Tandem 4Q17 – Record sales of $40 million rise 61% YOY, 69% sequentially; Basal-IQ filed with FDA, summer 2018 launch (PLGS); Control-IQ with TypeZero/G6 to enter pivotal in 2Q18 – March 1, 2018

Tandem reported very strong 4Q17 financial results and pipeline updates this afternoon in a call led by CEO Kim Blickenstaff, new CFO Leigh Vosseller (very strong in her first call), and EVP Susan Morrison. See the top highlights below!

Financial Highlights

1. Breakout Q4 sales of $40 million rise 61% YOY and 69% sequentially on t:slim X2/G5 launch; 2017 sales of $103 million up 16%, exceeding guidance

Tandem Quarterly Sales (1Q13-4Q17)

• Tandem had the most successful quarter in its history: 4Q17 sales of $40 million (non-GAAP) rose 61% year-over-year (YOY) and 69% sequentially. Though it was an easy comparison to a very challenging 4Q16 (when sales declined 15% on competitive headwinds), this 4Q17 performance easily broke the previous sales record from 4Q15 – $29 million on the launch of t:slim G4. Management cited the high demand for the t:slim X2/G5, driven by its successful US launch in late August. This integration did not have a full impact on Q3 sales, given only one month on the market; we also assume some patients got the insurance process started in Q3, but didn’t get shipped a pump until Q4. Animas’ exit also drove some incremental shipments, as noted below. (As a reminder, we track Tandem’s non-GAAP sales, which exclude its new technology upgrade program and are a better marker of the business’ trajectory. GAAP sales were also $40 million this quarter, rising 38% YOY from 4Q16.) Infusion set sales  more than doubled YOY to $8.4 million (GAAP).
  
  • CEO Kim Blickenstaff emphasized the X2’s highly praised software update feature (Tandem Device Updater), which indeed “set a new industry standard” for updating a pump at home to add Dexcom G5 integration. We imagine that many users deciding on a new pump were swayed by Tandem’s promise in October to offer free software updates for any new features approved by FDA in 2018 (i.e., PLGS; see below). This innovation certainly helps de-risk the pump choice process, since in-warranty upgrades from companies like Medtronic have historically required substantial out-of-pocket costs. Prepared remarks cited dQ&A’s 4Q17 US patient panel report: the ability to remotely upgrade the t:slim X2’s software was among the top three reasons people chose it. The other top reasons were CGM integration (#1) and good design and style (#2). “As the only pump company offering this future,” said CEO Kim Blickenstaff, “we see it as a meaningful differentiating factor for today and the foreseeable future.” We agree this is a major differentiator for Tandem, though one likely to be closed in the next couple of years once Medtronic and Insulet launch their own Bluetooth-enabled pumps, and once Bigfoot comes to market. For more information on the dQ&A panel and patient reasons for pump switching in 4Q17, contact Richard.wood@d-qa.com.
• Full year sales hit a record $103 million (non-GAAP), rising 16% YOY and exceeding 3Q17’s reduced guidance for $95-$100 million in 2017 sales. Tandem actually nailed its original 2017 guidance for $100-$107 million in sales, in line with our prediction leaving 3Q17 – given all the enthusiasm around t:slim X2/G5, we expected a big Q4 and Tandem certainly delivered on one.
• 2017 saw Tandem’s lowest YOY annual growth in its history – +16% was down from +22% in 2016, +46% in 2015, and +72% in 2014. With Animas exiting the market and the 670G launch proceeding slowly, we might have expected more upside in 2017 for Tandem. That said, Insulet also had a strong 2017 (US Omnipod revenue of $272 million grew 18% YOY), and there was competitive noise for Tandem around its cash position. As noted below, Tandem’s guidance for 2018 expects an acceleration to ~26% YOY growth ($132-$140 million in GAAP sales), which seems very doable leaving Q4.

Tandem Annual Sales (2012-2017)

2. Record Q4 pump shipments of 6,950 rise 57% YOY and 80% sequentially; 17,061 pumps shipped in 2017 (+1%); installed base >60,000 users

Tandem Quarterly Pump Shipments (1Q13-4Q17)

• In line with sales, pump shipments hit a record-high – the quarter’s 6,950 shipments rose 57% YOY and 80% sequentially, exceeding the previous record of 6,234 in 4Q15. A total of 17,061 pumps were shipped in 2017, rising a more modest 1% YOY (see flattening graph below). The flat 1% annual growth in pumps shipped vs. 16% revenue growth in 2017 is presumably explained by greater infusion set revenue with t:lock – indeed, infusion set sales more than doubled YOY to $8.4 million.
• Tandem has shipped a total of 68,890 pumps since inception, with 60,304 pumps shipped in the past four years – management clarified the latter is the best way to think about its active installed base. (Of course, some customers from prior to 2013 are likely still Tandem users, but simply out of warranty.) For comparison, Insulet’s installed base in the US stood at ~77,000-80,000 users, per 4Q17.
• In 4Q17, “more than half” of Tandem’s new shipments were to those coming from MDI, a great sign it is still expanding the market. Tandem also saw a “marked increase” from former Animas customers. Usually shipments to former Animas customers are in the “low teens” percentage of quarterly shipments; they grew to “more than 20%” in December. While Medtronic is the preferred transition partner, Tandem is clearly seeing benefit, as we expected following Tandem’s 3Q17 call and the Animas news last September. Of course, Tandem offers the only Dexcom-integrated pump on the market right now, and many Animas users were likely quite intentional in choosing a non-Medtronic durable pump. Said CEO Kim Blickenstaff, “We believe t:slim X2 is better aligned with the preferences of Animas users. We will be working hard to communicate the features and benefits. Overall, we’re encouraged by the early interest.”
• 2017 was the first full year of renewal opportunities – Tandem renewed ~2,000 customers (~12% of 2017 pump shipments), including 900 renewals in Q4. Management shared that industry-wide pump renewal rates are typically around 60%-70%, and Tandem’s goal is to hit 70% or above. Thus far, Tandem is at a ~70% renewal rate with its earliest customers (late 2012-early 2013 t:slim acquisition), but is at a lower ~30% renewal rate overall – indeed, the company shipped a total of 6,472 pumps in 2013, which were all presumably up for renewal grabs this year (though only ~2,000 were converted). New CFO Leigh Vosseller shared strong confidence on this front, highlighting that renewals don’t automatically occur – it can take time for patients to fully evaluate the options on the market, as well as time spent in insurance and reordering. We thought this was an astute point and agree that many patients with recently expired warranties are likely in a wait-and-see mode – “I’ll get a new pump when my current one breaks, but I’m going to wait as long as possible.”
• For comparison, Insulet added roughly ~11,000 patients in the US in 2017, behind Tandem’s ~15,000 new customer pump shipments in 2017 (i.e., 17,061 total pump shipments minus ~2,000 renewals = 15,000 new customers.) Insulet grew slightly faster on a higher base of sales but a lower new patient number, which highlights the different business models: Insulet’s sales are mostly driven by the installed base and attrition in a given quarter (recurring revenue model), while Tandem’s base is primarily driven by new pump shipments.

Tandem Annual Pump Shipments (2012-2017)

3. 2018 guidance: sales of $132-$140 million, accelerated ~26% YOY growth

In a clear sign of confidence, management guided for 2018 sales of $132-$140 million, implying accelerated 26% YOY growth at the midpoint. In line with seasonal trends, 1Q18 sales are expected to be ~18%-19% of sales. This reflects some 1Q18 optimism over 2017, as only 17% of 2017 sales came in 1Q17. CFO Leigh Vosseller highlighted five key drivers: (i) launch of Basal-IQ this summer (currently under FDA review; see below); (ii) executing on renewals, with the goal of retaining 70% of existing customers (Tandem shipped 10,800 pumps in 2014, giving ~40% more renewal opportunities than the 6,472 available in 2017); (iii) capturing more revenue from infusion sets, given a full year of the t:lock connector; (iv) Animas’ exit from the market, providing incremental patient opportunities; and (v) international market entry in 2H18, starting in Canada.

4. Very successful $69 million fundraise provides enough resources to get to cash-flow breakeven in 2H19 (assuming 80,000+ users, 55% gross margin)

Following a successful and better-than-expected $69 million fundraise in mid-February, Tandem believes 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; and (ii) gross margins get to 55%. The installed base number seems very doable, given the outstanding pipeline (see below), the current base of >60,000 customers, and ~15,000 new customers added in 2017. Gross margins stood at 43% in 4Q17 and 41% in 2017, meaning they need to rise notably on the higher volume of sales. Fortunately, Tandem’s gross margins are on a great trajectory: full-year 2017 gross margin was 41%, up from 28% in 2016; 4Q17 gross margin was 43%, up from 35% in 4Q16. If Tandem can do the same in 2017, it will be at nearly 50% starting 2019. Tandem also just doubled its manufacturing capacity (new facility) without increasing fixed costs, which will provide a big margin win as volumes expand. Indeed, CFO Leigh Vosseller was very confident: “Volume is now the biggest factor in improving gross margins.”

• “Recent financing eliminates one of the main points for our competition – marketing against our financial position, rather than the product features where we excel.” – CEO Kim Blickenstaff
• As noted on Tuesday, Dexcom invested $5 million in Tandem’s $69 million public stock offering, purchasing 2.5 million shares at $2/share. This represented a true vote of confidence, and today’s comments from Tandem management suggested this contributed to the better-than-expected fundraise. Noted Dexcom EVP Steve Pacelli on Tuesday: “No, this should not be viewed by the street as the first step to an acquisition. We’re extraordinarily committed to all of our pump partners, including Tandem, Lilly, and Insulet. At the end of the day, we discussed with Tandem, how participation might influence their offering. We agreed if they raised a sufficient amount of capital, we would participate. When it became clear they would raise more than enough to get to a place with a couple really significant new product launches, it became a no-brainer.”
• Tandem’s operating expenses increased only 5% in 2017 ($107 million), well under the 16% revenue growth. This was the third straight year of OpEx growth less than 10%.
• Tandem has potential to raise up to $32 million in additional financing if outstanding warrants are exercised, with $16 million in warrants expiring this April. Tandem believes it only needs $50-$60 million to get to cash-flow breakeven, so it already has some cushion with the total amount raised – and these warrants would provide more.

5. t:slim X2 filed with Health Canada and CE Mark; actively preparing for OUS launch in 2H18

Tandem’s international plans were in line with the announcement last week – the t:slim X2 with Dexcom G5 integration has been submitted to Health Canada, with a launch expected in 2H18. A CE Mark is also expected in 1H18, with EU commercialization expected to start in 2H18. International sales are not expected to meaningfully drive revenue in 2018. Canada is clearly the priority, as Tandem can leverage its existing US infrastructure. EU commercialization will happen via distributors, and the first agreement has been signed with Rubin Medical for distribution in Sweden, Norway and Denmark. Rubin Medical will perform all sales, marketing, customer training, and support for Tandem’s products. There were no specifics offered on the EU launch or other agreements being discussed.

• Given Dexcom’s  and Insulet’s 2017 performance, OUS is a definite growth opportunity for Tandem. OUS Omnipod sales of $120 million drove 50% of Insulet’s 2017 sales growth; OUS Dexcom sales of $122 million drove a 38% of Dexcom’s 2017 growth. While it will take Tandem several years to get to these levels, it certainly should provide incremental growth in 2018 and more thereafter.

6. New CFO Leigh Vosseller inspires lots of confidence in first call

Tandem’s new CFO Leigh Vosseller took over on January 1. We thought she was confidence-inspiring and impressive in her first call, tackling every investor question with a mix of poise and data. She clearly knows the business well, now in her fifth year at Tandem. Ms. Vosseller previously served as SVP of Finance from August 2017, and joined Tandem in August 2013 as VP of Finance. Prior to Tandem, she served in various senior finance positions in the healthcare industry, most recently as VP/CFO of Genoptix, Inc. (a Novartis company). Tandem’s previous CFO John Cajigas retired as of December 31, having served ten years in the role. The December press release announcing the change noted, “Mr. Cajigas’ retirement is not related to any disagreement with, or inaccuracy or omission in, the Company's accounting systems or financial reporting”

Pipeline Highlights

1. t:slim X2 with Basal-IQ (PLGS): PMA filed with FDA, preparing for summer 2018 launch; successful pivotal trial reported at ATTD

In impressive execution, Tandem has already filed a PMA for FDA approval of the t:slim X2 with Basal-IQ (predictive low glucose suspend) and Dexcom’s G5. The company continues to anticipate a summer 2018 launch, with a free software upgrade for current users – the timing is exactly on par with the 3Q17 and ATTD updates. The FDA submission was previously pegged for “1Q18,” so this is on the earlier side of guidance. Indeed, we’d emphasize how quickly Tandem moved this product development ahead – feasibility data was presented at ADA last June; the pivotal trial began enrolling last August and wrapped earlier this year; we saw positive pivotal results at ATTD two weeks ago (pasted below), and the FDA submission is already in. We continue to see this as a low-risk regulatory path – it is safer and more effective than the MiniMed 530G’s low glucose suspend – and it will provide immediate benefit to Tandem users and add some automation to compete with Medtronic’s MiniMed 670G hybrid closed loop. (How users will choose between them remains to be seen, but certainly Basal-IQ is more competitive than the current no-automation X2 device.) The user experience (see below), especially no alarms for suspension, looks strong. Assuming it is approved and launched by mid-year, Basal-IQ will provide a nice boost to Tandem’s 2H18. Competition-wise, Basal-IQ will bring Tandem automation well ahead of Insulet, and give Tandem valuable experience commercializing AID before the bigger launch next year with TypeZero’s Control-IQ. One analyst asked about incorporating G6 into Basal-IQ, which remains an open regulatory questions. Given the quickly-following 1H19 launch of the TypeZero/Dexcom G6/t:slim X2 Control-IQ system (hybrid closed loop), we’d assume Basal-IQ will stick with G5.

• At ATTD, Dr. Bruce Buckingham presented positive results from the pivotal trial (PROLOG) of Tandem’s predictive low glucose suspend device with Dexcom’s G5 – the system drove a 31% reduction in mean time <70 mg/dl, meeting its primary endpoint. Dr Buckingham praised how the suspensions occur without alarms, operating in the background – yes! The PLGS algorithm, branded “Basal-IQ” and embedded in the t:slim X2 pump, was tested in a randomized crossover, home pivotal study that included two weeks of baseline data collection, followed by three weeks of PLGS vs. three weeks of sensor-augmented pump (SAP) therapy with t:slim X2/G5 (or vice versa). The primary outcome was time <70 mg/dl, and the study enrolled 103 participants in a wide age range (6-72 years; mean age: 24 years) and very engaged in their diabetes (baseline A1c: 7.3%, 83% pump user, 84% CGM user). Unlike other PLGS studies, this study was not enriched for hypoglycemia, nor did it include an in-clinic hypoglycemia induction.  
• Mean time <70 mg/dl declined from 4.5% during SAP to 3.1% with PLGS, a 31% reduction (-19 minutes/day; p<0.001). Though the absolute reduction was small, we’d point out these rates of hypoglycemia were quite low, and the comparator arm was using Dexcom G5/t:slim X2, already experienced with pump and CGM, and came with baseline time-in-range at 64%. The median reduction in time <70 mg/dl was smaller: from 3.2% during SAP to 2.6% during PLGS (-9 minutes/day). Interestingly, more benefit from PLGS came during the day: -14-minutes vs. -9 minutes at night.
• For those experiencing >5% time <70 mg/dl at baseline, the improvement with PLGS was bigger – a 40% reduction in hypoglycemia from 6.7% during SAP to 4% with PLGS (-39 minutes/day). This group was just under 30% of the study population, explaining the smaller overall effect size. For those experiencing <5% in hypoglycemia at baseline, PLGS took hypoglycemia from 2.7% to 1.9% (-12 minutes/day). Other subgroup analyses by high/low baseline A1c and adult/pediatrics revealed the system was equally effective.
• Time-in-range improved very slightly from 64% on SAP to 66% on PLGS (+29 minutes/day; p<0.001) – again reinforcing how well this study population was doing at baseline. Mean glucose did not change – 159 mg/dl on both SAP and PLGS.
• Suspensions of insulin delivery occurred on 91% of days, with a mean of 5.7 suspensions per day. The mean duration of suspension was only 18 minutes, but that still meant a cumulative total suspension time of 104 minutes per day. For a group with more hypoglycemia, we’d imagine the suspension data and time <70 results would be more dramatic. The study had one severe hypoglycemia event in SAP and none on PLGS. 
• The study had a 99% completion rate, ~95% CGM usage, and strong system usability ratings: >88% of participants agreed/strongly agreed that they would like to use the system frequently; thought the system was easy to use; felt very confident using the system; did not need the support of a technical person to use the system; and did not need to learn a lot before getting going with the system.

2. Control-IQ (hybrid closed loop) with TypeZero/Dexcom G6: pivotal trial to begin in 2Q18, rolling FDA PMA submission in 2H18, US launch in 1H19

Tandem’s second-generation hybrid closed loop with TypeZero and Dexcom’s G6 (Control-IQ), will enter its pivotal trial (IDCL) in 2Q18, enabling a “rolling” (“modular”) FDA PMA submission in 2H18 and a US launch in 1H19. This pivotal timing is right on par with the 3Q17 update (“1H18”), but this is the first management has indicated plans for a “rolling” PMA submission – presumably this would allow the FDA to look at the submission in pieces, presumably prior to the pivotal data. This sounds like a great regulatory path, especially because FDA will just have reviewed (and likely approved) the t:slim X2 with Basal-IQ. At ATTD, Dr. Boris Kovatchev shared that the international closed loop (IDCL) pivotal trial testing this fully integrated system will enroll 150 participants, randomized 2:1 to closed loop vs. sensor-augmented pump. The main efficacy outcomes is time-in-range (70-180 mg/dl). As of a January update from Tandem, a smaller two-week, at-home study at seven sites was expected to start enrollment this quarter (1Q18), followed by the aforementioned pivotal trial starting in 2Q18. The overall timing is tight and execution will need to be strong, but the pieces seem to be coming into place and the timing is clearer than ever. It is a major win for Tandem that this pivotal study is NIH funded and the system is using TypeZero’s algorithm, which has been tested for over 14,500 days in over 450 clinical trial participants (30 clinical trials) at 15 research sites on four continents. Also in a win, the product will again allow for a software update at home, meaning t:slim X2 users (with or without Basal-IQ) won’t need a brand new pump – they’ll simply add Control-IQ with the Tandem Device updater.

• CEO Kim Blickenstaff emphasized that this system will “leapfrog” the competition by adding automatic correction boluses for hyperglycemia, something Medtronic has certainly been working on but has never given specific launch timing on. (The FLAIR study testing Medtronic’s advanced hybrid closed loop with automatic correction boluses was again pushed back at ATTD, now expected to start later this year. Medtronic has not given launch timing on this product, other than saying at JPM that it will come after April 2019.)
• At ATTD, normally-stoic Dr. Boris Kovatchev was visibly excited about the fully integrated Tandem X2/TypeZero/Dexcom G6 Control-IQ system, which has now been tested in a ski camp study in 13-18 year olds (n=25) – over 48 hours of skiing, time-in-range (70-180) increased from 50% on SAP vs. a remarkable 73% on Closed Loop, translating to 6 more hours per day in range (p=0.01)! Average glucose declined 35 mg/dl (baseline: 179 mg/dl; p=0.03). Time <70 mg/dl increased slightly from 0.8% to 3.1%, but it was not statistically significant (p=0.7) – and the conditions were unquestionably challenging in this trial. The G6 CGM was connected 97% of the time, and closed loop was active for 95% of the time (99% excluding warmup) – very strong connectivity in extreme conditions. Dr Kovatchev showed the impressive picture below of someone doing a snowboard jump while on the integrated system – nice! The next phase of the trial will test the system in skiing 6-12 year olds.

3. t:slim X2 mobile app to launch in 2H18, presumably allowing pump status display, smartphone alerts, and uploading data to t:connect

Tandem’s t:slim X2 mobile app is expected to launch in 2H18, the first update we’ve heard since Tandem’s ADA 2017 Media Day. Previously an end-of-2017 launch was hoped for, though presumably it was pushed back to wait for Basal-IQ to launch. The app will talk via Bluetooth to the X2 pump, wirelessly uploading data to t:connect, mirroring pump alerts, and integrating other information. In the future, there is obvious potential to control the pump, particularly for the t:sport product (see below).

• We snapped a picture of the planned t:slim X2 mobile app at AADE 2017. We’re not sure if it’s changed since then, but the screen showed the CGM trend graph, recent boluses and basal rate, insulin on board, pump reservoir and battery, and time-in-range. We also like the idea of automatic uploading of data to t:connect (“Never upload a pump again!” – awesome!), and integrating with Dexcom CGM. This will be important for competing with Insulet’s Dash PDM and mobile display app, which is currently slated for FDA clearance in 2H18 followed by a limited market release.

4. t:sport patch pump: clinical trials in 2019, goal to launch in 2020-2021 time frame; will include Control-IQ, about half size of t:slim X2, on-pump bolus button

In the first development timeline ever, t:sport is moving ahead, Tandem’s patch pump concept with a short infusion set. Clinical trials are expected in 2019, with the goal of launching in the 2020-2021 time frame. The on-body component is about half the size of the current t:slim X2, and in new news, will integrate the Control-IQ hybrid closed loop algorithm (and presumably talk directly to Dexcom’s G6). Management shared plans today to use a low-cost 200-unit cartridge, include an on-pump bolus button (e.g., bolus through clothing), and maintain a rechargeable battery. A wireless handheld device or presumably a user’s own phone would control the pump. The product is in development for U100 insulin, but research will look into concentrated insulin – this would offer a more discreet alternative to the 480-unit t:flex (which has not sold very much) and help compete with Insulet’s Omnipod U200 and U500 devices with Lilly. Tandem is also exploring a slightly larger 300-unit cartridge for this device. This will be very interesting to follow, as it should offer competition to Insulet’s Omnipod Horizon and Roche’s Solo. On the other hand, the short infusion set means it’s not a true tubeless patch pump, leaving more pressure to excel on other aspects of the user experience.

• We snapped a picture of this device at Tandem’s ADA 2017 Media Day. We’re not sure if it’s changed from the below, but it is much smaller than the current pump and roughly the size of Insulet’s Omnipod.

-- by Adam Brown and Kelly Close