Memorandum

Tandem 1Q18 – Sales of $27 million rise 42% YOY; Basal-IQ filed with G5 (summer launch), with G6 iCGM to hopefully launch before end of year – April 26, 2018

    Executive Highlights

    • Tandem reported strong 1Q18 sales of $27 million, rising 42% YOY on an easy comparison (-5% in 1Q17). Sales fell 32% sequentially from the blowout record 4Q17, in line with seasonality. This was the strongest Q1 in Tandem’s history, handily beating the previous Q1 record ($20 million) during the ongoing t:slim G4 launch ramp (1Q16). The 1Q18 momentum came from the t:slim X2/G5 launch, t:lock infusion sets, former Animas patients (>20% of pump shipments), and pump renewals (600 in 1Q18). 2018 sales are still expected at $132-$140 million (+26% YOY), with plans to hit the mid-to-upper end.

    • Pump shipments of 4,444 in 1Q18 rose an outstanding 58% YOY. This brings the estimated “active installed base” to over 63,000 users (pumps shipped in the last four years), and total pumps since inception to over 72,000. “About half” of Tandem’s organic new customers (i.e., non-renewal) came from MDI - a sign it’s expanding the market.

    • Tandem now has ~$82 million in cash and burned only $13 million in 1Q18. Current resources, following the 1Q18 raise, are still expected to get Tandem to cash-flow breakeven in 2H19, assuming the base exceeds 80,000 and margins improved to 55% from the current 42%. Investor confidence has definitely returned from an all-time low, based on the tone of the questions and smaller number of them.

    • A summer 2018 launch is still expected for the under-FDA-review t:slim X2 with Basal-IQ (predictive low glucose suspend) and Dexcom’s G5. In major new news, an update to add Dexcom’s G6 is expected to launch before the end of 2018. Tandem has already spoken to the FDA regarding G6 and has a plan in place to update Basal.IQ by leveraging the new iCGM designation with interoperability in mind. This is impressively fast execution following the late March clearance of G6 under the surprise lower-classification 510(k) iCGM pathway. CEO Kim Blickenstaff spoke very positively on the new iCGM designation, as it will dramatically shrink the work and timeline to keep pumps up to date with Dexcom CGM – no more multi-year delay.

    • Hybrid closed loop with TypeZero/Dexcom’s G6 (Control-IQ) will enter a pivotal trial in 2Q18, enabling a “rolling” FDA PMA submission in 2H18. A US launch is still expected in 1H19, which feels doable but ambitious.

    Tandem reported 1Q18 financial results today in a call led by CEO Kim Blickenstaff, new CFO Leigh Vosseller (strong in her second call), and EVP Susan Morrison. See the top highlights below!

    Financial and Business Highlights

    1. Sales of $27 million rise a strong 42% YOY on easy comparison; best Q1 in Tandem’s history

    Tandem’s 1Q18 sales of $27 million rose a strong ~42% year-over-year (YOY) on a GAAP basis, albeit against an easy comparison to a 5% decline in sales in 1Q17. On a non-GAAP basis, sales were up a more robust ~54% YOY, as this excludes $1.5 million in deferred revenue recognized in 1Q17 (new technology program). This was the strongest Q1 performance in Tandem’s history, handily beating the previous Q1 record's $20 million when the t:slim G4 launch was ramping up (1Q16). Sequentially, 1Q18 sales fell ~32% from the blowout record in 4Q17 – this seems steep but is actually on par with the typical Q4-Q1 seasonality in Tandem’s business.

    • Management attributed the strong momentum to the t:slim X2/G5 launch (launched in late August), t:lock infusion sets, former Animas patients (>20% of pump shipments), and pump renewals (600 in 1Q18). CEO Kim Blickenstaff emphasized “these were not one-time events” – they continued to benefit the business in 1Q18 and will do so going forward. Notably, pump supply sales of $10 million grew 63% YOY, outpacing company growth – this was a smart move for Tandem to move away from luer lock and now capture 100% of infusion set revenue with the t:lock connector. 1Q18 was the first quarter in which Tandem sold infusion sets to its entire installed base following the t:lock connector’s launch in late 2017.

    Tandem Quarterly Sales, 2Q13-1Q18, millions

    2. Impressive 4,444 pumps shipped, +58% YOY; active installed base over 63,000

    Tandem shipped 4,444 pumps in 1Q18, a 58% YOY gain from 2,816 pumps shipped in 1Q17. This brings the estimated “active installed base” to over 63,000 users (pumps shipped in the last four years), and total pumps since inception to over 72,000. In line with seasonality, pump shipments declined 36% sequentially from 4Q17 – in line with what Tandem saw in 1Q17 (-36%), 1Q16 (-35%), and 1Q15 (-37%). Consistent with 4Q17, “about half” of Tandem’s organic new customers (i.e., non-renewal) came from MDI, a great sign for expanding the market. Tandem shipped 600 renewal pumps in 1Q18, bringing total renewals to 2,200; management did not give the retention rate, as it often takes time to secure a renewal following the four-year expiration; the goal remains a retention rate of 70%.

    • In line with December, over 20% of 1Q18 pump shipments went to former Animas customers – up from “low teens” prior to Animas exiting the market. While Medtronic is the preferred transition partner, Tandem is clearly seeing benefit, as we expected following Tandem’s 3Q17 and 4Q17 calls 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 - with the no-cal G6 soon to ship, sticking with Dexcom will continue to be attractive. Omnipod Dash is also not going to be truly integrated with Dexcom’s G5/G6, so this advantage should continue for at least 2018.

    Tandem Quarterly Pumps Shipped, 2Q13-1Q18

    3. 2018 guidance maintained for 26% growth ($132-$140 million), with new expectation to be at the mid-to-upper end

    Management maintained the 2018 revenue guidance range – $132-$140 million, +26% YOY – but now expects to be on the “mid-to-upper end” of the range. This reflects optimism leaving Q1. CFO Leigh Vosseller again highlighted the five key drivers mentioned in 4Q17, three of which were evident in 1Q18 (renewals, Animas, infusion set sales): (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 in 2018 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.

    4. Cash is solid: $82 million following equity financing and warrants; net cash used only $13 million in 1Q18; enough to reach breakeven in 2H19

    Tandem’s cash position is the best it has been in years: as of March 31, the company had ~$82 million in cash and equivalents, reflecting: (i) ~$64 million in net proceeds from the equity financing completed in February 2018; and (ii) an additional ~$7 million in net proceeds raised from warrants exercised in 1Q18. The company believes current resources will take it to cash-flow breakeven in 2H19, assuming: (i) an installed base of >80,000 users ordering supplies consistently; and (ii) gross margins of 55%. Gross margin was 42% in 1Q18, up notably from 36% in 1Q17 – the second straight quarter with an improvement in the 5-6 percentage-point range. While the next 18 months will need to see significant gross margin improvement, Tandem could very well achieve the installed base number in 2018 – especially if it executes on the pipeline. Investor confidence has certainly been restored: Tandem’s market cap is now at ~$357 million, its highest point in two years.

    • In early 2Q18, Tandem received an additional $11 million in proceeds from warrant exercises – that’s nearly another quarter of cash at the current burn rate.

    • In a nod to leverage, Tandem’s operating expenses of $27 million fell 3% YOY, while revenue grew at a robust 44%. CFO Leigh Vosseller said Tandem’s goal is to contain operating expense growth to <10% in 2018, including spending necessary to successfully launch in international markets. The company seems well on its way to hitting the >55% gross margin target by 2H19 .

    5. International plans unchanged: CE Mark expected in 2Q18, Health Canada filed, OUS sales to start in 2H18

    Tandem’s international plans have not changed since Q4: the t:slim X2 with Dexcom G5 integration has been submitted to Health Canada and a CE Mark is expected in 2Q18. The first international sales are still expected in 2H18. Sales outside the US are not expected to meaningfully drive revenue in 2018 (“a year of building”), but will contribute more in 2019 and beyond. CEO Kim Blickenstaff said in Q&A that international could represent 10%-15% of company sales over time – that seems reasonable to us (and possibly conservative). Tandem will go direct in Canada, while other countries will launch via experienced distributors. Animas’ exit is really driving Tandem’s prioritization, and management emphasized it is not taking the focus off the US. Tandem has announced three distribution agreements so far:

    • For Australia and New Zealand, Tandem announced distribution agreements earlier this week with Australasian Medical & Scientific Ltd (AMSL) and New Zealand Medical & Scientific Ltd (NZMS) to commercialize the t:slim X2. The distributors will perform all sales, marketing, and customer training/support for Tandem’s products. Launch timing for Australia and New Zealand has never been shared.

    • In Italy, Movi SpA will distribute t:slim X2 (announced in early April).

    • As previously announced, Rubin Medical will distribute t:slim X2 in Sweden, Norway and Denmark. Rubin Medical will perform all sales, marketing, customer training, and support for Tandem’s products.

    Pipeline Highlights

    1. “Confident” for summer launch of Basal.IQ (PLGS) with Dexcom G5; update to add G6 iCGM before end of 2018 (FDA path already outlined)

    Tandem is “confident” for a summer 2018 launch of the under-FDA-review t:slim X2 with Basal-IQ (predictive low glucose suspend) and Dexcom’s G5. In major new news, an update to add Dexcom’s G6 (under the new iCGM pathway) is expected to launch before the end of 2018. Tandem has already spoken to the FDA regarding the latter and has a plan in place to quickly update Basal.IQ to add G6. Wow – this is impressively fast execution following the late March clearance of G6 under the surprise lower-classification 510(k) iCGM pathway. It’s also quite impressive for Tandem, who only filed the G5 version in January – getting that version approved and then updating to G6 within the same calendar year would be remarkable. (G6 is expected to launch this quarter, 2Q18. We’ll hear more specific timing next week.)

    • CEO Kim Blickenstaff spoke very positively on the new iCGM designation with interoperability in mind, as it will dramatically shrink the work and timeline for Tandem to stay up to date with Dexcom CGM. Indeed, in the old PMA process for a sensor-augmented pump, updating to G6 would be a 12-18 month effort, which translated to an ~2-year launch delay between t:slim G4 and t:slim G5. Now, it sounds like Basal.IQ/G6 integration could launch within ~6 months of the G5 version. Nice! Mr. Blickenstaff called it a “big advantage” for Dexcom and for Tandem. We agree and wonder if Abbott, Medtronic, and Senseonics will go for the iCGM path and how soon; Senseonics does appear to meet the accuracy requirements, while the others fall slightly short.

    • Launching Basal.IQ with G6 also offers Tandem a competitive advantage over the MiniMed 670G: the no-calibration G6 sensor vs. at least 3-4 fingersticks per day on the Guardian Sensor 3. While Basal.IQ obviously won’t mitigate hyperglycemia, it will really reduce the lows without alarms, and we imagine that will be highly welcome to intensively managed early adopters.

    • Basal.IQ training will be an online module for current users before software updating their pumps – we love that! Users will have to go through a training process and pass an “examination.” There are no sales or personnel interactions – nice! This is how Tandem will also do Control.IQ. Given the significant in-person training burden of the 670G, this could prove to be another advantage for Tandem.

    • We continue to see this as a low-risk regulatory path, 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 t:slim 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 competitors (Insulet, Bigfoot, Lilly, Beta Bionics), and give Tandem valuable experience commercializing AID before the bigger launch next year with TypeZero’s Control-IQ.

    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), is still expected to enter its pivotal trial (IDCL) in 2Q18, enabling a “rolling” (“modular”) FDA PMA submission in 2H18 and a US launch in 1H19. This timing is unchanged since 4Q17; we’ll be interested to see if the pivotal actually gets underway this quarter, as it has been quite delayed. On the plus side, the earlier-than-expected G6 clearance should certainly help. This system will also pursue iCGM compatibility, meaning other iCGMs could presumably be integrated over time. Mr. Blickenstaff emphasized Control.IQ will “leapfrog” the competition (670G) by adding automatic correction boluses for high blood sugars – we agree this is a compelling feature, especially when combined with a no-calibration sensor. We do not believe Insulet or Bigfoot plan to have automatic correction boluses; Beta Bionics and Lilly might, but we’re not positive.

    3. Discontinuing sales of 480-unit t:flex pumps; exploring other options for high insulin requirements, including concentrated insulin

    Tandem has decided to discontinue the 480-unit :flex Insulin Pump, which features an industry-leading 480-unit insulin cartridge for people with greater insulin needs. Demand has simply been low: in 1Q18, for instance, Tandem shipped less than 100 t:flex pumps compared to more than 4,000 t:slim X2 pumps. Most quarters recently have not even mentioned t:flex. Management said ~3,000-4,000 have been sold to date, reflecting less than 5% of Tandem’s installed base. Current t:flex customers will remain fully supported, including manufacturing of t:flex cartridges and 24x7 customer support for the remaining time left in warranties. We think this is a prudent decision, particularly with stiffer competition coming from Insulet’s U500/U200 Omnipods with Lilly and BD’s Swatch pump.

    • From an R&D perspective, Tandem is “evaluating” other potential solutions for people with greater insulin needs such as insulin concentrates.” No further details were shared; presumably this will take a partnership with an insulin company. 

     

    --by Adam Brown and Kelly Close