Memorandum

Tandem 2Q17 – Sales of $21M down 7% YOY, but up 22% sequentially; Cash burn improves 32%, but financing still a concern; t:slim G5 under review; PLGS launch delayed to summer 2018; CE Mark filing by end of 2017 – July 28, 2017

Executive Highlights

  • Tandem’s sales (non-GAAP) totaled $21 million in 2Q17, a 7% year-over-year decline on a very tough comparison to 2Q16’s 46% YOY growth. Still, this marked the third straight quarter with a YOY sales decline, a trend Tandem has never seen. Sales rose an encouraging 22% sequentially from 1Q17. Management reaffirmed 2017 guidance for full-year sales of $100 million-$107 million (12%-20% YOY growth from 2016).
  • Pump shipments totaled 3,427 in 2Q17, a 25% YOY decline and a 22% sequential gain. Cumulative pump shipments are now ~57,000, and notably, ~60% of Tandem’s new patients this quarter came from MDI.
  • Tandem has $38 million in cash on hand, meaning only enough for at least a couple more quarters. The call did not provide a firm financing update, though the company has just filed for an at-the-market (ATM) public stock offering. The share price is down to ~$0.59, an all-time low (market cap: ~$29 million). An update is expected in Q3.
  • In new news, a CE Mark will be filed by the end of 2017, enabling t:slim X2 sales outside of the US in a “handful of key geographies” in 2018 (Canada was specifically mentioned).
  • In the pipeline, (i) the t:slim X2 with Dexcom G5 integration remains under FDA review (no launch timing shared); (ii) t:lock, Tandem’s new custom infusion set connector, will launch in 3Q17; (iii) launch of the predictive low glucose suspend device has been delayed ~1 quarter to “summer 2018”; and (iv) launch of the TypeZero treat-to-range system is still expected by the end of 2018.

Tandem reported 2Q17 results this afternoon in a call led by CEO Kim Blickenstaff. The business is definitely in a wait-and-see mode, as t:slim G5 approval is a gating item for success this year and the cash situation is a concern; we continue to see more upside than The Street is giving Tandem credit for, though execution will need to be strong in the back half of the year. See the call’s top financial and pipeline highlights below.

Financial Highlights

1. Tandem’s sales of $21 million declined 7% year-over-year (YOY) in 2Q17, marking three straight quarters with a YOY decline. The last three comparisons have been difficult to t:slim G4 momentum one year ago, including in 2Q16 (+46% growth). On the plus side, revenue rose 22% sequentially from a challenging 1Q17.

2. Pump shipments of 3,427 declined 25% YOY in 2Q17, but rose 22% sequentially from 1Q17. The user base is now ~57,000 customers, and ~60% are coming from MDI (consistent with 1Q17).

3. Full-year sales guidance was unchanged – revenue of $100-$107 million (+12% to +20% YOY). Tandem is ~37% of the way there, dead on with what it saw in 2013, 2014, and 2015 (last year was an exception, as 49% of sales came in 1H16). Key tail winds will include a t:slim G5 launch (under FDA review), the 3Q17 launch of t:lock, four-year renewals, and seasonality.

4. Cash burn dropped to $15.8 million in 2Q17, a strong 32% improvement from $23 million in 1Q17. Still, financing is a definite concern: the company has $38 million in cash and equivalents on hand, meaning only enough for at least a couple more quarters. The call did not provide a firm financing update or runway, though the company has just filed for an at-the-market (ATM) public stock offering; the share price is now down to ~$0.59, an all-time low (market cap: ~$29 million). More financing clarity is expected in the Q3 call.

5. Tandem estimates its US pump market share is at ~10%, and in line with the 4Q16 update, believes sustained profitability could come at a market share of 15% and gross margins of 55%. Management said this could come in 2019, implying a very significant bump in gross margin from the current level of 38%. Tandem later told us this assumes a constant US pumper base of ~550,000, meaning it must only add ~25,000 patients to the base by 2019 – very doable if it continues at the current rate. 

6. Management also commented on the MiniMed 670G (“we continue to hear mixed reviews”) and pointed out the t:slim X2’s comparative hardware advantages.

Pipeline Highlights

7. The t:slim X2 with Dexcom G5 integration is still under FDA review, and management did not give a specific launch timeline (previously “summer 2017,” and before that, “mid-2017”). Tandem is “prepared to launch,” consistent with previous plans to roll the product out within 30 days of approval. The 12,000+ t:slim X2 users will be able to software update their pumps and add G5 integration at no cost

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. Management said this could bring “tens of millions” in additional revenue, as it will increase the percentage of sets purchased directly from Tandem from the current ~61% to 100%.

9. Launch of the predictive low glucose suspend (PLGS) t:slim X2 with Dexcom G5 has been delayed to “summer 2018,” back from the previous “early 2018.” The ~1 quarter delay was attributed to pivotal enrollment, which is starting to ramp up now. The five-site, 90-patient, crossover trial is expected to wrap up by end of 2017, also back one quarter from the previous “3Q17.” Inpatient feasibility data (n=10, overnight) at ADA 2017 looked excellent

10. In a first, Tandem is also now preparing to file for CE Mark by the end of this year, enabling t:slim X2 sales outside of the US in a “handful of key geographies” in 2018 (Canada was specifically mentioned). The company plans to partner with distributors to service and support international customers.

11. Timing on the second-gen automated product with TypeZero’s treat-to-range algorithm and Dexcom’s G6 is unchanged: a launch expected by the end of 2018. The NIH-funded iDCL trial main phase is still not recruiting, per ClinicalTrials.gov.

12. Two pipeline project mentioned at Tandem’s ADA Media Day were not covered today: Tandem’s first-gen secondary display mobile app (possible launch this year) and the t:sport patch pump (no timing shared).

Financial Highlights

1. Tandem’s sales of $21 million declined 7% year-over-year (YOY) in 2Q17, marking three straight quarters with a YOY decline. The last three comparisons have been difficult to t:slim G4 momentum one year ago, including in 2Q16 (+46% growth). On the plus side, revenue rose 22% sequentially from a challenging 1Q17, in line with Tandem’s typical sequential improvements as the year progresses. From a revenue perspective, the business is actually holding quite steady in the face of competitive headwinds, a good sign for Tandem as t:slim X2 with G5 comes (hopefully) soon.

Tandem Quarterly Sales (2Q13-2Q17)

2. Pump shipments of 3,427 declined 25% YOY in 2Q17, but rose 22% sequentially from 1Q17. The user base is now ~57,000 customers, and ~60% are coming from MDI (consistent with 1Q17). Of the ~40% of new users coming from other pumps, Tandem continues to see the largest percentage converting from Medtronic, followed by Animas – this is a good sign for defending against 670G. On the other hand, as Tandem focuses on the MDI population, it will see more competition in the coming years from Insulet’s Dash (FDA submission in 2H17), Bigfoot/Abbott’s system (pivotal in 2018), and a host of MDI dose titration products leveraging CGM.

3. Full-year sales guidance was unchanged – revenue of $100-$107 million (+12% to +20% YOY). Tandem is ~37% of the way there, dead on with what it saw in 2013, 2014, and 2015 (last year was an exception, as 49% of sales came in 1H16). Key tail winds will include a t:slim G5 launch (under FDA review), the 3Q17 launch of t:lock, four-year renewals, and seasonality.

4. Cash burn dropped to $15.8 million in 2Q17, a strong 32% improvement from $23 million in 1Q17. Still, financing is a definite concern: the company has $38 million in cash and equivalents on hand, meaning only enough for at least a couple more quarters. The call did not provide a firm financing update or runway, though the company has just filed for an at-the-market (ATM) public stock offering; the share price is now down to ~$0.59, an all-time low (market cap: ~$29 million). More financing clarity is expected in the Q3 call. As we’ve said before, we continue to believe the financial community undervalues Tandem’s 50,000+ user base and pipeline, while overvaluing the competitive impact of the MiniMed 670G. The power of Bluetooth connectivity and Tandem’s Device Updater should enable a steady stream of innovation, and Tandem’s marketing and attention to patient needs remains outstanding. Certainly, sales will need to improve as the year goes on to restore confidence, but this should happen if the t:slim X2 G5 launches as expected.

5. Tandem estimates its US pump market share is at ~10%, and in line with the 4Q16 update, believes sustained profitability could come at a market share of 15% and gross margins of 55%. Management said this could come in 2019, implying a very significant bump in gross margin from the current level of 38%. Tandem later told us this assumes a constant US pumper base of ~550,000, meaning it must only add ~25,000 patients to the base by 2019 – very doable if it continues at the current rate.  Obviously the gross margin piece will be harder to achieve.

6. Management also commented on the MiniMed 670G (“we continue to hear mixed reviews”) and pointed out the t:slim X2’s comparative hardware advantages. Mr. Blickenstaff said (“anecdotally”) some HCPs and patients are: (i) finding the 670G’s new interface difficult to learn, train, and use; (ii) frustrated that the pump has a larger form factor; (iii) annoyed by Auto Mode exits; and (iv) experiencing variability in sensor accuracy (“particularly compared to G5, which is the only CGM approved for dosing decisions”). Mr. Blickenstaff believes the t:slim X2 form factor and ease of use “shine” compared to 670G, since it is 60% smaller than the X2, has a touchscreen (instead of physical buttons) and a 1/3 larger display, is approved for 6+ years (670G is only 14+ years), includes Bluetooth and a rechargeable battery, and is the only software-updateable pump available (“no complicated swap out programs to access new technology”).

  • It was also clear from his remarks that Tandem is heavily reliant on Dexcom as a partner and a system differentiator: “Dexcom’s G5 is the most accurate CGM on the market, and G6 has even improved accuracy. Adoption of automated insulin delivery will be a function of burden imposed by training and use of the system. G5 has the least calibration to achieve the best accuracy – just two per day. There is no need for bolus fingerstick confirmation, which also reduces patient burden.”

Pipeline Highlights

7. The t:slim X2 with Dexcom G5 integration is still under FDA review, and management did not give a specific launch timeline (previously “summer 2017,” and before that, “mid-2017”). Tandem is “prepared to launch,” consistent with previous plans to roll the product out within 30 days of approval. The 12,000+ t:slim X2 users will be able to software update their pumps and add G5 integration at no cost – “reinforcing the power of modern consumer technology that no other pump offers.” Management emphasized the G5’s remote monitoring (Share) capabilities, which are not available in the t:slim G4 nor in the MiniMed 670G.

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. Management said this could bring “tens of millions” in additional revenue, as it will increase the percentage of sets purchased directly from Tandem from the current ~61% to 100%. 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 (from Tandem’s ADA Media Day, we learned they typically buy sets in bulk from Animas at a lower price); (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. We got a glimpse at this at ADA (see below) and the form factor change is barely noticeable. The rollout will be key to manage carefully, as supply reordering is a pain for patients and Tandem is renegotiating distributor contracts now.

9. Launch of the predictive low glucose suspend (PLGS) t:slim X2 with Dexcom G5 has been delayed to “summer 2018,” back from the previous “early 2018.” The ~1 quarter delay was attributed to pivotal enrollment, which is starting to ramp up now. The five-site, 90-patient, crossover trial is expected to wrap up by end of 2017, also back one quarter from the previous “3Q17.” Inpatient feasibility data (n=10, overnight) at ADA 2017 looked excellent –100% suspension and resumption of insulin delivery as intended (per algorithm); a median glucose of 88 mg/dl at suspension and 83 mg/dl at resumption; and no reference glucose values <60 mg/dl. We see this as a very low-risk R&D project with a clear FDA path and significant upside for Tandem to get a first-gen product to market quickly – whether it will compete effectively against hybrid closed loop systems (e.g., 670G) remains to be seen.

  • According to Tandem’s market research, hypoglycemia prevention is “80% of the value” customers seek in automated insulin delivery – no further details were provided on this research, but if true, it supports Tandem’s decision to do PLGS first (quicker to market) and then move to hybrid closed loop.

10. In a first, Tandem is also now preparing to file for CE Mark by the end of this year, enabling t:slim X2 sales outside of the US in a “handful of key geographies” in 2018 (Canada was specifically mentioned). The company plans to partner with distributors to service and support international customers. Management alluded to this at the ADA Media Day, and said today that a recent notified body audit went well. This could be a nice revenue expansion strategy, though the European market is also increasingly competitive, and we assume profitability is likely to be lower here.

11. Timing on the second-gen automated product with TypeZero’s treat-to-range algorithm and Dexcom’s G6 is unchanged: a launch expected by the end of 2018. The NIH-funded iDCL trial main phase is still not recruiting, per ClinicalTrials.gov. We see this timing as doable but somewhat ambitious, given the delays for PLGS (a simpler product – though unrelated to the TypeZero algorithm), the addition of another partner into the second-gen submission (TypeZero), the continued delays in iDCL actually starting, and presumably a wait to incorporate Dexcom’s G6 (FDA submission by the end of September). On the plus side, the trial is NIH-funded and will save Tandem a lot of money at a time when cash is a concern.

12. Two pipeline project mentioned at Tandem’s ADA Media Day were not covered today: Tandem’s first-gen secondary display mobile app (possible launch this year) and the t:sport patch pump (no timing shared). Here’s what we learned at ADA:

  • Tandem’s first-gen app will talk to the t:slim X2 via Bluetooth, wirelessly upload pump data to t:connect, and mirror key metrics from the pump display. Bluetooth BGM integration is also a goal (retrospective data only), and phone users will also receive notifications of pump alerts. Future generations (no timing given) hope to add more ambitious features, like remote bolusing, decision support, training and education, share notifications, and automated pump setup.
  • Tandem’s t:sport patch pump is still in development (no timing shared), and we got a first hands-on look at the small on-body component (roughly the size of Insulet’s OmniPod). Similar to Cellnovo, the plan is to have a 4-inch tubing that connects the pump to the infusion site. It’s still unclear whether smartphone app control will be possible, or whether a handheld will be the only way of interacting with the system. Tandem has obviously de-prioritized this project relative to the nearer-term automation pipeline.

Pipeline Summary

Pipeline Product

Timeline

Dexcom G5 CGM integration for the t:slim X2 Pump                                        

FDA approval and launch previously expected in “summer 2017.” PMA supplement filed as of 4Q16 call in February. Tandem is “prepared to launch” once approval come through.

 

Predictive Low Glucose Suspend (PLGS) for the t:slim X2 Pump

Launch in summer 2018, assuming a six-month FDA review. A 90-patient, five-site pivotal trial is expected to wrap up by the end of 2017. Inpatient feasibility data was shared at ADA.

Type Zero’s TTT (treat-to-target) automated insulin delivery algorithm and Dexcom G6 CGM for t:slim X2

Launch by the end of 2018. Pivotal trial in 2017-2018. IDCL main phase is still not recruiting.

t:lock Custom Infusion Set connector

 

Initial launch in 3Q17, with full rollout by end of 2017.

Mobile app for mirroring t:slim X2 pump information

Possible launch by the end of 2017, per ADA Media Day

t:sport
~50% smaller t:slim worn on the body, a short infusion set, and pump control via a wireless handheld or mobile app

No recent updates. PMA submission previously expected in 2018.

 

-- by Adam Brown and Kelly Close