Memorandum

Tandem 4Q13 – Sales of $10 million up 32% sequentially; 7,500 pumps shipped since launch; sales force to nearly double – March 7, 2014

Executive Highlights

  • Sales of Tandem’s t:slim insulin pump and related supplies totaled $10.2 million in 4Q13 and $29.0 million for 2013, a nice upward trend from 4Q12 sales of $2.3 million and 2012 sales of $2.5 million. Sequentially, 4Q13 sales rose 32% from 3Q13.
  • Since launch in August 2012, a total of 7,500 t:slim pumps have been shipped. The call highlighted that 45% of the t:slim installed base is new to pumping.
  • Tandem’s field sales force will nearly double from 36 to 60 reps in 2014.
  • FDA filing of the t:slim with Dexcom CGM integration is expected in 2Q14. FDA filing of t:flex, a t:slim with a larger capacity 480-unit reservoir, is expected in mid-2014.

Tandem CEO Mr. Kim Blickenstaff led the company’s 4Q13 financial results call yesterday afternoon, its first following the company’s $125 million IPO in November 2013. Our overall take on Tandem's first public quarter is that there were very high expectations going in and the company had a quite favorable result for the quarter, particularly given the competition (new pumps from Insulet and Medtronic and new entrant Asante). This report contains the top business and R&D highlights from the call:

1. Sales were $10.2 million in 4Q13 and $29.0 million in 2013, up significantly from 4Q12 sales of $2.3 million and 2012 sales of $2.5 million. Sequentially, 4Q13 sales rose 32% from 3Q13. For 2014, Tandem estimates sales will fall in the range of $48-$54 million, a 66-86% year-over-year increase from 2013.

2. Tandem shipped 2,406 t:slim pumps in 4Q13, an impressive 2.5 times the number in 4Q12. Since August 2012, 7,500 pumps have been shipped; 45% of the t:slim installed base is new to pumping.

3. Tandem expanded from 11 to 36 sales territories/reps in 2013, and a further expansion to 60 territories/reps is nearly complete. The major impact is expected in 2H14.

4. Tandem achieved a positive gross margin of 21% in 2013, a major improvement over 2012’s
-54% gross margin.

5. As of December 31, Tandem had $129 million in cash and cash equivalents, which manageable notably said was sufficient for operating needs for the next 18 months.

6. Reimbursement contracting negotiations are ongoing with major payers. Currently, 66% of the business is running through distributors; the long-term goal is ~25-30%.

7. In January, Tandem initiated a voluntary recall of selected lots of t:slim cartridges. The total cost is ~$1.6 million, and most of the impact ($1.3 million) was taken in 4Q13. Quality is clearly supremely important; we’d say Tandem dodged a bullet here and now needs to make sure there are no quality issues, ideally whatsoever, in the next year and going forward. (That’s hard to achieve, but quality issues are obviously not confidence inspiring.)

8. An FDA PMA filing of the t:slim with Dexcom G4 Platinum integration(“t:sensor”) is expected in 2Q14. Tandem anticipates a 12-15 month FDA review.

9. An FDA 510(k) filing of t:flex – the same t:slim pump body but with a larger capacity 480-unit reservoir – is expected in mid-2014. A six-month FDA review is expected.

10. The call did not mention the t:sport and t:dual projects, pipeline devices that were first discussed in detail at JPM 2013. We’re dying to see movement on t:dual in particular as this will be so key to Tandem’s activity in the artificial pancreas.

Below, you will find more details on each of the highlights, along with a pipeline summary and Q&A.

Financial and Business Highlights

1. Sales of Tandem’s t:slim insulin pump and related supplies totaled $10.2 million in 4Q13 and $29.0 million for 2013, a nice upward trend from 4Q12 sales of $2.3 million and 2012 sales of $2.5 million. As a reminder, commercial sales of the t:slim pump commenced in August 2012, meaning the 4Q12 and 2012 figures represent very early days post-launch. More illuminating was the sequential trend throughout 2013 – sales stepped up over the course of the year, particularly in 2H13. Management attributed the late-year acceleration to the tripling in sales reps/territories from 11 at the beginning of 2013 to 36 by the end of the year (more details below). In addition, callers were reminded of the seasonality inherent in the pump business – 4Q13 is usually the strongest quarter for companies as patient deductibles and flexible spending accounts reset. The metrics are certainly trending in the right direction, though it will be several quarters before we have a better sense of the business’ trajectory.

 

4Q12

2012

1Q13

2Q13

3Q13

4Q13

2013

Sales* (millions)

$2.3

$2.5

$5.5

$5.5

$7.7

$10.2

$29.0

YOY Growth

---

---

---

---

---

343%

1,060%

Sequential Growth

---

---

139%

0%

40%

32%

---

* Sales of the t:slim pump accounted for 90% of sales, with “pump-related supplies” (we assume mostly infusion sets) accounting for the remaining 10%.

  • For 2014, Tandem estimates sales will fall in the range of $48-$54 million, a 66-86% year-over-year increase from 2013. In Q&A, the guidance seemed lower than some analysts were expecting – management countered that it represents a “pretty conservative estimate” and the goal is to hit the upper end of the range. Though Tandem is expanding its field sales force in 2014 from 36 to 60 reps, the short-term impact will be a disruption in sales regions/territories – this will negatively impact revenue in the first half of the year as reps come up to speed (~9-12 months) and territories are realigned. The guidance does not assume any revenues from new products (t:flex or t:sensor).

2. Tandem shipped 2,406 t:slim pumps in 4Q13, 2.5 times the number shipped in 4Q12. Since launch in August 2012, 7,500 pumps have been shipped. Tandem saw sequential increases in pump shipments in every quarter in 2013, though we would note that the sequential growth trajectory gradually slowed over the course of the year. Rough math would give Tandem a ~1.7% US market share, assuming ~450,000 US patients are on insulin pumps and Tandem has an installed base of 7,500 patients. Insulet reported at JPM in January that it had a market share of 15% on an installed base of ~60,000 patients.

  • The call highlighted that 45% of the t:slim installed base is new to pumping. (For comparison, Insulet’s 4Q13 call noted that “over 70%” of its new patient adds are new to pumping.) Remarks attributed the popularity in MDIs to the t:slim’s improved user interface, a historical “barrier” to pump use in management’s view – we think this has probably played a role, though we suspect having a device on the body, patient/clinical inertia, and cost have likely been bigger barriers. In Q&A, management called MDIs the company’s “number one segment,” though we would note that the current metric suggests ~65% of t:slim users switched from another pump. Overall, Tandem estimates that ~27% of US type 1 patients currently use an insulin pump.
  • In Q&A, management expressed confidence that Tandem has not been impacted by the dynamic insulin pump competitive landscape, including the launch of Medtronic’s MiniMed 530G. Management also mentioned the Insulet OmniPod, but did not view it as a direct competitor given the product’s tubeless nature. Overall, management said that Tandem is “not seeing too much from a competitive standpoint that is impacting things.” Certainly, there is enough room for several companies with innovative products to continue to grow the insulin pump market. We agree with management that OmniPod is not as much of a direct competitor to the t:slim; what will be most interesting is to see is how the 45% new-to-pump metric changes over time. Insulet’s has remained pretty consistent over time in the 70-75% range.

 

4Q12

1Q13

2Q13

3Q13

4Q13

Cumulative since launch (August 2012)

Pump Shipments

844

852

1,363

1,851

2,406

~7,500

Sequential Growth

---

1%

60%

36%

30%

---

3. In 2013, Tandem expanded from 11 to 36 sales territories/reps, and a further expansion to 60 territories/reps is nearly complete. Management expects that it will take approximately 9-12 months for these new reps to become fully productive, meaning their contribution will be fully realized in 2H14. An initial disruption in sales and rep productivity is expected as the sales force expansion and realignment rolls out in 1H14.

4. Tandem achieved a positive gross margin of 21% in 2013, a major improvement over 2012’s -54% gross margin. Gross margin improved to 12% in 4Q13 from -20% in 4Q12. While the 4Q13 gross margin was lower than the full-year gross margin, it largely reflected the negative impact of the t:slim cartridge recall (a 13-percentage point hit; see below). In addition, current production volumes are very low, which makes gross margin quite variable until the business expands. Ultimately, Tandem expects gross margins in the mid-60% range and operating margins in the mid-20% range. In Q&A, management would not put a timeline on when the company could reach these goals. (For context, Insulet reported in its 4Q13 call that gross margin on the US OmniPod is expected to reach the mid-60%-range by 2Q14 – that represents nearly nine years after the OmniPod was first commercialized in October 2005. While the business models are of course very, very different, we suspect that it will take at minimum a few years for Tandem to reach mid-60% gross margins.)

5. As of December 31, Tandem had $129 million in cash and cash equivalents, sufficient for operating needs for the next 18 months. The company does have a “projection scenario” that could bring it to cash flow breakeven on current financial resources. This will depend on many factors, including the productivity of the new sales rep hires and regulatory approvals/launch of new products. Operating loss in 2013 was $49 million, a 48% increase over $33 million in 2012. Operating loss for in 4Q13 was $17 million, slightly more than double the $8 million loss observed in 4Q12.

6. Management shared little on reimbursement, only noting in Q&A that contracting negotiations are ongoing with major payers. As of the fourth quarter, 66% of the business was running through distributors. Encouragingly, this is trending in the right direction (it was 69% for all of 2013), though there is certainly lots to do to get to the ultimate goal of 25-30% running through distributors. Management shared that “it is the typical contracting process” and “hopefully this year we can announce some of the larger ones as we get contracted.” Negotiations aside, the company feels “very comfortable” that customers that want to get the t:slim can get it either directly through Tandem or through one of the distributors. Management said direct pricing of the t:slim will be in the “$4,000-5,000 range for pumps.”

7. In January, Tandem initiated a voluntary recall of selected lots of t:slim cartridges. As we noted in our initial and follow-up coverage, the source of the problem was isolated to a piece of test equipment and was identified during Tandem's own internal testing, not from patient reports or any adverse events. The recalled cartridges may be at risk for leaking. Tandem has corrected the issue and put quality controls in place to prevent it from happening in the future. The total direct cost of the recall is expected to be $1.6 million (return and replacement of affected cartridges plus inventory write-off) – almost the entire impact ($1.3 million) was recorded as a charge to cost of sales in 4Q13, with the remaining $300,000 to be recognized in 1Q14. The recall reduced gross margin by 13 percentage points in 4Q13; none of the direct cost hit the sales line in the P&L. As we noted in our initial coverage, we don't see the recall as a major issue or threat to patient safety. However, it was unfortunate that Tandem had to issue separate recall notices - the public perception may be one of a major problem, which we do not think is the case.

 

R&D Highlights

We conclude our top 10 with major activity in R&D.  

8. An FDA PMA filing of the t:slim with Dexcom G4 Platinum integration(“t:sensor”) is expected in 2Q14. Management expects a 12-15 month review, placing potential approval in mid/late 2015. We felt that this timeline was appropriately conservative given the unpredictability of the FDA and the ongoing ~12-month review of the Animas Vibe with Dexcom G4 integration – as a reminder, PMA applications have a statutory 180-day review. Management noted that the t:sensor project “is progressing well,” is a “top priority” for Tandem, and development work is “essentially complete.” Tandem had pre-submission discussions with the FDA in 4Q13 to confirm the regulatory path and get clarity on questions.

  • While CGM integration may not be the top reason that patients choose a pump, we believe it is becoming increasingly important as CGM adoption expands. Market leader Medtronic offers the only CGM-integrated pump right now, an important advantage over other pump players. It’s hard to know what impact this integration will have on Tandem’s business, though it can only help. We’d note that Dexcom’s financial results calls over the past year have repeatedly highlighted the strong sales of the Animas Vibe in Europe against the Medtronic Veo.

9. An FDA 510(k) filing of t:flex – the same t:slim pump body but with a larger capacity 480-unit reservoir – is expected in mid-2014. Tandem expects a six-month FDA review, placing potential approval in late 2014/early 2015. For context, the t:slim’s original 510(k) application was approved after an approximate six-month review. Similar to the t:sensor project, Tandem held discussions with the FDA last year to gain further clarity on the regulatory pathway for t:flex.

10. The call did not mention the t:sport and t:dual projects, pipeline devices that were first discussed in detail at JPM 2013. Both are certainly expensive, longer-term R&D projects than t:sensor and t:flex, so it was not a surprise to us that they were absent from the call.

  • t:sport – At the time, the t:sport was expected to be a discreetly worn tubed pump (35-40% smaller than the t:slim) controlled with a wireless touchscreen handheld (i.e., no on-pump screen). The t:sport was characterized as ideal for those who are active (“a fitness pump”) or those who want more discretion. Aside from the tubing difference, we thought it was somewhat similar in value proposition to OmniPod (simplicity, discretion, ideal for an active lifestyle – albeit the presence of tubing is obviously a key difference). We wonder how the eventual size of the t:sport will compare to the second-generation OmniPod. If the major goal is discretion and active wear, we believe the durable t:sport pump will likely have a tough time marketing against the OmniPod.
  • t:dual – Tandem’s dual chambered infusion pump is in partnership with JDRF. The agreement’s goal is a “fully automated artificial pancreas system using therapies in conjunction with insulin.” JDRF will support Tandem with performance-based milestone funding over 2013-2015 to complete the development, testing, and manufacturing of the pump. We have seen many AP researchers switching to the t:slim over the past year, and the stamp of JDRF on this partnership certainly adds to the company’s closed- loop credibility. Additionally, this makes Tandem (to our knowledge) the only company that has publicly announced development of a dual-chambered pump.
    • There’s an ongoing debate in the field if more than one hormone is needed for closed-loop control. Some have argued that use of glucagon should be used in a rescue fashion only, while others believe more chronic use on a daily basis allows for more aggressive insulin dosing (e.g., Drs. Ed Damiano and Steven Russell’s approach). Interestingly, we have not heard much discussion of using amylin or GLP-1 agonists. Aside from the pump itself, a key roadblock to a multi-hormone system may be cost – we continue to hear chatter about the high cost of glucagon in particular.

 

Pipeline Summary

Pipeline Product

Timeline

t:sensor
t:slim insulin pump with Dexcom G4 Platinum CGM integration

FDA PMA filing in 2Q14; 12-15 month review expected.

t:flex
t:slim with a larger capacity 480-unit reservoir

FDA 510(k) filing in mid-2014; six-month review expected.

t:sport
Smaller t:slim controlled by wireless touchscreen handheld

???

t:dual
Dual-chamber t:slim in partnership with JDRF

JDRF Partnership announced on January 8, 2013. JDRF supporting Tandem with performance-based milestone funding over the next two years to complete development, testing, and manufacturing.

 

Questions and Answers

Q: Your guidance for 2014 is slightly below what we were expecting. Given that this is your first quarter, what is your philosophy on guidance? Some companies guide to how they believe they will perform while others build in some conservatism.

A: In general, we are trying to take conservative approach. The expansion of the field sales force really disrupts regions and territories where we already have a presence. It’s a little bit hard to guess at all these moving pieces. We’re taking a range for what we think is a pretty conservative estimate of productivity. We’re trying to guide to what we can achieve in middle to upper end of range.

Q: Have you changed your assumptions and plans around sales force expansion relative to our last conversations? What productivity are you assuming?

A: Not much has changed. Our assumptions are fairly similar to what we talked about previously. One key change is that because of we had such a successful 4Q13, we are moving to a model of 60 territories, where we were previously looking at 50-60 – we are moving to the top end of that range.

Q: Could you give a little more clarity on how you ended the year in terms of sales reps and where you expect to end 2014? Where do you expect to be in terms of pump sales for 2014?

A: We ended 2013 with 36 reps. Currently, we almost have almost 60 territories filled. I expect by mid-year 2014, the 60 territories will move towards that productivity we are talking about, and we will finish 2014 with those 60 reps. We will finish this year out by seeing how this organization does. We’re not providing the detail on how many pumps we plan to sell in 2014.

Q: Could you comment on the competitive environment and what you’re seeing, perhaps from the perspective of your ability to get direct sales. Additionally, could you comment on what you have learned from the competitive landscape?

A: We continue to do extremely well with our number one segment, MDIs. This is not impacted that much from competitive landscape, especially Medtronic’s MiniMed 530G. When the MiniMed 530G came out, there was a lot of consternation and noise surrounding it. I don’t believe we saw an impact from the device in 4Q13. Other than the new OmniPod, with the smaller pod, we’re really not that competitive. That’s the tubeless system and when people made a choice to go on a tubeless pump from MDI, they chose the OmniPod. We’re not competitive in that regard. We’re not seeing too much from a competitive standpoint that is impacting things. Going forward, it’s going to be more of our own organizational reallocation of territories, because every territory is going to be impacted in 2014 at the beginning of the year.

Q: Was pricing stable in 4Q13?

A: Yes.

Q: Is that the same price level you’re assuming for the 2014 guidance?

A: From industry standpoint, we are still saying that the direct pricing will be in the $4,000-5,000 range for pumps.

Q: Last time we talked, you were moving slowly but surely through payers. Can you provide an update on reimbursement?

A: One metric I look at is how much business is running through distributors. For 2013, it was 69%. In 4Q13, it was 66%. We are moving towards our goal of ~25-30% distributor, and the rest direct. It is the typical contracting process. Hopefully this year we can announce some of the larger ones as we get contracted.

Q: You have essentially filled the 60 territories; so I am guessing it is just a matter of getting everyone on board, trained, and up to productivity?

A: That is correct. We have just put out the final offers to the last of the 60 territories. They should be all accepted, ready to go, and on board in 2Q14.

Q: Is it correct that none of $48-54 million came from the t:sensor and t:flex?

A: Yes, the guidance does not assume any revenues from t:flex or t:sensor.

Q: Can you break down the 4Q13 revenues into direct, distributor, and supply revenue?

A: We did not provide it. It is moving along the lines of the year percentage; for the year, the distributor was 69%, and it was 66% for 4Q13.

Q: You had an extremely strong 4Q13, with 2,400 pumps. Could you provide more color on where some of that strength came from? Was it opening more accounts, or switches from MDI?

A: Across the board, the primary impact was the increase in territories; we have gone from 11 to 36 in 2013. We saw the greatest impact of the additional sales force in 4Q13. That’s the process we have in play for 2014. We want to get as many territories as we can up and running in 1H14 so that by the time we get to 2H14, and in particular 4Q13, they can contribute as significantly as the original group did in 2013.

Q: You’ve been clear about the seasonality and the sequential step down. I think after that we will see steady sequential increases thereafter, with the fourth quarter backend loaded. It is important that we start of right. The 1Q14 is two-thirds done; can you provide a little help framing a reasonable range to think about 1Q14 revenues?

A: If you look at the typical drop from the fourth quarter and the first quarter in the general industry, I think we would see something very similar to that. I think the other impact to consider is that we will see some disruption because of the new territories coming on board. We also just completed our national sales meeting where people were out of the field for a week, so that will have some impact in 1Q14. So, if your starting point is the typical drop-off for the industry, that is what we are expecting for 1Q14.

Q: What do you see as a typical drop-off?

A: I cannot provide that detail.

Q: Are you comfortable with the current 1Q14 consensus of $9.3 million? It sounds like you might think that’s a little high.

A: I can’t comment on that.

Q: Are they any updates on commercial insurance carrier coverage? How is access today for patients not covered by commercial carriers? Do you have any updates on UnitedHealth Group or Cigna?

A: I think the typical process is still moving along. We are working to try to get these contracts in place; we are still in the negotiation process. From an access standpoint, we feel very comfortable that our customers and potential customers can reach our product either directly through us or through one of the distributors we work with. As far as the some of the payers like UnitedHealthcare, we are continuing to negotiate with those payers so I can’t comment on the status of those negotiations.

Q: In the first quarter if I’m understanding correctly, we’re going to see a little bit of leftover charges associated with some of the recalls. I know you mentioned eventually getting up into the 60s, but could you maybe help us understand how you’re thinking about what level of gross margin expansion could we expect see in 2014?

A: It will probably be around $300,000 of the product recall cost hitting in 1Q14 so that will be have a very small impact in 1Q14. As far as expectations for gross margins, it is driving to operating margins of 130-140%. Obviously gross margins are going to have a big impact on that. As far as scaling the organization and the volume, increasing output, and reducing scrap or rework costs are key factors in hitting operating margin targets as well as gross margin targets. We expect to make some meaningful improvements there in 2014.

Q: Is there a time period you are looking to get to that 60% margin? Is it sooner or later than three years?

A: We’re not looking at a time period right now because a lot of that is dependent on many other things such as the scalability, the launch of new products, the uptake of t:slim, and the movement to putting other products on market. A lot of that is moving parts that, at this point, we’re not comfortable with putting a statement on.

Q: In terms of submitting t:sensor, would you assume a regular review process for the FDA, perhaps approximately a year? I know J&J has had some delays with their combined product with Dexcom.

A: I would agree with you. We intend to file the t:sensor PMA, which is typically a one-year to 15-month process.

Q: And on the t:flex that’s typically shorter, around a six-month review?

A: Correct. The first response is required in 90 days. Typically, we see this in a six-month cycle.

Q: On the progression and ramp, is there any additional context you’re willing to give? Are there any percentages in the first half or second half of the year, or are you simply betting on a big fourth quarter?

A: It will typically follow the industry. I think the impact of having the additional sales force once we’re past the initial disruption is going to forecast most of revenue in 2H14.

Closing Remarks: The momentum that we experienced in 2013 is very encouraging, as well as the number of people choosing to use t:slim to manage their therapy. The t:slim pump is designed with the support of the diabetes community to be easy to teach, easy to learn, and easy to use. We view the t:slim pump as a platform from which Tandem can expand its business to support different segments of the diabetes community. I look forward to keeping you updated.

 

--by Adam Brown and Kelly Close