Memorandum

Tandem 3Q20 – Record worldwide sales of $124 million (+31% YOY) on strong US performance; 22,021 pump shipments drive global user base to “nearly 190,000”; smartphone control submitted to the FDA – November 5, 2020

Executive Highlights

  • Tandem reported record quarterly revenue of $124 million in 3Q20, up 31% YOY and 13% sequentially on a very tough comparison to 105% YOY growth in 3Q19. The $124 million in 3Q20 revenue easily surpassed the previous record quarterly revenue of $109 million in 2Q20. The strong performance was driven by the US, where revenue hit a record $108 million (+36% YOY). As in 2Q20, the strong growth amid the COVID-19 pandemic was driven by Control-IQ and Tandem’s success in virtually training and onboarding new Control-IQ users onto their system. Tandem’s US business also saw a nice boost from the coverage win with UnitedHealthcare that took effect in July (UnitedHealthcare customers made up “over 10%” of shipments in the quarter).

  • Tandem shipped a record total of 22,021 pumps worldwide this quarter, rising 23% YOY and 18% sequentially. The record quarter was driven entirely by the US market, which saw a record 18,380 pumps shipped, up 33% YOY and 25% sequentially. Tandem’s worldwide in-warranty user base is “nearly 190,000,” up ~47% from 129,000 in 3Q19. Once again, “approximately half” of new patients in the quarter came from MDI, with the other half switching from competitors’ pumps. This is in line with previous rates and encouraging to see, given some fears that MDI conversions might be more heavily impacted by COVID-19. Finally, as lockdown restrictions eased, virtual trainings made up “approximately half” of pump trainings done in 3Q20, compared to “nearly 100%” in 2Q20.

  • In the biggest pipeline update from the day, Tandem shared that it has “recently” filed the 510(k) for smartphone pump control to the FDA. This comes on the early side of previous expectations to file for smartphone bolusing in 4Q20. Smartphone bolus control was also expected to be cleared in 1Q21, though Mr. Sheridan hedged on that timeline today given resources at the FDA being shifted towards COVID-19. This is a highly-requested feature and depending on Omnipod 5 timing (slated for launch in 1H21) could make t:slim X2 the first commercially available pump with smartphone control. 

  • Tandem intends to launch its t:sport insulin pump in the “second half of 2021,” mostly in line with 2Q20 expectations for clearance by “summer of 2021.” In a deviation from prior plans, Mr. Sheridan shared that Tandem is reversing its two-part regulatory strategy and will be submitting a 510(k) filing to the FDA for “mobile app control” of t:sport ahead of a “separate filing” with a dedicated controller. We believe the submission of t:sport with smartphone control is slated for 1H21.

Tandem reported 3Q20 financial results this afternoon in a call led by CEO John Sheridan and CFO Leigh Vosseller. Check out our top highlights below.

Financial and Business Highlights

1. Record worldwide revenue of $124 million, rising 31% YOY, driven by record US revenue of $108 million (+36% YOY); OUS sales of $16 million, rising 2% YOY

Tandem reported record quarterly revenue of $124 million in 3Q20, rising 13% sequentially and 31% YOY on a very tough comparison to 105% YOY growth in 3Q19. The $124 million in 3Q20 revenue easily surpassed the previous record quarterly revenue of $109 million in 2Q20. Immediately during his prepared remarks, CEO John Sheridan attributed the record global revenue to the domestic strength of t:slim X2 and Control-IQ, as well as wins like the announcement of UnitedHealthcare coverage for Control-IQ in June that took effect on July 1, the NEJM publication on Control-IQ in August, the US launch of the t:connect mobile app this summer, and the international launches of Control-IQ in the UK and South Africa.

  • Tandem’s US business stood out in the quarter, delivering 99% share of growth. US revenue grew an impressive 36% YOY to $108 million on a very tough comparison to 80% YOY growth in 3Q19. Sequentially, US revenue rose 20% from $89 million in 2Q20. As in 2Q20, the strong growth amid the COVID-19 pandemic was driven by Control-IQ and Tandem’s success in virtually training and onboarding new Control-IQ users onto their system. Tandem’s US business also saw a nice boost from the coverage win with UnitedHealthcare that took effect in July.

  • International revenue totaled $16 million, rising 2% YOY on an incredibly tough comparison to 532% YOY growth in 3Q19. As a reminder, 3Q18 marked the first quarter of international availability for Tandem. Sequentially, OUS revenue fell almost 20%. During her prepared remarks, CFO Leigh Vosseller attributed the slow YOY growth and sequential decline in OUS sales to high OUS variability with recent market launches, adjusting to Tandem’s legacy markets post-Animas, the summer holiday season in Europe, and the COVID-19 pandemic, which hit European markets more than the US because OUS (people with diabetes are mostly seen through a hospital system in Europe).

    • “Internationally, COVID-19 is creating increased variability, particularly as some regions begin to experience a resurgence of the virus and others are taking more stringent precautionary measures. As a reminder, many countries outside of the US, people with diabetes are typically seen through a hospital system and the use of telehealth continues to be the demand for our t:slim X2 system.” – Mr. Sheridan

  • Sales of pumps totaled $70 million in the quarter, rising 25% sequentially and making up 65% of total sales. That leaves $54 million of revenue coming from sales of infusion sets and cartridges. The 72% YOY growth in sales of supplies is a testament to Tandem’s impressive user base growth in the past twelve months.

2. Record pump shipments of 22,021, rise 23% YOY and 18% sequentially; 18,380 US shipments (+33% YOY) and 3,641 OUS shipments (-10% YOY); worldwide in-warranty user base of “nearly 190,000” (+47% YOY)

Tandem shipped a record total of 22,021 pumps worldwide this quarter, rising 23% YOY and 18% sequentially. Notably, this tops the previous record of 21,258 pump shipments in 2Q19 when Tandem experienced “onetime dynamics” from pent-up OUS demand. The record quarter was driven entirely by the US market, which saw a record 18,380 pumps shipped, up 33% YOY and 25% sequentially. Internationally, 3,641 pumps were shipped, down 10% YOY and 8% sequentially.

  • Tandem’s worldwide in-warranty user base is “nearly 190,000,” up ~47% from 129,000 in 3Q19. Sequentially, this is up by 12% from “nearly 170,000” in 2Q20, meaning that Tandem netted ~20,000 new customers this quarter. Mr. Sheridan noted that this means that Tandem has already achieved “nearly 40%” of its goal to have 500,000 customers using its technology by 2024. During the call, Ms. Vosseller shared Tandem now has 35,000 OUS in-warranty users, compared to ~22,000 in 3Q19 (+59% YOY). With some quick math, that leaves ~155,000 US in-warranty users, representing 18,000 sequential adds (+13%) and 48,000 adds in the last twelve months (+45% YOY). As a reminder, we consider these estimates to likely be conservative, as they only count purchases from the last four years; in reality, Tandem is probably renewing pumps that expired over four years ago.

  • Of the ~22,000 pump shipments in the quarter, ~3,200 were renewals. This brings the year-to-date total to 8,400 renewing customers, already surpassing the figure for all of 2019 and representing 75% YOY growth on a year-to-date basis. Again, we didn’t hear a specific figure for the renewal rate, but in the past, it has ranged from “about half” in 1Q19 to “more than half” in 4Q19. During Q&A, Ms. Vosseller acknowledged that “renewals are going to be an increasingly important part of our revenue stream as time goes on” and Tandem’s user base grows.

  • Shipments to UnitedHealthcare customers made up “over 10%” of shipments in the quarter. That represents a more than doubling from the typical “4% to 5%” of shipments typically seen “over the last few years.” Management noted that the “over 10%” figure in 3Q20 likely represented some pent-up demand (United entered its preferred agreement with Medtronic in 2016 and began covering Tandem in July 2020), though we’d expect customers from UnitedHealthcare to eventually reach a “steady-state” somewhere between the 4%-5% and 10% numbers.

  • Once again, “approximately half” of new patients in the quarter came from MDI, with the other half switching from competitors’ pumps. This follows a trend over the last few quarters (2Q20, 1Q20, 4Q19, 3Q19) and has stayed consistent throughout the pandemic. After disclosing this figure during his prepared remarks, Mr. Sheridan noted, “This is a metric I’m particularly proud of, as it’s evidence that we are seeing success in one of our broader corporate goals, to bring the benefits of insulin pump therapy to more people living with diabetes.” As a point of comparison, yesterday, Insulet reported “about 80%” of new starts coming from MDI, also a pattern which it has maintained for the past several quarters and has sustained through the pandemic.

  • During his prepared remarks, Mr. Sheridan noted that virtual trainings made up “approximately half” of trainings in the third quarter. This transition to a mixed model follows 2Q20 when “nearly 100%” of trainings were conducted virtually and was attributed to the loosening of COVID-19 lockdown restrictions and some practices going back to seeing some patients in-person. Tandem views its success with virtual trainings as a huge asset, not just during the COVID-19 pandemic as cases (and therefore lockdowns) fluctuate around the world and currently are on the rise, but also because patients seem to like having the virtual training option with Tandem receiving “better customer service scores when we actually provide remote training.”

3. Full-year guidance raised by ~$13 million at midpoint to $465-$475 million (+28%-31% YOY)

Following a very strong 3Q20 performance, Tandem chose to raise its full-year 2020 revenue guidance to $465-$475 million, representing 28%-31% YOY growth. This represents a guidance raise of ~$13 million from 2Q20 guidance for $450-$465 million in FY20 revenue. As a reminder, Tandem had entered the year guiding for FY20 revenue of $450-$465 million, suspended that guidance during the 1Q20 update on COVID-19 uncertainties, and then reinstated that guidance following 2Q20. Today’s guidance raise is entirely driven by better than expected US numbers: US FY20 revenue is now expected to come in at $395-$400 million, compared to $380-$390 in 2Q20 guidance. In contrast, OUS FY20 revenue continues to be guided for $70-$75 million. 

  • Tandem’s guidance implies 4Q20 revenue of $134-$144 million. That would imply YOY growth of ~24%, sequential growth of 8%-17%, and record revenue, though we’d guess that the guidance is actually slightly conservative, considering seasonal dynamics. Tandem typically sees a considerable revenue uptick in the fourth quarter of year (due to most deductibles resetting at the calendar year mark) – fourth quarters typically make up 35%-40% of Tandem’s full-year sales. Still, given COVID-19 uncertainties and pent-up UnitedHealth demand in 3Q20, slightly conservative guidance certainly seems prudent.

  • Tandem is guiding for gross margins for FY20 to be in the “low- to mid-50s” range, consistent with 2Q20 comments. FY20 Adjusted EBITDA guidance also remained the same in the “low- to mid-teens.” For comparison, gross margin in 2019 came in at 54% and adjusted EBITDA margin was 13%.

4. Gross margin of 53%, impacted by Control-IQ royalties; $465 million in cash and short-term investments; net loss of $9 million

Tandem reported a gross margin of 53% in 3Q20, about even with gross margin of 54% in 3Q19. Sequentially, gross margin was improved from 50% in 2Q20. Gross margin in 3Q20 was impacted “just over 1%” by royalties associated with Control-IQ (due to Dexcom’s ownership of TypeZero), a slight reduction from 2Q20 when gross margin was impacted 2% in 2Q20. This royalty impact is expected to continue to decline as a percentage of sales over time. Additionally, in 2Q20, we heard about impact on manufacturing capacity from COVID-19 (due to additional precautionary measures and more complicated supply chain management) creating so headwinds around gross margin – we didn’t hear any commentary about this today. For 2020, Tandem is guiding for “low-to-mid” 50s% gross margins, but  Ms. Vosseller maintained confidence that gross margins would reach 60+% long-term.

  • Tandem finished the quarter with $465 million in cash and short-term investments, a slight increase from $426 million in 2Q20. The ~$38 million increase in cash comes from ~$30 million in from employee stock option warrant exercises and ~$8 million in free cash flow.

  • Net loss in the quarter was $9 million, compared to $3 million in 3Q19. Sequentially, the $9 million net loss is an improvement from $27 million in 2Q20. Things are trending in the right direction: operating expenses in 3Q20 rose 17% to $66 million; considering the 31% YOY revenue growth, this is good leverage.

t:slim X2 and Control-IQ Highlights

1. Smartphone pump control 510(k) submitted to the FDA, launch timing “may be difficult to predict”; “nearly 50,000 people” have downloaded t:connect mobile app

In the biggest pipeline update from the day, Tandem shared that it has “recently” filed the 510(k) for smartphone pump control to the FDA. This comes on the early side of previous expectations to file for smartphone bolusing in 4Q20. Smartphone bolus control was also expected to be cleared in 1Q21, though Mr. Sheridan hedged on that timeline today given resources at the FDA being shifted towards COVID-19. Being able to dose insulin from a personal smartphone (or even smartwatch) is a highly requested feature and if all goes as planned, Tandem could be the first pump company with the capability. Insulet’s Omnipod 5 used smartphone control in its pivotal trial (completed as of EASD 2020) and that system is expected to launch in 1H21.

  • Following launch in July, Tandem’s t:connect mobile app (App Store, Google Play) has been downloaded by “nearly 50,000” people. The t:connect app serves as the “center” of Tandem’s “digital health strategy” and gives users easy access to pump information, including Dexcom CGM trends, insulin on board, recent boluses, and basal information. Tandem’s t:connect smartphone app also allows for wireless uploading of t:slim X2 insulin dosing data and CGM data, removing the burden of cable transfers for patients and providers. Presumably, the app will also serve as an alternate controller for the t:slim X2 pump once smartphone bolusing is cleared by the FDA.

  • “Our app’s mobile bolus features anticipated to be our first new launch next year which we plan to offer to our in-warranty t:slim X2 customers for no cost. We did a beta launch of the first generation of this app this year primarily in the third quarter and nearly 50,000 people now downloaded the app on their Android and iOS devices. Overall customers and HCP's have been positive about its features but we're continuing to receive customer feedback where people are requesting additional features beyond the display of information and are looking for the ability to program insulin delivery. Along these lines, we have recently submitted a 510(k) filing to the FDA for our mobile bolus feature and look forward to delivering what people are asking for to help make the diabetes management easier.” – Mr. Sheridan

2. International Control-IQ availability: currently available in UK and South Africa; expected to launch in “half” of OUS markets by “year’s end”

As we reported in 2Q20, Control-IQ is now available internationally in the UK and South Africa. Building on these ahead of schedule launches, Mr. Sheridan announced today that “by year’s end, we anticipate Control-IQ will be available in more than half the countries outside the United States and look forward to broad availability.” Currently t:slim X2 pump software is available in 12 languages and it is our understanding that Tandem plans to eventually launch Control-IQ in all geographies where t:slim X2 is currently available. It is notable that international launches of Control-IQ have not been slowed by COVID-19 as we are repeatedly hearing international markets have been slower to recover due to care delivery patterns. In 2Q20, Ms. Vosseller shared that Tandem had received reimbursement approval in Germany and would begin marketing Control-IQ there in 2H20, though this went unmentioned on today’s call. Growing Control-IQ in Europe should help drive Tandem’s international sales and serve as a very compelling AID competitor to Medtronic’s MiniMed 780G. Additionally, as noted by Mr. Sheridan in today’s call, international pump adoption is generally lower than in the US at “10% to 20%” (of type 1s) meaning there is a large market opportunity for Tandem, especially with Control-IQ, to bring more people onto pump and AID technology.

3. Control-IQ enhancements reiterated for “2021”: goals to improve clinical outcomes, personalization, and system usability

During today’s call, Mr. Sheridan reiterated plans to launch various Control-IQ algorithm enhancements in “2021.” As of 2Q20, algorithm updates were slated to be available in “the second half of 2021”; today’s phrasing used a slightly more general “2021.” Though Mr. Sheridan did decline to give specifics on algorithm updates for “competitive reasons,” he once again shared that the enhancements would be “centered around algorithm refinements that are intended to even further improve clinical outcomes, new features for greater personalization, and improvements to the overall system usability.” As we noted in 2Q20, these timelines mark a shift from comments made in February in which Tandem said it planned to bring a fully closed loop system capable of “complete bolus and basal insulin automation” with its next AID update in “2021.” As we wrote back in February, this timeline seemed aggressive, but we still imagine Tandem has fully closed loop ambitions. Regardless of timing, we expect patients and providers will welcome software updates especially given how easy it is to update t:slim X2 pumps.

4. Abbott partnership “going quite well”; no timing provided for integration

Tandem’s partnership with Abbott (finalized in June) to integrate Abbott’s FreeStyle Libre CGM with t:slim X2 pumps is “going quite well” according to comments made by Mr. Sheridan, during Q&A. Mr. Sheridan stated that the two companies were in still in the early “planning” and “early design” phases, slightly progressed from 2Q20 commentary that the two companies were still in the early stages “preparing and getting together to put together the details of a development plan and a pipeline plan.” On that update, concern was raised about whether or not this limitation would affect the Tandem-Abbott partnership and Mr. Sheridan assured analysts it would not. Mr. Sheridan added that Tandem and Abbott have not decided which specific models of their pumps and CGMs they plan to integrate, but the warning/limitation for FreeStyle Libre 2 has nothing to do with the integration of “our pump with their sensor” from a technical perspective.

  • “[The partnership] is going quite well. I mean, we’re working very well with them. It’s a good team. We have a good relationship. It’s a complex implementation in that there’s many moving parts and there’s multiple teams that are working on this right now. So, I think that because of the timing right now we’re in the early design process. We’re still in the planning phase, early design phase. It really makes it difficult for us to sort of commit to specific timing. I’ll just say it’s going well and that we will probably be speaking more about this in the fourth quarter call early in the spring.” – Mr. Sheridan

Pipeline Highlights

1. t:sport FDA submission expected in “first half of 2021” with mobile app control

Tandem intends to launch its t:sport insulin pump in the “second half of 2021,” mostly in line with 2Q20 expectations for clearance by “summer of 2021.” In a deviation from prior plans, Mr. Sheridan shared that Tandem is reversing its two-part regulatory strategy and will be submitting a 510(k) filing to the FDA for “mobile app control” of t:sport ahead of a “separate filing” with a dedicated controller. Previously, Tandem had planned to submit t:sport with a dedicated controller, first, in 4Q20, followed by t:sport with smartphone control in 2021. Based on today’s commentary, it appears the timing for submission of t:sport with mobile app control is still on track for the “first half of 2021,” though that would obviously put the dedicated controller filing behind previous plans for 4Q20. In the past, Tandem had also outlined plans to “almost have a soft launch” for t:sport after initial clearance of the pump with a dedicated controller, collecting real-world data “with small numbers”; given smartphone control will be filed first, those are, presumably, no longer the plans.

  • As a reminder, t:sport is a screenless, wirelessly controlled tubed pump (short infusion set), which will include the Control-IQ algorithm and iCGM integration (no new clinical data will be needed). t:sport is half the size of the current t:slim; will switch to a syringe-driven pumping mechanism (a 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 on the pump if the phone is out of range or out of battery, keeping tandem more competitive with the on-body system design of Insulet’s Omnipod Horizon.

  • During Q&A, Mr. Sheridan emphasized the updated form factor of the t:slim pump and mobile control that would allow patients to more discretely bolus insulin and manage their diabetes. On the topic of discretion, Mr. Sheridan also implied that this could be a key differentiator in increasing t:sport uptake among type 2 patients.

Slide taken from Tandem’s 2018 Analyst Meeting (note that the launch timing expectation is no longer up to date

 

 

--by Hanna Gutow, Katie Mahoney, Albert Cai, and Kelly Close