Tandem 3Q19 – Control-IQ FDA approval still expected in Q4 (“very confident”); Record sales of $95 million rise 105% on 17,839 pumps shipped – November 4, 2019

Tandem reported 3Q19 financial results today in a call led by Executive Chairman Kim Blickenstaff, CEO John Sheridan, and CFO Leigh Vosseller. Check out our top highlights below!

Financial and Business Highlights

1. Global Revenue Jumps 105% YOY to Record $95 Million; US Sales Increase to $79 Million, Rising 80%; OUS Sales Grow 5x to $16 million

Tandem reported record worldwide sales of $95 million in 3Q19, rising an impressive 105% YOY on a tough comparison to 71% growth in 3Q18. Sequentially, sales rose 2%, just surpassing the $93 million record set in 2Q19. Tandem has now seen eight straight quarters of >50% YOY sales growth, five consecutive quarters of >70% growth, and three straight quarters of sales more than doubling – truly remarkable momentum, and the best may be yet to come with Control-IQ! As usual, pump shipments made up the majority of sales (67%), followed by infusion sets (22%) and cartridges (11%).

• US sales totaled $79 million, rising a strong 85% YOY on a very difficult comparison to 80% YOY growth in 3Q18. Domestic sales drove 72% of overall company growth in 3Q19, with management citing continued popularity of Basal-IQ (predictive low glucose suspend). The availability of a free software update to Control-IQ is also critical, as it helps de-risks the choice of order timing for new users – “I can get on the t:slim X2/Basal-IQ now and be assured of getting Control-IQ quickly and without spending more money.” Even still, management did note some pausing has happened in the US market ahead of Control-IQ, which implies there will be pent-up demand once the launch actually happens. Tandem started 2019 with approximately 70 US territories, and based on demand, has increased scaling efforts to have 90 territories by early next year.

• International sales totaled $16 million, rising an impressive 532% on the first ever YOY comparison available. Sales declined 31% sequentially from the record $23 million in 2Q19. This marks the fifth quarter of t:slim X2 on the OUS market and the first ever sequential decline (see green line below). The sequential decline was likely driven by the disappearing number of Animas users OUS, along with fulfilling a lot of pent-up demand in 2Q19. Management also cited a possible hesitancy for international customers from buying a new t:slim X2 due to anticipation of Basal-IQ in their countries.

2. Pump Shipments of 17,839 Up 112% YOY; In-Warranty US Installed Base of 107,000; Half of New Users Still Coming from MDI

Tandem shipped 17,839 pumps worldwide in 3Q19, more than doubling (+112%) from 8,434 in 3Q18 but falling 16% sequentially. US pump shipments reached a remarkable 13,814, easily passing the 4Q18 record of 12,935. International shipments totaled 4,025, more than quadrupling YOY (+282%) from 3Q18, the first quarter of availability, but down 52% sequentially. As noted above, Tandem fulfilled significant pent-up demand in 2Q19.

• Tandem’s in-warranty US installed base crossed the 100,000 mark for the first time, hitting 107,000 at the end of the quarter. Globally, the company has approximately ~129,000 in-warranty customers (22,000 international). Note that these are both very conservative estimates, as they only count pump purchases in the past four years. In reality, Tandem is still renewing pumps from warranties that expired in 2016-2017 – i.e., 3-4 years later!

• US pump shipments included approximately 2,000 renewals, nearly doubling from ~1,100 in 3Q18. Cumulatively, Tandem has renewed “more than 12,000” of “approximately 24,000” renewal opportunities, in line with the “about half” renewal rate we saw through the first half of the year. As its US installed base continues to grow, scaling renewals will be an important of Tandem’s business. With strong Basal-IQ uptake and impending launch of Control-IQ as the first-to-market Dexcom-integrated hybrid closed loop, Tandem is in good position to keep its customers on t:slim pumps. Perhaps the biggest wild card is reimbursement and coverage – i.e., Insulet’s pharmacy model with Dash and Medtronic’s preferred deal with UHC.

• Approximately half of Tandem’s new users still come from MDI, in line with past few years. Tandem is continuing to expand the pump market at a fast rate, and we’ll be eager to see if that changes once Control-IQ is available – many believe automated insulin delivery will be the “killer app” for pumps, making them more of a must-have. In 2Q19, Insulet shared that “approximately 80%” of its new users were MDI converters, and it’s clear that both companies are helping to expand the pump market. It will be interesting to see how much momentum Insulet drives with Omnipod Dash available at no PDM cost (pay-as-you-go) – will Tandem and Medtronic pursue “subscription” pump therapy, exchanging upfront revenue (for a new pump) with predictable monthly sales?

3. Gross Margin of 54%; Cash-Flow Positive: $157 Million in Cash, +$26 million; Adjusted EBITDA +$13 Million, Net Loss of $3 Million

Tandem’s profitability metrics are moving in the right direction:

• Tandem ended the quarter with $157 million in cash, up from $131 million in 2Q19. This marked the second straight quarter of positive cash flow, following +$5 million in 2Q19 (1Q19 had a $2 million burn). This is impressive for a pump company growing this fast, and an expectation going forward – even with investments in manufacturing capacity and a lot of marketing and sales investment for Control-IQ. Tandem had previously guided to begin generating cash from operations in “2H19,” though it has already achieved this on a year-to-date (Q1-Q3) basis.

• Gross margin for 3Q19 was 54%, up from 47% in 3Q18. The 54% level is consistent with margin expectations for the full year, driven by higher sales and higher manufacturing volume.

• Operating expenses totaled $57 million in 3Q19, rising 50% YOY – less than half the rate of revenue growth. Tandem is still showing awesome leverage in the business.

• Net loss was just $3 million, significantly improved from a net loss of $34 million in 3Q18. Gross profit of $51 million increased 133% from $22 million in 3Q18. Adjusted EBITDA, which excludes stock-based compensation, came positive for the fourth consecutive quarter at $13 million – a significant improvement from -$4.7 million in 3Q18.

4. 2019 Guidance Raised by $8 million on Low-End: $358-$365 Million (+95-99% YOY)

Management increased full-year 2019 guidance to between $358-$365 million, raising low-end expectations by $8 million, while keeping the high-end of guidance the same as that of 2Q19. The updated guidance now reflects annual sales growth of 95%-99%. It’s been quite a year for sales guidance raises: in 2Q19, management increased expectations by a whopping $50 million; in 1Q19, it was raised by $45 million! The low-end guidance raise stems from optimism around continued growth in the US market, excitement for the launch of Control-IQ (4Q19; see below), and continued international roll-out of Basal-IQ. Adjusted EBITDA for the year is expected to end positive, between 7%-12%.

• Full-year guidance for US revenue was narrowed slightly from the previous $295-$305 million to the new $300-$305 million. At the mid-point, this represents impressive 74% YOY growth for Tandem in the US. International revenue guidance was narrowed from the previous $55-$60 million to the new $58-$60 million – a five-fold rise in sales in 2019.

Pipeline Highlights

1. “Very Confident” in Control-IQ FDA Approval in 4Q19; “Off the Charts” Excitement; Free Software Update Will Require New Rx

CEO John Sheridan stated he was “very confident” that the Control-IQ hybrid closed loop would be approved by the FDA “this quarter” (i.e., before the end of 2019) – no change in timing. Mr. Sheridan added that there have been “no concerning issues” with the FDA regarding Control-IQ, and the ongoing review process was characterized as “routine” and “interactive.” Mostly, he used the word “pending” to characterize the approval, implying it may be very close to the finish line. The control algorithm was submitted for FDA review in ~July following strong “landmark” pivotal trial results at ADA 2019 and the prestigious publication in NEJM two weeks ago. Impressively, the 4Q19 launch timing is unchanged since 1Q19. As a reminder, only the Control-IQ algorithm itself is being reviewed, as the t:slim X2 ACE pump and Dexcom G6 iCGM are already FDA cleared. Following Control-IQ approval for 14+ years of age, Tandem will “take a few weeks” to educate providers on features and functionality, before shipping out pumps to new users and rolling out the free home software update for current t:slim X2 users. That cadence implies that even if approval comes this week, the launch may not technically happen until December. (Indeed, Tandem has not factored the launch of Control-IQ into its revenue guidance.) In anticipation of the launch, Tandem has already begun training its sales teams on Control-IQ – we expect strong uptake for this highly usable advanced hybrid closed loop system (no fingersticks, no juggling modes, automatic boluses). It should drive quite a 2020 for Tandem in the US and for expanding the automated insulin delivery (AID) field.

• Two weeks ago, results from Control-IQ’s pivotal were published in the prestigious NEJM, alongside an editorial from University of Padova’s Dr. Daniela Bruttomesso. Importantly, Executive Chairman Kim Blickenstaff noted that getting Control-IQ data in NEJM will be “invaluable” in conversations with HCPs and payers. A big priority for Tandem is re-securing coverage from UnitedHealthcare following Medtronic’s exclusive, expanded deal (February). Tandem estimates UHC has 50 million covered lives in the US, backing out to ~250,000 people with type 1 diabetes that Tandem is currently prevented from accessing. (Insulet is exempt from the UHC/Medtronic deal.)

• Control-IQ is expected to be an “inflection point” for Tandem, and Mr. Sheridan called the level of awareness around Control-IQ “off the charts.” The high level of interest for Control-IQ created some “pausing” in new pump purchases in the quarter, as patients and providers anticipate the new algorithm’s approval. (The pause was not quantified, but certainly didn’t slow down record sales!) Notably, this pause was seen despite the fact that Tandem announced on their 2Q19 call that Control-IQ would be a free software upgrade for all in-warranty t:slim X2 users in the users or any t:slim X2 pumps purchased before December 31, 2020. In Q&A, Mr. Sheridan implied the pause relates to HCPs not wanting to do double work – prescribing Basal-IQ and then re-prescribing Control-IQ (see below). This is a good point and reminder for the field – even free software updates may have some “market pause” associated with them. In the past, market pauses like this were standard (e.g., Dexcom, Tandem, Medtronic) because innovation was historically delivered via brand-new (expensive) hardware.

  • “The decision (to buy the t:slim X2) really comes down to the interaction with the physician and the person who wants to acquire the new technology. I think the physician is just recommending that they wait until Control-IQ is available, because it’s easier for them, since they don’t have to go through the download process. We could argue that the downloading process is very simple, and it’s not that big of a deal, but I think that’s what it is coming down to … If physicians were to prescribe the pump today with Basal-IQ, they will have to come back and prescribe it as a Control-IQ pump in just a short period of time. I think it’s a combination of those issues that are really affecting that decision process.” – Mr. John Sheridan

  • The comment above confirmed our expectation that Control-IQ will indeed require a new prescription before the free home software update – even for current Basal-IQ users. Control-IQ will also require completion of a “brief” online training module, per 2Q19 remarks. None of this is surprising, as it parallels the move from the t:slim X2/G5 to add Basal-IQ/G6.

  • Tandem remains the only US pump company that offers free, in-warranty software pump updates that can be done at home. Medtronic plans to add this feature with the MiniMed 780G (anticipated by ADA 2020), while Insulet’s Omnipod will presumably offer this eventually (either via the Dash handheld or once Horizon is launched and controlled via an app). We salute Tandem for offering such a meaningful leap in innovation as a free update for current users via the Tandem Device Updater.

• The pediatric pivotal (ClinicalTrials.gov) for Control-IQ has finished recruitment and remains on track for FDA submission in 1Q20. The four-month study (n=150) will support Control-IQ approval for patients 6-14 years – excellent of Tandem to move this so quickly! For context, Medtronic’s 7-13 year old approval came 21 months after the initial adult/adolescent approval. As of 2Q19, management thought pediatric approval for Control-IQ could come before summer 2020, where diabetes camps will offer a “significant educational and market opportunity.”

• International launch details for Control-IQ were not shared, though it will “probably” be discussed on Tandem’s 4Q19 call. We’d guess mid/late 2020 would be the absolute earliest we might see the hybrid closed loop in OUS markets. A CE Mark/Health Canada filing has not been discussed; it’s possible Tandem is waiting for the FDA approval before moving ahead on OUS filings.

Control-IQ and t:connect Mobile App From the AADE Exhibit Hall

2. t:slim X2 Smartphone App to Launch Concurrently with Control-IQ

As shared in the AADE 2019 Exhibit Hall, today’s call confirmed the t:connect smartphone app will launch concurrently with Control-IQ – allowing patients to upload their t:slim X2 pump data and Dexcom G6 CGM data to the t:connect web platform wirelessly. The anticipated 4Q19 launch timing comes delayed from 1Q19 expectations for a launch in “summer” 2019. Still, the new app will remove the burden of cabled data transfer for both patients and providers – a huge win, a necessary driver for more continuous/remote management, and the potential first no-cable-upload for a pump in the US. (Insulet has not yet launched automatic uploads for Dash - from what we can tell, Dash must still be plugged in to a Mac/PC to upload to Glooko.) Mr. Sheridan shared that more features would be rolling out the app, “at a steady cadence” in 2H20.

• The t:connect app offers secondary display (mirror) of pump information, including Dexcom CGM trend, insulin on board, recent boluses, and basal information. The user interface looks friendly and very useful! It will be interesting to see how Tandem displays the automated basal and bolus dosing with Control-IQ – will it look like the below? For context, the Tandem app has a tighter integration with Dexcom, showing CGM and insulin delivery data within the same app; Insulet’s Dash Display app only shows the pod’s insulin information, requiring the Dexcom app to be running separately.

3. t:sport Hardware Design is “Final”; Anticipated Submission as ACE Pump in “Summer” 2020; FDA is “Bullish” on Smartphone Control

In the first significant update on Tandem’s t:sport pump since 1Q19, we learned that the hardware design is now “final,” with focus moving to software. The ~50% smaller, no-screen pump will be submitted to FDA in “summer” 2020, in line with earlier expectations; with this timing, a launch of t:sport seems possible before the end of 2020. Tandem confirmed that the device will be submitted as an ACE pump, the interoperable category created by Tandem in February with t:slim X2. As a reminder, t:sport is a screenless, wirelessly controlled tubed pump (short infusion set), which will include the Control-IQ algorithm and iCGM integration (no new clinical data will be needed). t:sport is half the size of the current t:slim; will switch to a syringe-driven pumping mechanism (a big manufacturing change for Tandem); and will add wireless charging, water resistance, an on-device bolus button, and an easier fill process. Closed loop will still run on the pump if the phone is out of range, keeping Tandem more competitive with the on-body system design of Insulet’s Omnipod Horizon.

• Tandem reiterated plans to have smartphone control for t:sport, with Mr. Sheridan calling the FDA “very bullish” on having phone control of insulin delivery. Still, the company is also working on developing a dedicated device (likely a locked-down touchscreen device, similar to Omnipod Dash), in parallel with its smartphone app. For many patients, having direct smartphone control of their pumps will be a major win for ease of use, and it’s going to be a race to see who will launch with this first – Tandem? Insulet? Medtronic? Tidepool Loop?

Slide taken from Tandem’s 2018 Analyst Meeting.

4. Basal-IQ Available in “Half” of Tandem’s OUS Countries; t:slim X2 to Expand into Germany, France, and Three More Countries in early 2020

Tandem’s predictive low glucose suspend algorithm, Basal-IQ, is now available in “half” of its OUS countries, following US launch just over a year ago. The Tandem Device Updater became available on September 30, which will enable current t:slim X2 users to upgrade their devices and add G6 integration and PLGS functionality. The cadence of countries for Basal-IQ launch will continue to depend on Tandem’s distribution partners, regulatory progress, reimbursement, and where Dexcom’s G6 is available. Basal-IQ has done very well in the US and it certainly makes Tandem more competitive against Medtronic OUS, where the 640G has been available for some time and 670G continues to launch in new countries.

• Starting in early 2020, Tandem plans to expand into five new countries: Germany, France, Belgium, the Netherlands, and Luxembourg. Tandem recently signed agreements with experienced distributors who service these regions – offloading the customer service, training, and sales. France and Germany are large pump markets and provide a meaningful opportunity for Tandem next year. As far as we know, Dexcom’s G6 is not yet available in France or Belgium, but the availability of Basal-IQ should help Tandem compete with Medtronic as Tandem enters the sizeable German market. Launch of MiniMed 670G is expected in Germany and France by April 2020, and the MiniMed 640G with PLGS is already available.

• At last week’s ISPAD Congress 2019, Tandem had a poster showing incredibly positive pediatric (ages 6-17) real-world data on Basal-IQ. The data, uploaded to t:connect between August 2018 and March 2019, showed 0.9% of time spent under 70 mg/dl, or just 13 minutes per day and far less than observed in clinical trial settings! Additionally, the subgroup for which before and after Basal-IQ data was available (n=491) showed a reduction in time <70 mg/dl from 1.6% to 1.1% (~7 minutes/day; 31% relative reduction, p<0.001). The ability to significantly reduce hypoglycemia from an already-low baseline is certainly a major testament to Basal-IQ’s effectiveness.

5. Partnership with Abbott Still Being Finalized; Don’t Anticipate Meaningful Impact “Until 2021”

Following last month’s announcement, prepared remarks only briefly referenced the plan to integrate a “next generation” Abbott FreeStyle Libre CGM with Tandem’s insulin pumps. CEO John Sheridan was fairly cryptic, noting “There are a number of steps in finalizing this agreement.” Abbott also made reference to the partnership on its 3Q19 earnings call, a positive sign of both companies’ commitment to working together and interoperability, more broadly. When asked about integrating FreeStyle Libre 2 during Q&A, Mr. Sheridan made it very clear that Tandem has not even committed to which Abbott device the company plans on integrating (i.e., FreeStyle Libre 2 or something else down the pipeline). Additionally, he noted that the partnership probably would not have a “meaningful impact on revenue or growth” until 2021. See our report for a list of what potential integrations could look like.

--by Albert Cai, Ani Gururaj, Adam Brown, and Kelly Close