Tandem Diabetes Care, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; quarterly comparisons include the quarter ended December 31, 2019. Tandem develops and sells insulin pumps, cartridges and infusion sets, primarily through its t:slim X2 platform.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $362.3 million | $183.9 million |
| Gross profit / margin | $194.2 million / 54% | $89.8 million / 49% |
| Operating loss | $16.7 million | $44.6 million |
| Net loss | $24.8 million | $122.6 million |
| Cash from operations | $41.9 million | $(8.3) million |
| Cash, cash equivalents and short-term investments | $176.5 million at year-end | $129.0 million at year-end |
| Notes payable | None | None |
Revenue rose 97% year over year, reflecting 73,431 worldwide pump shipments, up 113% from 34,493. Domestic sales were $302.1 million and international sales were $60.2 million. Pump-related supplies also grew as the installed customer base expanded. Gross margin improved mainly from the higher share of pump sales and manufacturing efficiencies.
Fourth-quarter 2019 revenue was $108.4 million, compared with $76.2 million in fourth-quarter 2018. Tandem reported Q4 operating income of $2.1 million and net income of $2.7 million, versus operating income of $0.6 million and net income of $3.7 million in Q4 2018. Despite quarterly profitability in both years, the company remained loss-making for full-year 2019.
Operating expenses increased: SG&A rose 58% to $165.7 million and R&D rose 55% to $45.2 million. Stock-based compensation was $58.1 million in 2019, versus $23.7 million in 2018. The $11.1 million non-cash warrant revaluation loss contributed to 2019’s net loss; the comparable 2018 warrant loss was $66.5 million, alongside debt interest and a $5.3 million debt-extinguishment loss.
Working capital was $176.7 million at year-end. Inventory increased to $49.1 million from $19.9 million, and accounts receivable increased to $46.6 million from $35.2 million. Capital expenditures were $19.5 million. The company repaid its term loan in 2018 and reported no borrowings at year-end 2019. Management said available cash and investments should fund liquidity needs for at least 12 months from the filing date.
Changes, outlook and risks
- Growth and profitability: Management attributed growth to demand for t:slim X2, Basal-IQ, international expansion and conversions from former Animas customers. It said it achieved quarterly profitability in Q4 2018 and Q4 2019, but cautioned that profitability may not be consistent. No formal numeric revenue or earnings guidance is provided.
- Products and investment: FDA clearance for Control-IQ was received in December 2019; its U.S. launch began in January 2020. Tandem planned international availability in select markets in the second half of 2020, subject to approvals. A mobile application and the smaller t:sport pump were in development; the company planned to pursue FDA authorization for t:sport as an ACE pump in 2020.
- Capacity and costs: Tandem expected to outsource part of cartridge production and expand capacity in 2020. It anticipated continued spending on customer support, manufacturing and product development, and noted that investments could weigh on near-term margins.
- Commercial exposure: Byram Healthcare and RGH Enterprises represented 15.4% and 14.8% of 2019 sales, respectively. Independent distributors accounted for approximately 76% of sales. UnitedHealthcare’s preferred-provider policy for most members age seven and older was expected to restrict access to Tandem pumps for a majority of its members.
- Other material risks: The Animas transition benefited sales in 2018–2019, but management did not expect a significant further benefit. The business depends heavily on t:slim X2 and Dexcom CGM integration; the filing describes risks from competition, reimbursement changes, manufacturing and supplier constraints, product safety and regulatory requirements. Tandem was investigating the extent of unauthorized network access following a phishing attack and said sensitive information may have been compromised.
- Contingencies and controls: The company reported no legal or regulatory matter for which a material loss was considered probable or reasonably estimable. The auditor issued unqualified opinions on the financial statements and internal controls; the warranty reserve was identified as a critical audit matter. Management reported effective disclosure controls and internal control over financial reporting.
Key facts for investors to verify
- Whether rapid pump shipment and revenue growth continues after the Animas-related opportunity fades, and whether quarterly profitability can become sustainable.
- Whether Control-IQ, the mobile application and t:sport meet launch, regulatory and commercial expectations.
- Whether distributor and customer concentration, including Byram, RGH and UnitedHealthcare exposure, changes materially.
- Whether manufacturing expansion and third-party cartridge production deliver expected capacity, cost and gross-margin improvements.
- Whether inventory growth and the $16.7 million warranty reserve remain appropriate as pump volumes and product versions change.
- The outcome and any customer, regulatory or financial consequences of the phishing-incident investigation.
- Whether the company can use its tax attributes: Section 382 ownership-change limits reduced the expected value of certain tax-loss and credit carryforwards.