Tandem Diabetes Care, Inc. — 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Tandem develops and commercializes insulin-delivery products; substantially all revenue came from U.S. sales of its t:slim pump and related supplies.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales | $13.5 million | $7.8 million | $31.8 million | $18.8 million |
| Gross margin | 33% | 33% | 27% | 27% |
| Operating loss | $19.0 million | $12.1 million | $58.2 million | $33.0 million |
| Net loss | $19.9 million | $13.1 million | $61.1 million | $39.5 million |
| Operating cash used | Not provided for quarter | Not provided for quarter | $46.2 million | $34.9 million |
For the first nine months, sales increased 70% year over year, while the net loss widened. SG&A rose 82% to $55.0 million and R&D rose 53% to $11.9 million, reflecting commercial expansion, higher staffing and a $1.0 million DexCom milestone payment. Stock-based compensation was $11.0 million for the nine months, versus $1.6 million in 2013.
At September 30, cash and cash equivalents were $35.6 million, restricted cash was $2.0 million, and short-term investments were $44.3 million: $81.9 million combined, as described by management. The combined balance was down from $131.5 million at December 31, 2013. Total assets were $116.6 million and stockholders’ equity was $67.5 million. Long-term notes payable had a carrying value of $29.4 million; the stated principal outstanding was $30.0 million. No amounts were outstanding on the $1.5 million SVB revolving line.
Net cash used in investing activities was $44.6 million, primarily reflecting net purchases of short-term investments and $5.3 million in property and equipment. Financing activities provided $2.0 million. Management said available cash, borrowing capacity and equity-related proceeds were expected to meet liquidity requirements for at least 18 months.
Material changes and developments
- Q3 sales rose 74% year over year. Tandem shipped 2,935 pumps in Q3 2014 versus 1,851 in Q3 2013; cumulative shipments since launch were approximately 14,400 by September 30.
- Sales territories expanded from 36 at the end of Q3 2013 to 60 at the end of Q3 2014. Management said territory realignment temporarily disrupted sales-force productivity.
- The April 2014 amended Capital Royalty loan reduced the interest rate from 14% to 11.5% and extended the interest-only period through March 31, 2018; maturity is March 31, 2020. The company could borrow up to an additional $30 million by March 31, 2015 under a separate tranche agreement.
- Sales to distributors represented 76% of Q3 sales, compared with 70% a year earlier. Management attributed the increase partly to new payor-distributor arrangements that broadened in-network access.
Outlook, risks and unusual items
Management expects continued net losses for the next several years and may need additional capital. It expects sales to fluctuate seasonally and gross margins to remain exposed to product mix, reimbursement, distributor share, production costs and manufacturing efficiency. The company reported no specific earnings or revenue forecast.
For the amended term loan, minimum annual revenue covenants are $30 million for 2014, $50 million for 2015, $65 million for 2016 and $80 million for 2017, rising to $95 million thereafter. Tandem said it had met the 2014 threshold by September 30.
A voluntary recall of selected t:slim cartridge lots began in January 2014 because of potential leakage. Total direct costs were approximately $1.7 million, including $0.3 million recorded in the first nine months of 2014; the company did not expect further direct financial impact. The filing also describes potential safety, product-liability and reputational exposure related to the recall.
Regulatory milestones include a PMA submission to the FDA for the t:slim G4 during Q3 and a 510(k) submission for the t:flex pump. Approval and commercialization timing were not assured. Key risks include dependence on t:slim, reimbursement and distributor access, competition, manufacturing and supplier capacity, regulatory approval, continuing cash burn and compliance with debt covenants. No material pending legal proceedings were reported, and no loss contingency was accrued for legal or regulatory matters.
Important facts for investors to verify
- Whether pump sales growth and new payor arrangements translate into sustained demand and improved operating economics.
- Cash burn, access to the additional loan tranche, and the assumptions supporting management’s stated 18-month liquidity outlook.
- Progress and FDA decisions on the t:slim G4 PMA and t:flex 510(k), including the timing and cost of any required follow-up.
- Ongoing product quality, warranty costs and any further consequences from the cartridge recall.
- Compliance with future revenue covenants and the effect of debt interest, repayment terms and potential additional financing on liquidity.