Tandem Diabetes Care, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing reports full-year results, with selected unaudited quarterly data. Tandem develops and sells insulin pumps and related supplies; new pump shipments were entirely from its t:slim X2 platform.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $183.9 million | $107.6 million |
| Gross profit / margin | $89.8 million / 49% | $44.1 million / 41% |
| Operating loss | $44.6 million | $62.9 million |
| Net loss | $122.6 million | $73.0 million |
| Operating cash flow | $(8.3) million | $(66.1) million |
| Cash, cash equivalents and short-term investments at year-end | $129.0 million | $14.2 million |
| Working capital at year-end | $121.6 million | $28.1 million |
| Notes payable at year-end | None | $76.5 million |
- Revenue rose 71%; worldwide pump shipments increased 102% to 34,493, including 4,288 international shipments. International sales began in the third quarter and totaled $9.7 million.
- Supplies and accessories sales increased, supported by a larger installed customer base and wider use of the t:lock infusion-set connector. Pump sales were 67% of revenue; pump-related supplies and accessories made up the remainder.
- Gross margin improvement reflected higher pump volumes and manufacturing efficiencies. Operating expenses increased 26% to $134.5 million, including higher personnel and stock-based compensation costs.
- Net loss widened largely because of a $66.5 million non-cash loss from revaluing stock warrants and a $5.3 million debt-extinguishment loss. The company repaid its $82.7 million term-loan principal in August 2018; the resulting $87.7 million financing cash outflow included associated amounts and fees.
- Fourth-quarter revenue was $76.2 million, operating income was $0.6 million, and net income was $3.7 million. Management said the quarter marked the company’s first profitability, while cautioning that it might not be sustained near term.
Material changes and developments
- Basal-IQ, the company’s first automated insulin delivery feature, launched in the U.S. in August 2018, integrating with Dexcom G6 to suspend insulin delivery to help reduce hypoglycemia.
- Commercial sales of t:slim X2 with Dexcom G5 integration began in selected international markets in 2018; Canada approval and initial sales also began that year. International revenue was entirely through distributors.
- The company raised approximately $172.9 million net through public stock offerings in 2018 and received $29.6 million from warrant exercises. Common shares outstanding rose to 57.6 million at year-end from 10.1 million a year earlier.
- Year-end inventory fell to $19.9 million from $27.0 million, while accounts receivable increased to $35.2 million from $20.8 million amid higher sales.
Outlook, commentary and key risks
- No formal numerical revenue or earnings guidance is provided. Management expects continued investment and losses may persist; it believes available cash and investments will fund liquidity needs for at least 12 months from the filing date.
- Management’s development targets included U.S. Control-IQ sales in the second half of 2019, an international launch in 2020, a first-generation mobile application in 2019 subject to FDA approval, and FDA authorization for the t:sport pump in 2020. These are goals, not assured outcomes.
- Management expects ongoing demand growth, customer renewals and manufacturing efficiency to support profitability over time, but noted that supply constraints on key pump components had limited production capacity. It planned to increase component purchases and warehouse capacity in 2019.
- Significant exposures include continued operating losses and financing needs; reliance on one pump platform and Dexcom integration; regulatory and clinical approval uncertainty; competition; reimbursement risk, including UnitedHealthcare’s preferred-provider policy that restricts access for most of its members; and dependence on distributors. Edgepark and Byram represented 19.4% and 15.6% of 2018 sales.
- The FDA issued two inspection observations at the Barnes Canyon facility in 2017; Tandem responded with corrective actions, and the FDA indicated it would revisit them at a later inspection. A voluntary recall of 55 t:slim G4 pumps was closed in August 2018.
- CEO Kim Blickenstaff was expected to become Executive Chairman on March 1, 2019, with COO John Sheridan expected to become CEO. The filing also discloses a personal relationship between the incoming CEO and CFO and says the Audit Committee would consider whether additional disclosure controls were appropriate.
Important facts for investors to verify
- Whether rapid shipment and revenue growth can continue without recurring component shortages, and whether gross-margin gains are sustainable.
- Cash burn, working-capital trends, and the company’s financing needs as it funds product development, customer support and international expansion.
- Actual timing and regulatory outcomes for Control-IQ, t:sport and mobile-health products, and ongoing reliance on Dexcom and compatible CGM supplies.
- Customer renewal rates, distributor concentration, payer access and the impact of UnitedHealthcare’s policy.
- Status and resolution of the FDA’s manufacturing observations, product quality and warranty costs, and the adequacy of controls following the disclosed executive relationship.