Tandem Diabetes Care, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context
Tandem develops, manufactures and sells insulin pumps and related supplies for people with insulin-dependent diabetes. Its t:slim X2 platform accounted for all new pump shipments. The company launched t:slim X2 with Control-IQ technology in the United States in January 2020 and began a limited launch of its mobile application during the quarter.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Sales | $97.9 million | $66.0 million | Up 48%; domestic sales were $79.5 million and international sales $18.4 million |
| Gross profit / margin | $50.3 million / 51% | $33.4 million / 51% | Margin was flat; higher volume and manufacturing efficiencies were offset by product mix and other costs |
| Operating expenses | $63.8 million | $44.4 million | SG&A rose 42% and R&D rose 50% |
| Operating loss | $13.6 million | $11.0 million | Loss increased |
| Net loss | $14.9 million | $23.0 million | Loss narrowed, mainly as the warrant remeasurement loss fell to $1.9 million from $12.7 million |
| Net loss per share | $0.25 | $0.40 | Basic and diluted |
| Operating cash flow | $(20.6) million | $(4.1) million | Greater cash use, primarily from working-capital changes |
Worldwide pump shipments increased 18% to 17,378. Pump-related supply sales increased 93%; management cited a larger installed base and customers purchasing supplies at a higher rate than anticipated. Pumps represented 61% of sales, compared with 70% a year earlier.
At quarter-end, cash and cash equivalents were $74.5 million and short-term investments were $85.7 million, totaling $160.2 million. Current assets were $280.9 million and current liabilities $99.6 million. The filing reports no current borrowings and says previously used debt financing had been fully repaid; operating lease liabilities totaled $27.9 million. Management believed available cash and investments would fund liquidity needs for at least 12 months from the filing date.
Cash increased by $23.3 million during the quarter, but this did not reflect positive operating cash generation: investing cash inflow of $32.9 million mainly reflected maturities and sales of short-term investments, and financing inflow of $11.5 million mainly came from stock-plan exercises.
Material changes and management commentary
- Sales rose in both the United States and international markets. Domestic pump shipments benefited from Control-IQ demand; international sales included initial orders for new geographies.
- Operating expenses grew faster than sales, reflecting additional personnel, customer-support and commercial capacity, product development activity, and higher stock-based compensation. Stock-based compensation expense was $15.9 million, versus $9.8 million.
- The company started commercial-scale cartridge production with a third-party manufacturer to add capacity. It reported cartridge and infusion-set inventory below target, and its primary infusion-set manufacturer faced inventory constraints; some customers were offered similar-product substitutions.
- Management provided no quantified sales or earnings guidance. It expected COVID-19 to adversely affect sales and operating results in coming months, potentially more proportionally in international markets, and said the full impact could not be estimated. The company had curtailed in-person sales and clinical activities and shifted eligible employees to remote work.
- Development plans included AID enhancements, mobile-health offerings and the t:sport pump. The company anticipated a broader U.S. mobile-app launch in Q2 2020 and intended to offer Control-IQ updates in select international geographies in the second half of 2020, subject to approvals and reimbursement.
Risks, contingencies and unusual items
- COVID-19 and operations: Potentially delayed customer purchasing, prescriptions, product-development studies and launches, alongside added operating costs and uncertainty in forecasting.
- Supply and manufacturing: Cartridge and infusion-set constraints could affect fulfillment, sales and reputation. The company also planned manufacturing investments that could pressure near-term margins.
- Profitability: Tandem had an accumulated deficit of $639.7 million and continued to report an operating loss. Management cautioned that prior quarterly profitability did not establish sustained profitability.
- Data breach and litigation: The company reported a January 2020 phishing-related email-account breach; it could not determine whether information was viewed. Four putative class actions were filed in April 2020, after quarter-end. The claims seek various forms of relief, and the company said the outcome and potential loss could not be estimated.
- Other exposures: Competition, reimbursement and payer access (including UnitedHealthcare’s preferred-provider policy), regulatory approvals, reliance on CGM and other suppliers, and the ability to retain customers and scale operations remain material risks. No material loss was considered probable and estimable for the ordinary-course legal matters disclosed at March 31.
Important facts for investors to verify
- Whether COVID-19 materially changed sales, customer renewals, international demand or product launches after the quarter.
- Whether cartridge and infusion-set production recovered sufficiently to meet demand and rebuild inventory.
- Whether the 51% gross margin can be maintained as product mix, manufacturing costs and supply constraints change.
- Whether operating cash use and working-capital requirements remain manageable against the stated $160.2 million liquidity balance.
- Developments, potential costs and disclosure updates relating to the January data breach and April class actions.
- Regulatory, reimbursement and commercial progress for Control-IQ, the mobile application and products under development.