Tandem 3Q16 – Tough quarter as sales growth slows to 32% YOY, down 10% sequentially; 2016 guidance reduced by $20 million; cash down to $36 million; competitive headwinds – November 2, 2016

Yesterday afternoon, Tandem CEO Kim Blickenstaff led the company’s 3Q16 financial update, the roughest quarter we’ve ever seen from the pump company. Below, we enclose the call’s top financial and R&D highlights, followed by a pipeline summary.

Financial and Business Highlights

1. Non-GAAP sales of Tandem’s insulin pumps and supplies totaled $20.7 million in 3Q16, a 32% YOY gain from 3Q15 and a concerning 10% sequential decline from 2Q16. GAAP revenue totaled just $12.3 million, declining a significant 22% YOY and 47% sequentially – reflecting $8.4 million in deferred revenue related to the Technology Upgrade Program for the just-launched t:slim X2. Non-GAAP sales are a better indication of the business, but even 32% growth was the second lowest in Tandem’s history (and the lowest growth came in 3Q15, an easy comparison).

2. Tandem shipped 3,896 pumps in 3Q16, a 14% YOY increase and a 15% sequential decline. This was Tandem’s lowest YOY pump shipment growth ever. The installed base is over 46,000 users.

3. Management substantially reduced guidance for full-year revenue from $105-$110 million (as estimated in 2Q16) to $85-$90 million (non-GAAP). Headwinds include the MiniMed 630G and 670G; the UHC pump decision (Medtronic only); delayed purchasing patterns (t:slim X2); and some choosing CGM first. The company has seen “a significant reduction” in its sales and sales pipeline so far in Q4. We would add higher deductibles and co-pays as another significant barrier – in years past, patients would have paid their deductible by the fourth quarter, but this is not nearly as true today when deductibles are far higher, to say nothing of co-pays.

4. Cash stands at $36 million, plus an option to borrow $35 million from CRG before December 31. Combined, these resources are expected to support at least 12 months of operations. Cash burn this past quarter was ~$20 million, over a third of the Q2 balance of $54.3 million. Tandem’s stock is currently trading on the NASDAQ at just $2.20 per share (equivalent to a market cap of ~$60 million), down nearly 60% from the previous day’s close.

5. The impact of UnitedHealthcare’s decision to exclusively cover Medtronic pumps (effective July 1) was in line with expectations –8% of Tandem’s shipments have historically been adults covered by UHC. Although management has spoken to the top payers and indicated that they “came away encouraged that they see the importance of offering their members a choice among insulin pumps,” it also seems clear that the payer environment is only becoming more challenging.  

R&D Pipeline

6. In October, Tandem began shipping its new t:slim X2 pump platform. The new pump is nearly identical to the t:slim, but built under class III (PMA) controls, enabling “upgrade-ability” to Dexcom G5 and G6 CGM integration and support future upgrades to automated insulin delivery. This is a very big benefit to patients. The pump also adds a new two-way Bluetooth radio to allow communication with more than one external device (e.g., a Dexcom CGM transmitter and a smartphone app).

7. The first new feature on t:slim X2, Dexcom G5 integration, will be submitted to the FDA by the end of 2016. Management maintained expectations for a ~six-month review process, meaning an approximate mid-2017 approval.

8. Tandem’s predictive low glucose suspend (PLGS) functionality using Dexcom G5 CGM completed a feasibility study in August and management was “very pleased with the results.” The company has a pre-submission meeting with FDA scheduled for December. A pivotal trial is expected in 1Q17, and following an expected six-month FDA review, Tandem still expects a 2017 launch. This feels very ambitious to us, but presumably possible if everything goes right.

9. Tandem’s second-gen AP product, integration with TypeZero’s treat-to-target algorithm (including automatic correction boluses), remains on schedule for a 2017 pivotal trial and an expected 2018 launch. This is a “top development priority” for the company, which we were very glad to hear.

10. There was no update on discussions with Dexcom regarding a Tandem mobile app for t:slim and t:flex users to see integrated pump and G5 CGM information on their smartphones.

Financial and Business Highlights

1. Non-GAAP sales of Tandem’s insulin pumps and supplies totaled $20.7 million in 3Q16, a concerning 10% sequential decline from 2Q16 and a softer 32% year-over-year (YOY) gain from 3Q15. GAAP revenue, which pulls out ~$8 million in deferred revenue related to the Technology Upgrade Program for the just-launched t:slim X2, totaled just $12 million, declining nearly 47% sequentially and 22% YOY against a very easy comparison (16% growth in 3Q15, Tandem’s lowest ever). Non-GAAP sales are a better indication of the business, but even 32% growth was the second lowest in Tandem’s history, and the lowest growth came one year ago in 3Q15 – the easiest comparison in Tandem’s history.

• CEO Mr. Kim Blickenstaff commented that it is “impossible to quantify how much softness we saw in Q3 is due to a delay in decision-making vs. a customer choosing an alternative therapy.” That is to say, some consumers may have hesitated before purchasing an existing Tandem pump in anticipation of t:slim X2, which began shipping in October, and others may have opted for the recently launched Medtronic MiniMed 630G (to be first in line for the MiniMed 670G) or a CGM. Still others are probably waiting until their pump dies completely before making a decision.

Figure 1: Tandem Quarterly Sales (2Q13-3Q16)

*Note that Q316 sales are non-GAAP, adjusted for the impact of the Technology Upgrade Program.   

2. Tandem shipped 3,896 pumps in 3Q16, a 14% YOY increase from 3Q15 (3,341 pumps shipped) and a 15% sequential decrease from 1Q16. This was Tandem’s lowest YOY pump shipment growth ever, and 3Q16 was the first time total shipments in a quarter dipped below 4,000 since 3Q15. Tandem shipped 1,965 t:slim pumps (50% of 3Q16 shipments), 1,542 t:slim G4 pumps (40%), and 389 t:flex pumps (10%). In every quarter since launch last year, t:slim G4 had represented the majority of pumps sold. The dramatic shift to t:slim, which has a free upgrade path to t:slim X2, is presumably an indication that customers see the potential of the t:slim X2 and its device updater feature.

• Four factors may have negatively impacted Q3 sales: (i) potential pausing in the purchase of pump products in anticipation of the the launch of t:slim X2; (ii) UHC’s decision to “restrict” most of its members over 18 (as of July 1) to Medtronic pumps; (iii) competition from the Medtronic MiniMed 630G launch (to be first in line for the 670G); and (iv) people choosing or pausing to consider CGM as their first diabetes management tool (Dexcom continues to drive the “CGM first” message).  Although it wasn’t mentioned, we believe higher deductibles and higher co-pays are probably prompting fewer pumps to be purchased overall.
• Tandem has now shipped over 46,000 pumps since launch in August 2012. About 50% of its new customers continue to be new to pump therapy, a continued positive that the company is expanding the market (albeit not as much in 3Q16).

Figure 2: Quarterly Pump Shipments (2Q13-3Q16)

3. Management substantially lowered (by $20 million) non-GAAP guidance for full-year revenue from $105-$110 million (per 2Q16) to $85-$90 million – a major $20 million reduction (numbers exclude the upgrade program). Tandem has also seen “a significant reduction” in its sales and sales pipeline so far in Q4. Furthermore, 1Q16 called for $108-$115 million in full-year sales, marking two straight guidance reductions. Mr. Cajigas mentioned that Tandem decreased guidance in the face of competitive pressures coming from “newly launched competitive products” (Medtronic’s MiniMed 630G) and “the regulatory approval of others” (Medtronic’s MiniMed 670G).

• There was likely some delayed purchasing of t:slim pumps ahead of the t:slim X2 launch. But how much? In Q&A, Mr. Cajigas expressed cautious optimism for the future: “I think we’ll see how the fourth quarter goes. I think the common theme in our conversation today is that we do believe this is a short-term dynamic, and we have dealt with this in the past with the 530G launch, as well as the Animas Vibe launching early in 2015. Those were headwinds that took about a quarter or two to sort of move past, but you can see what we accomplished in those periods where we are going 45-plus-percent growth, obviously on a smaller base but still very good growth considering what we were facing at those times.”
• A major question mark for Tandem is how patients will evaluate their pump options over the next six months: (i) do I want the MiniMed 670G right out of the gate: a first-gen product that looks compelling, but I’m locked in for four years (reimbursement has also not yet been set that we know of); (ii) do I want a pump that can be software updated to add CGM and automation without needing new hardware (t:slim X2); or (iii) do I not want a pump at all and perhaps just go on CGM? We do think the ability to remote software update a pump is compelling and helps de-risk the fear of getting a new pump and trying to gamble on a company’s pipeline (“What if something better comes out?”), but the competitive storm from Medtronic is significant. We believe a thriving commercial environment is best for all patients and that Tandem needs to stay strong enough to get competitive products out.

4. Tandem is down to $36 million in cash, plus the option to access $35 million from a debt arrangement with CRG. Management estimates that this is enough to support “operating needs for at least the next 12 months.” Cash burn this past quarter was a significant ~$20 million, over a third of the Q2 balance of $54 million. Most of this spend was attributed to increasing inventory levels for the t:slim X2 launch, further preparation for the 1Q17 transition to a new facility leased in 2Q16, clinical trial costs associated with PLGS products, and an up-front licensing payment to TypeZero (the Virginia-based startup from which Tandem licensed the  treat-to-target closed loop algorithm in July). The pressure is certainly on in the next few quarters to deliver solid results. Once marketing ramps for the MiniMed 670G, Tandem may face even greater headwinds though if reimbursement doesn’t go as well as expected, this should help Tandem.

• Tandem’s stock is currently trading on the NASDAQ at just $2.20 per share (equivalent to a market cap of ~$59 million), down nearly 60% from the previous day’s close. For context, a day after Tandem reported 2Q16 results, share price fell 15%. The stock hit a high this year at just over $11 in April.

5. The impact of UnitedHealthcare’s decision to exclusively cover Medtronic pumps (effective July 1) was in line with expectations, as 8% of Tandem’s shipments have historically been adults covered by UHC. During 2Q16’s call, Mr. Blickenstaff referred to the policy as “unexpected and disappointing” and said he had met with a member of UnitedHealthcare’s Executive Management Team who was key in making the decision. Tandem has spoken with the executive contacts at each of its top payers, and “came away encouraged that they see the importance of offering their members a choice among insulin pumps.” That said, during the 2Q16 call, Mr. Blickenstaff said he didn’t expect a “near-term reversal” of the decision.

R&D Pipeline

6. In October (Q4), Tandem began shipping its new t:slim X2 pump. The product is nearly identical to the t:slim, but built under class III (PMA) controls, enabling “upgrade-ability” to Dexcom G5 and G6 CGM integration and automated insulin delivery. The pump also adds a new two-way Bluetooth radio to allow communication with more than one external device (e.g., a Dexcom CGM transmitter and a smartphone app). No t:slim X2 sales metrics were shared (it only became available in early Q4), but we assume many potential Tandem buyers held off on purchasing a pump until it became available. The technology upgrade program is also generous for a company of Tandem’s size (details here), offering free upgrades for t:slim purchased after July 1; otherwise, upgrades are $399 or $799, far cheaper than Medtronic is offering ($599 or $3,100 to get on the 630G). For the first time ever, t:slim outsold t:slim G4 this past quarter, presumably as customers position themselves for an upgrade to t:slim X2.

• Mr. Blickenstaff on t:slim X2: “The new radio, along with the recently approved device updater, which enables us to roll out remote software updates, makes the t:slim X2 our pump of the future and unlike any other pump in the market.” The remote software update capability will indeed set Tandem apart from other pump companies right now, though we expect more and more diabetes devices to move in this direction – it is unquestionably better for patients and for manufacturers.

7. The first new feature on t:slim X2, Dexcom G5 integration, will be submitted to the FDA by the end of 2016. Management maintained expectations for a ~six-month review process, meaning an approximate mid-2017 approval. This approval could make the t:slim X2 the first or second Dexcom G5-integrated pump on the market (Animas G5 is at FDA right now) and will set the stage for Tandem’s future PLGS and automated insulin delivery plans. It will also be the first time patients can buy a stand-alone pump and shortly thereafter turn the same hardware into a sensor-augmented version through a remote software update – this is brilliant and Tandem deserves a lot of credit for blazing this trail. Just like the t:slim G4, Tandem anticipates very strong demand for the integrated G5 feature – fortunately, this will also have the advantages that t:slim G4 customers lost out on (Software 505 algorithm, remote monitoring, app viewing).

8. Tandem’s predictive low glucose suspend (PLGS) functionality using Dexcom G5 CGM completed a feasibility study in August and management was “very pleased with the results.” The company has a pre-submission meeting with FDA scheduled for December. A pivotal trial is expected in 1Q17, and following an expected six-month FDA review, Tandem still expects a 2017 launch. This news is right on track with previous guidance for a 2017 launch, and is certainly ambitious timing! Management anticipates a rapid six-month review for this first-gen algorithm because it will come on the heels of an FDA review of the t:slim X2 with G5 CGM integration – the only addition is the PLGS algorithm. Plus, it follows a three-month review for the MiniMed 670G hybrid closed loop. Management expects t:slim X2 users will be able to software update their pumps to add the PLGS feature. We love that FDA continues to work so hard to engage with manufacturers pre-submission. In a talk at DiabetesMine D-Data Exchange last week, FDA’s Dr. Courtney Lias shared that her team had monthly meetings with Medtronic about 670G for 2.5 years pre-submission, speeding up availability by an estimated three years!

• Mr. Blickenstaff shared that Tandem conducted market research with current pumpers, MDIs, and CDEs, who said they would prefer Tandem’s PLGS system over Medtronic’s 670G, assuming equivalent sensor accuracy - in reality, G5 is more accurate. The preference for Tandem's PLGS offering was primarily attributed to the remote updating capability, ease of use, modern features, and form factor. It’s always hard to unpack such research, but this would appear to be a major positive for Tandem: perhaps users don’t see a huge incremental advantage of hybrid closed loop over PLGS. [Of course, one could also artificially raise the baseline basal rates (e.g., 130%) and keep PLGS enabled, enabling pseudo hybrid closed loop (as some 640G users are doing in Europe).]
  
  • Timing, reimbursement, and early market views on the 670G will also be key. The 670G will launch several months before Tandem’s PLGS, giving Medtronic the advantage with more eager type A patients (who are also more likely to be disappointed). On the other hand, Tandem’s PLGS system will leverage Dexcom’s G5, which is more accurate than Medtronic’s newer Guardian sensor. Animas, Bigfoot, and Insulet are also in the running (late 2017-2018 launches) – see our updated competitive landscape here.

9. Tandem’s second-gen AP product, integration with TypeZero’s treat-to-target algorithm, remains on schedule for a 2017 pivotal trial and an expected 2018 launch. Notably, the TypeZero algorithm will include automatic correction boluses based on CGM values, something the MiniMed 670G will not have at launch (but is in development with the DREAM algorithm in the MiniMed 690G). Automated insulin delivery remains the “top development priority” for Tandem, as it should be. The t:slim will be used in the upcoming International Diabetes Closed Loop Trial (IDCL; n=240, ten sites, six months per person), previously slated to start later this year. This trial is NIH funded ($12.7 million), will test TypeZero’s InControl algorithm, and is technically designed with a PMA submission in mind (per our conversation in January). We assume Tandem will run its own pivotal trial with the commercial device and perhaps the G6 sensor. The agreement also provides Tandem access to TypeZero’s future AP innovations over the next five years, presumably more sophisticated closed-loop algorithms or decision support software.

10. There was no update on the discussions with Dexcom for a Tandem mobile app allowing current t:slim and t:flex users to see integrated pump and G5 CGM information on their smartphones. Notably, the Device Updater will allow the t:slim and t:flex to be updated to communicate with this app on a phone. As we understand it, this will provide an option for current users that don’t want to pay for the t:slim X2 upgrade, but want to see their pump information on a phone alongside Dexcom CGM.

Pipeline Summary

-- by Brian Levine, Adam Brown, and Kelly Close