Business context and reporting period
Tandem Diabetes Care, Inc. designs and sells insulin pumps and related disposable supplies for people with insulin-dependent diabetes. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; financial amounts below are in U.S. dollars. Its t:slim X2 platform accounted for all new pump shipments. The company launched t:slim X2 with Basal-IQ in the U.S. in August and began sales in select international markets.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $46.3m | $27.0m | $107.7m | $67.3m |
| Gross profit / margin | $21.8m / 47% | $11.9m / 44% | $48.3m / 45% | $26.6m / 40% |
| Operating loss | $(15.7)m | $(13.2)m | $(45.2)m | $(53.4)m |
| Net loss | $(34.2)m | $(16.0)m | $(126.3)m | $(61.6)m |
| Net loss per share, basic and diluted | $(0.62) | $(3.09) | $(2.81) | $(13.79) |
For the first nine months, operating cash used was $22.5m, versus $54.5m in 2017. Investing activities used $84.1m, mainly reflecting purchases of short-term investments; financing provided $115.2m, primarily from equity offerings and warrant exercises, partly offset by debt repayment. Cash and cash equivalents were $32.3m and short-term investments $81.3m at September 30, for combined liquidity of $113.6m. Current assets were $162.7m and current liabilities $58.6m. The company reported no outstanding term-loan borrowings at quarter-end.
Stockholders’ equity was $115.4m, compared with a $29.1m deficit at December 31, 2017. The company had an accumulated deficit of $603.8m. Nine-month weighted-average shares were 45.0m versus 4.5m a year earlier; 57.4m shares were outstanding at September 30.
Material changes versus the prior comparable period
- Sales increased 71% in Q3 and 60% for the nine-month period. Worldwide pump shipments rose 118% in Q3 to 8,434 and 81% for nine months to 18,325. Growth reflected pump shipments, increased supply sales and initial international sales.
- Gross margin improved, supported by higher volumes and manufacturing efficiencies. Comparisons are affected by the expired Technology Upgrade Program, which had increased 2017 gross profit and margins; management cites a 5 percentage-point Q3 benefit and a 3 percentage-point nine-month benefit in 2017.
- Nine-month operating loss narrowed, but net loss increased substantially, largely because of a $69.0m noncash warrant fair-value loss and a $5.3m debt-extinguishment loss. Q3 also included a $12.3m warrant revaluation loss.
- The company repaid its $82.7m term-loan principal in August, with total cash repayment of $87.7m including accrued interest and fees. Repayment removes future interest and other costs under that loan, but accelerated recognition of the remaining debt discount produced the extinguishment loss.
- Equity offerings and warrant exercises raised significant capital and substantially increased shares outstanding, while the share-price rise also increased stock-based compensation expense.
Outlook, management commentary and risks
Management expects operating losses and negative cash flows to continue for at least the next 12 months, but believes cash and investments on hand will meet liquidity needs for at least that period. The filing provides no numerical revenue or earnings guidance. Management’s stated priorities include sales growth, pump renewals, increasing supply sales, manufacturing efficiency, product development and international expansion.
Basal-IQ received FDA approval in June 2018 and launched in August. For Control-IQ, management planned an iPump 510(k) filing in Q4 2018 and a separate algorithm submission in the first half of 2019, subject to clinical results and regulatory review. The filing also describes development of the smaller t:sport pump and a mobile application.
Key risks include continued losses and possible future financing needs; competition and reimbursement limitations; dependence on distributors, suppliers and Dexcom integration; execution of product launches and clinical/regulatory plans; manufacturing capacity and quality; product liability and intellectual-property disputes; and uncertainty in international expansion. The filing notes a prior FDA Form 483 with two observations at the Barnes Canyon facility; the FDA had said it would address them at a future inspection. A voluntary recall of 55 t:slim G4 pumps was closed August 29, 2018. No material legal loss was considered probable or estimable at quarter-end. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether sales growth and pump renewals continue, including shipment trends and recurring supply sales.
- Whether gross-margin improvement persists after accounting for product mix, warranty costs and the 2017 Technology Upgrade Program comparison.
- Whether liquidity remains adequate given ongoing losses, planned investment and any need for further capital; also monitor dilution from equity and warrants.
- Whether Control-IQ development, clinical evidence and regulatory filings meet the stated timetable, and whether Basal-IQ gains market acceptance.
- Whether the FDA’s follow-up inspection resolves the Barnes Canyon observations and whether manufacturing quality, supply availability and product reliability remain satisfactory.