Tandem 1Q19 – Sales grow 142% to $66 million, with 14,732 pumps shipped; major $45 million FY19 guidance raise to $300-$315 million; Control-IQ pivotal data at ADA, US launch in 4Q19 – April 30, 2019

Tandem reported very strong 1Q19 financial results this afternoon in a call led by newly appointed CEO John Sheridan (his first as CEO after taking over in March), CFO Leigh Vosseller, and Executive Chairman Kim Blickenstaff. See below for the top financial and pipeline highlights.

Financial Highlights

1. Sales More Than Double YOY to $66 Million; International Sales of $11 Million Up 59%; Better-Than-Usual 21% US Sequential Decline

Tandem reported worldwide sales of $66 million, more than doubling YOY (+142%) on a very challenging comparison to 56% YOY growth in 1Q18. This marks six consecutive quarters of 50%+ sales growth, and three consecutive quarters of 90%+ growth. As usual, pump shipments comprised the majority of sales (70%), with infusion sets (20%) and cartridges (10%) contributing the remaining portions. In keeping with seasonal patterns, revenue declined 13% sequentially from the impressive record sales of $76 million in 4Q18. US sales of $55 million in 1Q19 doubled YOY (+100%) on a tough comparison to 56% YOY growth in 1Q18; sales declined a weaker-than-usual 21% sequentially from the record $69 million in US sales in 4Q18. Q1 is traditionally Tandem’s seasonally weakest quarter, with sequential declines of 32% and 29% in 1Q18 and 1Q17, respectively.

• International sales of $11 million contributed 17% of total revenue and increased a strong 59% sequentially from $7 million in 4Q18. This was only the t:slim X2’s third quarter on the OUS market, signaling a lot of pent-up demand and early uptake. Management noted that backorders from unmet OUS demand in late 2018 are expected to be completely filled by the end of 2Q19, meaning the momentum should certainly continue in the upcoming quarter. Mr. Sheridan confirmed that Tandem’s t:slim X2 is now shipping in Canada, bolstered by March’s reimbursement in Ontario; the pump is now covered for nearly half of all Canadians living with type 1 diabetes. Tandem will be evaluating further international expansion for t:slim X2 “later in the year,” with the primary factors being presence of favorable reimbursement and availability of Dexcom’s G6 CGM. Mr. Sheridan added that Germany is a “large market for us to consider.” The OUS rollout of Basal-IQ via Tandem’s device updater is expected in 2H19, with timing to vary by country.

Tandem Global, US, OUS Quarterly Sales (2Q13-1Q19)

2. Pump Shipments of 14,732 Up 232% YOY; In-Warranty US Installed Base Estimated at 87,000; ~100,000 Tandem Customers Worldwide

Tandem shipped 14,732 pumps in 1Q19, with 9,669 pumps shipped in the US and 5,063 pumps shipped OUS. Worldwide pump shipments more than tripled YOY (+232%) and declined just 9% sequentially – very impressive! US pump shipments more than doubled YOY (+118%) and declined 25% sequentially. As noted above, this is a softer-than-usual Q1 sequential decline, which has typically seen US shipments down ~35%, according to Ms. Vosseller. International shipments rose a very strong 57% sequentially, reflecting healthy demand as Tandem makes the t:slim X2 available globally. Based off four-year cumulative pump shipments, the US in-warranty installed base is ~87,000, up from ~80,000 as of 4Q18.

• Executive Chairman Mr. Kim Blickenstaff shared that Tandem boasts “nearly 100,000 customers.” He also added that the Tandem Device Updater, which enables remote software upgrades, has been used “more than 20,000 times” – a figure we have not heard before.

• Aligning with previous quarters, ~50% of Tandem’s new users came from MDI – expanding the market, though at a slightly lower rate than Insulet’s ~80%. Mr. Sheridan also cited dQ&A data showing that in the past two quarters, ~45% of patients starting a new pump in the US have chosen Tandem – wow! Contact dQ&A for more details.

Tandem Global, US, OUS Quarterly Pumps Shipped, 2Q13-1Q19

• US pump shipments included 1,200 renewals, doubling YOY. Ms. Vosseller estimated this accounted for “about half” of the available opportunities from warranties expiring in 2016 and 2017 – well below Tandem’s goal of renewing 70% of customers. Although “a small percentage of renewals” from that timeframe continue to trickle in, she no longer expects to reach the goal of a 70% renewal rate for pumps sold in 2012-2013. However, this remains a goal “going forward,” and we expect Basal-IQ and Control-IQ will help retain some of these pumpers. Ms. Vosseller explained that the “primary limiting factor” was the competitive environment at the time of warranty expiration, including inability to reach UnitedHealthcare customers (only Medtronic and Insulet are now covered, unlike back in 2012-2013).

• Since J&J Animas’ exit (October 2017), Tandem has continued to see “double the volume” of conversions from former Animas pumpers. Before J&J left the market, Ms. Vosseller said that Animas was in the “low-teens” as a proportion of Tandem’s new pump shipments; that implied roughly ~one-quarter of pump shipments were to Animas in 1Q19, or roughly ~2,000-3,000 pumps. On the plus side, this implies Tandem is competing well with Medtronic, the preferred Animas transition partner. On the other hand, the Animas opportunity will also begin to thin out, putting pressure on Tandem to expand into MDI or steal share from Medtronic. While this will be challenging, we do see market expansion ahead as more patients become interested in and begin to hear about AID (automated insulin delivery) – while this is not fully automated, it is certainly going that direction (see below for how management characterizes market expansion expectations).

3. Second Consecutive Quarter of Positive Adjusted EBIDTA; Gross Margin of 51%; $3 Million Cash Burn; Net Loss of $23 Million

Tandem achieved its second consecutive quarter of positive adjusted EBIDTA, which excludes the impact of non-cash stock-based compensation. Adjusted EBIDTA was $0.3 million in 1Q19, an impressive YOY improvement from -$12.8 million in 1Q18. Sequentially, adjusted EBIDTA declined from +$12.3 million on record sales in 4Q18. Adjusted EBIDTA for 2019 is estimated to be breakeven to positive.

• Gross margin for 1Q19 was 51%, up remarkably from 42% in 1Q18 and down slightly from 55% in 4Q18. Tandem continues to guide for a gross margin of ~52% for 2019, although Ms. Vosseller said that it could be “1%-2%” higher depending on how the year plays out.

• Tandem ended the quarter with $126 million in cash and equivalents, reflecting just a $2 million burn in 1Q19! That is an excellent result of terrific revenue growth and impressive expense management.

• Net loss was $23 million, an improvement from a net loss of $33 million in 1Q18. Tandem reported net income of +$3.7 million in 4Q18; however, 1Q19 included a $13 million non-cash charge related to outstanding warrants, along with a 10x YOY rise in stock-based compensation to ~$10 million.

• Operating expenses rose 65% YOY to $44 million, far slower than the 142% YOY revenue growth – great leverage! Operating margin improved to -17% compared to -57% in 1Q18. However, this is down from +1% in 4Q18.

4. 2019 Guidance Raised by a Whopping $45 million – $300-$315 Million (+63%-71% YOY)

Management increased full-year 2019 guidance to between $300-$315 million, a whopping ~$45 million rise (at the midpoint) and now reflecting annual sales growth of 63%-71%. This includes the previously anticipated international sales estimate of $45-$55 million, which Tandem still expects to be “more heavily influenced” by the Animas opportunity in the next two quarters. Ms. Vosseller explained that the original guidance to start the year ($255-$270 million) was based on renewals, a “best estimate” of the remaining Animas customers, and “modest market expansion.” However, Tandem has seen “unprecedented growth” in MDI and competitor conversions, as well as building momentum in pump shipments over the first four months of the year, leading to the substantial guidance increase of $45 million. Indeed, Ms. Vosseller noted that January accounted for just 25% of total shipments in 1Q19 and that the “escalation” across 1Q19 has continued into 2Q19.

• Uncertainty surrounding the Animas opportunity was once again a major focus of Q&A. Ms. Vosseller stressed the limited visibility into the number of Animas customers who have yet to choose a new pump. She cited an independent survey “back at the beginning of the year,” reporting ~15,000 Animas customers remaining of the original ~90,000 customers up for grabs. Medtronic will officially cease to provide Animas pump supplies and support in September, meaning patients will be forced to move to Medtronic, Tandem, or Insulet (unless they have stockpiled Animas supplies). This may “slightly” mitigate regular US seasonality trends, depending on how many Animas users decide to go with Tandem.

• The current guidance does not include the expected impact of Control-IQ, slated for a US launch in 4Q19 (see below). Ms. Vosseller added that 1Q19 momentum today could be enthusiasm for Control-IQ, as Tandem’s software update feature assures access to the hybrid closed loop. We’ll be fascinated to watch if the momentum continues throughout 2019, or if current sales are front-loaded ahead of the US launch.

Pipeline Highlights

1. Control-IQ Pivotal Study Complete, Data at ADA; FDA Submission in July; US Launch Now in “4Q19” for 14+ Years; Separate Pediatric Filing

The Control-IQ hybrid closed loop pivotal trial is now complete (n=168), with data to come on Sunday of ADA, an FDA submission expected in July, and a US launch now expected in “4Q19.” After the six-month study was paused in March due to a minor software bug, Tandem successfully rolled out a remote software update and completed the trial on time in April – impressive execution. But in a new wrinkle, Tandem won’t actually see the data until it is presented at ADA – since this is an NIH-funded scientific study, there are “procedures around who has access to the data.” The company may see a a preview of summary data shortly before it’s presented at the conference, but won’t receive the full data set until after ADA. This marks three straight updates where the Control-IQ US launch timing has inched steadily back – from “summer 2019” (3Q18) to “summer and end of Q3” (4Q18) to “2H19” (March) to now “4Q19.” Still, with a July submission and a potential three-month FDA review (i.e., similar to 670G), that puts approval around early 4Q19 – positioning Control-IQ as the second hybrid closed loop to market in the US, and the first with automated correction boluses and a no-fingersticks CGM (G6). 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)). At ATTD, FDA’s Dr. Courtney Lias suggested such a pathway is “likely.” The other two system components – the G6 iCGM and the t:slim X2 ACE pump – are already FDA regulated as interoperable (class II) devices, separating them from the algorithm itself.

• Today’s call confirmed that the Control-IQ submission will be for 14+ years, and the now-recruiting pediatric study (6+ years) will be submitted to FDA separately. The February call ambitiously hoped for a pediatric indication out of the gate, but now an indication for 6+ years seems likely to follow the adult approval. According to the new ClinicalTrials.gov listing, the Control-IQ pediatric study will last four months, enroll 150 participants, and complete this September – fast!

  • Also on Sunday of ADA 2019, we’ll hear data from the separate French FreeLife Kid study, testing the same Tandem Control-IQ/G6 configuration at five sites in France. As of February, n=97 pediatric participants were randomized.

• As noted at ATTD, not a single study participant (n=168) dropped out of the pivotal trial at any site – a fantastic (and really moving) sign for acceptance of the system. The six-month study randomized 2:1 – Control-IQ /G6 vs. t:slim X2/G6 without automation. The primary endpoint is time-in-range (70-180 mg/dl) over 26 weeks, with a slew of secondary endpoints. Dr. Boris Kovatchev shared at ATTD that mean A1c at enrollment was 7.6% (wide range of <7% to 10.5%), with 21% of participants at baseline on MDI and 30% previously not on CGM. An extension phase of three months is now ongoing, and, like Medtronic, Tandem is funding a continued access phase for pivotal trial participants to stay on the system. Based on anecdotal feedback, the team expects the “vast majority” of participants to continue on the system. We expect very strong data here.

• Mr. Sheridan again said to expect “mid-70%” time-in-range in the pivotal study, based on prior studies of Control-IQ. In prepared remarks, he highlighted the ATTD time-in-range consensus meeting, noting that 70% time-in-range is considered “clinically beneficial.” He also urged caution in reviewing time-in-range outcomes among different systems – is time-in-range only being reported when closed loop is active (most favorable) or for the full-duration of CGM wear?

• Mr. Sheridan also urged analysts to look at % time in closed-loop, which is expected to be “at least 90%” in the six-month Control-IQ pivotal study. He called this “a very important metric,” rightly noting that the algorithm “won’t provide benefit if it is not active.” This was also a subtle competitive dig at Medtronic’s MiniMed 670G, which saw sub-90% Auto Mode use in all of its pivotal trials (ranging from 76%-88%) and lower Auto Mode use in the latest real-world data (ranging from 65%-80%).

• Tandem is “still evaluating” if there will be an additional upgrade cost for Control-IQ – the hope remains to secure “incremental reimbursement” from insurers, based on expected “cost savings” with its hybrid closed loop. This was similar language to that used in 4Q18. Analysts pressed for more details in Q&A, but these discussions still sound early; we’d be surprised if Tandem could get incremental reimbursement ready in time for a 4Q19 launch, especially because pivotal data won’t be available for two more months. 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. 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 insurance hassle. 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, especially as Insulet has just gone to a no-upfront-cost PDM with Dash.

• Could Tandem integrate the FreeStyle Libre 2 iCGM into Control-IQ? In Q&A, Mr. Sheridan was quick to compliment Dexcom (“a great partner of ours”, “best in class”), but did confirm that the CGM agreement is non-exclusive. “If there are other iCGMs in the market that have appreciable market share, we would consider implementing them.” Still, he guessed that integrating a new iCGM into Control-IQ would be “on the order of a year” lead time – slower than we would have guessed in the world of interoperability, though that presumably includes appropriate testing, R&D, and business relationships. “We do not know enough about the technology Abbott has in Libre 2,” he added. Overall, this implied that even if Abbott gets Libre 2 cleared as an iCGM (the 1Q19 call’s expectation), potential integration into Control-IQ would be a late 2020 event at the absolute earliest.

2. Basal-IQ International Launch in 2H19, with Timing to Vary by Country

Tandem’s Basal-IQ with Dexcom G6 integration will begin launching outside the US in 2H19, with timing to vary by country. The launches will depend on distribution partners, regulatory progress, reimbursement, and where Dexcom’s G6 is available. The “2H19” timing is ~3-6 months back from September’s Analyst Meeting, which expected an “early 2019” international launch of Basal-IQ. (The 4Q18 call more vaguely said to expect such a launch “this year.”) Tandem obviously has a lot of the building blocks in place and early international sales are strong. Basal-IQ will provide important international competition against 670G, which has only just begun rolling out OUS.

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

Tandem expects to launch its t:slim X2 mobile app for Apple and Android this “summer,” offering secondary display of pump data and wireless data uploads from the t:slim X2 pump to t:connect. This is ~1-3 months wider timing than in 4Q18, where the plan was a “1H19” launch. This app will be important feature competition vis-à-vis Insulet’s Omnipod Dash, which also expects its secondary display app to launch this summer. These apps may sound incremental, but they offer important benefits: patients can view pump status on their own phone and upload data without plugging in to a computer; HCPs should get insulin pump data more reliably; Tandem should get more consistent, passively-flowing device data. These apps are also a stepping stone to wireless smartphone control, which remains Tandem and Insulet’s ultimate goal. It’s unclear if smartphone pump control will be available for t:slim X2 or fully wait for t:sport in late 2020 (see below).

4. t:sport FDA submission in mid-2020 (no change)

CEO John Sheridan shared that timing on t:sport “hasn’t changed,” with an FDA ACE pump submission expected in “mid-2020” and clearance before the end of 2020. The 4Q18 call said design and testing would mostly complete this year, with an FDA submission in “2H20”; the implication today was no change in timing. 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 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 on-body system design of Insulet’s Omnipod Horizon. (t:sport will still have tubing, whereas Omnipod will remain tubeless.) Mr. Sheridan reiterated comments from Tandem’s September Analyst Meeting, noting that t:sport has tested well in the MDI population.

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