Tandem 4Q15 – Sales of $29 million smash all-time record on “tremendous” response to t:slim G4; predictive suspend pivotal study this year; t:sport patch pump FDA filing in 2017 – February 24, 2016

This afternoon, Tandem CEO Kim Blickenstaff and CFO John Cajigas led the company’s 4Q15 financial update, highlighting a record-breaking quarter led by the launch of the Dexcom-integrated t:slim G4. Below, we enclose the call’s top ten financial and R&D highlights, followed by a pipeline summary.

Business and Financial Highlights

1. Sales of Tandem’s insulin pumps (t:slim, t:slim G4, and t:flex) and supplies reached a record-high $29.1 million in 4Q15, rising an outstanding 63% year-over-year (YOY) and 85% sequentially. As expected from the 3Q15 call, there was a “tremendous response” to the t:slim G4. The Dexcom-integrated pump carried 4Q15 sales, accounting for 62% of pumps shipped.

2. Tandem shipped a record-high 6,234 pumps in 4Q15, a 59% YOY increase from 4Q14 and an 82% sequential gain from 3Q15. To date, Tandem has shipped 33,825 pumps, encouraging uptake after just three years on the market. “About 50% of shipments” came from MDI patients, suggesting Tandem is still expanding the market at the same rate it is stealing share.

3. Tandem’s 2016 full-year guidance suggests a lot of management confidence going forward: full-year sales of $105 million-$112 million, representing annual sales growth of 44%-54% vs. 2015 – in other words, higher growth from a higher base of sales!

4. Profitability and cash burn improved on the strong 4Q15 sales volume. Gross margin improved to 46% in 4Q15 vs. 37% in 4Q14 and 35% in 3Q15. Current cash of $73 million is sufficient for at least the next 12 months.

5. Consistent with the 3Q15 call, Tandem will increase its sales force size 20% from 60 to 72 reps in 1Q16 (includes one rep and one CDE per territory). The portfolio of three pumps is expected to drive higher rep productivity in 2016: an average of 24-26 pumps per month per territory are expected vs. 21 in 2015 and 17 in 2014. That translates into an expected ~21,500 pumps sold in 2016, a 40% increase (on par with sales).

R&D Pipeline Highlights

6. Tandem plans to conduct an in-clinic feasibility study of its first-gen predictive low glucose suspend system in 2Q16. A pivotal trial will commence by the end of 2016, with the ambitious goal of a commercial launch by the end of 2017. The second-gen hypoglycemia-hyperglycemia minimizer will enter feasibility studies in 2016, a pivotal study in 2017, and a potential launch by the end of 2018. These systems will use either the Dexcom G5 or G6 sensor.

7. In a surprise, Tandem has resurrected t:sport, its wearable patch pump concept last discussed at JPM 2013. The product includes an ~50% smaller t:slim worn on the body, a short infusion set, and pump control via a wireless handheld or mobile app. The product will be actively developed in 2016 and submitted to FDA in 2017. Market research has been encouraging.

8. As expected, Tandem has filed a 510(k) to expand t:slim’s pediatric indication down to patients 6+ years old (it’s currently for 12+ year olds); clearance is expected in 2Q16. Once through FDA, Tandem will file a PMA supplement to expand the pediatric indication to the t:slim G4. This is important to compete with the Animas Vibe, which is now approved down to age two.

9. A 510(k) has been submitted for the “Tandem Device Updater” (now renamed from “Project Odyssey”), allowing remote online updating of the t:slim’s pump software. Tandem anticipates clearance in 2Q16, with a beta rollout to follow shortly. The first update will allow early t:slim customers to upgrade to the slightly improved t:slim software that rolled out last year.

10. In the coming weeks, Tandem will beta lunch the special healthcare provider version of the web-based t:connect data download software. An expanded launch will occur in mid-2016. The rollout was previously expected in 1H16, so this is happening on the earlier side of expectations.

Business and Financial Highlights

1. Sales of Tandem’s insulin pumps (t:slim, t:slim G4, and t:flex) and supplies reached a record-high $29.1 million in 4Q15, rising an outstanding 63% year-over-year (YOY) and 85% sequentially. The sales came on very tough YOY comparison to Tandem’s previous record in 4Q14, $17.9 million (which itself was a blowout quarter). It was particularly impressive to beat 4Q14 sales because 2015 did not see a sales force expansion – that’s a testament to Tandem’s ability to expand the pump market and the early demand for the Dexcom-integrated t:slim G4. Fourth quarter sales accounted for a whopping 40% (!) of the $73 million in total 2015 sales, taking Tandem right to the midpoint of its previously issued guidance ($70-$75 million) – not raising the guidance in the 3Q15 call was clearly a good decision, despite analysts’ views it was conservative at the time. Full-year sales grew 46% from 2014, and management was excited to report the third year in a row with sales growth exceeding 40%: after launching in late 2012, Tandem saw 1,169% growth in 2013, 72% growth in 2014, and now 46% growth in 2015. Is the expected 44%-54% YOY growth in 2016 (an acceleration from a higher base) sustainable?

• As expected from the 3Q15 call, there was a “tremendous response” to the t:slim G4. The Dexcom-integrated pump carried 4Q15 sales, accounting for 62% of pumps shipped (3,857 of 6,234). This was very impressive on several fronts: (i) Dexcom’s G5 launched in 3Q15-4Q15 and saw major uptake, representing a theoretical headwind for Tandem (patients have to decide between data on the pump with t:slim G4 and data on the phone with G5); (ii) Tandem actually had a week of t:slim G4 sales in 3Q15 (486 t:slim G4 pumps shipped), meaning some demand was actually not part of 4Q15; (iii) sales did not reflect any pump renewals, as the first Tandem customers’ warranties expire in late 2016; (iv) Tandem does not have a t:slim G4 upgrade program; and (v) Tandem’s t:slim G4 is not the first Dexcom-integrated pump, as the Animas Vibe has been available since January 2015. All in all, it was an impressive quarter.

Figure 1: Tandem Quarterly Sales – 2Q13-4Q15

2. Tandem shipped a record-high 6,234 pumps in 4Q15, a 59% YOY increase from 4Q14 and an 82% sequential gain from 3Q15. This included 3,857 t:slim G4 shipments (its first full quarter on the market following one week of sales in September), 1,806 t:slim shipments, and 571 t:flex shipments (the second full quarter on the market for the t:slim with an expanded 480-unit reservoir). In 4Q15, average sales rep productivity was 34 pumps per month per territory, nearly doubling 3Q15 (19 pumps per territory) and up from 22 pumps per territory in 4Q14. The vast majority (86%) of total sales in 4Q15 came from new pumps, up from 81% in 3Q15 though identical to 4Q14. We assume this will eventually trend down as Tandem’s patient base expands and revenue from recurring supplies outpaces revenue from new pumps. In 2015 overall, Tandem shipped 15,483 pumps, growing 43% YOY from 2014.

• To date, Tandem has shipped 33,825 pumps, encouraging uptake after just three years on the market. At JPM 2016, Insulet suggested its US patient base at the end of 2015 was ~60,000-70,000 users, meaning Tandem’s base is roughly half the size. [Note: At JPM, Insulet only provided its estimate of a “4% market share” in “1.7 million type 1s”; a more specific patient base number should come on the Q4 call tomorrow.]
• “About 50% of shipments” were to patients new to pump therapy, suggesting Tandem is still expanding the market at the same rate it is stealing share from competitors. Management said of the 1,500 480-unit t:flex pumps shipped in 2015, 60% were to people who previously used MDI. We assume most of that is in type 1, though remarks indicated an increasing number of type 2 t:flex customers. Aside from sales and pump shipment growth, we see the percent-new-to-pump number as the most metric to follow for Tandem’s long-term prospects. Management has not given a specific value in some time, suggesting the stat probably bounces around from quarter-to-quarter.

Figure 2: Quarterly Pump Shipments (2012-2015)

• In a survey of t:slim G4 users, nearly 45% were NOT using CGM before going on the Dexcom-integrated pump. We were excited to hear this metric, as it suggests CGM-pump integration can indeed expand use of CGM; it should also bode well for expanding CGM penetration once automated insulin delivery is available (the so-called “killer app” for CGM). We wonder if most of those t:slim G4 patients were on a competitive pump or if they actually made the double leap from MDI+SMBG to pump+CGM. We also wonder how many patients get on the t:slim G4 but decide not to go forward with using CGM.
• Can Tandem sustain its growth in MDI users? Will the company stay competitive as other automated insulin delivery products likely come to market first (at minimum Medtronic’s MiniMed 670G, whose pivotal trial is expected to wrap up in the coming weeks, with launch expected by April 2017). The t:slim’s touchscreen and cool factor is definitely differentiated from anything on the market right now, but US competition is certain to increase from other pumps with friendlier user interfaces, especially: (i) Insulet’s next-gen touchscreen OmniPod handheld with a paired Dexcom app (submission in 2016); and (ii) Bigfoot’s automated system and potential interim products, which will integrate Dexcom and leverage a smartphone app as the interface.

3. Tandem’s 2016 full-year guidance is ambitious: full-year sales of $105 million-$112 million, representing annual sales growth of 44%-54% vs. 2015 – in other words, higher growth from a higher base of sales. Management’s confidence stems from four factors: (i) a 1Q16 sales force expansion from 60 to 72 reps (see below); (ii) the first full-year with three different products on the market (t:slim, t:slim G4, t:flex); (iii) planned product enhancements in 2016, especially the pediatric indication; and (iv) the first four-year pump renewals starting in late 2016. As in the past two years, sales are expected to be back-loaded in 2H16 due to seasonality and the expanded sales force coming up to speed. We wonder if 4Q15’s demand for t:slim G4 is sustainable into 2016 – management was confident it could, though it is possible this was pent-up demand that will dissipate.

4. Profitability and cash burn improved on the higher 4Q15 sales volume. Gross margin improved to 46% in 4Q15 vs. 37% in 4Q14 and 35% in 3Q15; for 2015, gross margin improved to 36% vs. 31% in 2014. Management emphasized that operating expenses are growing slower than sales, and they were basically flat YOY for the second straight quarter ($24.7 million in 4Q15 vs. $24 million in 4Q14); at the same time, 4Q15 sales increased 63% YOY. Operating margin improved to -39% in 4Q15 from -98% in 4Q14.

• Current cash of $73 million declined $11 million sequentially from 3Q15 (a 31% reduction from 3Q15’s $16 million cash burn). Management believes current resources are sufficient for at least the next 12 months. “Under some scenarios,” cash may be sufficient until Tandem reaches cash flow breakeven. In January 2016, Tandem amended a term loan, giving it access to up to $50 million in addition to the $30 million it borrowed in January 2013. Tandem drew $15 million in January, with a one-time option to access an additional $35 million before the end of 2016. Key factors influencing cash include territory productivity, regulatory approvals, and gaining leverage within operations as sales expand and new products gain market acceptance.
• Management is targeting gross margins of ~60% in 2-4 years, which has now moved up from the previous “3-5 years” as of the 3Q15 call. We’re not sure if management is more optimistic on the margin front, or if the change simply reflects the calendar moving into 2016 from 2015. It is smart that the t:slim, t:flex, and t:slim G4 all leverage the same core manufacturing, despite being three separate products – that should help markedly on the manufacturing volume front going forward.
• A significant 77% of Tandem’s business continues to run through distributors, and management does not see that changing anytime soon. This obviously hurts margins, though the path to going direct was not discussed on this call.

5. Consistent with the 3Q15 call, Tandem will increase its sales force size 20% from 60 to 72 reps in 1Q16 (includes one rep and one CDE per territory). The portfolio of three pumps is expected to drive higher rep productivity in 2016: an average of 24-26 pumps per month per territory vs. 21 in 2015 and 17 in 2014. That translates into an expected ~21,500 pumps sold in 2016, a 40% increase, consistent with the expected 44%-54% sales growth. Management expects some territory disruption, but not as much as seen in 2013 and 2014. In Q&A, management said the sales force could eventually reach ~100 reps, though it hasn’t given guidance on the sales force’s longer-term trajectory. For context, Insulet’s current sales force is ~150 reps, or about twice the size of Tandem’s force.

R&D Pipeline Highlights

6. Tandem plans to conduct an in-clinic feasibility study of its first-gen predictive low glucose suspend system in 2Q16. A pivotal trial will commence by the end of 2016, with the ambitious goal of a commercial launch by the end of 2017. Management did not say how long the pivotal would be, but the timing would imply an FDA PMA review of less than a year – certainly possible, but it would be need to be faster than the 13-month review time for the non-automated t:slim G4. Tandem has already submitted a pre-IDE to FDA, though it sounds like the IDE has not been submitted – if so, this product is running at least a quarter behind the previous expectation (3Q15) to submit an IDE by the end of 2015. For the first time, management revealed that the predictive suspension algorithm has been developed internally, but “in consultation with industry thought leaders.” We wonder how it differs from the algorithm in Medtronic’s MiniMed 640G.

• The second-gen hypoglycemia-hyperglycemia minimizer will enter feasibility studies in 2016 and a pivotal study in 2017. In response to an analyst, management said an end of 2018 launch is a good guess at this point, though this was pretty speculative. For context, this would put Tandem’s hybrid closed loop more than a year behind Medtronic’s MiniMed 670G pivotal study, which is wrapping up in about a week (launch expected by April 2017). The timing is on par with Bigfoot’s plan to enter a pivotal study in 2017 and launch in 2018. Insulet and Animas have not revealed specific timing on their artificial pancreas programs.
• Tandem’s current plan is to use the Dexcom G5 sensor in these automated insulin delivery systems, though it’s “possible” G6 may be integrated instead. Indeed, Dexcom’s 4Q15 call yesterday indicated artificial pancreas partners are working to incorporate G6 into studies. Dexcom will submit the IDE for G6 in the next two weeks, paving the way for a G6 pivotal trial in 2Q16; that timing certainly fits with Tandem’s second-gen artificial pancreas product, though we’re not sure if it will make it for the first-gen predictive suspend system.  
• As a reminder, an FDA meeting in 3Q15 confirmed that Tandem should pursue an incremental path to close the loop: predictive low glucose suspend followed by a hyperglycemia-hypoglycemia minimizer. Initially Tandem had hoped to complete studies for these products simultaneously, but in working with FDA, a sequential development path is preferred. This is the path Medtronic was following with its MiniMed 640G and MiniMed 670G US pivotal studies, but as of JPM, Medtronic will most likely skip the MiniMed 640G in the US. We wonder if Tandem might do the same; presumably Medtronic convinced FDA it made sense to move ahead with the MiniMed 670G; it did have to do the 640G pivotal study, however, and Medtronic does have much more clinical and real world experience with closed-loop devices.   

7. In a surprise, Tandem has resurrected t:sport, its wearable patch pump concept last discussed at JPM 2013. The product includes an ~50% smaller t:slim worn on the body, a short infusion set, and pump control via a wireless handheld or mobile app. The product will be actively developed in 2016 and submitted to FDA in 2017. We had thought this pipeline project was dead, but management said market research last year was positive and t:sport “feels like a viable product.” The on-body component (200-unit reservoir, ~50% smaller than t:slim) now sounds smaller from the original vision of 300-unit reservoir and ~35-40% smaller than the t:slim. Tandem believes the pump could appeal to pediatrics and those desiring something smaller and more discreet. We see this as an answer to competition from Insulet’s OmniPod, Medtronic’s proposed MiniMed Flex (a similar product concept last discussed at Medtronic’s 2014 Analyst Meeting), and Cellnovo’s pump system.

• We think t:sport could be differentiated if patients can dose directly from the phone without a handheld device. It’s a bold project, however, since Insulet’s OmniPod has a better on-body form factor (no short infusion set, automated insertion), Medtronic may be developing something similar with MiniMed Flex (no recent updates), and Cellnovo could conceivably come to the US with its system (though it only has five quarters of cash remaining and has not given a recent US submission update). We assume the costs are not terribly high for Tandem to develop this product, though we wonder if this pump will expand its potential market enough beyond moving faster on automated insulin delivery or other things it could do (e.g., hiring more sales reps, apps).

8. As expected, Tandem has filed a 510(k) to expand t:slim’s pediatric indication down to patients 6+ years old (it’s currently for 12+ year olds). Clearance is expected in 2Q16. Once through FDA, Tandem will file a PMA supplement to expand the pediatric indication to the t:slim G4. The latter is important competitively, as the recent Animas Vibe pediatric approval goes down to age two, the youngest indication for a sensor-augmented pump in the US.

9. A 510(k) has been submitted for the “Tandem Device Updater” (now renamed from “Project Odyssey”), allowing remote online updating of the t:slim’s pump software. Tandem anticipates clearance in 2Q16, with a beta rollout to follow shortly. This is right on par with management’s previous expectations. Initially, the Updater will be a vehicle for smaller software updates for the t:slim and t:flex, with “long-term” potential to activate built-in Bluetooth to enable CGM integration. The first software enhancement to launch will allow early t:slim customers to access the updated t:slim software that began shipping with new pumps last year – this included a number of changes based on customer and HCP feedback, including a streamlined cartridge change process (great to see this being addressed, as it was a criticism in diaTribe’s test drive back in 2012). We see this as an excellent 21^st century way to keep pump software up to date, and hope all diabetes devices can move in this direction. As a reminder, Bigfoot also plans to offer remote firmware upgrades with its system.

• It may eventually be possible for Tandem to remotely update the t:slim’s software and turn on the t:slim’s and t:flex’s built-in Bluetooth radio; that would enable Dexcom G5 compatibility without needing a brand new pump. The regulatory specifics seem complicated here. Can the 510(k) cleared original t:slim and t:flex be software updated to become a PMA-regulated G5-integrated pump? It’s hard to know how the FDA will think about that, though from a patient perspective, we don’t see that kind of software update as very high risk. As a reminder, it is not possible to make the t:slim G4 compatible with G5, as the radios are different.

10. In the coming weeks, Tandem will beta lunch the special healthcare provider version of the web-based t:connect data download software. An expanded launch will occur in mid-2016. The rollout was previously expected in 1H16, so this is happening on the earlier side of expectations. Management said t:connect HCP will have prescriber features, including different reporting, easier sharing, and streamlined access to multi-patient data. Medtronic has been the leader in courting HCPs with CareLink, though the data field is moving fast; in recent months, we’ve been particularly impressed with Glooko’s progress, especially on the insulin dosing advice front. Would Tandem’s time be better spent outsourcing data management (Diasend, Glooko, Tidepool) rather than building it in house? It’s a tough call. We also see Dexcom’s Clarity and Abbott’s AGP software as excellent options too. A bigger question in our view is integrating with electronic health records (e.g., as we saw at DTM with Dexcom/EPIC) – which company will nail the provider workflow aspect of diabetes data?

Pipeline Summary

-- by Adam Brown and Kelly Close