing.
- Management believed cash, short-term investments, borrowing availability, and future operating cash flows would fund core activities for at least 12 months. However, the credit line was unavailable at the filing date because of the Notes interest-payment default described below.
- Debt default: In October 2023, Tandem learned that additional interest had accrued on the Notes since May 2021 because it had not timely removed restrictive legends and transferred the Notes to an unrestricted CUSIP. The overdue additional interest was approximately $3.1 million at September 30 and $3.2 million at November 1; overdue interest itself accrues interest at 2.5%. Tandem said it had deposited funds with the trustee and was coordinating payment in Q4 2023. While the default continues, the trustee or holders of at least 25% of the Notes may declare the outstanding Notes immediately due and payable, which could materially harm liquidity.
- The $50 million credit facility was amended in August 2023; its maximum leverage covenant was not tested at September 30. Tandem stated it would have failed that covenant absent the amendment. It remained compliant with the minimum interest coverage covenant.
- A putative securities class action filed in September 2023 alleges failure to disclose the effects of COVID-19, inflation, and competitor products on sales and revenue. Tandem intends to defend the case but cannot estimate the outcome or potential loss. A separate phishing-related class action was settled and dismissed in August 2023.
- Other stated risks include competition and pricing, reimbursement and regulatory approvals, product-launch execution, distributor ordering variability, macroeconomic and supply-chain pressures, cybersecurity and privacy risks, and possible contingent earnout payments for AMF Medical of up to CHF 129.6 million if milestones are met.
Most important facts for investors to verify
- Whether overdue Notes interest was paid, the default cured, and access to the revolving credit line restored; whether any holder or trustee exercised acceleration rights.
- Whether Tandem Mobi launched on the expected schedule and customer purchase delays converted into sales; progress and commercial availability of Dexcom G7 integration.
- Actual pump demand versus distributor inventory effects, particularly outside the U.S., and the trajectory of pump shipments and installed-base growth.
- The continuing revenue and gross-margin impact of Tandem Choice, including customer take-up after the price reduction.
- Cash burn, inventory growth, and the ability to fund operations and potential acquisition earnouts without available revolving-credit borrowing.
- Developments in the securities lawsuit and any material change in the possible exposure.