Memorandum

Tandem 4Q18 – Extraordinary sales of $76 million rise 89% on 16,168 pumps shipped; record profit, positive cash flow; Control-IQ launch in US in Summer-to-End of Q3 – February 26, 2019

Executive Highlights

  • Tandem reported blowout, record 4Q18 sales of $76 million, climbing an extraordinary 89% YOY – an impressive acceleration on a very tough comparison to 61% (!) growth in 4Q17 – faster growth from a higher base tends to be rare but is always so exciting to see. Sales increased an astounding 65% sequentially, and that was from the previous record sales of $46 million in 3Q18. International revenue contributed ~9% of worldwide 4Q18 sales, totaling $7 million and nearly tripling after the OUS launch in 3Q18. 2018 sales increased 71% YOY to $184 million, smashing guidance by >$20 million.

  • Record pump shipments of 16,168 more than doubled YOY (133%) – the largest YOY increase in Tandem’s history on tremendous enthusiasm for Basal-IQ/G6. This success is also huge testament to Dexcom in our view. US shipments of 12,935 climbed 75% sequentially from the previous record, and international shipments more than tripled (+206%) to 3,233. 80,000 pumps have shipped in the US over the last four years, representing a “reasonable estimate” of Tandem’s in-warranty installed base. Notably, half of new customers are still from MDI; of the half coming from pumps, most are from Medtronic (with the rest from Animas).

  • 2019 sales are expected at $255-$270 million, a strong 39%-47% rise vs. 2018. The guidance includes international revenue of $45-$50 million, reflecting substantial management confidence in capturing international Animas customers as well as new pump users in 1H19.

  • On top of record sales, Tandem had its most profitable quarter ever, including a gross margin of 55% (up from 43% in 4Q17), its first positive cash flow (+$15 million), and a net income of $3.7 million (up from a net loss of $11.4 million in 4Q17).

  • The Control-IQ/G6 hybrid closed loop is now expected to launch between “summer and end of Q3” (September), as a new study in 6+ years could enable a pediatric launch out of the gate. This is back slightly from the plan to launch this “summer,” though certainly a positive tradeoff to potentially launch with pediatric/adult labeling out of the gate. Tandem and the FDA are currently discussing the submission cadence, and depending on how fast the new pediatric study gets done, Tandem will either submit for 6+ years or go for an initial submission in 14+ years. The ongoing, six-month pivotal in 14+ years (n=168) will wrap up in April and report on Sunday of ADA 2019.

  • This was the last quarter that Kim Blickenstaff will lead Tandem as CEO – what a way to turn over the reins.

Tandem reported blowout 4Q18 financial results this afternoon in an energizing call led by outgoing CEO Kim Blickenstaff, COO John Sheridan (who will become CEO on Friday), and CFO Leigh Vosseller. See below for our top financial and pipeline highlights.

Financial and Business Highlights

1. Blowout Sales of $76 million up 89% YOY; International Sales Nearly Triple to $7 million; FY2018 Sales of $184 Million Rise 71% YOY

Tandem Global, US, OUS Quarterly Sales, 2Q13-4Q18

Tandem Global, US, OUS Annual Sales, 2013-2018

  • Tandem reported worldwide record 4Q18 sales of $76 million, rising an incredible 89% YOY on a very tough comparison to 61% growth in 4Q17. This marks six straight quarters of double-digit growth and two straight quarters of record sales following the launch of Basal-IQ in August. Sequentially, sales increased a remarkable 65% from the previous record of $46 million in 3Q18, also marking three consecutive quarters of sequential gains. An analyst probed in Q&A – what drove the better-than-expected increase? “The inflection point was the Basal-IQ launch. We expected a small step, but it was a large leap for the business.” 4Q18 likely benefitted meaningfully from the positive experiences of early adopters, who shared their experiences online (word of mouth) and with healthcare providers (who prescribed more Basal-IQ in Q4). As expected, pump sales ($55 million) accounted for the lion’s share (72%) of revenue, with infusion sets (20%) and insulin cartridges (8%) contributing the remaining $15 million and $6 million, respectively.

    • International revenue for 4Q18 totaled $7.1 million, nearly tripling sequentially and now ~9% of worldwide sales. This is the second quarter that Tandem has posted international sales, which rose 184% sequentially from $2.5 million in 3Q18. US revenue of $69 million increased 58% sequentially from a record base of $44 million in 3Q18.
  • 2018 sales of $184 million increased 71% YOY on an easy (for Tandem) comparison to 16% growth in 2017. The FY2018 result smashed guidance by over $20 million ($160-$165 million), and the beat was nearly $50 million higher (!) than the year’s original starting guidance ($132-$140 million). Wow! Tandem has posted positive annual revenue growth every year since it became a public company, though this was its best annual growth in five years (back when sales were $50 million for the year). US and OUS 2018 sales totaled $174 million and $9.6 million, respectively. OUS sales exceeded expectations despite an inability to meet the entire international demand for 4Q18. Mr. Sheridan said this was not due to capacity concerns – Tandem can build 110,000 pumps on an annual basis – but how quickly suppliers were able to support Tandem’s increased purchase requests for the necessary raw materials. Tandem is “continuing to work” with supply partners “to identify scalable solutions to resolve our new pump raw materials issues.” Unmet international demand is expected to carry over into early 2019.

2. Record Q4 Pump Shipments of 16,168 Up 133%; In-Warranty Installed Base Estimated at ~80,000; 34,493 Pumps Shipped in 2018

Tandem Global, US, OUS Quarterly Pumps Shipped, 2Q13-4Q18

Tandem shipped a record 16,168 pumps globally in 4Q18, with 12,935 pumps shipped in the US and an impressive 3,233 pumps shipped OUS in the second quarter after the 3Q18 international launch. Total pump shipments more than doubled YOY (133%) from 6,950 pumps in 4Q17, reflecting the largest YOY increase in Tandem’s pump shipments to date. To put the quarter’s 16,168 pumps in perspective, we’d note that Tandem shipped 17,061 pumps for all of 2017! Sequentially, 4Q18 pump shipments increased 92% (also the largest to date) from the previous record of 8,434 in 3Q18. US shipments climbed 75% sequentially and international shipments more than tripled (+206%) sequentially, demonstrating substantial pent-up-demand abroad. According to Ms. Vosseller, 80,000 pumps have shipped in the US over the last four years, representing a “reasonable estimate” of Tandem’s in-warranty installed base. That said, Tandem is still renewing pumps from 5+ years ago, so the installed base is actually much higher – probably closer to 90,000 or even 100,000.

  •  Tandem shipped an incredible 34,493 pumps in 2018, more than doubling (102%) from 17,061 pumps shipped in 2017. Tandem’s 2018 pump shipments exceeded total pumps shipped during 2013, 2014, and 2015 combined. 30,205 pumps were shipped in the US and 4,288 pumps were shipped internationally throughout 2018.

  • In line with the previous four quarters, “about 50%” of new Tandem users are coming from MDI – a great sign for market expansion. (During prepared remarks, Mr. Sheridan stated that the proportion was “more than half,” though we assume it bounces around 50% from quarter-to-quarter.) Ms. Vosseller shared that the remaining half of new users are “majority Medtronic,” leaving the “smaller piece” to Animas customers, which there are about 15,000 left to convert (see below).

  • Renewals sales continue to “scale rapidly,” as Tandem shipped 1,800 renewal pumps in 4Q18 alone, more than doubling that shipped in 4Q17 and bringing the total renewal pumps shipped to date to 7,500 pumps. Excitingly for Tandem, warranties for “over 16,000” customers have expired through the end of 2018, with “more than 20%” occurring in 4Q18. This leaves a lot of opportunity on the table in 2019 in existing customers. It’s an excellent sign that Tandem is holding on to so many current customers, even before Control-IQ is available.

  • During prepared remarks, Mr. Sheridan shared results from an “independent survey” reporting that ~15,000, or ~one-third of former Animas customers in the US, have yet to switch to a new pump. No source was cited. However, recent dQ&A data suggest that relative to Animas’ base at the time of its market exit in October 2017, ~44% of US users remain on an Animas pump. The proportion is closer to one-third relative to Animas’ 3Q15 user base. Animas supplies will no longer be available from Medtronic as of September, and while Mr. Sheridan expects “some” US patients will switch to a new pump before then, he believes “many Animas customers” will wait until September to make that decision. To date, dQ&A reports Animas users are converting to Tandem and Medtronic at nearly even rates: 41% have switched to Tandem and 37% have switched to Medtronic. This is quite extraordinary for a company that J&J worried would not survive less than two years ago; as a reminder, we wrote a plea to J&J that was ignored asking for choice for patients given that they had not originally chosen Medtronic. By telephone, we requested that Tandem and Insulet be added as choices and heard that Tandem in particular would not be chosen given the poor health of its business. We are glad that patient presence has prevailed and would guess that Medtronic is disappointed that less than 40% of the Animas business has come their way, despite a sole-source deal brokered by J&J. Back to the numbers – 22% in dQ&A's panel have chosen Insulet’s Omnipod – not surprising, given the less likely transition from a tubed to a patch pump. Please contact Richard Wood at dQ&A for more details. Internationally, Mr. Sheridan anticipates “an increased number of Animas customers” making decisions in 1H19. In fact, international Animas conversions were already beginning towards the end of 2018, leading to the stress on Tandem’s international supply chain infrastructure and the resulting inability to meet full OUS demand.

3. Most profitable quarter in Tandem history: gross margin of 55%, positive cash flow (+$15 million), net income of $3.7 million; one year early!

Tandem reported the most profitable quarter in its history, including a gross margin of 55% and $15 million of cash flowing in – both came one year earlier than the previous goal for “4Q19.” Wow! It is also notable that Insulet reported its most profitable quarter ever yesterday. Is the pump industry reaching an inflection point for scale and profitability? Surely Insulet and Tandem are showing the insulin pump business can be profitable, provided the right volumes are reached…

  • Gross margin reached 55% in 4Q18, up impressively from 43% in 4Q17 and 47% in 3Q18. For 2019, Tandem has guided for a nearly-similar gross margin of ~52%, up from 49% for all of 2018. Tandem showed excellent leverage this year, as operating expenses grew 26% in 2018 vs. revenue growth of 71%.

  • Tandem generated $15 million in cash in 4Q18 a 14% sequential increase and ending the year with $129 million on hand and no debt. CFO Ms. Leigh Vosseller noted that if the $170 million in net cash received from Tandem’s financing activities is excluded, Tandem saw a net cash burn of just $12 million throughout 2018 – “dramatically” lower than in previous years and quite a remarkable achievement, given the pipeline progress and growth in 2018. Ms. Vosseller primarily attributed this strong performance to Tandem having generating cash from operations for the first time in 4Q18, as well as marking the first full quarter with no debt obligations.

  • Adjusted EBITDA was +$12.3 million in 4Q18, up from -$5.3 million in 4Q17. Adjusted EBITDA for 2018 was -$15 million, an impressive improvement from -$44 million in 2017. Guidance calls for a breakeven adjusted EBITDA in 2019.

  • Net income was +$3.7 million in 4Q18, up from a net loss of $11.4 million in 4Q17.

  • Operating margin improved to +1% in 4Q18, up from -24% in 4Q17

4. Management Guides for 2019 Revenue of $255-$270 Million (+39%-47%); $45-$50 Million Expected in OUS 2019 Sales

Tandem guided for 2019 sales between $255-$270 million, reflecting annual sales growth of 39%-47% as compared to 2018’s blowout 71% growth. This guidance includes international revenue of $45-$50 million – given $9.6 million in 2H18 international sales, this OUS guidance indicates substantial confidence from Tandem management in OUS pent-up-demand. During Q&A, Ms. Vosseller attributed “a big portion” of 2019 international guidance to the Animas opportunity. Whereas Tandem is “considering” launching in other countries in 2H19, Ms. Vosseller expects to see “the majority of growth” in Tandem’s already established EU geographies thanks to Animas conversions.

  • Ms. Vosseller expects the international launch of Basal-IQ and the US launch of Control-IQ to “fuel continued growth from both the new and renewal markets.” Tandem “continues to evaluate” Control-IQ pricing strategy (more on that below), but incremental reimbursement has not been factored into 2019 guidance.

  • Tandem expect the typical US seasonality, with historical trends indicating an ~17% of pump shipments in Q1 based on insurance deductible resets. Ms. Vosseller noted that the rate “may be higher” in 1Q19 based on the remaining Animas opportunity. Internationally, different reimbursement dynamics preclude similar visibility and trends are likely to vary by geography. Management does not expect to see strong OUS seasonality patterns, besides “potential fluctuations” around holidays and summer vacation. However, Ms. Vosseller believes the Animas opportunity may also heavily influence international sales in the first three quarters of 2019, and anticipates the possibility of “some early benefit” from carryover of unmet 2018 demand.

5. COO John Sheridan to Succeed Kim Blickenstaff as CEO, Starting this Friday; Mr. Blickenstaff to Serve in New Role of Executive Chairman

Today’s call opened with an unexpected announcement regarding a major leadership change: Mr. Blickenstaff, who has served as Tandem’s President and CEO for over 12 years, will assume the newly created position of Executive Chairman, while Mr. Sheridan, who has been Tandem’s EVP and COO for five years, will take over as President and CEO. The change is effective this Friday, March 1. This was abruptly announced today and took us by surprise, though Mr. Blickenstaff said Mr. Sheridan was hired with this change in mind five years ago. That was news to us, as this succession plan was mentioned for the first time today and takes effect on Friday. Analysts on the call greeted the news warmly and did not seem one bit surprised and there was reference in one analyst report to this news having been shared at some recent point. Mr. Sheridan knows the business well and took most of Q&A today. Mr. Blickenstaff’s role as Executive Chairman will involve focusing on “external and corporate strategy efforts and continuing to build Tandem’s board for the future.” In the past year, Tandem’s Board has brought on Qualcomm Life’s highly respected Rick Valencia and recently added Versant Ventures’ Beckie Robertson. Mr. Blickenstaff has done an incredible job of leading Tandem through thick and thin, including its unique and energetic culture. The pressure will be on Mr. Sheridan to carry the leadership torch forward – maintaining Tandem’s customer obsession, earning the respect of the team, and maintain the current all-time-high investor confidence. Robertson has diabetes experience, having worked for multiple years at LifeScan; she also led the deal at Versant to invest in Intuity Medical back in 2010. She is currently in venture capital at Versant Ventures; Versant colleague Ross Jaffe was on the board of Insulet for many years and she will no doubt benefit enormously from his experience and acumen and knowledge in pumps.

  • Last week, Tandem announced new SVP of Technology & Digital Health, Manuel Jaime. Mr. Jaime brings more than 20 years of experience in high-tech, most recently as CTO at Cedar Electronics, a leader in the field of driver awareness, communications and information systems. He was also a co-founder and CEO of ClipCast Technologies, and he previously held various roles at CardioNet and Qualcomm. He also is an inventor on more than 20 patents relating to connected devices, wireless systems, video platforms, and low-power radio frequency. He sounds like a good fit for Tandem’s mobile app plans (see below), along with future AID algorithms, t:sport, and perhaps other digital efforts.

  • Looking ahead, Mr. Blickenstaff said Tandem will invest in: (i) development of connected health solutions; (ii) globalization of data management applications; (iii) customer and company data security; (iv) automated insulin delivery programs; and (v) t:sport development. Lots of excitement to go around as the field marches toward many more players on the automated insulin delivery front.

Pipeline Highlights

1. Tandem Control-IQ US launch pushed back to Summer-End of Q3 (September), Depending on New Pediatric Study (6+ Years); ADA 2019 to Share Pivotal Trial

Tandem now expects the Control-IQ/G6 hybrid closed loop with automatic boluses to launch in the US between “summer and end of Q3 (September),” as a brand-new study in 6+ years could enable a pediatric launch out of the gate. This is back slightly from the longstanding plan to launch this “summer,” though a strategic tradeoff to launch with pediatric and adult labeling out of the gate (and to better compete with the 670G, which is already approved for 7+ years and with a 2-6 year old indication expected within one year). The ongoing six-month, Control-IQ pivotal study in 14+ years is fully enrolled (n=168), will wrap up in April, and will report data on Sunday of ADA 2019. The primary endpoint is time-in-range with Control-IQ vs. sensor-augmented pump therapy (no automation). Last week at ATTD, we learned that not a single study participant has dropped out at any site – a remarkable vote of confidence in the next-gen hybrid closed loop with automatic boluses and the no-calibration G6. The new Control-IQ pediatric study – also first mentioned at ATTD – will enroll n=100 participants (6+ years) in a four-month crossover design. Tandem and the FDA are currently discussing the submission cadence, and depending on how fast the new pediatric study enrolls, Tandem will either wait for the pediatric data (expected “this summer”) or proceed with submission in 14+ years first. Regardless of what is decided, Tandem will likely have the second hybrid closed loop on the US market, and the first with automatic boluses and no fingerstick calibration.

  • Following t:slim X2’s FDA clearance as the first interoperable insulin pump (ACE Pump) this month, the FDA submission for Control-IQ will be for the algorithm and clinical data (as we understand it). It’s unclear if Tandem and Dexcom will attempt to submit Control-IQ as an “iController” under a de novo submission, potentially enabling a down regulation to Class II (510(k)). Both G6 and t:slim X2 are now regulated as interoperable devices, separating them from the algorithm itself (e.g., if Tandem wants to make a change to its ACE pump, or when Dexcom moves to G7 iCGM, the companies won’t need a new clinical study and PMA). FDA’s Dr. Courtney Lias told us last month that the regulatory paths are separate even if Control-IQ sits on the ACE Pump (which will be the case here).

    • Oddly, new CEO John Sheridan focused on only one main advantage of the ACE Pump designation – faster path to get the miniaturized t:sport to market. The ACE pump special controls don’t have any performance bar (like with iCGM), meaning other companies should be able to meet them (e.g., Insulet plans will pursue this path, per its call yesterday). Mr. Sheridan candidly admitted this fact, but added that the ACE pump designation still “requires a substantial amount of work” – i.e., Tandem has at least some near-term advantage while other pump companies work to catch up. But oddly, he undersold the two best advantages of the ACE pump indication, in our view: (i) easily integrating other iCGMs into Control-IQ in the future without having to run a new study; and (ii) interoperable pump integration with another algorithm (e.g., Tidepool Loop). Mr. Sheridan mainly cited the advantage of ACE Pump vis-a-vis the next-gen t:sport: as long as t:sport meets the ACE pump standards and communicates with the Control-IQ algorithm and an iCGM as expected, Tandem will not need a new clinical trial or a PMA submission to add the new pump – it can get t:sport cleared under the 510(k) ACE pump pathway and use the t:slim X2 as a predicate device. (He also briefly mentioned the ability to update the Control-IQ algorithm to add new automation features, and that would be approved separately from the ACE pump platform.) We hope to see Tandem and Dexcom integrate with Tidepool Loop, in addition to their own Control-IQ algorithm efforts. It will also be interesting to see if Tandem is open to integrating other CGMs – since Dexcom owns the Control-IQ algorithm, there may be contractual terms or incentives preventing this (our speculation).

  • Investors were refreshingly interested in what level of time-in-range Control-IQ will be able to achieve, especially vs 670G. Mr. Sheridan said “mid-to-high 70’s”, based on the TypeZero clinical data. The more nuanced question, however, is what Control-IQ will show in the pivotal trial vs. real-world use. One big factor is how well the pivotal study population does at baseline (are they very engaged people?) vs. on Control-IQ. Another question is how well the control group does with t:slimX2/G6 without automation – a pretty stiff comparator in its own right. The addition of automatic boluses and no calibration hassle should enable higher time-in-range and higher time-in-closed-loop vs. 670G – especially when boluses are missed or in cases of prolonged hyperglycemia. (As a reminder, the 670G needs ~4-6 calibrations per day in real-world use and will revert to manual mode for prolonged hyperglycemia.) Per ATTD, mean A1c in Control-IQ pivotal participants is 7.6% (wide range of <7% to 10.5%), with a notable 21% of participants on MDI and 30% previously not on CGM – that has the makings of very strong outcomes. We expect the data will be extremely positive and show a meaningful difference between having Control-IQ vs. not; however, the level of time-in-range will depend on where people are starting and how their behavior changes on AID.

  • Tandem is still “figuring out the Control-IQ pricing strategy,” but “hopes to get incremental reimbursement” from insurance companies for the new algorithm. For in-warranty t:slim X2 users, Control-IQ will be a remote pump software upgrade from Basal-IQ, just as Basal-IQ was a software upgrade for t:slim X2 users. At this point, no such reimbursement is factored into the 2019 guidance – a prudent move. Tandem has set an expectation with Basal-IQ that software upgrades will be free to users, so it will face a lot of pushback if there is a charge to upgrade or a lot of insurance hassle associated with upgrading. Given the general pricing pressure in the field, we’d be surprised if Tandem was heavily counting on incremental reimbursement for Control-IQ – it’s hard to imagine pumps getting any more reimbursement than they do now. Obviously the business needs to be healthy, but Tandem showed this quarter it can be – even without an incremental upgrade fee for Basal-IQ. Plus, Tandem’s Control-IQ pivotal study has been paid for by NIH – saving it millions of dollars. We hope Tandem will continue its commitment to accessible innovation by not charging users to upgrade.

  • Control-IQ is also involved in a pediatric study in France (FreeLifeKid study) and UVA’s Project Nightlight – see Dr. Kovatchev’s presentation from day #2 of ATTD for more on these. Data from FreeLifeKid will also report on Sunday of ADA. Mr. Sheridan anecdotally described very positive feedback, including from the esteemed Dr. Eric Renard (“a very positive effect” on parents in a very short period of time).

  • In line with Dexcom’s Investor Day, Tandem and Dexcom are also working on next-gen Control-IQ efforts offering more personalization and no carb counting. Both would keep Tandem competitive with Medtronic’s next-next-gen personalized closed loop (launch 2+ years away).

2. Basal-IQ to launch OUS this year, but no specific country timing shared

Tandem’s Basal-IQ with G6 integration will begin launching this year outside the US, but timing will vary country-to-country. This was less specific than September’s Analyst Meeting, which called for an “early 2019” Basal-IQ launch outside the US. Tandem already has a lot of the building blocks in place – see tremendous OUS traction above – and G6 availability will absolutely determine where it makes sense to launch. Management declined to name specific countries, but did say reimbursement, distributors, and Animas customers will impact where to launch. Right now, Tandem’s t:slim X2 with G5 integration is available in nine OUS countries: Australia, Italy, New Zealand, Denmark, Norway, Sweden, South Africa, Spain, and the United Kingdom. Canada is an obvious next choice, though we’d note that Dexcom won’t launch G6 until late 2019, following the CGM’s Health Canada approval announced last week.

3. Mobile app for t:slim X2 to launch in 1H19, focused on wireless pump uploads; ultimate goal of smartphone control

Tandem will launch its t:slim X2 mobile app for Apple and Android in the first half of this year, offering wireless data uploads from the t:slim X2 pump to t:connect. This app launch has now been delayed two quarters in a row – from “end of 2018” (September Analyst Meeting) to “early 2019” (3Q18) to the new 1H19 timing. The good news was confirmation of both Android and Apple launch; previous screenshots showed Apple iPhone only. Wireless smartphone control of the pump remains the ultimate goal for this app (as it should be!), though it’s unclear if that will be available for t:slim X2 or wait for t:sport (see below). Insulet expects smartphone control with Omnipod Horizon in 2H20, but only for Samsung Galaxy phones at launch. Will Tandem get smartphone control on both Apple and Android by next year?

4. t:sport design and testing to mostly complete this year, enabling ACE pump submission in 2H20

This year, Tandem expects to complete the “majority” of t:sport design and testing, including plans to order manufacturing tools by year end. The company will seek an ACE pump designation for t:sport in the second half of 2020; launch timing was not shared, though that was expected in 2H20” as of the September’s Analyst Meeting. Tandem also plans to submit for CE mark in 2020. As a reminder, t:sport is a miniaturized, screenless, wirelessly controlled tubed pump, which will include Control-IQ hybrid closed loop and iCGM integration (no new clinical data will be needed). The no-screen pump will be controlled via app on a user’s own phone. t:sport is half the size of the current t:slim; will switch to a syringe-driven pumping mechanism (a fairly big manufacturing change for Tandem); and will add wireless charging, water resistance, an on-device bolus button, and an easier fill process. Closed loop will still run if the phone is out of range, keeping Tandem more competitive with the system design of Insulet’s Omnipod Horizon. (Though t:sport will have tubing, whereas Omnipod will remain tubeless.)

 

--by Maeve Serino, Adam Brown, and Kelly Close