Memorandum

Tandem 2Q18 – Sales rise 60% YOY to $34 million, second-best ever; Basal-IQ launch in August w/ G6; Control-IQ pivotal enrolling, summer 2019 launch – July 30, 2018

Executive Highlights

  • Tandem reported strong 2Q18 sales of $34 million, up 60% year-over-year (YOY) and 25% sequentially. The quarter just reported feels a long way from the $21 million reported at this time a year ago! Although the YOY comparison to a 7% decline in sales in 2Q17 was easy, still, 2Q18 revenue represents the second-highest sales in Tandem’s history, only shy of the blowout record $40 million in 4Q17. The strong momentum came from excitement for Basal-IQ/G6 (launch next month), strong conversions from Animas and Medtronic patients, and 800 pump renewals from existing customers (more than doubling YOY). As a reminder, although Basal-IQ/G6 doesn’t “launch” until August, everyone benefits since it’s a free software upgrade.

  • An impressive 5,447 pumps were shipped in 2Q18, a 59% YOY gain and a very strong 23% sequential rise. This brings the estimated “active installed base” to over 66,000 users (pumps shipped in the last four years), and total pumps since inception to over 78,000. “About half” of Tandem’s organic new customers (i.e., non-renewal) came from MDI, similar to previous quarters.

  • In a big vote of confidence, 2018 sales guidance was raised to $140-$148 million (+30%-38% YOY), up from the previous $132-$140 million (+26% YOY). We believe there may well be room to increase guidance again but we’re impressed this increase was meaningful, over 5%.

  • Tandem’s cash position continues to improve, with ~$97 million on hand, up from $82 million at the end of 1Q18 and up from $38 million a year ago. Current cash should last until breakeven in 2H19, assuming the installed base gets to >80,000 customers ordering supplies (it’s already >66,000); and (ii) gross margins get to 55% (currently at 44% and improving).

  • Details on Tandem’s OUS strategy and AID pipeline will come at its first-ever Investor Day on September 25 – in-person in San Diego and via live webcast. Following a CE Mark in April for the t:slim X2 pump with Dexcom G5 integration, an international launch is expected in“2H18,” with “modest” OUS sales this year.

  • In line with FDA approval just before ADA, Tandem will ship the t:slim X2 with Basal-IQ (predictive low glucose suspend)/Dexcom G6 integration in August. Current X2 users get a free home software update to add PLGS/G6 integration.

  • The pivotal study (n=168) of Tandem’s second-gen AID system, Control-IQ, is now enrolling. A US launch is expected in “summer 2019,” a slight delay from the previous ambitious goal to launch in “1H19.” Notably, Tandem will submit Control-IQ (Dexcom G6 CGM, TypeZero algorithm with basal modulation auto-correction boluses) as a rolling, “modular” PMA, with the first part going to FDA this September – enabling the agency to review it in pieces, rather than waiting for the study to complete in April 2019. We appreciate FDA is enabling this – it reminds us about progress in oncology we recently wrote about “FDA approves first therapy through “Real-Time Oncology Review.”

Tandem reported very strong 2Q18 financial results this afternoon in a call led by CEO Kim Blickenstaff and highly-respected new CFO Leigh Vosseller. The top financial, business, and pipeline highlights are included below!

 

Financial and Business Highlights

1. Sales of $34 million rise outstanding 60% YOY on easy comparison; second highest sales in Tandem’s history

Tandem’s 2Q18 sales of $34 million rose an impressive 60% year-over-year (YOY), albeit vs. an easy comparison to a 7% decline in sales in 2Q17. Sales rose a strong 25% sequentially from an already-robust 1Q18, a terrific sign of momentum entering 2H18 as Basal-IQ with Dexcom G6 integration launches in August. This represented the second-highest sales in Tandem’s history, only shy of the blowout record $40 million in 4Q17. Tandem also handily crossed $30 million this quarter, only the second time it has ever crossed this milestone (the other being 4Q17). Pump sales came in at $21 million (62% of total sales), with supply sales of $13 million comprising the remainder; both grew in line with overall revenue, a positive sign. Given 5,447 pumps shipped, this also implies Tandem is receiving just under $4,000 per pump.

  • Management attributed the strong momentum to excitement for the FDA approved Basal-IQ/G6 (August launch), strong conversions from Animas and Medtronic patients, and pump renewals from existing customers (800 in 2Q18, more than doubling YOY). 2Q18 was the second quarter in which Tandem sold infusion sets to its entire installed base following the t:lock connector’s launch in late 2017. Clearly this is having a nice impact on revenue.

    • We suspect the t:slim X2’s software update feature is also helping many patients de-risk the pump choice decision – patients know that if they get on t:slim X2 now, they’ll be able to software update to Basal-IQ for free and to Control-IQ (cost not specified) once it is available next year. Plus, Tandem has the only Dexcom-integrated pump right now in the US, an advantage it will have for at least the rest of this year. As a reminder, Insulet’s Omnipod Dash is only “integrated” on a user’s own smartphone.

Tandem Quarterly Sales, 2Q13-2Q18, millions

 

2. 5,447 pumps shipped, strong +59% YOY, +23% sequentially; active installed base over 66,000; 78,000 pumps shipped since inception

Tandem shipped 5,447 pumps in 2Q18, a 59% YOY gain from 3,427 pumps shipped in 2Q17. This brings the estimated “active installed base” to over 66,000 users (pumps shipped in the last four years), and total pumps since inception to over 78,000. In line with sales, pump shipments increased 23% sequentially from 1Q17. Consistent with 4Q17 and 1Q18, “about half” of Tandem’s organic new customers (i.e., non-renewal) came from MDI, a great sign for expanding the market – this is down from 60% a year ago, when Tandem was not converting so many current pump customers, presumably mainly Medtronic. Tandem estimates it has a 12% pump market share in the US, implying a US pump market of ~550,000 users (assuming Tandem is using the more conservative installed base figure of 66,000).

  • Notably, Tandem saw double the number of Medtronic pumper conversions and double the number of Animas pumper conversions as in 2Q17 – signs it is holding/expanding share against Medtronic and capturing Animas users, as we expected. The specific number wasn’t broken out, but taking 5,447 pumps and subtracting 800 renewals (see below) and ~2,700 shipments to MDI users leaves just over 1,900 pumps shipped to pumpers coming from other companies.

  • Tandem shipped 800 renewal pumps in 2Q18, more than double the 300 shipped in 2Q17. Total renewals to date are 3,200. Tandem shipped 9,252 pump between 2Q12 (inception) and 1Q14, meaning the current renewal capture is 34% of total opportunities. Notably, Tandem is still seeing renewals from customers in 2012 (!), meaning many pumps are used well past their four-year warranty expiration. We also assume many users need time to run things through insurance, even if they renew right when four years are up. Tandem’s goal remains a retention rate of 70%, and we assume the 34% will improve meaningfully in the coming quarters once Tandem launches Basal-IQ.

Tandem Quarterly Pumps Shipped, 2Q13-2Q18

3. 2018 sales guidance raised meaningfully to $140-$148 million (+34% YOY), up $8 million from previous $132-$140 million

In a meaningful vote of confidence entering 2H18, Tandem has raised its 2018 sales guidance ~6% to $140-$148 million, an $8 million boost from the previous $132-$140 million. This translates to expected 2018 growth of 30%-38% YOY, up markedly from the previous expectation for 26% YOY growth. The confidence stems from “enthusiasm” for Basal-IQ (pipeline not quantified) and what Tandem expects for renewals and growth in infusion set sales. Tandem expects the usual seasonal trend, with more sales in 2H18 and especially in Q4. For context, Tandem’s 1H18 sales are ~43% of the way to the new guidance’s midpoint, meaning this is not conservative guidance – it does need to execute well on Basal-IQ’s launch to hit this. Tandem is well ahead of where it was in 2017 – when only 38% of its sales came in 1H17 – however, it had a rough start to 2017 and picked things up meaningfully in 2H17. The new guidance range reflects “only modest expectations for OUS sales” this year, in line with previous comments. We think the guidance is definitely achievable given Basal-IQ and no major competitive products expected from Medtronic or Insulet in 2H18. (Dash is only in limited market release in 2H18.)

4. Cash at $97 million, only $8 million burned in Q2; enough cash to get to breakeven in 2H19 (assuming 80,000+ users, 55% gross margin)

Tandem’s cash position continues to improve: as of June 30, it had ~$97 million in cash and equivalents, up from $82 million at the end of 1Q18. This reflects additional warrants exercised in 2Q18 (+$22 million in proceeds, way ahead of schedule), minus net cash use of only $8 million in the quarter – wow! The business is also showing nice operating leverage – operating expenses increased 8% YOY compared to 60% YOY revenue growth, which is fantastic progress. Tandem continues to believe it has enough financial resources to get to cash-flow breakeven in 2H19. The latter rests on two main assumptions: (i) Tandem has an installed base of at least 80,000 customers ordering supplies on a consistent basis (it’s already over 66,000); and (ii) gross margins get to 55% (currently at 44%). The installed base number is very doable, given the pipeline (see below) and OUS entry, the current base of >66,000 customers, and growth guidance for the rest of this year alone. Better than expected revenue will also obviously help.

  • Gross margins reached 44% in 2Q18, up a remarkable six-percentage points from 38% in 2Q17, and up nicely from 42% in 1Q18 and 43% in the record-breaking 4Q17. CFO Leigh Vosseller noted higher volumes, process efficiency, and capturing infusion set sales as key factors in the quarter’s margin expansion.

  • Tandem’s market cap is now at ~$1.2 billion, quadrupling where it stood in our 1Q18 coverage. Investor confidence is certainly up, and CEO Kim Blickenstaff noted today’s call had the largest audience in its history (and this doesn’t even count the replay audience).

5. OUS launch in “upcoming months” (2H18) following CE Mark; more details at September 25 Tandem Investor Day in San Diego

Following a CE Mark in April for the t:slim X2 pump with Dexcom G5 integration, an international launch is expected in the “upcoming months.” Management reiterated the previous “2H18” launch expectation, with “modest” OUS sales this year. Tandem has signed distributor contracts for Europe (UK, Spain, Italy, Scandinavia), Australia/New Zealand, and South Africa. There was no update on Health Canada approval, which was submitted in February. However, the 10-Q filing specifically mentions the 2H18 OU launch will include Canada. Tandem has never given OUS timing expectations on G6 integration, Basal-IQ, or Control-IQ.

  • Details on Tandem’s OUS strategy – timing, specific countries, strategy – will come at its first-ever Institutional Investor Day, to be held in San Diego on September 25 and webcast. Management said the day will focus on the automated insulin delivery pipeline and international timing/strategy. This is excellent news – Insulet’s first investor day in 2016 was a goldmine for pipeline and business updates, and Medtronic’s biennial investor day (see June 2018) is always jam-packed with diabetes updates.

  • In line with previous comments, a big focus is on capturing Animas patients in OUS geographies; management estimates approximately half of Animas’ 90,000 users were outside the US. This leaves a theoretical ~45,000 pumpers up for grabs – assuming most haven’t moved to another pump – presumably mostly focused in Canada, western Europe, and perhaps some in Australia.

6. Comments on the US Competitive Pump Environment

CEO Kim Blickenstaff and CFO Leigh Vosseller had multiple comments on the US pump environment, touching on Medtronic and the importance of the next 1-2 years for Tandem to capture share:

  • What about Medtronic’s new $25,000 performance guarantee for the MiniMed 670G? “That program is not completely clear in how it works and who is a candidate to have that hospitalization cost reimbursed. But in terms of implications, Medtronic now has a guarantee to reimburse for negative outcomes [that do occur]. We want to save the system cost by eliminating these outcomes, rather than have the system incur cost and then have to reimburse them. Reduction in hypoglycemia and hyperglycemia - I think that is what counts. Eliminating adverse outcomes rather than reimbursing for a system that causes them.” – CEO Kim Blickenstaff

    • Editor’s note: This was clever, on-the-feet framing, though the two are not mutually exclusive. Medtronic’s promise to reimburse for any hospitalizations that 670G users have is basically a warranty on the product, capping the downside a payer might have. At the same time, the 670G has also shown it can reduce hyperglycemia/hypoglycemia, and perhaps the key point here is that Medtronic has not built a business model around hyperglycemia/hypoglycemia mitigation.

  • “We’re entering a new era in durable pumps – it’s us or Medtronic. In the past, we had Roche, Animas, and Deltec going some years back. Now it’s a two-player race. It’s also different than last year, when the 670G was not widely available. The number of choices have been reduced. Patients can go back to MDI, but that is not going to be the preferred care going forward. The transfer over to Insulet (from durable pumps) has not been high percentage. As we look at renewals and Animas patients, we’re now down to two choices, and we’re good on head-to-head product features, and future availability of features and advances.” – CEO Kim Blickenstaff [Editor’s note: there was no comment on momentum associated with tubeless pumps.]

  • On guidance and mid/long-term growth prospects: “This year, we have an amazing opportunity and a narrow window – we’re one of few competitors (in the US) and we have a few really good products coming. (Our long-term) opportunity depends on what happens with the competition and what other players come into the market (with AID). This year and next, we want to capture as many customers as possible, while we’re one of the few players in the market … It’s an unusual time. we have about a 12% market share, there are Animas patients out there, making decisions, and we have a really great opportunity and a big position in the next year or two.” – CFO Leigh Vosseller

Pipeline Highlights

1. Basal-IQ to begin shipping in August following June FDA approval with Dexcom G6 iCGM; software update for existing X2 users

In line with the exciting FDA approval just before ADA, Tandem will begin shipping the t:slim X2 with Basal-IQ (predictive low glucose suspend) and Dexcom G6 integration in August. The August launch for users 6+ years will include new pumps shipped with the Basal-IQ algorithm and G6 integration, as well as a free home software update for in-warranty t:slim X2 users. Management highlighted this as the first pump compatible with FDA’s new iCGM pathway (Dexcom’s G6), a huge victory for Tandem and well ahead of the initial goal to separately add this before the end of the year. CEO Kim Blickenstaff also noted that for current users, Basal-IQ only has “one additional screen for users to learn,” and the online training typically takes only 30-45 minutes – nice!

  • Basal-IQ will only work with G6 and is not backwards compatible with G5; FDA technically approved both sensors, but Tandem went forward with G6 for software simplicity – a tough call but definitely the right one to go with in our view given no-calibration and the latest CGM and associated patient and HCP excitement and enthusiasm.

  • As we noted in June, Basal-IQ brings a number of milestones for the field: the first automated insulin delivery device approved with a no-calibration CGM; the first pump compatible with an iCGM sensor cleared for interoperability; and the first AID algorithm to be launched via software update without needing new hardware (current users simply need a new prescription and a 45-minute online training). Following the MiniMed 670G, Basal-IQ is the second AID device in the US. It is also Dexcom’s first AID partner launch.

  • FDA deserves tremendous credit for this approval, allowing iCGM (G6) compatibility even though the submission and pivotal trial used G5. This is excellent news for Tandem users, who won’t see a multi-year time lag between Dexcom model integrations. It’s also fantastic for the field as a whole – a regulatory beacon that future pumps/software now have a faster pathway (via iCGM) to keep up with new CGMs. For Tandem, it also likely means future iCGMs will quickly be integrated into its pumps – we’d guess Senseonics might be the second company to achieve this labeling.

  • From a competitive perspective, Tandem’s Basal-IQ/G6 brings stronger competition to Medtronic’s MiniMed 670G hybrid closed loop (>100,000 systems shipped). Basal-IQ also brings tougher competition to Insulet’s just-cleared Omnipod Dash, which is entering its limited market release but does not have automation nor G6 integration on the handheld.

Basal-IQ SWOT Analysis

Strengths

  • Basal.IQ algorithm avoids hypoglycemia well and operates silently without alarms or finicky “modes”

  • G6 integration – automated hypoglycemia avoidance (PLGS) without fingerstick calibrations

  • First pump compatible with an iCGM

  • Free software update for current t:slim X2 users, no new hardware

  • Approved for 6+ years at launch

  • Simple training: current users only need 45-minute online training module

  • Enables remote CGM monitoring, as long as G6 app is also used

Weaknesses

  • Basal.IQ is not compatible with Dexcom G5 (a tough choice near-term, but the right one in our view)

  • Hybrid Closed Loop (Control-IQ) with TypeZero slated to launch in summer 2019 – will Tandem hit the timing? Can it launch Basal-IQ and Control-IQ within 9-12 months of each other?

  • Users must order supplies separately from Dexcom and Tandem

  • No disclosed plans for a <6 years indication

  • No hyperglycemia mitigation relative to MiniMed 670G

Opportunities

  • Integration with future iCGMs without needing a new FDA submission? (e.g., Senseonics’ Eversense)

  • Mobile app previously expected to launch in 2H18 for automatic data upload, status viewing on phone

  • Early experience before launch of Control.IQ hybrid closed loop with TypeZero

Threats

  • Will Dexcom’s G6 rollout and installed base conversion take a while?

  • More preferred pump agreements with payers, such as Medtronic/UHC?

  • Will users in the market for a new pump choose either 670G hybrid closed loop or tubeless Insulet Omnipod Dash?

  • See an even deeper dive on Basal-IQ here, including key features, competitive implications, and questions.

2. Control-IQ pivotal underway, US launch now expected in “summer 2019”; first part of PMA submission this September, enabling FDA review in pieces

As noted in our ADA coverage, the pivotal study of Tandem’s second-gen AID system, Control-IQ, is now enrolling – ClinicalTrials.gov post here. A US launch of the hybrid closed loop with Dexcom’s G6/TypeZero algorithm (automatic correction boluses included!) is now expected in “summer 2019.” This is delayed from the previous goal to launch in “1H19,” though not too big. (Technically a June 21-30, 2019 launch would hit both “1H19” and “summer 2019,” though this seems less likely since the study is expected to wrap up in April.) Even if Control-IQ launches in late summer 2019 (e.g., August, just like Basal-IQ), it will very likely be the second hybrid closed loop on the US market – see our AID landscape here.

  • Tandem expects to submit Control-IQ as a rolling, “modular” PMA, with the first part of the submission to go to FDA this September. This will enable the agency to review the PMA in sections, instead of waiting for the full study results. (The full study is expected to end in April 2019.) Awesome! Assuming Tandem hits the timing, this also means Basal-IQ and Control-IQ will get to market within roughly a year of each other, an impressive pace of innovation and clinical trial/regulatory execution.

  • The six-month, NIH-funded International Diabetes Closed Loop Study (iDCL protocol 3) will serve as the pivotal trial for Control-IQ. The study started as of June 28 and is expected to run until April 2019. The plan is to enroll 168 participants, comparing six months of closed-loop (t:slim X2/Control-IQ/G6) to six months of sensor-augmented pump therapy (same devices, no automation). The ClinicalTrials.gov posting indicates the study is already recruiting at six centers: Sansum, Barbara Davis, Joslin, Mayo Clinic, Mount Sinai, and UVA. (Stanford is not yet recruiting, presumably because they are also running a Bionic Pancreas iLet bridging study right now.) The primary outcome is time-in-range (70-180 mg/dl) – nice! – with 32 (!) secondary outcomes including time >180 mg/dl, mean glucose (CGM), time <70 mg/dl, time <54 mg/dl, time in 70-140 mg/dl, time >250 mg/dl, coefficient of variation, and many others. (How awesome to see the consensus CGM metrics used!) Notably, A1c at 26 weeks is listed as the 14th secondary outcome – talk about a new era of diabetes clinical trials!

    • Notably, it appears the study’s enrollment criteria do not have limits on previous pump/CGM use or A1c levels – this should ensure a wide variety of patients included. We’re very happy to see this. One of the biggest concerns in all AID studies concerns the well-managed study populations, who are often doing far better than the average person with type 1. Will that be an issue here? The main inclusion criteria are on age (14+ years), total daily dose >10 units per day, type 1 diabetes for at least one year, and familiarity with carb counting. We wonder how many pump-naïve and CGM-naïve users will be included.

  • Notably, Tandem has notably taken a lot of the risks of this product off the table: The pivotal is NIH-funded and is now underway; the hardware/software integration is done; FDA has already approved Basal-IQ and G6, which differs from Control-IQ only in the control algorithm; and FDA is familiar with a version of this algorithm from years of academic studies with UVa’s DiAs. We see very low regulatory risk here, and hopefully big upside depending on how much Control-IQ improves glycemia and other outcomes over six months.

  • CEO Kim Blickenstaff noted some of the important advantages of this product over the competition (e.g., MiniMed 670G): (i) adding automatic correction boluses on top of basal modulation (leapfrogging 670G); (ii) Dexcom’s G6’s elimination of fingersticks, an “enormous advantage vs. anyone using 670G”; and (iii) simpler training and day-to-day system use. To these we would remote monitoring (with use of G6 app); ability to software update; and embedded Bluetooth. The one disadvantage is Tandem’s Control-IQ will be for 14+ years, while MiniMed 670G just got approved for 7+ years. Still, this is going to be a very, very strong product for Tandem.

 

-- by Adam Brown and Kelly Close