Tandem 1Q17 – $17.5 million in sales decline 13% YOY on tough comp; FY guidance maintained; t:slim X2 with G5 launch this summer; PLGS in early 2018, TypeZero by end of 2018 – April 27, 2017

Tandem CEO Kim Blickenstaff led the company’s 1Q17 financial update today, marking its third challenging quarter in row – competitive headwinds combined with a very difficult year-over-year comparison. We continue to see a lot of upside in the company’s pipeline and a loyal user base of over 50,000. Below, we enclose the call’s top financial and R&D highlights, followed by a pipeline summary.

Financial and Business Highlights

1. Tandem’s sales (non-GAAP) totaled $17.5 million in 1Q17, a 13% year-over-year decline on a very tough comparison to 1Q16’s 63% YOY growth. Still, this marked the second straight quarter with a YOY sales decline, a trend Tandem has never seen. Remarks characterized it as a “highly competitive environment,” particularly with Medtronic’s 630G/670G (see below). Sales declined 29% sequentially, though this was typical for Q4-Q1 seasonality.

2. Management confidently reaffirmed 2017 guidance for full-year sales of $100 million-$107 million, reflecting 12%-20% YOY growth from 2016. Sales will be back-loaded, and Tandem is banking on momentum from the planned summer 2017 launch of the t:slim X2/Dexcom G5 integration (under FDA review; see below).

3. Tandem shipped 2,816 pumps in 1Q17, a significant 30% YOY decline and a 36% sequential decline. Cumulative pump shipments are now over 53,000, meaning Tandem’s US installed base is nearly the size of Insulet’s (~67,000).

4. In 1Q17, “nearly 60%” of Tandem’s new customers were from MDI, a notable uptick from the historical ~50%, and a clear sign it is still growing the market (even as Insulet continues to perform well). Among Tandem customers switching from another pump, the largest percentage are notably converting from Medtronic (a positive for competing with 670G?).

5. Cash remains a concern, as Tandem has ~$54 million in the bank – this reflects a ~$23 million cash burn in 1Q17 offset by net proceeds of $22 million from a public stock offering. Tandem will need additional financing this year, though it does expect to spend less in 2017 than it did in 2016. 1Q17 gross margin was 36%, similar to 35% in 1Q16.

 6. CEO Kim Blickenstaff attacked the MiniMed 670G head on, criticizing Medtronic’s “bully theatrics” and “heavy handed” sales tactics; the 670G’s large pump size and “antiquated” user interface/form factor; the Guardian Sensor 3’s adjunctive labeling (more fingersticks and lower accuracy than G5); the training burden to set up the product; and the lack of a pediatric approval. See his prepared remarks below. It will be great for the field once multiple companies have automated insulin delivery products on which to compete head-to-head!

Pipeline Highlights

7. The t:slim X2 with Dexcom G5 integration remains on track for a summer 2017 launch (called “mid-2017” last quarter). Tandem plans to launch this product within 30 days of approval. Subject to approval, current t:slim X2 users (10,000+ patients) will be able to update their pump’s software for free to add G5 integration (via the Tandem Device Updater).

8. t:lock, Tandem’s new custom infusion set connector, has the same timing: shipments starting in 3Q17, with a rollout to nearly all customers by end of year. t:lock replaces the luer lock connection between the cartridge and infusion set and has three advantages: (i) higher revenue; (ii) less fill time; and (iii) less needed insulin.

9. A launch of Tandem’s predictive low glucose suspend (PLGS) device is still expected in “early 2018,” following an expected six-month FDA review process. Tandem has filed an IDE with the FDA for the pivotal study, which will commence in the coming weeks.

10. Tandem’s second-gen AID product, a treat-to-range system with TypeZero and Dexcom’s G6, is still expected to launch by the end of 2018. The NIH-funded IDCL study main phase – serving as the FDA pivotal – is still listed as not yet recruiting on ClinicalTrials.gov.  

Financial and Business Highlights

1. Tandem’s sales (non-GAAP) totaled $17.5 million in 1Q17, a 13% year-over-year decline on a tough comparison to 1Q16 (when sales grew 63% YOY on t:slim G4 momentum). This marked the second straight quarter with a YOY sales decline, a trend Tandem has never seen. Sales also declined 29% sequentially, though this was typical for Q4-Q1 seasonality. Remarks characterized it as a “highly competitive environment,” particularly with Medtronic’s 630G/670G (see below). GAAP sales of $19 million (excluding the upgrade program) fared slightly better, down 5% YOY.

• On a positive note, pump supply sales are increasing nicely, rising 64% YOY to $6.4 million. The increase came from growth in Tandem’s installed base, as well as an increase in infusion sets sales. This should improve further once t:lock comes to market later this year.
• Sales from insulin pumps accounted for 64% of non-GAAP sales ($11.2 million), meaning Tandem’s revenue per pump backs out to ~$4,000. This is notably lower than Medtronic’s stated price for the MiniMed 630G system, which ranges from $6,000-$9,000 (though includes the transmitter and BGM).

Quarterly Sales (2Q13-1Q17)

2. Despite the overall sales decline, management confidently reaffirmed 2017 guidance for full-year sales of $100 million-$107 million, reflecting 12%-20% YOY growth from 2016. Sales will be back-loaded, and Tandem is banking on momentum from the planned summer 2017 launch of the t:slim X2/Dexcom G5 integration. This launch will be absolutely critical for reinvigorating growth.

3. Tandem shipped 2,816 pumps in 1Q17, a 30% YOY decline and a 36% sequential decline. On the plus side, 91% of pump shipments were for the new t:slim X2, a positive for new patients getting access to Tandem’s pipeline of innovation via the remote software update feature. Cumulative pump shipments are now over 53,000, meaning Tandem’s US installed base is nearly the size of Insulet’s (~67,000).

Tandem’s Quarterly Pump Shipments (2Q13-1Q17)

4. In 1Q17, ~60% of Tandem’s new customers were from MDI, a notable uptick from the historical ~50% - a clear sign it is still growing the market, even as Insulet continues to perform well. Among Tandem customers switching from another pump, the largest percentage are notably converting from Medtronic (a positive for competing with 670G?), followed by Animas.

5. Cash remains a concern, as Tandem has ~$54 million in the bank – this reflects a ~$23 million cash burn in 1Q17 offset by net proceeds of $22 million from a public stock offering. Tandem will need additional financing this year, though it does expect to spend less in 2017 than it did in 2016. Some cost containment measures are underway, including a less expensive manufacturing facility and limiting headcount additions. Cash burn is highly driven by topline sales, meaning the burn will improve in 2H17 if the t:slim X2/G5 performs as well as management expects.

• 1Q17 gross margin was 36%, similar to 35% in 1Q16 (when sales were much higher on t:slim G4 momentum). At this point in time, Tandem needs to invest in the pipeline, and callers did not probe the profitability point very much. In 4Q16, management said “sustained profitability” could be reached once the installed base surpasses “15% of the insulin pump market,” when gross margin is expected to reach ~55%. To get to profitability, we estimate Tandem’s base probably needs to double, assuming the pump market will continue to grow (Medtronic, Insulet, etc.) and Tandem’s share is currently around 9%.

6. CEO Kim Blickenstaff attacked the MiniMed 670G head on, criticizing Medtronic’s “bully” and “heavy handed” sales tactics; the 670G’s large pump size and “antiquated” user interface/form factor; the Guardian Sensor 3’s adjunctive labeling (more fingersticks and lower accuracy than G5); the training burden to set up the product; and the lack of a pediatric approval. The criticisms were persuasive for a Wall Street audience that has (in our view) overreacted to the 670G’s impending launch – it will be a gradual rollout and the pump field’s four-year cycles making switching difficult and expensive. Of course, the 670G is a major new product and a competitive threat for Tandem, so some of the Street’s concern is warranted.

• Said Mr. Blickenstaff: “The 630G began shipping in the fourth quarter of last year and we're increasingly seeing reports and hearing feedback from customers and healthcare providers who are disappointed in Medtronic's new platform. The weaknesses of the Medtronic product become very real once customers and healthcare providers see and use the product firsthand, especially if they have ever seen a Tandem pump. Concerns about 670G have centered around the new interface being difficult to learn, train and use, as well as on the form factor of the pump – namely that it is still antiquated and has increased in size compared to Medtronic’s historical platform. This is where the t:slim X2 shines in comparison. The 670G is more than 60% larger than the t:slim X2, while the t:slim X2 offers the same 300-unit capacity in addition to modern features such as Bluetooth connectivity, a rechargeable battery that in today's world consumers have come to expect. Our display, which is one third larger than the 670G screen, provides a convenient and easy-to-use menus of a touch screen similar to today's consumer friendly mobile devices. In addition, we’re partnering with Dexcom for the continuous glucose monitoring technology, the most accurate sensor available. The real-world accuracy of Medtronic's new sensor, which is what powers their automated insulin delivery algorithm, remains to be seen. We do know that Dexcom CGM allows a person to make therapy decisions without pricking their finger, and it requires half the [recommended] calibrations of Medtronic. So the users of the 670G are not able to make dosing decisions using their sensor, this means that user will likely still need 5 to 7 fingersticks per day to use the pump in a real-world setting. In addition to patient burden, this also adds additional cost of extra meters and strips to the rest of the system. We also know that the 670G is not indicated for use by anyone below the age of 14 and that Medtronic determined that may not be safe for children under 7. It’s not clear to us that Medtronic is going out of its way to make these facts apparent to customers or healthcare providers, and we believe it is essential that the marketplace understands what the 670G is and what is not. By highlighting the core differentiated features of the t:slim X2, we're able to capitalize on the shortcomings of competitive products. Suffice it to say that we feel confident in our ability to compete pump platform versus pump platform against Medtronic. And the time when we would be able to offer superior automated insulin system is fast approaching.”
• “As you can see, we’re making great progress with our future products in addition to the strength we offer in our t:slim X2 platform today. I think this is recognized by Medtronic, as we increasingly hear of their sales efforts focused on discussing our company's stock price or financial condition, rather than product offerings and customer support. In addition, they are pressuring customers to make a commitment to purchase the 630G before an artificial deadline, which happens to coincide with Medtronic’s fiscal year end in order to have priority access to the 670G. We see these tactics as bully theatrics intended to redirect the attention of customers in healthcare providers away from the products themselves, promote peer and suppress choice.

Pipeline Highlights

7. The t:slim X2 with Dexcom G5 integration remains on track for a summer 2017 launch (called “mid-2017” last quarter). Tandem plans to launch this product within 30 days of approval. Subject to approval, current t:slim X2 users (10,000+ patients) will be able to update their pump’s software for free to add G5 integration (via the Tandem Device Updater). Yes! We hope the FDA approves this part of the submission – what a huge win for patients and a major advantage for Tandem to rollout innovation without new hardware and upgrade fees.

8. t:lock, Tandem’s new custom infusion set connector, has the same timing: shipments starting in 3Q17, with a rollout to nearly all customers by end of year. t:lock replaces the luer lock connection between the cartridge and infusion set and has three advantages: (i) higher revenue, as distributors will have to buy sets from Tandem instead of other suppliers; (ii) reduces the time required to fill the infusion set tubing by more than 30 seconds; and (iii) reduces the amount of insulin used in the process by approximately four units.

9. A launch of Tandem’s predictive low glucose suspend (PLGS) device is still expected in “early 2018,” following an expected six-month FDA review process. Tandem has filed an IDE with the FDA for the pivotal study, which will commence in the coming weeks. Per 4Q16, a five-site pivotal trial is expected to complete by 3Q17, and we assume that is still the case (though we cannot find anything on ClinicalTrials.gov).

10. Tandem’s second-gen AID product, a treat-to-range system with TypeZero and Dexcom’s G6, is still expected to launch by the end of 2018. The NIH-funded IDCL study main phase – serving as the FDA pivotal – is still listed as not yet recruiting on ClinicalTrials.gov. The start date is “March 15,” which could means either (i) getting the main phase underway is taking longer than expected; or (ii) the page isn’t up to date. The study will randomize 240 patients in a 2:1 ratio of closed-loop control vs. pump+CGM (open loop) over six months. With this funded trial and partnerships with TypeZero/Dexcom, we believe Tandem has substantially de-risked this development program.

Pipeline Summary

-- by Adam Brown and Kelly Close