Tandem Diabetes Care, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unless noted otherwise, amounts are in millions of dollars. Tandem develops and sells insulin pumps and related supplies, primarily its t:slim X2 platform, in the United States.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $34.1 | $21.3 | $61.4 | $40.3 |
| Gross profit | $15.1 | $8.0 | $26.5 | $14.8 |
| Gross margin | 44% | 38% | 43% | 37% |
| Operating loss | $(14.0) | $(19.0) | $(29.5) | $(40.2) |
| Net loss | $(59.4) | $(21.8) | $(92.1) | $(45.6) |
| Operating cash flow | Not separately presented | $(19.0) | $(35.5) |
Q2 sales rose about 60% year over year and first-half sales rose about 52%. Q2 pump shipments increased 59% to 5,447; first-half shipments increased 58% to 9,891. Management attributed growth to t:slim X2 with G5, competitive-market changes and increased supply sales following the t:lock connector launch. Improved production volumes and efficiencies also supported higher gross margins.
Operating expenses were $29.1 million in Q2 and $56.0 million for the first half. First-half SG&A declined 3% to $43.5 million, while R&D increased 24% to $12.4 million, primarily reflecting clinical-trial and development spending. Net losses were substantially affected by noncash warrant fair-value remeasurement losses of $42.5 million in Q2 and $56.8 million in the first half; these losses reflected appreciation in Tandem’s stock price.
Cash, liquidity and debt
At June 30, 2018, the balance sheet showed $50.5 million of cash and cash equivalents and $36.0 million of short-term investments. The company also held $10.0 million of restricted cash, required under its loan agreement. Management reported total cash, cash equivalents and short-term investments of $96.5 million including restricted cash, and believed liquidity would cover requirements for at least 12 months.
First-half financing provided $93.2 million, including approximately $64.0 million net proceeds from a February stock offering and $29.2 million from warrant exercises. Investing used $37.3 million, principally for purchases of short-term investments; operating activities used $19.0 million.
Aggregate term-loan borrowings were $82.7 million, secured by all company assets. The loan carries an 11.5% annual interest rate, has interest-only payments through December 2019, and matures March 31, 2020. The agreement requires minimum annual revenue of $95.0 million in 2018 and thereafter, and a minimum cash balance of $10.0 million. The back-end financing fee was raised to 6% of outstanding principal; $5.0 million was accrued at June 30.
Outlook, developments and risks
- Tandem expects operating losses and negative cash flows to continue for at least the next 12 months; elsewhere it says it expects significant losses for at least the next two years. It describes eventual profitability as dependent on sales growth, pump renewals, supply sales, manufacturing efficiencies and effective use of its commercial infrastructure.
- The FDA approved t:slim X2 with Basal-IQ in June 2018; U.S. commercial launch was planned for Q3 2018. Tandem planned international sales of t:slim X2 with G5 in select markets in the second half of 2018, including Canada. CE mark approval had been received, and distribution agreements were in place in several markets.
- Control-IQ development depended on clinical-trial progress and FDA approval. Tandem planned an initial PMA submission module in September 2018 and targeted a summer 2019 launch, subject to trial results and approval. The t:sport pump was targeted for 2020 or 2021; an initial mobile application was planned for the second half of 2018, subject to FDA approval.
- In April 2018, Tandem initiated a voluntary recall of 55 t:slim G4 pumps shipped from December 2016 through June 2017 because of a risk of inaccurate battery readings that could cause unexpected insulin-delivery suspension. The company said the FDA might determine that corrective actions were inadequate.
- Key risks include continued losses and financing needs; meeting the loan’s revenue and cash covenants; competition and reimbursement restrictions; product adoption and renewal sales; manufacturing, supplier and quality issues; regulatory and clinical-development delays; and reliance on Dexcom integration and distributors. The company noted a prior FDA Form 483 with two observations at its Barnes Canyon facility. No material legal claim was identified as probable and estimable.
- Management reported effective disclosure controls as of June 30. Implementation of a new enterprise resource and accounting system during Q2 was a material change to internal control over financial reporting.
Most important facts to verify
- Whether subsequent results met the $95.0 million 2018 minimum-revenue covenant and whether the $10.0 million minimum cash requirement remained satisfied.
- Actual cash burn and unrestricted liquidity after the quarter, given ongoing losses and debt service.
- Basal-IQ launch, customer uptake, and any product-safety or regulatory developments related to the 55-pump recall and FDA observations.
- Whether international launches and Control-IQ clinical, regulatory and commercial milestones occurred on the stated timelines.
- How much future reported earnings are affected by noncash warrant remeasurement and stock-based compensation, and the dilution from equity offerings, warrant exercises and outstanding awards.