Memorandum

Tandem 2Q16 – New t:slim X2 to launch in 4Q16, enabling future software upgrades to add CGM, AP algorithms; G5 integration expected in mid-2017; sales rise 46% to $23 million – July 28, 2016

Executive Highlights

  • Sales of Tandem’s t:slim insulin pump and related supplies totaled $23 million in 2Q16, a 14% sequential increase from 1Q16 and a 46% year-over-year (YOY) gain from 2Q15. Tandem shipped 4,582 t:slim pumps in 2Q16, a 38% YOY increase from 2Q15 and a 13% sequential increase from 1Q16.
  • Management announced the 4Q16 launch of t:slim X2, a new class III pump platform nearly identical to the t:slim, but enabling future online software updates to add Dexcom CGM integration and automated insulin delivery. Dexcom G5 integration is expected to launch by mid-2017, predictive low glucose suspend by the end of 2017, and treat-to-target hybrid closed loop (TypeZero algorithm) in 2018 – on a very positive note, all will be offered to t:slim X2 customers when available, not just new customers at the time of those releases. Wow – that’s a lot to look forward to!

This afternoon, Tandem CEO Kim Blickenstaff led the company’s 2Q16 financial update. Below, we enclose the call’s top financial and R&D highlights, followed by a pipeline summary.

Financial Highlights

1. Sales of Tandem’s t:slim insulin pump and related supplies totaled $23 million in 2Q15, a 14% sequential increase from 1Q16 and a 46% year-over-year (YOY) gain from 2Q15. The sales were Tandem’s second highest ever, behind $29.1 million from a breakout 4Q15 performance.

2. Tandem shipped 4,582 pumps in 2Q16, a 38% YOY increase from 2Q15 and a 13% sequential increase from 1Q16. Demand remains high for the t:slim G4 (launched in September 2015), which accounted for 57% of all pumps shipped in the quarter – clearly this is not pent-up demand nearly a year into this launch. Tandem has now shipped over 42,000 pumps since launch in 2012. “Approximately half” of Tandem’s new customers are still new to pump therapy.

3. In the wake of UHC’s selecting Medtronic as its “preferred” provider of insulin pumps, management lowered guidance for full-year revenue from $108-$115 million (as estimated in 1Q16) to $105-$110 million. This is not a very big change. Mr. Blickenstaff characterized UnitedHealthcare’s decision to exclusively cover Medtronic pumps (effective July 1) as “unexpected and disappointing.” He doesn’t expect a “near-term reversal,” but did meet personally with a UHC executive and it’s our view this was likely a fairly positive meeting.

4. The call announced the t:slim X2 Upgrade Program, Tandem’s first upgrade program, enabling current t:slim and t:slim G4 users to transition to the next-gen t:slim X2 starting in 4Q16. The upgrade price will range from $0-$799 (depending on purchase date). Impressively, Tandem already has the upgrade website posted.

5. To support growth, Tandem recently signed a lease to add approximately 50,000 square feet of space. The facility has a lower rent and operating cost structure. This certainly reflects positive business momentum.

R&D Pipeline Highlights

6. For the first time, Tandem announced it will launch a new pump platform, t:slim X2, in 4Q16. The new pump will be 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. The pump will add 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). t:slim X2 will not require a formal PMA submission – simply component changes and switching the manufacturing over to class III controls. We also see this as a very positive move.

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

8. Tandem’s predictive low glucose suspend (PLGS) feature for the t:slim X2 platform will use  Dexcom’s G5 CGM, and a feasibility study is scheduled to be completed in August. A pivotal trial is expected in 1Q17, and following an expected six-month FDA review, Tandem still expects to launch this functionality on the t:slim X2 platform in 2017.

9. Tandem’s second-gen AP offering, integration with TypeZero’s treat-to-target algorithm, remains on schedule for a 2017 pivotal trial and an expected 2018 launch. The licensing agreement with TypeZero last week was a huge win for Tandem, who gets access to a very well-studied control algorithm (originated at UVA, more than 28 clinical studies, n=475) for its second-gen automated insulin delivery product.

10. A Tandem mobile app allowing current t:slim and t:flex users to see integrated pump and G5 CGM information on their smartphones is under discussion with Dexcom.

11. A PMA submission for the t:sport “patch pump” has been pushed back to 2018 from the previous goal of 2017. The t:sport has been placed on the backburner, given the upcoming R&D work on Dexcom CGM integration and automated insulin delivery for the t:slim X2.

12. This month, Tandem announced FDA clearance for the t:slim to be used in children as young as six years old (previously it was 12+ years) and the Device Updater (formerly Project Odyssey) which is making it possible for t:slim X2 devices sold in 4Q15 to become sensor-augmented and ultimately artificial pancreas products over the next two years via remote software updates.

 

Financial and Business Highlights

1. Sales of Tandem’s t:slim, t:slim G4, and t:flex insulin pumps and supplies totaled $23 million in 2Q16, a 14% sequential increase from 1Q16 and a strong 46% year-over-year (YOY) gain from 2Q15. The sales were Tandem’s second highest ever, behind $29 million from a breakout 4Q15 performance. The comparison was also difficult to 52% YOY growth in 2Q15. Demand remains high for the t:slim G4 (launched in September 2015), which accounted for 57% of all pumps shipped in the quarter – clearly this is not pent-up demand nearly a year into this launch. Pump sales represented 79% of total sales, in line with prior quarters.

  • Management cited the 1Q16 sales force expansion (60 to 72 reps), improved rep productivity, and a portfolio of three pumps as key topline revenue drivers. The average productivity of the sales force in 2Q16 was 21 pumps per month per territory vs. 19 in 2Q15. On a rolling 12-month basis (ended June 30), productivity was 23 pumps per month per territory vs. 18 in the previous 12 months.

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

2. Tandem shipped 4,582 pumps in 2Q16, a 38% YOY increase from 2Q15 and a 13% sequential increase from 1Q16. In line with revenue, it was Tandem’s second highest quarter of pump shipments in its history. Tandem shipped 2,591 t:slim G4 pumps (57% of 2Q16 shipments), 1,498 t:slim pumps (33%), and 493 t:flex pumps (10%) – a nearly identical split to 1Q16. High G4 uptake bodes well for the company as it advances into the automated insulin delivery space.

  • Tandem has now shipped over 42,000 pumps since launch in August 2012. Notably, “approximately half” of Tandem’s new customers are still new to pump therapy. This is the most critical metric to follow in gauging the sustainability of Tandem’s growth in our view. It will be interesting to see if this changes over the next few years – how large is the MDI population willing to move to a pump? Will Tandem and Insulet eventually saturate this market? We certainly believe that with a 50% “new to pump” statistic, things bode well for Tandem. Can both companies maintain their impressive growth into this area? 

Figure 2: Quarterly Pump Shipments (2Q12-2Q16)

3. In the wake of UHC selecting Medtronic as its “preferred” provider of insulin pumps, management lowered guidance for full-year revenue from $108-$115 million (as estimated in 1Q16) to $105-110 million. The $3-$5 million drop in the guidance is what we would have expected, as 8% of shipments last year would now be ineligible to receive Tandem pumps under the new UHC policy. The updated guidance reflects the UHC news offset by pipeline wins, including the recent pediatric indication for t:slim, approval of the Device Updater, and expected launch of the t:slim X2 in 4Q16 (more on this below).

  • Mr. Blickenstaff characterized UnitedHealthcare’s decision to exclusively cover Medtronic pumps (effective July 1) as “unexpected and disappointing.” He doesn’t expect a “near-term reversal.” Notably, Mr. Blickenstaff did meet with a member of UnitedHealthcare’s Executive Management Team who was key in making the decision. The meeting was “constructive and candid,” and Mr. Blickenstaff shared clinical data, data on t:slim’s usability and training, and “compelling customer survey data” that indicates Tandem’s intuitive interface has led to better outcomes. No further details were shared. Presumably, “big data” that Tandem can put together with more time with its pumps on the market could bode very well for the company. Mr. Blickenstaff did mention in Q&A that Tandem is the only company with a software updateable pump, and this could help in payer discussions as it adds CGM and automated insulin delivery –  “I think our whole strategy of having the X2 platform is that all of our future products are going to be class III products, and so we will be the only one in the industry actually to add these feature upgrades during that warranty period.” We agree this is a big deal – it’s our guess both patients and HCPs will very much appreciate this automatic feature (lower hassle factor).
  • Unless the pump business model changes radically, payers may become THE battleground on which the pump industry fights over the coming years. This is already true in many markets (insulin, oral drugs, BGM, etc.) Given the large upfront cost of durable pumps (~$5,000), the business model may need to change to make this market more consumer-driven and less payer-dictated if it wants to preserve patients’ preferences – subscription pay-as-you-go, payment plan, lower upfront cost, etc.? Can and will companies move in this direction, particularly durable pump companies? Insulet seems best positioned to go this way, and Bigfoot has also talked about pursuing this type of business model.

4. The call announced Tandem’s first upgrade program, The t:slim X2 Upgrade Program enabling current t:slim and t:slim G4 users to transition to the next-gen t:slim X2 starting in 4Q16. The upgrade price will range from $0-$799 (depending on purchase date). Impressively, Tandem already has the upgrade website posted. The program will address two groups of current users: t:slim users frustrated not to have Dexcom CGM integration right now and t:slim G4 users desiring G5 integration. Plus, future users worried about being locked out of next-gen product will be able to breathe easier. Tandem did not have an upgrade program when the t:slim G4 was launched, so this is excellent to see. This program is expensive for a small company like Tandem, but it is the right thing to do – giving patients access to the latest technology within the four-year warranty cycle, and relying more on software as a vehicle for innovation delivery (rather than new and expensive hardware). We love the vision of remotely updateable pumps and commend Tandem for moving in this direction.

  • The t:slim and t:slim G4 will no longer be available after launch of the t:slim X2 and subsequent software update for G5 integration, respectively. This means that the t:slim X2 will be the core product going forward, and all of Tandem’s future pumps will be Class III devices. On the plus side, the manufacturing will be even more uniform across the portfolio – right now, the t:slim and t:flex are 510(k) cleared, while the t:slim G4 is a PMA.
  • Upgrade program details: For customers who have a t:slim, the date of purchase will determine the cost of an upgrade – $799 (pre-June 2015 purchase), $399 (July 2015-June 2016 purchase), and $0-$399 (post-July 2016 purchase). t:slim G4 users can upgrade to t:slim X2 for $799 or have an existing t:slim G4 retrofitted with X2 hardware and mailed back for $399 (subject to regulatory approval). The program will extend through September 30, 2017 – nice to see patients have nearly a year to take advantage.

5. To support growth, Tandem recently signed a lease to add approximately 50,000 square feet of space. The facility has a lower rent and operating cost structure. Tandem will move into the space in 1Q17 and transition most of its manufacturing there over a 6-9 month period. This is a clear vote of confidence in the future of the business and what sounds like a win for profitability.

R&D Pipeline

6. For the first time, Tandem announced it will launch a new pump platform, t:slim X2, in 4Q16. The new pump will be 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. The pump will add 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). t:slim X2 will not require a formal PMA submission – simply component changes and switching the manufacturing over to class III controls (“it's really our own internal timeline on when we're ready to go on this”).

  • t:slim X2 will become the core product moving forward and allow the Tandem Device Updater to realize its full vision –  rollout innovations (via software) outside of costly hardware updates and lengthy four-year product cycles. The remote software update capability will set Tandem apart from any other pump company right now, though we expect more and more diabetes devices to move in this direction.
  • The announcement comes after Tandem consulted the FDA about the possibility of software updating the current t:slim and t:flex pumps (510(k), class II) to turn on the embedded Bluetooth radio and enable Dexcom G5 CGM integration (PMA, class III). Tandem and the FDA concluded that the regulatory path would be “complex and uncertain.” It is unfortunate it is not possible, but the t:slim X2 with an upgrade program seems like a good middle-ground option – giving current customers access to the next-gen technology, but giving Tandem some upgrade revenue to make it sustainable from a business perspective.

7. Dexcom G5 integration for the t:slim X2 will be submitted to the FDA by the end of 2016. Management expects a ~six-month review process, meaning an approximate mid-2017 approval. This approval could make the t:slim X2 the first Dexcom G5-integrated pump on the market and will set the stage for Tandem’s future PLGS and artificial pancreas 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.  Subject to FDA approval, customers who own a t:slim X2 prior to the G5 integration approval will be able to update their pump using the Device Updater for no charge. 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).

8. Tandem’s predictive low glucose suspend (PLGS) functionality using Dexcom G5 CGM is scheduled to complete a feasibility study in August. 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! Notably, 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. Management expects t:slim X2 users will be able to software update their pumps to add the PLGS feature. 

  • Said Mr. Blickenstaff, “We believe this product, with all the features and benefits of t:slim, will be competitive with other AP pump offerings.” It will be interesting to see how the diabetes community perceives Tandem’s PLGS device relative to Medtronic’s MiniMed 670G hybrid closed loop (under FDA review, launch expected by April 2017). How much will patients value the hyperglycemia minimization? Animas may also be in market late in 2017 or early in 2018 with its hypoglycemia-hyperglycemia minimizer, which will enter a pivotal study in 4Q16. Three other organizations are a bit further behind: Beta Bionics (insulin-only pivotal starting in 2Q17), Bigfoot Biomedical (first in-clinic trial started, pivotal in 1H17), and Insulet (first human trials this year, in market in 2018).

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. The licensing agreement with TypeZero last week was a huge win for Tandem, who gets access to a very well-studied control algorithm (originated at UVA, more than 28 clinical studies, n=475) for its second-gen automated insulin delivery product – a hypoglycemia-hyperglycemia minimizer (hybrid closed loop). The t:slim will now be used in the upcoming International Diabetes Closed Loop Trial (IDCL; n=240, ten sites, six months per person), slated to start later this year. This trial is NIH funded ($12.7 million), will test TypeZero’s InControl algorithm, and is designed with a PMA submission in mind (per our conversation in January). Based on today’s call, we’re not sure if IDCL will serve as the pivotal study, or if Tandem will run its own pivotal with the commercial device (we assume the latter). 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. This was not discussed today.

10. A Tandem mobile app allowing current t:slim and t:flex users to see integrated pump and G5 CGM information on their smartphones is under discussion with Dexcom. 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.  

11. A PMA submission for the t:sport “patch pump” has been pushed back to 2018 from the previous goal of 2017. The t:sport has been placed on the backburner, given the upcoming R&D work on the t:slim X2 with Dexcom CGM integration and automated insulin delivery. We think is a very smart move – Tandem’s t:sport (~50% smaller t:slim, worn on the body, short infusion set) will not match Insulet’s truly tubeless OmniPod, and the pipeline and competitive upside seems higher from more quickly integrating with G5 and automating insulin delivery.

  • Based on FDA discussions, t:sport will first launch with a dedicated controller handset – not a smartphone controller app as previously hoped. Management said that based on the FDA’s “concerns regarding the use of mobile phones, we believe that controlling a pump via mobile device will be a longer path to market.” This is not too surprising – Drs. Courtney Lias and Stayce Beck have certainly shared an openness to using mobile apps to control pumps, but always add the caveats that “additional safety concerns must be addressed.” The t:sport pump will be technically capable of being controlled via a dedicated controller or mobile device – assuming an FDA path opens up later, adding mobile app control would be very nice addition.

12. This month, Tandem announced FDA clearance for the t:slim to be used in children as young as six years old (previously it was 12+ years) and the Device Updater (formerly Project Odyssey). Both announcements came right in line with previous guidance for clearance in 2Q16. The t:slim pediatric indication was one of Mr. Blickenstaff’s highlights for the quarter, though management could not be specific about how much tailwind it will provide sales in 2016. We assume the indication will transfer directly over to the t:slim X2 once it launches in 4Q16. The approval of the Device Updater, an online tool for updating insulin pump software remotely, was also a major highlight of the quarter. As we noted two weeks ago, Tandem will do a beta launch this summer, and a wider launch will occur later this year. The first software enhancement will allow early t:slim customers to access the updated t:slim software that began shipping with new pumps in April 2015 – this included a number of changes based on customer and HCP feedback, including a streamlined cartridge change process (great to see this being addressed, as it was a criticism in diaTribe’s test drive back in 2012 and an outstanding thing to get fixed).

Pipeline Summary

Pipeline Product

Timeline

t:slim X2                                                                        

New pump platform built under Class III controls to allow for upgrade to Dexcom G5/G6 CGM integration and automated insulin delivery. Will include two-way Bluetooth radio for communicating with >1 external device at a time.

Launch in 4Q16

 

Dexcom G5 CGM integration for the t:slim X2 Pump                                        

PMA submission for G5 integration expected before the end of the year, and estimated six-month review process (approval expected mid-2017)

 

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

IDE for feasibility study approved in June, study scheduled to completed in August.

Pivotal trial in 1Q17, expected six-month FDA review, launch by end of 2017.

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

Pivotal trial in 2017. Expected 2018 launch.

Tandem Device Updater                                                

Remote online updating of the t:slim’s pump software.

 

Cleared by FDA in July 2016

Lower t:slim age indication down to six years old

Cleared by FDA in July 2016

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

PMA submission in 2018. To be initially launched with a dedicated controller device.

Mobile app for viewing Dexcom CGM and t:slim pump information together

Under discussion with Dexcom

t:connect HCP                                                                   

Special healthcare provider version of web-based data management software

Beta launch in 1Q16, expanded launch in mid-2016

 

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