UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission File Number 001-36189
_________________________________________________________________
(Exact name of registrant as specified in its charter)
_________________________________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
(Zip Code) | |||
(Address of principal executive offices) | |||
(858 ) 366-6900
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Symbol | Name of Exchange on Which Registered |
Securities registered pursuant to Section 12(g) of the Act:
_____________________________________________________None___________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
x | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 28, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $3.6 billion based on the closing price for the common stock of $64.52 on that date. Shares of common stock held by each executive officer, director, and their affiliated stockholders have been excluded from this calculation as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 14, 2020, there were 59,726,471 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended December 31, 2019, or this Annual Report, contains “forward-looking statements” within the meaning of the federal securities laws, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Annual Report, other than statements of historical fact, are forward-looking statements. You can identify forward-looking statements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to such statements. In particular, forward-looking statements contained in this Annual Report relate to, among other things, our future or assumed financial condition, results of operations, liquidity, trends impacting our financial results, business forecasts and plans, research and product development plans, manufacturing plans, strategic plans and objectives, capital needs and financing plans, product launches, regulatory approvals, the impact of changes in the competitive environment, and the application of accounting guidance. We caution you that the foregoing list may not include all of the forward-looking statements made in this Annual Report.
Our forward-looking statements are based on our management’s current assumptions and expectations about future events and trends, which affect or may affect our business, strategy, operations or financial performance. Although we believe that these forward-looking statements are based upon reasonable assumptions, they are subject to numerous known and unknown risks and uncertainties and are made in light of information currently available to us. Our actual financial condition and results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption “Risk Factors” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, and elsewhere in this Annual Report, as well as in the other reports we file with the Securities and Exchange Commission, or the SEC. You should read this Annual Report with the understanding that our actual future results may be materially different from and worse than what we expect.
Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Forward-looking statements speak only as of the date they were made, and, except to the extent required by law or the rules of the NASDAQ Global Market, we undertake no obligation to update or review any forward-looking statement because of new information, future events or other factors.
We qualify all of our forward-looking statements by these cautionary statements.
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PART I
Item 1. | Business |
Overview
We are a medical device company with an innovative approach to the design, development and commercialization of products for people with insulin-dependent diabetes. Our goal is to lead in insulin therapy management by building a robust ecosystem and portfolio of data-driven products and services around our flagship insulin pumps. We believe our competitive advantage is rooted in our consumer-focused approach, and the incorporation of modern and innovative technology into our product offerings. Our manufacturing, sales and support activities principally focus on our flagship pump platform, the t:slim X2 Insulin Delivery System (t:slim X2), and our complementary product offerings. The simple-to-use t:slim X2 is based on our proprietary technology platform and is the smallest durable insulin pump available. It is the only pump currently available in the United States that is capable of remote feature updates, which positions us well to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. We aim to improve and simplify the lives of people with diabetes and those of their healthcare providers, by delivering innovative hardware and software solutions, as well as best-in-class customer support.
Since our initial commercial launch, we have been able to rapidly innovate and bring more products to market than our competitors. We have commercially launched seven insulin pumps in the United States since 2012 and two pumps outside the United States since 2018. Four of our insulin pumps have featured integration with continuous glucose monitoring (CGM) technology, and two have featured an automated insulin delivery (AID) algorithm. We believe that the three new classifications defined by the United States Food and Drug Administration (FDA) for the interoperability of devices for AID will help support continued rapid innovation by streamlining the regulatory pathway for integrated products. In June 2018, the t:slim X2 was the first insulin pump designated as compatible with integrated continuous glucose monitoring (known as iCGM) devices; in February 2019, the t:slim X2 was the first in a new device category called Alternate Controller Enabled Infusion Pumps (ACE pumps); and in December 2019, Control-IQ technology for the t:slim X2 insulin pump was the first automated insulin dosing software in a new interoperable automated glycemic controller category.
Today, our t:slim X2 hardware platform represents 100% of our new pump shipments. It is the only commercial insulin pump that allows users to update their pumps’ software quickly and easily from a personal computer. We have offered in-warranty t:slim customers in the United States four different software updates for no-cost using the Tandem Device Updater, including our two AID algorithms, Basal-IQ technology and Control-IQ technology. Basal-IQ technology launched in August 2018 and is a predictive low glucose suspend feature that is designed to temporarily suspend insulin delivery to help reduce the frequency and duration of hypoglycemic events. Control-IQ technology launched in January 2020 and is an advanced hybrid-closed loop feature, designed to help increase a user's time in targeted glycemic range. It is the first and only system cleared to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar. Outside the United States we began selling efforts with t:slim X2 with Dexcom G5 integration in the third quarter of 2018, offering no-cost software updates for Basal-IQ technology in the third quarter of 2019, and intend to begin offering Control-IQ technology updates in select geographies in the second half of 2020.
Our insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years. In addition to insulin pumps, we sell disposable products that are used together with our pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body.
In the four-year period ended December 31, 2019, we shipped approximately 142,000 insulin pumps, which is representative of our estimated global installed customer base on the typical four-year reimbursement cycle. Approximately 118,000 of these pumps were shipped to customers in the United States and approximately 24,000 were shipped to international markets.
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For the years ended December 31, 2019, 2018 and 2017, our consolidated sales were $362.3 million, $183.9 million, and $107.6 million, respectively. For the years ended December 31, 2019, 2018 and 2017, our net loss was $24.8 million, $122.6 million, and $73.0 million, respectively. Worldwide pump sales accounted for 68%, 67%, and 66% of our total sales, respectively, for the years ended December 31, 2019, 2018 and 2017, while pump-related supplies and accessories accounted for the remainder in each year. Our accumulated deficit as of December 31, 2019 and December 31, 2018 was $624.8 million and $600.1 million, respectively. This included $216.6 million and $147.4 million of non-cash stock-based compensation charges and non-cash changes in the fair value of common stock warrants as of December 31, 2019 and 2018, respectively.
Our headquarters and our manufacturing facility are located in San Diego, California. We also have an office in Boise, Idaho. We employed 1,043 full-time employees as of December 31, 2019.
Diabetes and the Insulin Therapy Management Market
Diabetes is a chronic, life-threatening disease for which there is no known cure. The disease is categorized by improper function of the pancreas when it either does not produce enough insulin or the body cannot effectively use the insulin it produces. If not closely monitored and properly treated, diabetes can lead to serious medical complications, including damage to various tissues and organs, seizures, coma and death.
Diabetes is typically classified as either type 1 or type 2:
• | Type 1 diabetes is characterized by the body’s nearly complete inability to produce insulin. It is frequently diagnosed during childhood or adolescence. Individuals with type 1 diabetes require daily insulin therapy to survive. |
• | Type 2 diabetes represents 90% to 95% of all individuals diagnosed with diabetes and is characterized by the body’s inability to either properly utilize insulin or produce enough insulin. Initially, many people with type 2 diabetes attempt to manage their diabetes with improvements in diet, exercise and oral medications. However, as their diabetes advances, some patients progress to requiring injectable therapies, such as long-acting insulin, and a subset of this population will require daily rapid-acting insulin therapy. |
The International Diabetes Federation estimates that 463 million people have diabetes worldwide, approximately half of which are undiagnosed. In the United States, the Centers for Disease Control and Prevention estimates that in 2018 approximately 34 million people were living with diabetes of which approximately 27 million had diagnosed diabetes. We consider our addressable market to be people diagnosed with diabetes who are living with either type 1 diabetes, or with type 2 diabetes who require daily rapid acting insulin. Throughout this Annual Report, we refer to these individuals as people with insulin-dependent diabetes.
Estimated Diagnosed Diabetes Prevalence(1)
Worldwide | Domestic | ||
Type 1 | 24.2 million | 1.6 million | |
Type 2 (all therapies) | 206.8 million | 25.4 million | |
Type 2 (insulin only) | 5 million | 1.5 million | |
(1) Internal estimates based on data from the International Diabetes Federation and the Centers for Disease Control and Prevention (CDC)
Diabetes Management Challenges
Diabetes can be difficult for patients to manage. Unlike most therapies, daily insulin requirements can vary greatly and can be affected by many factors, such as type or quantity of food eaten, illness, stress and exercise. People with diabetes have to be diligent in working to prevent their blood glucose from fluctuating outside of a targeted range. Hypoglycemia, or low blood glucose levels, can cause a variety of long-term effects or complications, including damage to various tissues and organs, seizures, coma or death. Hyperglycemia, or high blood glucose levels, can also cause a variety of long-term effects or complications, including cardiovascular disease and damage to various tissues and organs. Preventing and managing fluctuations in blood glucose levels, particularly when someone is outside their target blood glucose range is often time consuming and stressful to people with diabetes and their loved ones.
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Insulin Therapy Management
There are two primary therapies used by people with insulin-dependent diabetes, insulin injections and insulin pumps. The use of insulin injections is often referred to as Multiple Daily Injection, or MDI, therapy. Insulin pumps are intended to more closely resemble the physiologic function of a healthy pancreas and use rapid-acting insulin to fulfill both mealtime (bolus) and background (basal) requirements. Insulin pump systems are most commonly comprised of a programmable hardware device, a cartridge filled with insulin by the user, and an infusion set to administer insulin into the person’s body. This system is known as a durable pump. By comparison, patch insulin pumps are disposable and adhere to the body without an infusion set.
Insulin pump therapy can provide benefit to a person with insulin-dependent diabetes when used independently or in conjunction with CGM, which is a therapy that provides users with real-time access to their glucose levels as well as trend information. In addition, insulin pumps may feature an AID algorithm that is designed to automatically adjust a person’s insulin delivery based on their CGM trends and other factors to help minimize the frequency and/or duration of hypoglycemia and/or hyperglycemic events. Insulin pumps may also feature connectivity with mobile apps and data management applications, which are used by the pump user, their caregivers and their healthcare providers, to quickly and easily identify meaningful insights and trends, allowing them to refine therapy and lifestyle choices for better management of their diabetes.
The American Diabetes Association estimated that in 2015, between 750,000 and 1 million people worldwide used an insulin pump. Domestically, we estimate that 600,000 people in the United States use an insulin pump. There are a variety of insulin pump manufacturers worldwide, while domestically, we are currently one of only two commercial durable insulin pump manufacturers and there is one programmable commercial patch insulin pump manufacturer.
We believe that the distinct advantages and increased awareness of insulin pump therapy as compared to other available insulin therapies will continue to generate demand for insulin pump devices and pump-related supplies. We further believe that recent and ongoing developments in the use of CGM technology and AID algorithms in conjunction with insulin pump therapy will continue to provide people with insulin-dependent diabetes benefits that will make insulin pump therapy an even more attractive treatment alternative.
Our Technology: Improving the Lives of People with Diabetes
We develop our insulin pump technology and related product offerings using a consumer-focused approach. We initially rely on the use of behavioral sciences, including extensive research to ascertain what people with insulin-dependent diabetes require and prefer from their diabetes therapy. We then look to modern consumer technology for inspiration and design our hardware and software solutions to meet the specific demands of people with diabetes. This multi-step approach has resulted in products that provide users with the distinct features and functionality they seek and in a manner that makes the features usable and intuitive.
Since our initial commercial launch, we have been able to rapidly innovate and bring more products to market than our competitors. We have commercially launched seven insulin pumps since inception, all of which have been developed using our proprietary technology platform. The following table provides information regarding the commercial availability of our insulin pump products:
Product | U.S. Commercial Availability | OUS Commercial Availability | ||
t:slim | August 2012 - October 2016 | N/A | ||
t:flex | May 2015 - June 2018 | N/A | ||
t:slim G4 | September 2015 - August 2017 | N/A | ||
t:slim X2 | October 2016 - September 2017 | N/A | ||
t:slim X2 with G5 | September 2017 - August 2018 | September 2018 - present (varies by geography) | ||
t:slim X2 with Basal-IQ technology | August 2018 - present | September 2019 - present (varies by geography) | ||
t:slim X2 with Control-IQ technology | January 2020 - present | Launch goal: 2H 2020* (to vary by geography) | ||
*Subject to regulatory approvals and other factors
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Today, our commercial efforts exclusively focus on the manufacturing, sale and support of our flagship pump platform, the t:slim X2 insulin delivery system, but we continue to provide ongoing service and support to existing t:slim, t:slim G4 and t:flex customers. The t:slim X2 insulin delivery system is comprised of a t:slim X2 pump, its 300-unit disposable insulin cartridge and an infusion set. It is also the only commercially available insulin pump featuring optional integration with Dexcom’s CGM.
Our t:slim X2 Insulin Pump Form Factor (Actual Size)
t:slim X2 Insulin Pump: Our t:slim X2 was designed to offer greater ease of use and look more like other modern consumer technology, such as a smart phone, as compared to other traditional insulin pumps. Key features include:
• | Color touchscreen - The large color touchscreen is easy to read, simple to learn, and intuitive to use for anyone familiar with a smartphone or tablet. |
• | Small and discreet - The t:slim X2 pump is up to 38 percent smaller than other pumps, yet can hold up to 300-units of insulin. |
t:slim X2 Profile (Actual Size)
• | Flexible technology - Can be used with or without automated insulin delivery or CGM - When advanced features are turned off, the t:slim X2 pump removes the CGM chart from the screen and puts the Bolus and Option buttons front and center for easy access. We currently offer integration with Dexcom’s G5 or G6 sensor, depending on geography. |
• | AID features (availability varies by geography) - We have commercially launched two different AID algorithms on our t:slim X2 platform - Basal-IQ technology and Control-IQ technology. |
◦ | Basal-IQ technology: This predictive low glucose suspend feature is designed to temporarily suspend insulin delivery to help reduce the frequency and duration of hypoglycemic events. With Dexcom G6 CGM integration, this feature works with no fingersticks required for mealtime dosing or calibration. |
◦ | Control-IQ technology: This advanced hybrid-closed loop feature is designed to help increase a user's time in targeted glycemic range (70-180 mg/dL). It is the first and only system cleared to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar. Control-IQ technology is integrated with Dexcom’s G6 CGM and offers optional settings for sleep and exercise that change the treatment values to better match the different physiological needs during these activities. |
• | Connectivity - Features a two-way Bluetooth wireless technology radio for communicating with more than one external device at a time. It also features a micro-USB connection that supports charging the lithium-polymer battery, software updates and rapid data uploads. |
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Tandem Device Updater: A revolutionary tool that allows pump users to update their pumps’ software quickly and easily from a personal computer. It is PC- and Mac- compatible and designed to work with the t:slim X2 in a manner similar to software updates on a smartphone. Because remote updatability for insulin pump software is a unique feature not available in competitive pump offerings, the Tandem Device Updater provides our customers with the capability to access new and enhanced features and functionality faster than the industry has been able to in the past. It was cleared by the FDA in the third quarter of 2016 and launched outside the United States in the third quarter of 2019. We have used this technology to offer in-warranty t:slim customers in the United States four different software updates for no-cost, including Basal-IQ technology, and most recently Control-IQ technology. Outside the United States we began offering no-cost software updates for Basal-IQ technology in the third quarter of 2019 and intend to begin offering Control-IQ technology updates in select geographies in the second half of 2020, subject to regulatory approvals and other factors.
t:connect: Our web-based data management application provides users, their caregivers and their healthcare providers with a fast, easy and visual way to display diabetes therapy management data from our pumps and supported blood glucose meters. This application empowers people with diabetes, as well as their caregivers and healthcare providers, to quickly and easily identify meaningful insights and trends, allowing them to refine therapy and lifestyle choices for better management of their diabetes. It also provides us with valuable data that we can analyze computationally to reveal patterns, trends and associations that can be used in continuous product improvements, and identification of clinical outcomes data. t:connect launched in the United States in the third quarter of 2013. In 2017, we launched t:connect HCP, which is an enhanced version of t:connect designed to simplify the ability of pump users to share t:connect data with their healthcare providers. We also plan to launch our new mobile application that when used with Control-IQ technology, is designed to wirelessly upload pump data to t:connect, receive notification of pump alerts and alarms, and provide a discrete, secondary display of glucose and insulin data. We believe t:connect can serve as a key component of additional mobile health applications that are currently under development. t:connect and t:connect HCP are currently not available to users or healthcare providers outside the United States.
Our Strategy
Enabled by our singular focus on diabetes management, our goal is to lead in insulin therapy management by building a robust ecosystem and portfolio of data-driven products and services around our flagship insulin pumps. We believe we are uniquely positioned to significantly expand and further penetrate the insulin-dependent diabetes market by focusing on the needs of our customers and their caregivers, and by supporting healthcare providers and payors with real world insights.
To achieve our goal, we intend to pursue the following business strategies:
• | drive worldwide adoption of our products by offering the best insulin delivery systems; |
• | deliver a portfolio of therapy management solutions designed to improve patient outcomes; |
• | expand the value provided by our portfolio through an ecosystem approach to diabetes management; |
• | build deeper relationships with all stakeholders across multiple channels, including virtual and tele-health platforms; |
• | leverage our manufacturing operations to achieve cost and production efficiencies; |
• | use data in new ways that deliver real-world insights and that promote better outcomes; and |
• | identify new offerings that support our mission to improve the lives of people with diabetes. |
Products Under Development
Our products under development support our strategy of developing insulin delivery systems as part of a therapy management portfolio designed to improve patient outcomes, and include AID system enhancements, a next-generation hardware platform, and connected (mobile) health offerings.
t:sport Insulin Delivery System: Our Next-Generation Hardware Platform
Our next-generation hardware platform is referred to under its development name, the t:sport Insulin Delivery System, or t:sport. The t:sport pump is half the size of t:slim X2 and is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump. We anticipate that t:sport will feature a 200-unit cartridge, an on-pump bolus button, a rechargeable battery, an AID algorithm, and a Bluetooth radio. t:sport is being designed for use with leading U-100 insulins, and we are evaluating the use of insulin concentrates for people with greater insulin needs. t:sport will utilize a pumping mechanism that differs from our current Micro-Delivery technology used in the t:slim pump platform.
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t:sport Shown with Mobile App Controller
Based on the FDA’s feedback, we are designing the product so that it will have the technical capability to be controlled using either a dedicated controller or our mobile device application. We expect that each of these functionalities will require separate regulatory reviews by the FDA. We plan to first pursue FDA authorization for t:sport as an ACE pump in 2020 and to thereafter submit for regulatory approvals outside the United States. We are designing t:sport to be compatible with our AID algorithms and any available iCGM.
Connected (Mobile) Health Offerings
We are preparing for the launch of a mobile application that has been designed to wirelessly upload pump data to our t:connect database management application, receive notification of pump alerts and alarms, and provide a discrete, secondary display of pump therapy data. Future updates of this app are expected to integrate other health-related information from third party sources and, subject to future regulatory approvals, support future pump-control capabilities for t:slim X2 and other products under development. The launch of the first generation of this app in the United States follows the availability of our Control-IQ technology. We also expect the wireless upload of data to the t:connect database will reduce patient burden and increase healthcare provider office efficiency by reducing the manual steps historically required for data extraction.
Sales, Marketing and Customer Care
In 2019, we expanded the number of territories in our U.S. sales organization from approximately 70 to approximately 90 by year-end. The vast majority of these territories are supported by a sales representative and a clinical diabetes specialist who, as a team, call on domestic endocrinologists, nurse practitioners, primary care physicians, certified diabetes educators and potential customers. Where appropriate, some territories are supported by multiple clinical diabetes specialists. Our U.S. sales team is augmented by individuals in our internal customer sales support organization, who follow up on leads generated through promotional activities and educate people on the benefits of our proprietary technology and products.
Our internal customer sales support organization also contacts existing customers who are approaching their insurance renewal date to aid in the renewal process. Our goal is for at least 70% of our existing customers to purchase a new pump from us when making their next pump purchasing decision. Typically, domestic customers are eligible for insurance reimbursement to purchase a new insulin pump once every four years; however, some plans may be limited to once every five years or have additional restrictions or requirements. Insurance reimbursement processes outside the United States vary by geography. As our market penetration continues to build momentum, and as we launch new products into the market, we plan to further expand our sales, clinical and marketing infrastructure in the United States. However, only modest territory optimizations and expansions are anticipated in 2020.
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In Canada, we established a small direct sales and clinical infrastructure, and commenced marketing and sales efforts following Health Canada approval of the t:slim X2 with G5 integration in October 2018. In November 2019, we received Health Canada approval for the t:slim X2 with Basal-IQ technology. Throughout 2019, we also secured reimbursement in the majority of Canadian provinces, and these efforts will continue in 2020.
In other select geographies outside the United States, our initial efforts focused on the identification and contracting of distributors in areas where we believe there is a meaningful opportunity to achieve market acceptance of our t:slim X2 insulin pump. We began our scaled launch in the third quarter of 2018 after obtaining the right to affix the CE Mark to the t:slim X2 with G5 integration and following the completion of pre-launch activities, such as translating our pump software and user manual, and completing distributor sales and customer service trainings. Unlike our domestic operations, our international distributors (other than in Canada) have substantially greater responsibility for sales, marketing and customer support efforts. Our international distributors in 2019 covered several geographies including: Australia, Italy, New Zealand, Scandinavia (Denmark, Norway and Sweden), South Africa, Spain, and the United Kingdom. In 2020, our international distributors will also cover Germany, France, Belgium, Luxembourg and the Netherlands.
Revenue Concentrations and Significant Customers. A small number of independent domestic distributors have historically accounted for a significant portion of our revenues. During the year ended December 31, 2019, we made sales to approximately 43 independent distributors in the United States, and 12 independent distributors internationally. In fiscal 2019, sales to Byram Healthcare and RGH Enterprises, Inc. accounted for 15.4% and 14.8% of consolidated sales, respectively. In fiscal 2018, sales to RGH Enterprises, Inc. and Byram Healthcare accounted for 19.4% and 15.6% of consolidated sales, respectively. None of our independent distributors in the United States are required to sell our products exclusively and each of them may freely sell the products of our competitors. Our distributor agreements in the United States generally have one-year initial terms with automatic one-year renewal terms and are terminable in connection with a party’s material breach. Our distributor agreements outside the United States generally have longer initial terms and, in addition to being terminable in connection with a party’s material breach, include provisions that allow us to terminate those agreements prior to their ordinary expiration in exceptional circumstances. We believe our domestic distributors carry minimal inventory at any given time. Internationally, there may be variability in inventory levels among our distributors, particularly when they first commence product sales or surrounding the launch of new products.
Animas. In October 2017, Johnson & Johnson announced that it was discontinuing the operations of Animas, and exiting the insulin pump business entirely, and, in connection with these activities, designated Medtronic as a preferred partner to facilitate the transition of Animas insulin pump customers. Throughout 2018 and 2019 we experienced an increase in our percentage of sales to people who reported converting from using an Animas pump. Animas pump supplies were no longer available for customers to purchase after September 2019. Accordingly, we believe that the vast majority of Animas pump users have transitioned to an alternative pump, and that remaining Animas pump users will likely switch in 2020 as they use up their remaining supplies.
Outside the United States, many of our international distributors had existing relationships with Animas customers and were motivated to keep those individuals as existing customers by replacing Animas pumps with our t:slim X2 as opportunities arose. We believe the benefit from the Animas opportunity outside the U.S. was substantially realized by end of the second quarter of 2019.
Training and Customer Care. Our customer care infrastructure, which services the United States and Canada, consists of individuals focused on training, insurance verification and 24/7 technical services. Our goal is to offer best-in-class customer support and services as these offerings are often viewed by people with diabetes and their healthcare providers equally as important as the products we offer. In 2019, we opened a facility in Boise, Idaho to begin scaling our customer care organization outside of San Diego. This has allowed us to hire talented service employees more quickly than we would have been able to in San Diego at a lower cost of operations, which provides further leverage to our infrastructure. During 2020 we expect to expand our customer care infrastructure, including investments in facilities, technology and personnel, to meet the needs of our larger base of in-warranty customers. We also provide training to our distribution partners who fulfill their customer care responsibilities outside the United States.
Third-Party Reimbursement
In the United States, customer orders are typically fulfilled by billing third-party payors on behalf of our customers, or by utilizing our network of distributors who then bill third-party payors on our customers’ behalf. Our fulfillment and reimbursement systems are fully integrated such that our products are shipped only after receipt of a valid physician’s order and verification of current health insurance information.
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We are accredited by the Community Health Accreditation Program and are an approved Medicare provider. Over the last ten years, Medicare reimbursement rates for insulin pumps and disposable cartridges have remained relatively unchanged. Domestically, we primarily bill for our insulin pump products and associated supplies using existing Healthcare Common Procedure Coding System codes for which Medicare reimbursement is well established. However, pump eligibility criteria for people with type 2 diabetes can be different and often requires additional documentation and laboratory testing to gain in-network insurance reimbursement benefits.
We enter into contracts with national and regional third-party payors to establish reimbursement for our insulin pump products, disposable cartridges and other related supplies. We employ a team of managed care managers who are responsible for negotiating and securing contracts with third-party payors throughout the United States. For the year ended December 31, 2019, approximately 27% of our sales in the United States were generated through our direct third-party payor contracts.
If we are not contracted with a person’s third-party payor and in-network status cannot be otherwise obtained, then to the extent possible we utilize distribution channels so our customers’ orders can be serviced. As of December 31, 2019, we had executed distributor agreements with approximately 43 independent distributors in the United States. In some cases, but not all, this network of distributors allows us to access people who are covered by commercial payors with whom we are not contracted, at in-network rates that are generally more affordable for our customers. However, UnitedHealthcare designated one of our competitors as their preferred, in-network durable medical equipment provider of insulin pumps for most customers over seven years of age. Unless UnitedHealthcare implements a change to its coverage policies for insulin pumps, we expect this decision will prevent a majority of UnitedHealthcare members from purchasing our insulin pump , whether directly from us or through our network of distributors.
Our distribution partners outside the United States and Canada are responsible for all reimbursement, tender application and fulfillment activities.
Manufacturing and Quality Assurance
Historically, we have manufactured our pump and disposable cartridge products at our Barnes Canyon facility in San Diego, California. In 2020, we anticipate outsourcing a portion of our cartridge manufacturing to an experienced third-party contract manufacturer to provide us additional flexibility in scaling our business while creating additional leverage. In 2019, we made capital expenditure investments for the expansion of warehousing capacity and ordered additional manufacturing equipment for implementation in 2020. We anticipate these investments will allow us to double our cartridge manufacturing capacity from 2019 to 2020, without meaningfully increasing the cost of overhead associated with our manufacturing facilities. We believe these investments position us well to achieve our long-term gross margin targets.
We currently utilize a semi-automated manufacturing process for our pump products and disposable cartridges. The pump production line reaches a maximum output of approximately 30,000 pumps per year on a single shift. In 2019, we scaled from two to three pump manufacturing lines and currently have the capacity to produce approximately 180,000 pumps annually. Disposable cartridges are manufactured on a production line that reaches a maximum output of approximately one million cartridges per year on a single standard eight-hour shift. In 2019, we had four cartridge manufacturing lines and improved the efficiency of our disposable cartridge manufacturing process, which provided us capacity to build 16 million units annually. We also began investing in three additional cartridge manufacturing lines that will become operational at our third-party manufacturing location. When fully operational, we believe our seven cartridge manufacturing lines can support an installed base of more than 250,000 customers.
Outside suppliers are the source for most of the components and some sub-assemblies in the production of our insulin pumps. Any sole and single source supplier is managed through our supplier management program that is focused on reducing supply chain risk. Our suppliers are evaluated, approved and monitored periodically by our quality department to ensure conformity with the specifications, policies and procedures applicable to our devices. Members of our quality department also inspect our devices at various steps during the manufacturing cycle to facilitate compliance with our devices’ stringent specifications.
We have received certification from BSI Group, a Notified Body to the International Standards Organization, or ISO, of our quality system. Certain processes utilized in the manufacturing and testing of our devices have been verified and validated as required by the FDA and other regulatory bodies. As a medical device manufacturer, our manufacturing facility and the facilities of our sterilization and other critical suppliers are subject to periodic inspection by the FDA and certain corresponding state agencies.
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Research and Development
Our research and development team includes employees who specialize in software engineering, mechanical engineering, electrical engineering, fluid dynamics, mobile connectivity and graphical user interface design, many of whom have considerable experience in diabetes-related products. Our research and development team focuses on the continuous improvement and support of current product offerings, as well as our products under development.
In June 2015, we entered into non-exclusive agreements with Dexcom to allow the integration of our insulin pump products with the Dexcom G5 and G6 CGM systems worldwide. Each agreement has an initial term of five years, and thereafter renew automatically for additional one-year terms unless either party provides advance notice to the other party that they do not wish to extend the agreement. The agreements do not require any licensing fees, milestone payments or royalty obligations to Dexcom. The agreements contain customary provisions for termination in the event of an uncured material breach or in the event of a dissolution of the other party, and prohibit our assignment of the agreements to a Dexcom competitor without Dexcom’s prior consent.
In 2016, we entered into a worldwide, non-exclusive, royalty-bearing license agreement with TypeZero to allow the integration of our insulin pump products with TypeZero’s inControl AID technology. The agreement also provides us access to TypeZero’s future AID innovations for five years following the date of the agreement. In addition, the license agreement contemplated that our insulin pump products would be used alongside TypeZero’s AID technology in certain studies under the International Diabetes Closed Loop (IDCL) Trial, which are now completed. In August 2018, TypeZero was acquired by Dexcom. Nevertheless, the terms of our agreement with TypeZero remain effective until the patents covered by the agreement have expired, subject to customary provisions for termination in the event of an uncured material breach.
In October 2019, we and Abbott Laboratories, or Abbott, announced that we intend to develop and commercialize integrated diabetes solutions that combine Abbott's glucose sensing technology with Tandem's innovative insulin delivery systems to provide additional treatment options for people with insulin-dependence to manage their diabetes. These development and commercialization plans are contingent on the negotiation of a definitive agreement, and while the parties are currently exploring a business relationship, there can be no assurance that an agreement will be reached or that any agreement will be on the terms that are currently being discussed.
Intellectual Property
We have made protection of our intellectual property a strategic priority. We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property laws, non-disclosure agreements and other measures to protect our proprietary rights.
As of December 31, 2019, our patent portfolio consisted of approximately 86 issued U.S. patents and 68 pending U.S. patent applications. Of these, our issued U.S. patents expire between approximately 2021 and 2036. We are also seeking patent protection for our proprietary technology in other countries throughout the world. In addition, we also have 39 trademark registrations, including 16 U.S. trademark registrations and 23 foreign trademark registrations.
In July 2012, we entered into an agreement with Smiths Medical, Inc. pursuant to which we were granted, through certain assignments and certain non-exclusive and exclusive, worldwide, fully paid-up, royalty-free licenses, certain rights to patents and patent applications related to ambulatory infusion pumps and related software and accessories for the treatment of diabetes. We agreed to pay $5.0 million in license fees and to share equally any associated sublicense revenues we may receive. As of December 31, 2019, we had paid the initial license fees in full and have not entered into any sublicense agreements.
Competition
The medical device industry is intensely competitive, subject to rapid change and highly sensitive to the introduction of new products, treatment techniques or technologies, or other market activities of industry participants. We compete in domestic and international markets with a number of companies that manufacture insulin delivery devices, such as Medtronic MiniMed, a division of Medtronic, and Insulet Corporation. In late 2017, Eli Lilly & Co. announced that it was developing an insulin pump with AID technology, and there are several other companies that are currently marketing insulin pump products in international markets. In addition, we face competition from a number of companies, medical researchers and existing pharmaceutical companies that are pursuing new delivery devices, delivery technologies, sensing technologies, procedures, drugs and other therapeutics for the monitoring, treatment and prevention of diabetes.
For additional information, see the section of this Annual Report under the caption “Risk Factors” in Part I, Item 1A.
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Government Regulation
Our products are medical devices subject to extensive regulation by the FDA in the United States, corresponding state regulatory authorities and other regulatory bodies in other countries. The U.S. Federal Food, Drug, and Cosmetic Act, (FDCA) and the FDA’s implementing regulations govern:
• | product design and development; |
• | pre-clinical and clinical testing; |
• | establishment registration and product listing; |
• | product manufacturing; |
• | labeling and storage; |
• | pre-market clearance or approval; |
• | advertising and promotion; |
• | product sales and distribution; |
• | recalls and field safety corrective actions; and |
• | servicing and post-market surveillance. |
FDA’s Pre-Market Clearance and Approval Requirements. Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the United States will require either a pre-market notification under Section 510(k) of the FDCA, also referred to as a 510(k) clearance, or approval from the FDA through the Premarket Approval, or PMA, process. Both the 510(k) clearance and PMA processes can be expensive, lengthy and require payment of significant user fees, unless an exemption is available.
The FDA classifies medical devices into one of three classes. Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are subject to general controls such as labeling, pre-market notification and adherence to the FDA’s Quality System Regulation, or QSR, which cover manufacturers’ methods and documentation of the design, testing, production, control quality assurance, labeling, packaging, sterilization, storage and shipping of products. Class II devices are subject to special controls such as performance standards, post-market surveillance, FDA guidelines, or particularized labeling, as well as general controls. Some Class I and Class II devices are exempted by regulation from the 510(k) clearance requirement, and the requirement of compliance with substantially all of the QSR. t:slim, t:flex, t:slim X2, t:slim X2 with Control-IQ technology and t:connect received FDA clearance as Class II devices. However, t:connect was subsequently down-classified to a Class I device. A PMA application is required for devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or certain implantable devices, or those that are “not substantially equivalent” either to a device previously cleared through the 510(k) process or to a “preamendment” Class III device in commercial distribution before May 28, 1976 when PMA applications were not required. t:slim G4 and t:slim X2 with G5 integration, and t:slim X2 with Basal-IQ technology received FDA approval as Class III devices.
There are three new Class II categories classified by the FDA for the interoperability of devices as a complete AID system that are intended to help support continued rapid innovation by streamlining the regulatory pathway for integrated products approved by the FDA. In June 2018, our t:slim X2 with Basal-IQ technology was the first insulin pump to receive approval for iCGM compatibility. In February 2019, we received FDA approval of our De Novo application to classify the t:slim X2 to a Class II device, under the new insulin pump classification referred to as ACE pumps. Most recently, in December 2019 we received FDA approval of our De Novo application to classify our Control-IQ technology as the first automated insulin dosing software in a new interoperable automated glycemic controller category that automatically adjusts insulin delivery to a person with diabetes by connecting to an ACE pump and iCGM. In connection with the De Novo applications for both the ACE pump and the interoperable automated glycemic controller category the FDA also established certain special controls that we will need to continue to satisfy. If we are not able to satisfy those special controls, we would be required to seek approval for those products under the traditional PMA submission process.
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For Class III devices a PMA application must be supported by valid scientific evidence that typically includes extensive technical, pre-clinical, clinical, manufacturing and labeling data to demonstrate to the FDA’s satisfaction the safety and efficacy of the device. A PMA application also must include a complete description of the device and its components, a detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling. After a PMA application is submitted and found to be sufficiently complete, the FDA begins an in-depth review of the submitted information. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA. In addition, the FDA generally will conduct a pre-approval inspection of the manufacturing facility to evaluate compliance with QSR, which requires manufacturers to implement and follow design, testing, control, documentation and other quality assurance procedures.
FDA review of a PMA application generally takes approximately one year but may take significantly longer. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
• | systems may not be safe or effective to the FDA’s satisfaction; |
• | the data from pre-clinical studies and clinical trials may be insufficient to support approval; |
• | the manufacturing process or facilities may not meet applicable requirements; and |
• | changes in FDA approval policies or adoption of new regulations may require additional data. |
If an FDA evaluation of a PMA application is favorable, the FDA will issue either an approval letter, or approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of a device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not-approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved by the FDA for marketing.
New PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling, device specifications, materials or design of a device that has been approved through the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the approved PMA application and may or may not require as extensive technical or clinical data or the convening of an advisory panel.
Clinical trials are typically required to support a PMA application and are sometimes required for a 510(k) clearance. These trials generally require submission of an application for an Investigational Device Exemption, or IDE, to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for abbreviated IDE requirements. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate institutional review boards at the clinical trial sites. The FDA’s approval of an IDE allows clinical testing to go forward, but it does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if the trial meets its intended success criteria. All clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern investigational device labeling, prohibit promotion, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. Clinical trials must further comply with the FDA’s regulations for institutional review board approval and for informed consent and other human subject protections. Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product. The commencement or completion of any clinical trial may be delayed or halted, or be inadequate to support approval of a PMA application, for numerous reasons, including, but not limited to, the following:
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• | the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold; |
• | patients do not enroll in clinical trials at the rate expected; |
• | patients do not comply with trial protocols; |
• | patient follow-up is not at the rate expected; |
• | patients experience adverse side effects; |
• | patients die during a clinical trial, even though their death may not be related to the products that are part of our trial; |
• | institutional review boards and third-party clinical investigators may delay or reject the trial protocol; |
• | third-party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule or consistent with the clinical trial protocol, good clinical practices or other FDA requirements; |
• | we or third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol or investigational or statistical plans; |
• | third-party clinical investigators have significant financial interests related to us or our study that the FDA deems to make the study results unreliable, or the company or investigators fail to disclose such interests; |
• | regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials; |
• | changes in governmental regulations or administrative actions; |
• | the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; and |
• | the FDA concludes that our trial design is inadequate to demonstrate safety and efficacy. |
Other Regulatory Requirements. Even after a device receives clearance or approval and is placed in commercial distribution, numerous regulatory requirements apply. These include:
• | establishment registration and device listing; |
• | QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, production, control, supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during all aspects of the manufacturing process; |
• | labeling regulations that prohibit the promotion of products for uncleared, unapproved or “off-label” uses, and impose other restrictions on labeling, advertising and promotion; |
• | the FDA’s Medical Device Reporting, or MDR regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; |
• | voluntary and mandatory device recalls to address problems when a device is defective and could be a risk to health; and |
• | corrections and removals reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health. |
Also, the FDA may require us to conduct post-market surveillance studies or establish and maintain a system for tracking our products through the chain of distribution to the patient level. We are currently in the planning phases for a post-market surveillance study for our t:slim X2 with Control-IQ technology. The FDA and the Food and Drug Branch of the California Department of Health Services enforce regulatory requirements by conducting periodic, unannounced inspections and market surveillance. Inspections may include the manufacturing facilities of our subcontractors.
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In general, failure to comply with applicable regulatory requirements can result in enforcement actions by the FDA and other regulatory agencies. These may include any of the following sanctions or consequences:
• | warning letters or untitled letters that require corrective action; |
• | fines and civil penalties; |
• | unanticipated expenditures; |
• | delays in approving or refusal to approve future products; |
• | FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; |
• | suspension or withdrawal of FDA clearance or approval; |
• | product recall or seizure; |
• | interruption of production; |
• | operating restrictions; |
• | injunctions; and |
• | criminal prosecution. |
We and our contract manufacturers, specification developers and some suppliers of components or device accessories, are required to manufacture our products in compliance with current Good Manufacturing Practice, or GMP, requirements set forth in the QSR. The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and it includes extensive requirements with respect to quality management and organization, device design, buildings, equipment, purchase and handling of components or services, production and process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing, and record keeping. The FDA evaluates compliance with the QSR through periodic unannounced inspections that may include the manufacturing facilities of our subcontractors. If the FDA believes that we or any of our contract manufacturers, or regulated suppliers, are not in compliance with these requirements, it can shut down our manufacturing operations, require recall of our products, refuse to approve new marketing applications, institute legal proceedings to detain or seize products, enjoin future violations or assess civil and criminal penalties against us or our officers or other employees.
Licensure. In the United States, several states require that durable medical equipment, or DME, providers be licensed in order to sell products to patients in that state. Some of these states require that DME providers maintain an in-state location or retain a licensed pharmacist, and in those states, we sell our products through a third-party distributor. Although we believe we are in material compliance with applicable state regulations regarding licensure requirements, if we were found to be noncompliant, we could be subject to fines and penalties or lose our licensure in that state, which could prohibit us from selling our current or future products to patients in that state. In addition, we are subject to certain state laws regarding professional licensure. We believe that our certified diabetes educators are in material compliance with such state laws. However, if our educators or we were to be found non-compliant in a given state, we may need to modify our approach to providing education, clinical support and customer service.
Fraud and Abuse Laws. There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including the federal Anti-Kickback Statute and the Physician Self-Referral Law, or the Stark Law, the federal civil False Claims Acts, the federal criminal Health Care Fraud Statute, as well as various state laws regulating healthcare. Our relationships with healthcare providers and other third parties are subject to scrutiny under these laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs.
Federal Anti-Kickback Statue. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual, or the furnishing, recommending, or arranging of a good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid.
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We provide the initial training to customers necessary for appropriate use of our products either through our own diabetes educators or by contracting with outside diabetes educators who have completed a Tandem pump-training course. Outside diabetes educators are reimbursed for their services at fair market value. Although we believe that these arrangements do not violate the Anti-Kickback Statute, regulatory authorities may determine otherwise, especially as enforcement of this law historically has been a high priority for the federal government. Noncompliance with the federal Anti-Kickback Statute could result in our exclusion from Medicare, Medicaid or other governmental programs (which could adversely affect our revenues to a material extent), restrictions on our ability to operate in certain jurisdictions, and civil and criminal penalties.
Physician Self-Referral Law. The Stark Law prohibits a physician from referring Medicare or Medicaid patients to an entity providing “designated health services,” including a company that furnishes durable medical equipment, if the physician has a financial relationship with the company. In addition to statutory exceptions, the Centers for Medicare and Medicaid Services (CMS), has issued numerous regulatory exceptions to the Stark Law. Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant arrangement, civil penalties, and exclusion from Medicare, Medicaid or other governmental programs. Although we believe that we have structured our provider arrangements to comply with current Stark Law requirements, these arrangements may not expressly meet the requirements for applicable exception from the law.
Federal False Claims Act. The federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. In addition, amendments in 1986 to the False Claims Act have made it easier for private parties to bring “qui tam” whistleblower lawsuits under the act. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, pay fines and/or be excluded from Medicare, Medicaid or other federal or state healthcare programs as a result of an investigation arising out of such action.
We submit reimbursement claims to federal healthcare programs, and we also may provide some coding and billing information to purchasers of our devices. These activities, if inappropriate, could result in liability under the False Claims Act. Further, claims arising from relationships which violate the Anti-Kickback Statute are considered to be false claims under the False Claims Act. Liability under the False Claims Act may also attach to claims arising from financial relationships which violate the Stark Law. We believe that we currently are in material compliance with the federal government’s laws and regulations concerning the submission of claims and the provision of coding and billing information. However, because we cannot guarantee that the government or qui tam relators will regard any billing errors that may be made as inadvertent, or our provider relationships as compliant, we may have exposure under the False Claims Act.
Federal Health Care Fraud Statutes. We are also subject to a federal health care fraud statute that, among other things, imposes criminal and civil liability for executing a scheme to defraud any health care benefit program including non-governmental programs, and prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false or fraudulent statement or representation, or making or using any false writing or document with knowledge that it contains a materially false or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services.
State Fraud and Abuse Provisions. Many states have also adopted some form of anti-kickback and anti-referral laws and false claims acts. We believe that we are in material conformance to such laws. Nevertheless, a determination of liability under such laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.
Data Privacy and Information Security Laws and Regulations. t:connect data is hosted on secure servers and our use of t:connect data is subject to internal policies and procedures that are designed to comply with the federal U.S. Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as applicable U.S state privacy laws (including, but not limited to, the California Consumer Privacy Act). Although t:connect and t:connect HCP are not currently available to users or healthcare providers outside the United States, we are also mindful of requirements under Canada’s Personal Information Protection and Electronic Documents Act, referred to as PIPEDA, and similar provincial laws, and the E.U. General Data Protection Regulation, commonly known as GDPR, and similar E.U. member state laws. Collectively, these laws and regulations set standards for safeguarding the confidentiality, integrity, and availability of the personal information we collect and use from customers and healthcare providers. These laws also require, among other things, that we are transparent about how we collect and share personal data and that we give t:connect users the ability to know what data we are collecting about them, to obtain a copy of that data, to correct or amend that data, and to request we restrict use of that data.
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Healthcare Fraud. In addition to information security and data privacy obligations, HIPAA also created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment. We believe we are in substantial compliance with these provisions of HIPAA.
Physician Payments Sunshine Act. The Physician Payments Sunshine Act requires certain manufacturers, including medical device manufacturers, to submit annual data pertaining to payments or other transfers of value to covered recipients, including physicians. Manufacturers may be subject to audit for their compliance with this law. Failure to submit the required data in an accurate and timely manner may result in the imposition of civil monetary penalties. We believe we are in substantial compliance with the Physician Payments Sunshine Act.
Anti-Bribery and Anti-Corruption Laws. The U.S. Foreign Corrupt Practices Act, or the FCPA, and similar laws in foreign jurisdictions generally prohibit U.S. corporations and their representatives from offering, promising, authorizing or making improper payments, gifts or transfers to any foreign government official in order to obtain or retain business. The scope of the FCPA would include interactions with certain healthcare professionals and hospital administrators in many countries. We believe we are in substantial compliance with the FCPA and similar foreign regulations.
International Regulation
International sales of medical devices are subject to local government regulations, which vary substantially from country to country. The time required to obtain approval in another country may be longer or shorter than that required for FDA approval, and the requirements may differ. There is a trend towards harmonization of quality system standards among the European Union, United States, Canada and various other industrialized countries.
The primary regulatory body in Europe is that of the European Union, which includes most of the major countries in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body.” This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s product. An assessment by a Notified Body of one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. Additional local requirements may apply on a country-by-country basis. Outside of the European Union, regulatory approval would need to be sought on a country-by-country basis in order for us to market our products.
Employees
As of December 31, 2019, we had 1,043 full-time employees. None of our employees are represented by a collective bargaining agreement, and we have never experienced any work stoppage. We believe we have good relations with our employees.
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Executive Officers
Kim D. Blickenstaff (age 67) has served as Executive Chairman of our board of directors since March 2019, and previously served as President and Chief Executive Officer from September 2007 to March 2019. Mr. Blickenstaff has served as one of our directors since September 2007. We recently announced that Mr. Blickenstaff will transition to the role of Chairman of our board of directors in March 2020. Prior to joining our company, he served as Chairman and Chief Executive Officer of Biosite Incorporated, or Biosite, a provider of medical diagnostic products, from 1988 until its acquisition by Inverness Medical Innovations, Inc. in June 2007. Mr. Blickenstaff previously served as a director of Medivation, Inc. (NASDAQ: MDVN), a biotechnology company, from 2005 to 2016, until its acquisition by Pfizer, and as a director of DexCom, Inc. (NASDAQ: DXCM), a provider of CGM systems, from June 2001 to September 2007. Mr. Blickenstaff was formerly a certified public accountant and has more than 20 years of experience overseeing the preparation of financial statements. He received a B.A. in Political Science from Loyola University, Chicago, and an M.B.A. from the Graduate School of Business, Loyola University, Chicago.
John F. Sheridan (age 64) has served as our President and Chief Executive Officer since March 2019 and as a member of our board of directors since June 2019. Mr. Sheridan previously served as Executive Vice President and Chief Operating Officer since April 2013. Prior to joining our company, Mr. Sheridan served as Chief Operating Officer of Rapiscan Systems, Inc., a provider of security equipment and systems, from March 2012 to February 2013. Mr. Sheridan served as Executive Vice President of Research and Development and Operations for Volcano Corporation, a medical technology company, from November 2004 to March 2010. From May 2002 to May 2004, Mr. Sheridan served as Executive Vice President of Operations at CardioNet, Inc., a medical technology company, now operating as BioTelemetry, Inc. (NASDAQ: BEAT). From March 1998 to May 2002, he served as Vice President of Operations at Digirad Corporation, a medical imaging company. Mr. Sheridan holds a B.S. in Chemistry from the University of West Florida and an M.B.A. from Boston University.
David B. Berger (age 50) has served as our Chief Legal and Compliance Officer since April 2019, as General Counsel since August 2013, as our Corporate Secretary since January 2015, and as our Executive Vice President since January 2016. From January 2008 until August 2013, Mr. Berger was employed at Senomyx, Inc., a taste science company, where he most recently served as Senior Vice President and General Counsel. He also served as Corporate Secretary of Senomyx from January 2008 until May 2014. From April 2003 until October 2007, Mr. Berger was responsible for all commercial aspects of legal affairs at Biosite, most recently serving as Vice President, Legal Affairs. Previously, Mr. Berger was an attorney at Cooley Godward LLP and Amylin Pharmaceuticals, Inc. Mr. Berger holds a B.A. in Economics from the University of California, Berkeley and a J.D. from Stanford Law School.
Brian B. Hansen (age 52) has served as our Executive Vice President and Chief Commercial Officer since February 2016. Prior to joining our company, Mr. Hansen served from September 2014 as Chief Commercial Officer of Adaptive Biotechnologies Corp. From May 2013 to September 2014, Mr. Hansen served as Head of Commercial, Sales and Marketing, of Genoptix, a Novartis Company. From December 2005 to February 2013, he served in various roles of increasing responsibility at Gen-Probe, Inc., a medical diagnostics company, most recently serving as Senior Vice President, Global Sales and Services from January 2012 to February 2013. Mr. Hansen received a B.S. in Business Administration from the University of Missouri-Columbia, and an M.B.A. from the School of Business at San Diego State University.
Elizabeth A. Gasser (age 44) has served as our Executive Vice President of Strategy and Corporate Development since January 2020. Prior to joining our company, Ms. Gasser served from June 2017 as an independent adviser providing strategic and corporate development solutions to boards and executive teams. From January 2016 to June 2017 she was Vice President of Corporate Strategy at QUALCOMM Technologies, Inc. (QTI), a subsidiary of QUALCOMM Incorporated (NASDAQ: QCOM), a global leader in the development and commercialization of technologies and products used in mobile devices and other wireless products. Prior to that, from November 2012 to January 2016 she was Vice President of Strategic Development at QTI, after serving in other strategic related roles of increasing responsibility beginning in 2006. Ms. Gasser holds a B.A. and an M.A. in Economics from the University of Cambridge.
Susan M. Morrison (age 40) has served as our Chief Administrative Officer since September 2013 and as an Executive Vice President since December 2017. From April 2013 until September 2013, she served as our Vice President, Human Resources, Corporate and Investor Relations. Ms. Morrison served as our Director, Corporate and Investor Relations, from January 2009 to March 2013, and was our Director, Corporate Services from November 2007 to December 2008. Prior to joining our company, Ms. Morrison held various positions in Corporate and Investor Relations at Biosite from August 2003 through November 2007. Ms. Morrison holds a B.A. in Public Relations from Western Michigan University.
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Leigh A. Vosseller (age 47) has served as our Executive Vice President, Chief Financial Officer, and Treasurer since June 2018, and served as Senior Vice President, Chief Financial Officer and Treasurer from January 2018 to May 2018. Ms. Vosseller is our principal financial and accounting officer. She joined us as Vice President of Finance in 2013 and was promoted to Senior Vice President of Finance in August 2017. Prior to that time, she served as Vice President and Chief Financial Officer at Genoptix, beginning in 2011, after initially joining Genoptix in 2008. Prior to that she held a senior finance position at Biosite where she played a key role in developing the financial and administrative infrastructure for international expansion. Ms. Vosseller is a certified public accountant (inactive) and holds a B.S. in Accounting from Missouri State University.
Family Relationships
Mr. Sheridan, our President and Chief Executive Officer, and Ms. Vosseller, our Executive Vice President, Chief Financial Officer and Treasurer, are involved in a personal relationship and share a primary residence. Ms. Vosseller reports directly to Mr. Sheridan. Our board of directors is informed of the relationship and due to the direct reporting arrangement, we have taken appropriate actions to ensure compliance with Company policies and procedures. Mr. Sheridan and Ms. Vosseller will not be involved in setting compensation or benefits for one another, which will continue to be determined by our Compensation Committee. In addition, our Audit Committee of the Board of Directors considered whether additional internal disclosure controls and procedures are appropriate in light of the circumstances and, as a result, certain additional internal controls were implemented during the year ended December 31, 2019.
Except as described above, there are no family relationships between any of our directors and executive officers.
Additional Information
We were incorporated in Colorado in January 2006 and reincorporated in Delaware in January 2008. Our website address is www.tandemdiabetes.com. We post links to our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, information statements, beneficial ownership reports and any amendments to those reports or statements filed or furnished pursuant to Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All such filings are available through our website free of charge. However, the information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address in this Annual Report are inactive textual references only.
Item 1A. | Risk Factors |
An investment in our common stock involves risks. You should carefully consider the risks described below, together with all of the other information included in this Annual Report, as well as in our other filings with the SEC, in evaluating our business. If any of the following risks actually occur, our business, financial condition, operating results and future prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline and you might lose all or part of your investment. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business, financial condition, operating results and prospects. Certain statements below are forward-looking statements. For additional information, see the section of this Annual Report under the caption “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to our Business and our Industry
We have incurred significant operating losses since inception and cannot assure you that we will achieve sustained profitability.
Since our inception in January 2006, we have incurred a significant net loss. As of December 31, 2019, we had an accumulated deficit of $624.8 million. To date, we have funded our operations primarily through private and public offerings of our equity securities, cash collected from sales of our products, and debt financing which has since been fully repaid. We have devoted substantially all of our resources to the design, development and commercialization of our products, the scaling of our manufacturing operations and commercial organization, the research and development of our current products and products under development, and the assembly of a management team to manage our business.
We began commercial sales of our first product, t:slim, in August 2012 and our flagship pump platform, t:slim X2, in October 2016. The t:slim X2 hardware platform now represents 100% of new pump shipments. Until the third quarter of 2018 we were only selling our products in the United States.
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Since the first quarter of 2013, we have been able to manufacture and sell our insulin pump products at a cost and in volumes sufficient to allow us to achieve a positive overall gross margin. For the years ended December 31, 2019 and 2018, our gross profit was $194.2 million and $89.8 million, respectively. Although we have achieved a positive overall gross margin and have substantially reduced our operating loss, we still operate at a net loss on an annual basis and expect that we may continue to do so for the foreseeable future.
To implement our business strategy and achieve consistent profitability, we need to, among other things, increase sales of our products and the gross profit associated with those sales, maintain an appropriate customer service and support infrastructure, fund ongoing research and development activities, create additional efficiencies in our manufacturing processes while adding to our capacity, and obtain regulatory clearance or approval to commercialize our products currently under development both domestically and internationally. We expect our expenses will continue to increase as we pursue these objectives and make investments in our business. Additional increases in our expenses without commensurate increases in sales could significantly increase our operating losses.
The extent of our future operating losses and the timing of our profitability are highly uncertain in light of a number of factors, including the timing of the launch of new products and product features by us and our competitors, market acceptance of our products and competitive products by people with insulin-dependent diabetes, their caregivers and healthcare providers, and the timing of regulatory approval of our products and the products of our competitors. Any additional operating losses will have an adverse effect on our stockholders’ equity, and we cannot assure you that we will be able to sustain profitability.
We currently rely on sales of insulin pump products to generate a significant portion of our revenue, and any factors that negatively impact sales of these products may adversely affect our business, financial condition and operating results.
We generate nearly all of our revenue from the sale of t:slim X2 insulin pumps and the related insulin cartridges and infusion sets. Sales of these products may be negatively impacted by many factors, including:
• | market acceptance of the insulin pumps and related products manufactured and sold by our key competitors, including Medtronic MiniMed, a division of Medtronic plc; |
• | the potential that breakthroughs for the monitoring, treatment or prevention of diabetes may render our insulin pumps obsolete or less desirable; |
• | adverse regulatory or legal actions relating to our products, or similar products or technologies of our competitors; |
• | failure of our Tandem Device Updater to accurately and timely provide customers with remote access to new product features and functionality as anticipated, or our failure to obtain regulatory approval for any such updates; |
• | changes in reimbursement rates or policies relating to insulin pumps or similar products or technologies by third-party payors, such as the decision by UnitedHealthcare that restricts a majority of its members from accessing our pumps; |
• | our inability to enter into contracts with third-party payors on a timely basis and on acceptable terms; |
• | problems arising from the expansion of our manufacturing capabilities and commercial operations, or destruction, loss, or temporary shutdown of our manufacturing facilities; |
• | concerns regarding the perceived safety or reliability of any of our products, or any component thereof; and |
• | claims that any of our products, or any component thereof, infringes on patent rights or other intellectual property rights of third parties. |
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In addition, sales of any of our current or future insulin pump products with CGM integration are subject to the continuation of our applicable agreements with Dexcom or other third parties which, under some circumstances, may be subject to termination, with or without cause, on relatively short notice. Sales of our current products may also be negatively impacted in the event of any regulatory or legal actions relating to CGM products that are compatible with our pumps, or in the event of any disruption to the availability of the applicable CGM-related supplies, such as sensors or transmitters, in a given market in which our products are sold. Sales of our products may also be adversely impacted if the CGM products that are compatible with our pumps are not viewed as superior to competing CGM products in markets where our products are sold, or if the price of these products is not competitive with similar products available in the market.
Because we currently rely on sales of our t:slim X2 insulin pump and related products to generate a significant majority of our revenue, any factors that negatively impact sales of these products, or result in sales of these products increasing at a lower rate than expected, could adversely affect our business, financial condition and operating results.
Our ability to maintain and grow our revenue depends in part on retaining a high percentage of our customer base.
A key to maintaining and growing our revenue is the retention of a high percentage of our customers due to the potentially significant revenue generated from ongoing purchases of disposable insulin cartridges and other supplies. In addition, our pumps are designed and tested to remain effective for at least four years and a satisfied customer may consider purchasing another product from us when the time comes to replace the pump. We have developed retention programs aimed at our customers, their caregivers and healthcare providers, which include training specific to our products, ongoing support by sales and clinical employees, and technical support and customer service. Demand for our products from our existing customers could decline or could fail to increase in line with our projections as a result of a number of factors, including the introduction of competitive products, breakthroughs for the monitoring, treatment or prevention of diabetes, changes in reimbursement rates or policies, manufacturing problems, perceived safety or reliability issues with our products or components or the products of our competitors, the failure to secure regulatory clearance or approvals for products or product features in a timely manner or at all, or for other reasons. The failure to retain a high percentage of our customers and increase sales to these customers consistent with our forecasts would have a material adverse effect on our business, financial condition and operating results.
We operate in a very competitive industry and if we fail to compete successfully against our existing or potential competitors, many of whom have greater resources than us, our sales and operating results may be negatively affected.
The medical device industry is intensely competitive, subject to rapid change and highly sensitive to the introduction of new products, treatment techniques or technologies, as well as other activities of industry participants. We believe our products compete, and will continue to compete, directly with a number of traditional insulin pumps, as well as other methods for the treatment of diabetes, including MDI therapy.
Our primary competitors are major medical device companies that are either publicly traded companies or divisions or subsidiaries of publicly traded companies, including Insulet and Medtronic MiniMed. In addition, Eli Lilly & Co. is developing an insulin pump. There are also a number of other companies developing and marketing their own insulin delivery systems and/or related software applications, including insulin pumps and Bluetooth-enabled insulin pens to support MDI therapy. While these industry changes are significant, it is difficult to know how they will impact our business or the competitive landscape in which we operate. Our key competitors, most notably Medtronic, enjoy several competitive advantages over us, including:
• | greater financial and human resources for sales and marketing, product development, customer service and clinical resources; |
• | greater ability to respond to competitive pressures and regulatory uncertainty; |
• | established relationships with healthcare providers, third-party payors and regulatory agencies; |
• | established reputation and name recognition among healthcare providers and other key opinion leaders in the medical industry generally and the diabetes industry in particular; |
• | greater market share and established base of customers; |
• | larger and more established distribution networks; |
• | greater ability to cross-sell products or provide incentives to healthcare providers to use their products; and |
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• | more experience in conducting research and development, manufacturing, clinical trials, and obtaining regulatory approval or clearance. |
In some instances, our competitors offer products that include features that we do not currently offer. For instance, Insulet offers an insulin pump with a tubeless delivery system that does not utilize an infusion set.
In addition, the competitive environment in which we operate has resulted and may continue to result in competitive pressures on our manufacturers, suppliers, distributors, collaboration partners and other business constituents. For example, we have entered into development agreements with Dexcom, which provide us non-exclusive licenses to integrate various generations of Dexcom CGM technology with our insulin pump products. In the fourth quarter of 2017, Abbott launched a new blood glucose sensing technology in the United States which competes with the Dexcom technology, and another CGM product with CE Mark approval was approved in the second quarter of 2018 for sale in the United States. While we are currently in discussions with Abbott to develop and commercialize integrated diabetes solutions, there can be no assurance that we will enter into a definitive agreement with Abbott, that such an agreement will be on terms favorable to us, or that this collaboration will be successful. Competitive pressures within our industry could negatively impact the financial condition of our business partners, impact their ability to fulfill contractual obligations to us, and result in harm to our financial condition and operating results.
For these and other reasons, we may not be able to compete successfully against our current or potential future competitors. As a result, our product sales may be negatively affected, which could have a material adverse impact on our financial condition and operating results
Competitive products or other technological developments and breakthroughs for the monitoring, treatment or prevention of diabetes may render our products obsolete or less desirable.
Our ability to achieve our strategic objectives will depend, among other things, on our ability to develop and commercialize products for the treatment of diabetes that offer distinct features and functionality, are easy-to-use, provide superior treatment outcomes, receive adequate coverage and reimbursement from third-party payors, and are otherwise more appealing than available alternatives. Our primary competitors, as well as a number of other companies and medical researchers are pursuing new delivery devices, delivery technologies, sensing technologies, treatment techniques, procedures, drugs and other therapies for the monitoring, treatment and prevention of diabetes. Any breakthroughs in diabetes monitoring, treatment or prevention could reduce the potential market for our products or render our products obsolete altogether, which would significantly reduce our sales or cause our sales to grow at a slower rate than we currently expect. In addition, even the perception that new products may be introduced, or that technological or treatment advancements could occur, could cause consumers to delay the purchase of our products.
Because the insulin-dependent diabetes market is large and growing, we anticipate companies will continue to dedicate significant resources to developing competitive products and technologies. The introduction by competitors of products that are or claim to be superior to our products may create market confusion that may make it difficult to differentiate the benefits of our products over competitive products. In addition, some of our competitors employ aggressive pricing strategies, including the use of discounts, rebates, low cost product upgrades or other financial incentives that could adversely affect sales of our products. If a competitor develops a product that competes with or is perceived to be superior to our products, or if competitors continue to utilize strategies that place downward pressure on pricing within our industry, our sales may decline, our operating margins could be reduced and we may fail to meet our financial projections, which would materially and adversely affect our business, financial condition and operating results.
Moreover, we have designed our products to resemble modern consumer electronic devices to address certain embarrassment and functionality concerns consumers have raised with respect to traditional pumps. The consumer electronics industry is itself highly competitive, and characterized by continuous new product introductions, rapid developments in technology, and subjective and changing consumer preferences. If, in the future, consumers cease to view our products as contemporary or convenient as compared to then-existing consumer electronics technology, our products may become less desirable.
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The failure of our insulin pump and related products to achieve and maintain market acceptance could result in us achieving sales below our expectations, which would cause our business, financial condition and operating results to be materially and adversely affected.
Our current business strategy is highly dependent on our insulin pump and related products achieving and maintaining market acceptance. In order for us to sell our products to people with insulin-dependent diabetes, we must convince them, their caregivers and healthcare providers that our products are an attractive alternative to competitive products for the treatment of diabetes, including traditional insulin pump products and MDI therapies, as well as alternative diabetes monitoring, treatment or prevention methodologies. Market acceptance and adoption of our products depends on educating people with diabetes, as well as their caregivers and healthcare providers, about the distinct features, ease-of-use, beneficial treatment outcomes, and other perceived benefits of our products as compared to competitive products. If we are not successful in convincing existing and potential customers of the benefits of our products, or if we are not able to achieve the support of caregivers and healthcare providers for our products, our sales may decline or we may achieve sales below our expectations.
Market acceptance of our products could be negatively impacted by many factors, including:
• | the failure of our products to achieve and maintain wide acceptance among people with insulin-dependent diabetes, their caregivers, healthcare providers, third-party payors and key opinion leaders in the diabetes treatment community; |
• | lack of evidence supporting the safety, ease-of-use or other perceived benefits of our products over competitive products or other currently-available insulin treatment methodologies; |
• | perceived risks or uncertainties associated with the use of our products, or components thereof, or of similar products or technologies of our competitors; |
• | adverse regulatory or legal actions relating to our insulin pump products or similar products or technologies; and |
• | results of clinical studies relating to our existing products or products under development or similar competitive products. |
In addition, even if we are able to convince people with insulin-dependent diabetes, their caregivers or healthcare providers that our products compare favorably to the products and treatment alternatives offered by our competitors, negative perceptions regarding our size or financial stability relative to that of our competitors could cause consumers to delay the purchase of our products or to purchase competitive products.
Furthermore, the rapid evolution of technology and treatment options within our industry may cause consumers to delay the purchase of our products in anticipation of advancements or breakthroughs, or the perception that advancements or breakthroughs could occur, in our products or the products offered by our competitors. It is also possible that consumers interested in purchasing any of our future products currently under development may delay the purchase of one of our current products.
If our insulin pump products do not achieve and maintain widespread market acceptance, we may fail to achieve sales consistent with our projections, in which case our business, financial condition and operating results could be materially and adversely affected.
Failure to secure or retain adequate coverage or reimbursement for our current products and our potential future products by third-party payors could adversely affect our business, financial condition and operating results.
A substantial portion of the purchase price of an insulin pump is typically paid for by third-party payors, including private insurance companies, preferred provider organizations and other managed care providers. Future sales of our current and future products will be limited unless our customers can rely on third-party payors to pay for all or part of the associated purchase cost. Access to adequate coverage and reimbursement for our current and future products by third-party payors, both domestically and internationally, is essential to the acceptance of our products by customers.
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As guidelines in setting their coverage and reimbursement policies, many third-party payors in the United States use coverage decisions and payment amounts determined by CMS, which administers the U.S. Medicare program. Medicare periodically reviews its reimbursement practices for diabetes-related products, and there is uncertainty as to the future Medicare reimbursement rate for our products. In addition to the currently existing reimbursement code for insulin pumps, CMS recently established an additional reimbursement code for insulin pumps with automated insulin delivery and CGM integration. The reimbursement rate for the new code is expected to be established in 2020, but is not yet known. We are unable to determine the effect of this new reimbursement code on the volume of our pump sales, pump revenues, and operating results, until the reimbursement rate is known. It is also possible that CMS may review and modify the current coverage and reimbursement of diabetes-related products in connection with anticipated changes to the regulatory approval process for insulin pumps and related products, software applications and services. In addition, third-party payors that do not follow the CMS guidelines may adopt different coverage and reimbursement policies for our current and future products. It is possible that some third-party payors will not offer any coverage for our current or future products. For instance, UnitedHealthcare has designated one of our competitors as their preferred, in-network durable medical equipment provider of insulin pumps for most customers age seven or above. Unless UnitedHealthcare changes its coverage policies regarding insulin pumps, we expect this decision will prevent a majority of UnitedHealthcare members from purchasing our products. It is possible that other third-party payors may adopt similar policies in the future, which would adversely impact our ability to sell our products.
We currently have contracts establishing reimbursement for our insulin pump products with approximately 184 national and regional third-party payors in the United States. While we may enter into additional contracts both domestically and internationally, with third-party payors and add coverage for future products under our current agreements, we cannot guarantee that we will succeed in doing so or that the reimbursement contracts that we are able to negotiate will enable us to sell our products on a profitable basis. In particular, we have limited experience securing reimbursement in international markets. In addition, existing contracts with third-party payors generally can be modified or terminated by the third-party payor without cause and with little or no notice to us. Moreover, compliance with the administrative procedures or requirements of third-party payors may result in delays in processing approvals by those third-party payors for customers to obtain coverage for our products. Failure to secure or retain adequate coverage or reimbursement for our current and future products by third-party payors, or delays in processing approvals by those payors, could result in the loss of sales, which could have a material adverse effect on our business, financial condition and operating results.
Further, the healthcare industry in the United States is increasingly focused on cost containment as government and private insurers seek to control healthcare costs by imposing lower payment rates and negotiating reduced contract rates with third-party payors. If third-party payors deny coverage or reduce their current levels of payment, or if our production costs increase faster than increases in reimbursement levels, we may be unable to sell our products on a profitable basis.
We may face unexpected challenges in marketing and selling our products, and training new customers on the use of our products, which could harm our ability to achieve our sales forecasts.
We have limited experience marketing and selling our newer products as well as training new customers on their use, particularly in international markets. In addition, the vast majority of our existing customers are individuals with type 1 diabetes, and we have limited experience marketing and selling our products to customers with type 2 diabetes. We anticipate that selling our products to customers with higher insulin requirements, including customers with type 2 diabetes, may be even more difficult following our decision to discontinue sales of new t:flex pumps in the third quarter of 2018.
Our financial condition and operating results are and will continue to be highly dependent on our ability to adequately promote, market and sell our t:slim X2 insulin pump and related products, and the ability of our diabetes educators to train new customers on the use of our products. If our sales and marketing representatives or diabetes educators fail to achieve their objectives, our sales could decrease or may not increase at levels that are in line with our forecasts.
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If we are unable to maintain our existing sales, marketing, clinical and customer service infrastructure, we may fail to increase our sales to meet our forecasts.
A key element of our business strategy involves our sales, clinical, marketing and customer service personnel driving adoption of our products. We have significantly increased the number of sales, marketing, clinical and customer service personnel employed by us since we commenced commercial sales in 2012. However, we have faced considerable challenges in growing and managing these resources, including with respect to recruiting, training and assimilation of new territories and accounts. We expect to continue to face significant challenges as we manage and grow our infrastructure in the future and work to motivate and retain the individuals who make up our existing infrastructure. These challenges may be even greater in connection with our commercial expansion outside of the United States, where we have limited experience. Unexpected turnover among our sales, marketing, clinical and customer service personnel, or unanticipated challenges in recruiting additional personnel, would have a negative impact on our ability to achieve our sales projections. Further, if a sales, marketing or clinical representative was to depart and be retained by one of our competitors, we may fail to prevent him or her from helping competitors solicit business from our existing customers, which could adversely affect our sales. Similarly, if we are not able to recruit and retain a network of diabetes educators and customer service personnel, we may not be able to successfully train and service new customers, which could delay new sales and harm our reputation.
We expect the management of our sales, marketing, clinical and customer service personnel will continue to place significant burdens on our management team. If we are unable to retain our personnel in line with our strategic plans, we may not be able to effectively commercialize our existing products or products under development, or enhance the strength of our brand, either of which could result in the failure of our sales to increase in line with our projections or cause sales to decline.
Our sales and marketing efforts are dependent on independent distributors who are free to market products that compete with our products. If we are unable to maintain or expand our network of independent distributors, our sales may be negatively affected.
For the year ended December 31, 2019, sales to approximately 55 independent distributors represented approximately 76% of our sales. We believe a majority of our sales will continue to be to independent distributors for the foreseeable future, and it is possible that the percentage of our sales to independent distributors could increase, particularly in light of our reliance on independent distributors outside of the United States. For example, our dependence upon independent distributors domestically could increase if third-party payors decide to contract with independent distributors directly in lieu of contracting with us to supply our products to their members directly. Our dependence upon independent distributors could also increase if customers prefer to purchase all of their diabetes supplies through a single source, instead of purchasing pump-related products through us and other diabetes supplies through other suppliers. None of our independent distributors domestically has been required to sell our products exclusively and each of them may freely sell the products of our competitors. Our distributor agreements in the United States generally have one-year initial terms with automatic one-year renewal terms, and are terminable in connection with a party’s material breach. Our distributor agreements outside of the United States generally have longer initial terms and, in addition to being terminable in connection with a party’s material breach, include provisions that allow us to terminate those agreements prior to their ordinary expiration in specified circumstances. If we are unable to maintain or expand our network of independent distributors, our sales may be negatively affected.
For the year ended December 31, 2019, our two largest independent distributors in the United States collectively comprised approximately 31% of our worldwide sales, and our three largest independent international distributors collectively comprised approximately 60% of our international sales. If any of our key independent distributors were to cease to distribute our products or reduce their promotion of our products as compared to the products of our competitors, our sales could be adversely affected. In that case, we may need to seek alternative independent distributors or increase our reliance on our other independent distributors or our direct sales representatives, which may not prevent our sales from being adversely affected. Additionally, to the extent we enter into additional arrangements with independent distributors to perform sales, marketing or distribution services, the terms of the arrangements could result in our product margins being lower than if we directly marketed and sold our products.
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If the third parties on which we increasingly rely to assist us with our current and anticipated pre-clinical development or clinical trials do not perform as expected, we may not be able to obtain regulatory clearance or approval or commercialize our products.
As our clinical infrastructure expands, we expect to increasingly rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct some of our current and anticipated pre-clinical investigations and clinical trials. If we are not able to reach mutually acceptable agreements with these third parties on a timely basis, these third parties do not successfully carry out their commitments or regulatory obligations or meet expected deadlines, or the quality or accuracy of the data they obtain is compromised due to the failure to adhere to agreed upon clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory clearance or approval for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected.
We are increasingly dependent on clinical investigators and clinical sites to enroll patients in our current and anticipated clinical trials, and the failure to successfully complete the clinical trials could prevent us from obtaining regulatory approvals for or commercializing our products.
As part of our product development efforts, we expect to increasingly rely on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage such trials and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that clinical sites may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients, fail to ensure compliance by patients with clinical protocols, or fail to comply with regulatory requirements, we may be unable to successfully complete our clinical trials, which could prevent us from obtaining regulatory approvals for our products and commercializing our products, which would have an adverse impact on our business.
If important assumptions about the potential market for our products are inaccurate, or if we have failed to understand what people with insulin-dependent diabetes are seeking in an insulin pump, our business and operating results may be adversely affected.
Our business strategy was developed based on a number of important assumptions about the diabetes industry in general, and the insulin-dependent diabetes market in particular, any one or more of which may prove to be inaccurate or may change over time. For example, we believe that the benefits of insulin pump therapy as compared to other common insulin treatment alternatives will continue to drive growth in the market for insulin pump therapy. In addition, we believe the incidence of diabetes in the United States and worldwide is increasing. However, each of these assumptions may prove to be inaccurate and limited sources exist to compare treatment alternatives and obtain reliable market data. The actual incidence of diabetes, and the actual demand for our products or competitive products, could differ materially from our projections if our assumptions are incorrect. In addition, our strategy of focusing exclusively on the insulin-dependent diabetes market may limit our ability to increase sales or achieve profitability.
Another key element of our business strategy is utilizing market research to understand what people with diabetes are seeking to improve their diabetes therapy management. This strategy underlies our entire product design, marketing and customer support approach and is the basis on which we developed our current products and are pursuing the development of new products. However, our market research is based on interviews, focus groups and online surveys involving people with insulin-dependent diabetes, their caregivers and healthcare providers that represent only a small percentage of the overall insulin-dependent diabetes market. As a result, the responses we received may not be reflective of the broader market and may not provide us accurate insight into the desires of people with insulin-dependent diabetes. In addition, understanding the meaning and significance of the responses received during our market research necessarily requires that analysis be conducted and conclusions be drawn. We may not be able perform an analysis that yields meaningful results, or the conclusions we draw from the analysis could be misleading or incorrect. Moreover, even if our market research has allowed us to better understand the features and functionality consumers are seeking in an insulin pump to improve management of their diabetes therapy, there can be no assurance that consumers will actually purchase our products or that our competitors will not develop products with similar features.
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We expect to face complexities frequently encountered by companies in competitive and rapidly-evolving markets, which may make it difficult to evaluate our business and forecast our future sales and operating results.
We operate in a competitive and rapidly-evolving market. Important industry changes, such as the FDA approval and launch of new products by our competitors, as well as changes specific to our business, such as the timing of our launch of new products currently in development and our potential expansion of commercial sales in international markets, combine to make it more difficult for us to predict our future sales and operating results, as well as our expected timeframe to achieve profitability. In assessing our business prospects, you should consider these factors as well as the various risks and difficulties frequently encountered by companies in competitive and rapidly evolving markets, particularly those companies that manufacture and sell medical devices.
These risks include our ability to:
• | implement and execute our business strategy; |
• | manage and improve the productivity of our sales, clinical, marketing and customer service infrastructure to grow sales of our existing and proposed products, and enhance our ability to provide service and support to our customers; |
• | achieve and maintain market acceptance of our products and increase awareness of our brand among people with insulin-dependent diabetes, their caregivers and healthcare providers; |
• | comply with a broad range of regulatory requirements within a highly regulated industry; |
• | enhance our manufacturing capabilities, increase production of products efficiently while maintaining quality standards, and adapt our manufacturing facilities to the production of new products; |
• | respond effectively to competitive pressures and developments; |
• | enhance our existing products and develop proposed products; |
• | obtain and maintain regulatory clearance or approval to enhance our existing products and commercialize proposed products; |
• | perform clinical trials with respect to our existing products and proposed products; and |
• | attract, retain and motivate qualified personnel in various areas of our business. |
As a result of these or other risks, we may not be able to execute key components of our business strategy, and our business, financial condition and operating results may suffer
The Technology Upgrade Program resulted in accounting complexities that may lead to confusion when comparing our historical and future financial results.
While our Technology Upgrade Program expired on September 30, 2017, it resulted in a number of accounting complexities that made comparisons of our historical and future financial results more difficult. In particular, during the term of the Technology Upgrade Program, generally accepted accounting principles in the United States prevented us from recognizing, at the time of sale, up to 100% of the sales and cost of sales associated with the sale of our insulin pumps to eligible customers. Instead, depending on the type of pump sold, we were required to defer some or all of the sales and cost of sales until a later date. In light of the expiration of the program, we are no longer subject to these accounting deferrals. However, in evaluating our 2017 financial results through December 31, 2017, as a result of the Technology Upgrade Program we recorded incremental net sales of $5.0 million that were previously deferred, with a corresponding increase of $3.1 million in gross profit. It is possible that we may offer other consumer-directed programs in the future, which may result in similar or additional accounting complexities making comparisons of historical and future results more difficult.
Despite our efforts to explain the required accounting treatment for the Technology Upgrade Program, it is possible that there may be confusion when comparing our historical and future financial results, which may cause investors to avoid investing in our common stock and adversely impact our stock price.
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Our ability to achieve profitability will depend, in part, on our ability to reduce the per unit cost of our products while also increasing production volume.
We believe our ability to reduce the per unit cost of our insulin pumps and related products will have a significant impact on our ability to achieve profitability. Our cost of sales includes raw materials and component parts, labor costs, product training expenses, freight, reserves for expected warranty costs, royalties, scrap and excess and obsolete inventories. It also includes manufacturing overhead costs, including expenses relating to quality assurance, manufacturing engineering, material procurement and inventory control, facilities, equipment, information technology and operations management. Our warranty reserves require a significant amount of judgment and are primarily estimated based on historical experience. Recently released versions of our pump may not incur warranty costs in a manner similar to previously released pumps. If we are unable to increase our production volumes while sustaining or reducing our overall cost of sales, including through arrangements such as volume purchase discounts, negotiation of pricing and cost reductions with our suppliers, more efficient training programs for customers, improved warranty performance or fluctuations in warranty estimates, it will be difficult to reduce our per unit costs and our ability to achieve profitability will be constrained.
In addition, the per unit cost of our products is significantly impacted by our overall production volumes, and any factors that prevent our products from achieving market acceptance, cause our production volumes to decline, or result in our sales growing at a slower rate than we expect, would significantly impact our expected per unit costs, which would adversely impact our gross margins. In addition, we may not achieve anticipated improvements in manufacturing efficiency as we undertake actions to expand our manufacturing capacity. If we are unable to effectively manage our overall costs while increasing our production volumes and lowering our per unit costs, we may not be able to achieve or sustain profitability, which would have an adverse impact on our business, financial condition and operating results.
Manufacturing risks may adversely affect our ability to manufacture products, which could negatively impact our sales and operating margins.
Our business strategy depends on our ability to manufacture our current and proposed products in sufficient quantities and on a timely basis so as to meet consumer demand, while adhering to product quality standards, complying with regulatory requirements and managing manufacturing costs. We are subject to numerous risks related to our manufacturing capabilities, including:
• | quality or reliability defects in product components that we source from third-party suppliers; |
• | our inability to secure product components in a timely manner, in sufficient quantities and on commercially reasonable terms; |
• | difficulty identifying and qualifying alternative suppliers for components in a timely manner; |
• | implementing and maintaining acceptable quality systems while experiencing rapid growth; |
• | our failure to increase production of products to meet demand; |
• | our inability to modify production lines and expand manufacturing facilities to enable us to efficiently produce future products or implement changes in current products in response to consumer demand or regulatory requirements; |
• | our inability to manufacture multiple products simultaneously while utilizing common manufacturing equipment; and |
• | potential damage to or destruction of our manufacturing equipment or manufacturing facilities. |
As demand for our products increases, and as the number of our commercial products expands, we will have to invest additional resources to purchase components, hire and train employees, and enhance our manufacturing processes and quality systems. We may also increase our utilization of third parties to perform contracted manufacturing services for us, and we may need to acquire additional custom designed equipment to support the expansion of our manufacturing capacity. In addition, although we expect some of our products under development to share product features and components with our current products, manufacturing of these products may require modification of our production lines, hiring of specialized employees, identification of new suppliers for specific components, qualifying and implementing additional equipment and procedures, obtaining new regulatory approvals, or developing new manufacturing technologies. Ultimately, it may not be possible for us to manufacture these products at a cost or in quantities sufficient to make these products commercially viable.
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If we fail to increase our production capacity to meet consumer demand while also maintaining product quality standards, obtaining and maintaining regulatory approvals, and efficiently managing costs, our sales and operating margins could be negatively impacted, which would have an adverse impact on our financial condition and operating results.
We depend on a limited number of third-party suppliers for certain components and products, and the loss of any of these suppliers, their inability to provide us with an adequate supply of components or products, or our ability to adequately forecast customer demand, could harm our business.
We currently rely, and expect to continue to rely, on third-party suppliers to supply components of our current products and our potential future products, including our disposable cartridges. For example, we rely on plastic injection molding companies to provide plastic molded components, electronic manufacturing suppliers to provide electronic assemblies, and machining companies to provide machined mechanical components. We also purchase all of our infusion sets and pump accessories from third-party suppliers. For our business strategy to be successful, our suppliers must be able to provide us with components and products in sufficient quantities, in compliance with regulatory requirements and quality control standards, in accordance with agreed-upon specifications, at acceptable costs and on a timely basis.
Although we have long-term supply agreements with many of our suppliers, these agreements do not include long-term capacity commitments. Under most of our supply agreements, we make purchases on a purchase order basis and have no obligation to buy any given quantity of components or products until we place written orders, and our suppliers have no obligation to manufacture for us or sell to us any given quantity of components or products until they accept an order. In addition, our suppliers may encounter problems that limit their ability to manufacture components or products for us, including financial difficulties, damage to their manufacturing equipment or facilities or problems with their own suppliers. As a result, our ability to purchase adequate quantities of our components or products may be limited. If we fail to obtain sufficient quantities of high-quality components to meet demand on a timely basis, we could lose customer orders, our reputation may be harmed and our business could suffer.
We generally use a small number of suppliers for our components and products, some of which are located outside the United States including China and Mexico. Depending on a limited number of suppliers exposes us to risks, including limited control over cost such as tariffs, availability, quality and delivery schedules. Moreover, in some cases, we do not have long-standing relationships with our manufacturers and may not be able to convince suppliers to continue to make components available to us unless there is demand for such components from their other customers. As a result, there is a risk that certain components could be discontinued and no longer available to us. We have in the past been, and we may in the future be, required to make significant “last time” purchases of component inventories that are being discontinued by the manufacturer to ensure supply continuity. If any one or more of our suppliers cease to provide us with sufficient quantities of components in a timely manner or on terms acceptable to us, we would have to seek alternative sources of supply. Because of factors such as the proprietary nature of our products, our quality control standards and applicable regulatory requirements, we cannot quickly engage additional or replacement suppliers for some of our critical components. Failure of any of our suppliers to deliver products at the level our business requires could harm our reputation and limit our ability to meet our sales projections, which could have a material adverse effect on our business, financial condition and operating results.
We place orders with our suppliers using our forecasts of customer demand, which are based on a number of assumptions and estimates, in advance of purchase commitments from our customers. As a result, we incur inventory and manufacturing costs in advance of anticipated sales, which sales ultimately may not materialize or may be lower than expected. If we overestimate customer demand, we may experience higher inventory carrying costs and increased excess or obsolete inventory, which would negatively impact our results of operations.
We may also have difficulty obtaining components from other suppliers that are acceptable to the FDA or other regulatory agencies, and the failure of our suppliers to comply with regulatory requirements could expose us to regulatory action including warning letters, product recalls, termination of distribution, product seizures or civil penalties. Such a failure by our suppliers could also require us to cease using the components, seek alternative components or technologies, and modify our products to incorporate alternative components or technologies, which could necessitate additional regulatory approvals. Any disruption of this nature, or any increased expenses associated with any such disruption, could negatively impact our ability to manufacture our products on a timely basis, in sufficient quantities, or at all, which could harm our commercialization efforts and have a material adverse impact on our operating results.
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If we cannot reliably manufacture our proprietary infusion set connector, or if it does not achieve market acceptance, we may not achieve our financial projections.
In September 2017, we began commercial sales in the United States of products with our customized t:lock connector, which is used to connect our pump cartridge to our infusion set offerings. Our t:lock connector replaced the standard Luer-lok connector that historically joined an infusion set to our proprietary disposable insulin cartridges. Concurrently, we began selling infusion sets that are compatible with t:lock. Starting in 2018, we initially offered standard Luer-lok cartridges and infusion sets in select international markets, and transitioned to our t:lock connector in international markets during 2019.
We believe the transition to the t:lock connector, for our direct customers and distributors in the United States and international markets, is substantially complete. However, during 2020 there may be limited circumstances where we continue offering both styles of cartridges and infusion sets in international markets to facilitate the transition of customer supplies. Due to the variability in purchasing patterns, standard Luer-lok inventories may not be consumed at the predicted rates and we may be required to offer both styles of insulin cartridges and infusion sets for a longer period than anticipated or we may be left with excess quantities of standard Luer-lok inventories that we cannot sell at standard prices or at all, which would negatively impact our results of operations.
While the t:lock connector was designed based on customer feedback, and all standard Luer-lok infusion sets that we recently offered are now available with the t:lock connector, it is possible that t:lock may not continue to gain market acceptance by current or potential customers, their caregivers, or healthcare providers. Any negative market response to the t:lock connector may impact a current customer’s decision to purchase a new pump from us at the time of renewal. In addition, potential customers may decide not to purchase our insulin pumps if they do not prefer the t:lock connector or t:lock compatible infusion sets, which could have a material adverse impact on our business, financial condition and operating results.
Our business operations are primarily located in San Diego, California, and any disruption at one of our facilities could adversely affect our business and operating results.
Substantially all of our current operations are conducted in San Diego, California, including our manufacturing processes, research and development activities and management and administrative functions. In addition, the majority of our inventories of component supplies and finished goods is stored at two facilities in San Diego. We also store finished goods at certain third-party warehouses in California and Texas for the fulfillment of certain customer orders. In the second half of 2019, we commenced limited customer and technical support activities in Boise, Idaho. We expect our operations in Boise to expand substantially during 2020. We take precautions to safeguard our facilities, including by acquiring insurance, employing back-up generators, adopting health and safety protocols and utilizing off-site storage of computer data. However, vandalism, terrorism or a natural disaster, such as an earthquake, fire or flood, or other catastrophic event, could damage or destroy our manufacturing equipment or our inventories of component supplies and finished goods, cause substantial delays in our operations, result in the loss of key information, result in reduced sales, and cause us to incur additional expenses. Our insurance coverage may not be sufficient to provide coverage with respect to the damages incurred in any particular case, and our insurance carrier may deny coverage with respect to all or a portion of our claims. Regardless of the level of insurance coverage or other precautions taken, damage to our facilities may have a material adverse effect on our business, financial condition and operating results.
We may not experience the anticipated operating efficiencies from the transition of our manufacturing and warehousing operations.
At the beginning of 2018 we completed the transition of our manufacturing operations to our Barnes Canyon facility and during the fourth quarter of 2019 we commenced operations at a new logistics warehouse in San Diego. We expect that both of these actions will allow for future capacity for product manufacturing and warehousing expansion. However, we may not experience the anticipated operating efficiencies at either facility. In addition, beginning in 2020 we expect to utilize a third party for a portion of our cartridge manufacturing. If we fail to achieve the operating efficiencies that we anticipate, our manufacturing and operating costs may be greater than expected, which would have a material adverse impact on our operating results. In addition, we or our contract manufacturers may encounter problems during manufacturing for a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction, component part supply constraints and environmental factors, any of which could delay or impede our ability to meet customer demand and have a material adverse impact on our business, financial condition and operating results. In addition, because of the custom nature of our cartridge manufacturing process and product components, and the highly regulated nature of our products overall, in the event of any problems with our contract manufacturer, we may not be able to quickly establish additional or alternative arrangements.
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We expect that the management and support of our new facilities and the increase of our manufacturing volumes will place significant burdens on our management team, particularly in areas relating to operations, quality, regulatory, facilities and information technology. We may not be able to effectively manage our ongoing manufacturing operations and we may not achieve the operating efficiencies that we anticipate, either from our own facilities or from our use of contract manufacturing. Further, additional increases in demand for our products may require that we further expand our business operations, which may require that we obtain additional facilities, make additional investments in capital equipment or increase our utilization of external third parties to perform contracted manufacturing services for us.
If we do not enhance our product portfolio to meet the demands of our market, we may fail to effectively compete, which may impede our ability to become profitable.
In order to increase our sales and market share in the insulin-dependent diabetes market, we must enhance and broaden our product portfolio in response to the evolving demands of people with insulin-dependent diabetes, their caregivers and healthcare providers, as well as competitive pressures and technologies. We may not be successful in developing, obtaining regulatory approval for, or marketing our proposed products when anticipated, or at all. In addition, notwithstanding our market research efforts, our future products may not be accepted by people with insulin-dependent diabetes, their caregivers, healthcare providers or third-party payors. The success of any proposed product offerings will depend on numerous factors, including our ability to:
• | identify the product features and functionality that people with insulin-dependent diabetes, their caregivers and healthcare providers are seeking in an insulin pump, and successfully incorporate those features into our products; |
• | develop and introduce products in sufficient quantities and in a timely manner; |
• | offer products at a price that is competitive with other products then available; |
• | work with third-party payors to obtain reimbursement for our products; |
• | adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties; |
• | demonstrate the safety and efficacy of proposed products; and |
• | obtain the necessary regulatory approvals for proposed products. |
If we fail to generate demand by continuing to develop products that incorporate features and functionality requested by people with insulin-dependent diabetes, their caregivers or healthcare providers, or if we do not obtain regulatory clearance or approval for proposed products in time to meet market demand, we may be unable to compete and may fail to generate sales sufficient to achieve or maintain profitability. We have in the past experienced, and may in the future experience, delays in various phases of product development and commercialization, including during research and development, manufacturing, limited release testing, marketing and customer education efforts. Any delays in our anticipated regulatory submissions or approvals, or subsequent product launches, may significantly impede our ability to successfully compete in our markets. In particular, such delays could cause customers to delay or forego purchases of our products, or to purchase our competitors’ products. Even if we are able to successfully develop proposed products when anticipated, these products may not produce sales in excess of the costs of development, and they may be quickly rendered obsolete by changing consumer preferences or the introduction by our competitors of products embodying new technologies or features, or alternative methods for the treatment of diabetes.
Any concerns regarding the safety and efficacy of our products could limit sales and cause unforeseen negative effects to our business prospects and financial results.
Currently there are only limited published studies to evaluate the safety or effectiveness of our products in a controlled setting. As a result, people with insulin-dependent diabetes and healthcare providers may be slower to adopt or recommend our products, we may not have comparative data that our competitors have or are generating, third-party payors may not be willing to provide coverage or reimbursement for our products and we may be subject to greater regulatory and product liability risks. These and other factors could slow the adoption of our products and result in our sales being lower than anticipated. In addition, future studies or clinical experience may indicate that treatment with our products is not superior to treatment with competitive products. Such results could slow the adoption of our products and significantly reduce our sales, which could prevent us from achieving our forecasted sales targets or achieving or sustaining profitability.
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If the results of clinical studies or other experience, such as our monitoring or investigation of customer complaints, indicate that our products may cause or create an unacceptable risk of unexpected or serious complications or other unforeseen negative effects, we could be required to inform our customers of these risks or complications or, in more serious circumstances, we could be subject to mandatory product recalls, suspension or withdrawal of FDA clearance or approval, which could result in significant legal liability, harm to our reputation, and a decline in our product sales.
Any alleged illness or injury associated with any of our products or product recalls may negatively impact our financial results and business prospects depending on a number of factors, including the scope and seriousness of the problem, degree of publicity, reaction of our customers and healthcare professionals, competitive response, and consumer perceptions generally. Even if such an allegation or product liability claim lacks merit, cannot be substantiated, is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness, injury or death could adversely affect our reputation with customers, healthcare professionals, third-party payors, and existing and potential collaborators, and could adversely affect our operating results and cause a decline in our stock price. Furthermore, general concerns regarding the perceived safety or reliability of any of our products, or any component thereof, may have a similar adverse effect on us.
We may enter into collaborations, licensing arrangements, joint ventures, strategic alliances or partnerships with third parties that may not result in the development of commercially viable products or the generation of significant future revenues.
In the ordinary course of our business, we may enter into collaborations, licensing arrangements, joint ventures, strategic alliances or partnerships to develop proposed products or technologies, pursue new markets, or protect our intellectual property assets. We may also elect to amend or modify similar agreements that we already have in place. Proposing, negotiating and implementing collaborations, licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process, and may subject us to business risks. For example, other companies, including those with substantially greater financial, marketing, sales, technology or other business resources, may compete with us for these opportunities, or may be the counterparty in any such arrangements. We may not be able to identify or complete any such collaboration in a timely manner, on a cost-effective basis, on acceptable terms or at all. In addition, we may not realize the anticipated benefits of any such collaborations that we do identify and complete. In particular, these collaborations may not result in the development of products or technologies that achieve commercial success or result in positive financial results, or may otherwise fail to have the intended impact on our business.
Additionally, we may not be in a position to exercise sole decision-making authority regarding a collaboration, licensing or other similar arrangement, which could create the potential risk of creating impasses on decisions. Further, our collaborators and business partners may have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise with our collaborators and other business partners, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations, termination rights or the ownership or control of intellectual property developed during the collaboration. If any conflicts arise with our current or future collaborators, they may act in their self-interest, which may be adverse to our best interest, and they may breach their obligations to us. In addition, we have limited control over the amount and timing of resources that our current collaborators, such as Dexcom and TypeZero, or any future collaborators devote to our arrangement with them or our future products. Disputes between us and our current, future or potential collaborators may result in litigation or arbitration which would increase our expenses and divert the attention of our management. Further, these transactions and arrangements are contractual in nature and may be terminated or dissolved under the terms of the applicable agreements and, in such event, we may not continue to have rights to the products relating to such transaction or arrangement or may need to purchase such rights at a premium.
For example, we have entered into multiple development agreements with Dexcom, which provide us non-exclusive licenses to integrate various currently available generations of Dexcom CGM technology with our insulin pump products. Our agreements with Dexcom related to G5 and G6 CGM currently run until June 2020 with automatic one-year renewals unless a party provides prior notice to the contrary. Under certain circumstances, these agreements may be terminated by either party without cause or on short notice. Our current agreements with Dexcom do not grant us rights to integrate future generations of Dexcom CGM technology with any of our current or future products. Termination of any of our agreements with Dexcom would require us to redesign certain current products and products under development, and attempt to integrate an alternative CGM system into our insulin pump systems, which would require significant development and regulatory activities that could result in an interruption or substantial delay in the availability of the product to our customers. The termination of our existing commercial agreements with Dexcom would disrupt our ability to commercialize our existing products and our development of future products, which could have a material adverse impact on our financial condition and results of operations, negatively impact our ability to compete and cause our stock price to decline.
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We operate our business in regions subject to natural disasters and other catastrophic events, and any disruption to our business resulting from natural disasters will adversely affect our revenue and results of operations.
We operate our business in regions subject to natural disasters, including earthquakes, hurricanes, floods, fires and other catastrophic events. For example, a portion of our administrative offices located in San Diego are in an area that is prone to flooding, which has occasionally temporarily disrupted our business operations. Any natural disaster could adversely affect our ability to conduct business and provide products and services to our customers, and the insurance we maintain may not be adequate to cover our losses resulting from any business interruption resulting from a natural disaster or other catastrophic events. Any future disruptions to our operations could have a material adverse impact on our financial condition and results of operations in future periods.
A security breach or other significant disruption to our information technology systems, or failures of our pumps’ software to perform as we anticipate, could materially disrupt our operations or result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access to sensitive company information relating to our customers, suppliers or employees, which could damage our relationships, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could have an adverse and material effect on our business, financial condition and operating results.
The efficient operation of our business depends on our information technology and communication systems, as well as those of our third-party business partners. We rely on such systems to effectively store, process and transit proprietary sales and marketing data, accounting and financial functions, manufacturing and quality records, inventory management, product development tasks, research and development data, customer service and technical support functions. Our information technology systems, including those that support t:connect, our current and future mobile applications, as well as those involved in the operation of our Tandem Device Updater, are vulnerable to damage or interruption from a number of causes, including earthquakes, fires, floods and other natural disasters, terrorist attacks, attacks by computer viruses or hackers, malware, ransomware or other destructive software, cyberattacks, power losses, and computer system or data network failures. Should any of those risks occur, it could adversely impact the availability, confidentiality and integrity of information assets contained in those systems.
Our business also involves the storage and transmission of a substantial amount of confidential, personal, or other sensitive information, including health information and other personal information relating to our customers, the personal information of our employees and other individuals, and our proprietary, financial, operational or strategic information. Should any of the foregoing risks occur, it could also result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of such sensitive information, which could lead to significant reputational or competitive harm, litigation involving us or our business partners, regulatory proceedings, or substantial liabilities, fines, penalties or expenses. As a result, we strive to maintain and regularly update reasonable security measures, and to respond quickly and effectively if and when data security incidents do occur. Like many businesses, we are subject to numerous data privacy and security risks, including threats arising from computer viruses or hackers, cyberattacks and ransom-ware attacks. The continuously evolving nature of those risks may prevent us from protecting all of this information despite our efforts to do so. Many of our service providers are subject to similar risks. Whether or not our security measures and those of our service providers are ultimately successful, our expenditures on those measures could have an adverse impact on our financial condition and results of operations, and divert management’s attention from pursuing our strategic objectives. From time to time we have experienced various threats to our information technology systems, and we are currently investigating the extent of unauthorized access to data on our networks following a recent phishing attack. As a result of the ongoing investigation we may determine that substantial confidential, personal or other sensitive information was compromised, and in that case we may be subject to regulatory proceedings and substantial fines, penalties and expenses, as well as significant reputational harm, which may have a material adverse impact on us. We are unable to predict the direct or indirect impact of any such incidents to our business.
In addition to the risks regarding information technology systems and processing of sensitive information, our insulin pumps and other products rely on software that could contain unanticipated vulnerabilities, which could make our products subject to computer viruses, cyber-attacks, or failures. These risks significantly increased after July 2016, when we received FDA clearance of our Tandem Device Updater, which enables customers to remotely update software on their insulin pumps and may increase further following the launch of our new mobile application. We may also face new risks relating to our information technology systems as we continue to commercialize our products outside of the United States and are subject to additional regulations relating to the use and protection of personal information and as we launch new mobile applications.
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The failure of our or our service providers’ information technology systems or our pumps’ software or other mobile applications to perform as we anticipate, or our failure to effectively implement new information technology systems and privacy policies and controls, could disrupt our entire operation or adversely affect our software products. For example, we market our Tandem Device Updater as having the unique capability to deploy software updates to our pumps, which may allow customers remote access to new and enhanced features. The failure of our Tandem Device Updater to provide software updates as we anticipate, including as a result of our inability to secure and maintain necessary regulatory approvals, the inability of our pumps to properly receive software updates, errors or viruses embedded within the software being transmitted, or the failure of our customers to properly utilize the system to complete the update, could result in decreased sales, increased warranty costs, and harm to our reputation, any of which could have a material adverse effect on our business, financial condition and operating results.
If we are found to have violated laws concerning the privacy and security of patient health information or other personal information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business.
There are a number of domestic and international laws protecting the privacy and security of personal information, including HIPAA and related regulations, PIPEDA, and GDPR, or similar applicable laws. These laws place limits on how we may collect, use, share and store medical information and other personal information, and they impose obligations to protect that information against unauthorized access, use, loss, and disclosure.
If we, or any of our service providers who have access to the personal data for which we are responsible, are found to be in violation of the privacy or security requirements of HIPAA, PIPEDA, or GDPR, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial condition and operating results. Although we utilize a variety of measures to secure the data that we control, even compliant entities can experience security breaches or have inadvertent failures despite employing reasonable practices and safeguards.
We may also face new risks relating to data privacy and security as the United States, individual U.S. states, E.U. member states, and other international jurisdictions adopt or implement new data privacy and security laws and regulations as we continue to commercialize our products worldwide. For example, the California Consumer Privacy Act, which took effect on January 1, 2020, may impose additional requirements on us and increase our regulatory and litigation risk. As we continue to expand, our business will need to adapt to meet these and other similar legal requirements.
We depend on the knowledge and skills of our senior management and other key employees, and if we are unable to retain and motivate them or recruit additional qualified personnel, our business may suffer.
We have benefited substantially from the leadership and performance of our senior management, as well as certain key employees. For example, key members of our management have experience successfully scaling an early stage medical device company to achieve profitability. Our success will depend on our ability to retain our current management and key employees, and to attract and retain qualified personnel in the future. Competition for senior management and key employees in our industry is intense and we cannot guarantee that we will be able to retain our personnel or attract new, qualified personnel. The loss of the services of certain members of our senior management or key employees could prevent or delay the implementation and completion of our strategic objectives, or divert management’s attention to seeking qualified replacements. Each member of senior management, as well as our key employees may terminate employment without notice and without cause or good reason. The members of our senior management are not subject to non-competition agreements. Accordingly, the adverse effect resulting from the loss of certain members of senior management could be compounded by our inability to prevent them from competing with us.
We depend upon key employees in a competitive market, and if we are unable to provide meaningful equity incentives to retain key personnel, it could adversely affect our ability to execute our business strategy.
We are highly dependent upon the members of our management team, as well as other key employees. In our industry, it is common to attract and retain executive talent and other employees with compensation packages that include a significant equity component. We have issued, and may continue to issue, additional equity incentives that we believe will enhance our ability to retain our current key employees and attract the necessary additional executive talent. It may be more difficult to continue to incentivize employees during a period of rapid growth in our overall headcount while limiting the utilization of the share reserve under our current stock incentive plans. However, even if we issue significant additional equity incentives, there can be no assurance that we will be able to attract and retain key executive talent. A loss of any of our key personnel, or our inability to hire new personnel, may have a material adverse effect on our ability to execute our business strategy.
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We began commercialization of our products outside of the United States, which may result in a variety of risks associated with international operations that could materially adversely affect our business.
During 2018, we began commercialization of the t:slim X2 insulin pump in select geographies outside of the United States. We have limited experience commercializing our products outside of the United States and expect that we will be subject to additional risks related to international business markets, including:
• | different regulatory requirements for product approvals in foreign countries; |
• | differing U.S. and foreign medical device import and export rules; |
• | more restrictive privacy laws relating to personal information of end users and employees, including GDPR; |
• | reduced protection for our intellectual property rights in foreign countries; |
• | unexpected changes in tariffs, trade barriers and regulatory requirements; |
• | different reimbursement systems; |
• | economic weakness, including inflation, or political instability in particular foreign economies and markets; |
• | compliance with tax, employment, immigration and labor laws for employees living or traveling abroad or with U.S. regulations that would apply to activities in such foreign jurisdictions, such as the FCPA; |
• | foreign taxes, including withholding of payroll taxes; |
• | foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country; and |
• | business interruptions resulting from geopolitical actions, including war and terrorism, natural disasters, or incidence of disease. |
In addition, entry into international markets may require significant financial resources, impose additional demands on our manufacturing, quality, regulatory, customer support and other general and administrative personnel, and could divert management’s attention from managing our core business. We have limited experience with regulatory environments and market practices internationally, and we may not be able to penetrate or successfully operate in new markets. Accordingly, if we are unable to expand internationally, manage the complexity of our global operations successfully or if we incur unanticipated expenses, we may not achieve the expected benefits of this expansion and our financial condition and results of operations could be materially and adversely impacted.
We may seek to grow our business through acquisitions of complementary products or technologies, and the failure to successfully manage acquisitions, or the failure to integrate them with our existing business, could have a material adverse effect on our business, financial condition and operating results.
From time to time, we may consider opportunities to acquire other products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. Potential acquisitions involve numerous risks, including:
• | problems assimilating the acquired products or technologies; |
• | issues maintaining uniform standards, procedures, controls and policies; |
• | unanticipated costs associated with acquisitions; |
• | diversion of management’s attention from our existing business; |
• | risks associated with entering new markets in which we have limited or no experience; and |
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• | increased legal and accounting costs relating to the acquisitions or to compliance with regulatory matters. |
We have no current commitments with respect to any acquisition. We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired products or technologies into our business. Our potential inability to integrate any acquired products or technologies effectively may adversely affect our business, operating results and financial condition.
Risks Related to our Financial Results and Need for Financing
We may need or otherwise determine to raise additional funds in the future and if we are unable to raise additional funds when necessary or desirable, we may not be able to achieve our strategic objectives.
At December 31, 2019, we had $176.5 million in cash, cash equivalents and short-term investments. Our management expects the continued growth of our business, including the expansion of our customer service infrastructure to support our growing base of customers, our plans to expand commercial sales of our products outside of the United States, the growth of our manufacturing and warehousing operations, increase the the size of our facility footprint due to increasing headcount and additional research and development activities, will continue to increase our expenses. In addition, the amount of our future product sales is difficult to predict and actual sales may not be in line with our forecasts. Accordingly, our future capital requirements will depend on many factors, including:
• | the revenue generated by sales of our insulin pump products, and the related insulin cartridges and infusion sets, and any other future products that we may develop and commercialize; |
• | the gross profits and gross margin we realize from the sales we generate; |
• | the costs associated with maintaining and expanding an appropriate sales, clinical and marketing infrastructure; |
• | the expenses we incur or other capital expenditures we make to maintain or enhance our manufacturing operations, including leasing additional property, hiring additional personnel, purchasing additional manufacturing equipment and other measures taken to add manufacturing capacity; |
• | the expenses associated with developing and commercializing our proposed products or technologies; |
• | the costs associated with maintaining and expanding our customer service infrastructure; |
• | the cost of obtaining and maintaining regulatory clearance or approval for our products and our manufacturing facilities; |
• | the cost of ongoing compliance with legal and regulatory requirements; |
• | the expenses we incur in connection with potential litigation or governmental investigations; |
• | expenses we may incur or other financial commitments we may make in connection with current and potential new business or commercial collaborations, development agreements or licensing arrangements; |
• | anticipated or unanticipated capital expenditures; and |
• | unanticipated general and administrative expenses. |
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As a result of these and other factors we may in the future seek additional capital from public or private offerings of our equity or debt securities, or from other sources. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, we may incur significant financing or debt service costs, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaborations, licensing, joint ventures, strategic alliances, partnership arrangements or other similar arrangements, it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies, or grant licenses on terms that are not favorable to us.
If we are unable to raise additional capital when necessary, we may not be able to maintain our existing sales, marketing, clinical and customer service infrastructure, enhance our current products or develop new products, take advantage of future opportunities, respond to competitive pressures, changes in supplier relationships, or unanticipated changes in customer demand. Any of these events could adversely affect our ability to achieve our strategic objectives, which could have a material adverse effect on our business, financial condition and operating results.
Our operating results may fluctuate significantly from quarter to quarter.
There has been and may continue to be meaningful variability in our operating results from quarter to quarter, as well as within each quarter, especially around the time of anticipated new product launches or regulatory approvals by us or our competitors, and as a result of the commercial launch of our products in geographies outside of the United States. Our operating results, and the variability of these operating results, will be affected by numerous factors, including:
• | our ability to increase sales and gross profit from our insulin pump products, including the related insulin cartridges and infusion sets, and to commercialize and sell our future products; |
• | the number and mix of our products sold in each quarter; |
• | acceptance of our products by people with insulin-dependent diabetes, their caregivers, healthcare providers and third-party payors; |
• | the pricing of our products and competitive products, including the use of discounts, rebates or other financial incentives by us or our competitors; |
• | the effect of third-party coverage and reimbursement policies; |
• | our ability to maintain our existing infrastructure; |
• | the amount of, and the timing of the payment for, insurance deductibles required to be paid by our customers and potential customers under their existing insurance plans; |
• | interruption in the manufacturing or distribution of our products; |
• | our ability to simultaneously manufacture multiple products that meet quality, reliability and regulatory requirements; |
• | seasonality and other factors affecting the timing of purchases of our products; |
• | timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors; |
• | results of clinical research and trials on our existing and future products; |
• | the ability of our suppliers to timely provide us with an adequate supply of components that meet our requirements for product quality and reliability; |
• | regulatory clearance or approvals affecting our products or those of our competitors; and |
• | the timing of revenue and expense recognition associated with our product sales pursuant to applicable accounting standards. |
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In addition, we expect our operating expenses will continue to increase as we expand our business, which may exacerbate the quarterly fluctuations in our operating results. If our quarterly or annual operating results fall below the expectation of investors or securities analysts, the price of our common stock could decline substantially. Further, any quarterly or annual fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially, and these price fluctuations could result in further pressure on our stock price. We believe quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
Risks Related to our Intellectual Property and Potential Litigation
Our ability to protect our intellectual property and proprietary technology is uncertain.
We rely primarily on patent, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements, to protect our proprietary technologies. As of December 31, 2019, our patent portfolio consisted of approximately 86 issued U.S. patents and 68 pending U.S. patent applications. Of these, our issued U.S. patents expire between approximately 2021 and 2036. We are also seeking patent protection for our proprietary technologies in other countries throughout the world. In addition, we have 16 U.S. trademark registrations and 23 foreign trademark registrations.
We have applied for patent protection relating to certain existing and proposed products and processes. If we fail to file a patent application timely in any jurisdiction, we may be precluded from doing so at a later date. Further, we cannot assure you that any of our patent applications will be approved in a timely manner or at all. The rights granted to us under our patents, and the rights we are seeking to have granted in our pending patent applications, may not be meaningful or provide us with any commercial advantage. In addition, those rights could be opposed, contested or circumvented by our competitors, or be declared invalid or unenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer the same or similar products or technologies. Even if we are successful in receiving patent protection for certain products and processes, our competitors may be able to design around our patents or develop products that provide outcomes which are comparable to ours without infringing on our intellectual property rights. Due to differences between foreign and U.S. patent laws, our patented intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States. Even if patents are granted outside of the United States, effective enforcement in those countries may not be available.
We rely on our trademarks and trade names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our current or future trademark applications will be approved in a timely manner or at all. From time to time, third parties oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote additional resources to marketing new brands. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks.
We have entered into confidentiality agreements and intellectual property assignment agreements with our officers, employees, temporary employees and consultants regarding our intellectual property and proprietary technology. We also enter into confidentiality agreements with potential collaborators and other counter-parties, and the terms of our collaboration agreements typically contain provisions governing the ownership and control of intellectual property. In the event of unauthorized use or disclosure or other breaches of those agreements, we may not be provided with meaningful protection for our trade secrets or other proprietary information.
If a competitor infringes upon one of our patents, trademarks or other intellectual property rights, enforcing those patents, trademarks and other rights may be difficult, expensive and time consuming. Patent law relating to the scope of claims in the industry in which we operate is subject to rapid change and constant evolution and, consequently, patent positions in our industry can be uncertain. Even if successful, litigation to defend our patents and trademarks against challenges or to enforce our intellectual property rights could divert management’s attention from managing our business. Moreover, we may not have sufficient resources or incentive to defend our patents or trademarks against challenges or to enforce our intellectual property rights. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, pursuing litigation may provoke third parties to assert counterclaims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business, financial condition and operating results.
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The medical device industry is characterized by patent litigation, and from time to time, we may be subject to litigation that could be costly, result in the diversion of management’s time and efforts, or require us to pay damages.
Our success will depend in part on not infringing the patents or violating the other proprietary rights of third parties. Significant litigation regarding patent rights exists in our industry. Our competitors in both the United States and abroad, many of which have substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our products. The large number of patents, the rapid rate of new patent issuances, and the complexities of the technology involved increase the risk of patent litigation.
From time to time, we may receive communications from third parties alleging our infringement of their intellectual property rights or offering a license to intellectual property that is alleged to relate to products that we are currently developing. Any intellectual property-related discussions, disputes or litigation could force us to do one or more of the following:
• | stop selling our products or using technology that contains the allegedly infringing intellectual property; |
• | prevent or limit our ability to sell a product that we are currently developing; |
• | incur significant legal expenses; |
• | pay substantial damages to the party whose intellectual property rights we are allegedly infringing; |
• | redesign those products that contain the allegedly infringing intellectual property; or |
• | attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all. |
We do not currently maintain insurance to cover the expense or any liability that may arise from an intellectual property dispute with a third party. Any litigation or claim against us, even those without merit, or even preparing for a potential dispute or litigation before it arises, may cause us to incur substantial costs, and could place a significant strain on our financial resources and divert the attention of management from our core business. Any litigation or claim against us may also harm our reputation. Further, as we launch new products and increase our sales, and the number of participants in the diabetes market increases, we believe the possibility of our involvement in intellectual property disputes will increase.
We may be subject to damages resulting from claims that we, or our employees, have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
Many of our employees were previously employed at other medical device companies, including those that are our direct competitors or could potentially become our direct competitors. In some cases, those employees joined our company recently. We may be subject to claims that we, or our employees, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of these former employers or competitors. In addition, we have been and may in the future be subject to allegations that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if we successfully defend against these claims, litigation could cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. If our defense to those claims fails, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. We cannot guarantee that this type of litigation will not continue, and any future litigation or the threat thereof may adversely affect our ability to hire additional direct sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize proposed products, which could have an adverse effect on our business, financial condition and operating results.
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We may incur product liability losses, and insurance coverage may be inadequate or unavailable to cover these losses.
Our business exposes us to potential product liability claims that are inherent in the design, manufacture, testing and sale of medical devices. We are subject to product liability lawsuits alleging that component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition, injury or death to customers. The risk of one or more product liability claims or lawsuits may be even greater after we launch new products with new features or enter new markets where we have no prior experience selling our products and rely on newly-hired staff or new independent distributors or contractors to provide new customer training and customer support. In addition, the misuse of our products or the failure of customers to adhere to operating guidelines could cause significant harm to customers, including death, which could result in product liability claims. We may also identify deficiencies in our products that we determine are immaterial and do not pose safety risks, and therefore decide not to initiate a voluntary recall. However, any such deficiency may be more significant than we expect and lead to product liability claims. Product liability lawsuits and claims, safety alerts or product recalls, with or without merit, could cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business, harm our reputation and adversely affect our ability to attract and retain customers, any of which could have a material adverse effect on our business, financial condition and operating results.
Although we maintain third-party product liability insurance coverage, it is possible that claims against us may exceed the coverage limits of our insurance policies. Even if any product liability loss is covered by an insurance policy, these policies typically have substantial deductibles for which we are responsible. In addition, we expect the cost of our product liability insurance will increase as our product sales increase and we may also increase the amount of our deductibles over time. Product liability claims in excess of applicable insurance coverage could have a material adverse effect on our business, financial condition and operating results. In addition, any product liability claim brought against us, with or without merit, could result in further increases of our product liability insurance premiums. Insurance coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be able to obtain insurance coverage in the future on terms acceptable to us or at all. Our inability to obtain sufficient insurance coverage to protect again potential product liability claims could prevent or limit our commercialization of current products or products currently under development.
Risks Related to our Legal and Regulatory Environment
Our products and operations are subject to extensive governmental regulation, and failure to comply with applicable requirements could cause our business to suffer.
The medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding state regulatory agencies. The regulations are very complex and are subject to rapid change and varying interpretations. Regulatory restrictions or changes could limit our ability to carry on or expand our operations or result in higher than anticipated costs or lower than anticipated sales. The FDA and other U.S. governmental agencies regulate numerous elements of our business, including:
• | product design and development; |
• | pre-clinical and clinical testing and trials; |
• | product safety; |
• | establishment registration and product listing; |
• | labeling and storage; |
• | marketing, manufacturing, sales and distribution; |
• | pre-market clearance or approval; |
• | servicing and post-market surveillance; |
• | advertising and promotion; and |
• | recalls and field safety corrective actions. |
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Before we can market or sell a new regulated product or a significant modification to an existing product in the United States, we must obtain either clearance under Section 510(k) of the FDCA or approval of a PMA application from the FDA, unless an exemption from pre-market review applies. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based on extensive data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. Products that are approved through a PMA application generally need FDA approval before they can be modified. Similarly, some modifications made to products cleared through the 510(k) clearance process may require a new 510(k) submission. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time-consuming, and we may not be able to obtain these clearances or approvals on a timely basis or at all for our proposed products.
We may pursue 510(k) clearance for additional products or product modifications in the future. If the FDA requires us to go through a more rigorous examination for future products or modifications to existing products than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline or to not increase in line with our forecasts.
The FDA can delay, limit or deny clearance or approval of one of our devices for many reasons, including:
• | our inability to demonstrate that our products are safe and effective for their intended users; |
• | the data from our clinical trials may be insufficient to support clearance or approval; and |
• | failure of the manufacturing process or facilities we use to meet applicable requirements. |
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently cleared or approved products on a timely basis.
Any delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent us from generating revenue from these products or achieving profitability. Moreover, customers may defer purchasing our existing products in anticipation of a new product launch. Additionally, the FDA and other regulatory authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some customers from using our products and adversely affect our reputation and the perceived safety and efficacy of our products.
Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as fines, civil penalties, injunctions, warning letters, recalls of products, delays in the introduction of products into the market, refusal of the FDA or other regulators to grant future clearances or approvals, delays by the FDA or other regulators in granting clearances or approvals, and the suspension or withdrawal of existing approvals by the FDA or other regulators. Any of these sanctions could result in higher than anticipated costs, lower than anticipated sales, and diversion of management time and resources, any of which could have a material adverse effect on our reputation, business, financial condition and operating results.
Further, we commenced commercial sales of our products in select international markets during the third quarter of 2018. As we expand our operations outside of the United States and launch new products, we will become subject to various additional regulatory and legal requirements under the applicable laws and regulations of the international markets we enter. These additional regulatory requirements may involve significant costs and expenditures and, if we are not able to comply with any such requirements, our international expansion and business could be significantly harmed.
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Modifications to our products may require new 510(k) clearances or PMAs, or may require us to cease marketing or recall the modified products until clearances are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design, or manufacture, requires a new 510(k) clearance or, possibly, a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary for changes that we have made to our products. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMAs for modifications to our previously cleared or approved products, for which we concluded that new clearances or approvals were not necessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.
Further, the FDA’s ongoing review of and potential changes to the 510(k) program may make it more difficult for us to modify our previously cleared products, either by imposing stricter requirements on when a new 510(k) for a modification to a previously cleared product must be submitted, or by applying more onerous review criteria to such submissions.
If we or our third-party suppliers, contract manufacturers and service providers fail to comply with the FDA’s good manufacturing practice regulations, this could impair our ability to market our products in a cost-effective and timely manner.
We and our third-party suppliers, contract manufacturers and service providers are required to comply with the FDA’s Quality System Regulation (QSR), which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. The FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The FDA may impose inspections or audits at any time. We cannot assure you that our facilities or our contract manufacturer or component suppliers’ facilities would pass any future quality system inspection or audit. If we or our suppliers, contract manufacturers and service providers have significant non-compliance issues or if any corrective action plan that we or our suppliers, contract manufacturers or service providers propose in response to observed deficiencies is not sufficient, the FDA could take enforcement action against us and the manufacturing or distribution of our devices could be interrupted and our operations disrupted.
If we, or our suppliers, manufacturers and service providers, fail to adhere to QSR requirements, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.
A recall of our products, or the discovery of serious safety issues with our products, could have a significant negative impact on us.
The FDA has the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. The FDA has broad discretion to require the recall of a product or to require that manufacturers alert customers of safety risks, and may do so even in circumstances where we do not believe our product poses an unacceptable risk to health. In addition, manufacturers may, under their own initiative, recall a product if any material deficiency in a product is found or alert customers of unanticipated safety risks. A government-mandated or voluntary recall by us, one of our distributors or any of our other third-party suppliers could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls or notices relating to any products that we distribute would divert managerial and financial resources, and have an adverse effect on our reputation, financial condition and operating results.
Further, under the FDA’s Medical Device Reporting regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. Repeated product malfunctions may result in a voluntary or involuntary product recall, which could divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition and operating results.
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Any adverse event involving any products that we distribute could result in future voluntary corrective actions, such as recalls or customer notifications, or regulatory agency action, which could include inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.
Our failure to comply with U.S. federal and state fraud and abuse laws, including anti-kickback laws and other U.S. federal and state anti-referral laws, could have a material, adverse impact on our business.
There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws, physician self-referral laws, and false claims laws. Our relationships with healthcare providers and other third parties are subject to scrutiny under these laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs.
Healthcare fraud and abuse regulations are complex and evolving, and even minor irregularities can potentially give rise to claims that a statute or prohibition has been violated. The laws that may affect our ability to operate include:
• | the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering, paying or providing remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and state Medicaid programs; |
• | federal and state false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, state Medicaid programs, or other third-party payors that are false or fraudulent; |
• | federal and state physician referral laws, such as the Stark Law, that prohibit a physician from referring Medicare or Medicaid patients to an entity providing “designated health services,” including a company that furnishes durable medical equipment, with which the physician has a financial relationship unless that financial relationship meets an exception; |
• | federal and state laws, such as the Civil Monetary Penalties Law, that prohibit an individual or entity from offering or transferring remuneration to any person eligible for benefits under a federal or state health care program which such individual or entity knows or should know are likely to influence such eligible individual’s choice of provider, practitioner or supplier of any item or service for which payment may be made under federal health care programs such as Medicare and state Medicaid programs; |
• | federal criminal laws enacted as part of HIPAA that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; |
• | federal disclosure laws, such as the Physician Payments Sunshine Act, which require certain manufacturers, including medical device manufacturers, to submit annual data pertaining to payments or other transfers of value to covered recipients, including physicians; |
• | the Federal Trade Commission Act and similar laws regulating advertisement and consumer protections; |
• | foreign and U.S. state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; and |
• | federal and state laws governing the use, disclosure and security of personal information, including protected health information, such as HIPAA and the Health Information Technology for Economic and Clinical Health. |
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Possible sanctions for violation of these laws include monetary fines, civil and criminal penalties, exclusion from Medicare, Medicaid and other federal healthcare programs, and forfeiture of amounts collected in violation of those prohibitions and in some circumstances, treble damages. Any violation of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, financial condition and operating results. Recently, federal government agencies have published proposed rules for public comment which would make material modifications to several of these laws, including but not limited to the Anti-Kickback Statute, the Stark Law and HIPAA. It is unknown if or when these proposed rules may be adopted and what final form the proposed rules may take and how they may impact our business operations.
To enforce compliance with the federal laws, the U.S. Department of Justice, or DOJ, in conjunction with other federal agencies, has increased its scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming and can divert management’s attention from our core business. Additionally, if a healthcare company settles an investigation with the DOJ or other law enforcement agencies, we may be forced to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.
The scope and enforcement of these laws is uncertain and subject to rapid change in the current environment of healthcare reform. Federal or state regulatory authorities might challenge our current or future activities under these laws. Any of these challenges could have a material adverse effect on our reputation, business, financial condition and operating results. Any state or federal regulatory review of us, regardless of the outcome, would be costly and time-consuming. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.
We may be liable if we engage in the promotion of the off-label use of our products.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition against the promotion of the off-label use of our products or the pre-promotion of unapproved products. Healthcare providers may use our products off-label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use or the pre-promotion of an unapproved product, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties. Although our policy is to refrain from statements that could be considered off-label promotion of our products or pre-promotion of an unapproved product, the FDA or another regulatory agency could disagree and conclude that we have engaged in improper promotional activities. In addition, the off-label use of our products may increase the risk of product liability claims, which are expensive to defend and could result in substantial damage awards against us and harm our reputation.
Legislative or regulatory healthcare reforms may result in downward pressure on the price of and decrease reimbursement for our products, and uncertainty regarding the healthcare regulatory environment could have a material adverse effect on our business.
The sales of our products depend in part on the availability of coverage and reimbursement from third-party payors such as government health administration authorities, private health insurers, health maintenance organizations and other healthcare-related organizations. Both the federal and state governments in the United States continue to propose and pass new legislation and regulations designed to, among other things, expand healthcare coverage to more individuals, contain or reduce the cost of healthcare, and improve the quality of healthcare outcomes. This legislation and regulation may result in decreased reimbursement for medical devices, which may create additional pressure to reduce the prices charged for medical devices. Reduced reimbursement rates could significantly decrease our revenue, which in turn would place significant downward pressure on our gross margins and impede our ability to become profitable.
The Patient Protection and Affordable Care Act, or PPACA, substantially changed the way healthcare is financed by both governmental and private insurers, encourages improvements in the quality of healthcare items and services, and significantly impacts the medical device industry. However, a number of legislative changes have been proposed and adopted since the PPACA was enacted, and legislation has also been proposed that could modify or repeal the PPACA. The uncertainties regarding the future of the PPACA, and other healthcare reform initiatives, may have an adverse effect on our customers’ purchasing decisions regarding our products.
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In the future, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products. Cost control initiatives could decrease the price that we receive for our products. At this time, we cannot predict which, if any, additional healthcare reform proposals will be adopted, when they may be adopted or what impact they may have on the existing regulatory environment, or our ability to operate our business. Any of these factors could have a material adverse effect on our operating results and financial condition.
Our financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.
The PPACA imposes, among other things, an excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States, although this tax has been suspended for calendar years 2016, 2017, 2018 and 2019. It is unclear at this time if the moratorium will be further extended. We do not believe that our products are subject to this tax based on the retail exemption under applicable Treasury Regulations. However, the availability of this exemption is subject to interpretation by the Internal Revenue Service, or the IRS, and the IRS may disagree with our analysis. Absent further legislative action, the medical device excise tax applies to sales of taxable medical devices beginning on January 1, 2020, and future products that we manufacture, produce or import may be subject to this tax (unless the retail exemption or other applicable exemption applies). The financial impact this tax may have on our business is unclear and there can be no assurance that our business will not be materially adversely affected by it. Additionally, Congress could terminate the moratorium or further change the law related to the medical device tax in a manner that could adversely affect us.
Risks Related to our Common Stock
The price of our common stock may continue to fluctuate significantly.
The trading price of our common stock has been volatile in recent years. We believe our stock price has been, and will continue to be, subject to wide fluctuations in response to a variety of factors, including the following:
• | actual or anticipated fluctuations in our financial and operating results from period to period; |
• | our actual or perceived need for additional capital to fund our operations; |
• | market acceptance of our current products and products under development, and the recognition of our brand; |
• | introduction of proposed products, technologies or treatment techniques by us or our competitors; |
• | announcements of significant contracts, acquisitions or divestitures by us or our competitors; |
• | regulatory approval of our products or the products of our competitors, or the failure to obtain such approvals on the projected timeline or at all; |
• | speculative trading practices of market participants; |
• | issuance of securities analysts’ reports or recommendations; |
• | threatened or actual litigation and government investigations; |
• | sales of shares of our common stock by our employees, directors or principal stockholders; and |
• | general political or economic conditions. |
These and other factors might cause the market price of our common stock to fluctuate substantially. Fluctuations in our stock price may negatively affect the liquidity of our common stock, which could further impact our stock price.
In recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies across many industries. These changes may occur without regard to the financial condition or operating performance of the affected companies. Accordingly, the price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce the market price of our common stock.
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Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could reduce our stock price and prevent our stockholders from replacing or removing our current management.
Our amended and restated certificate of incorporation and bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions:
• | authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by the board of directors without prior stockholder approval; |
• | provide for the adoption of a staggered board of directors whereby the board is divided into three classes each of which has a different three-year term; |
• | provide that the number of directors shall be fixed by the board; |
• | prohibit our stockholders from filling board vacancies; |
• | provide for the removal of a director only with cause and then by the affirmative vote of the holders of a majority of the outstanding shares; |
• | prohibit stockholders from calling special stockholder meetings; |
• | prohibit stockholders from acting by written consent without holding a meeting of stockholders; |
• | require the vote of at least two-thirds of the outstanding shares to approve amendments to the certificate of incorporation or bylaws; and |
• | require advance written notice of stockholder proposals and director nominations. |
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including a merger, tender offer or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.
Our board of directors is authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.
Our amended and restated certificate of incorporation authorizes our board of directors, without the approval of our stockholders, to issue 5,000,000 shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, and to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our common stock, and the issuance of such shares in the future may reduce the value of our common stock.
U.S. federal income tax reform could adversely affect us and our stockholders.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, or the 2017 Tax Act, which significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The 2017 Tax Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact on our projection of minimal cash taxes. Our net deferred tax assets and liabilities were revalued at the newly-enacted U.S. corporate rate, and the impact was recognized in our tax expense, offset by a full valuation allowance, in the year of enactment. We continue to examine the impact that this tax reform legislation may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse.
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Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2019, we had federal net operating loss, or NOL, carryforwards of approximately $248.7 million, which includes the reduction recorded in 2019 discussed below. Of the total federal net operating loss carryforwards, $208.5 million will begin to expire in 2026, unless previously utilized. If there is an “ownership change” with respect to our company, as defined under Section 382 of the Code, the utilization of our NOL and research credit carryforwards may be subject to substantial limitations imposed by the Code, and similar state provisions. Limitations imposed on our ability to utilize NOL carryforwards could cause U.S. federal income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause NOL carryforwards to expire unused, in each case reducing or eliminating the benefit of our NOL carryforwards. In general, an ownership change occurs whenever there is a shift in ownership of our company by more than 50% by one or more 5% stockholders over a specified time period.
We have completed an analysis through December 31, 2018 to determine whether our net operating losses and credits are likely to be limited by Section 382. Based on this study, the Company determined that offerings of our securities caused an ownership change, as defined under Section 382, in 2018 and the resulting limitation significantly reduced the Company’s ability to utilize its net operating loss and credit carryovers before they expire. As a result, in 2019 the Company significantly reduced its deferred tax assets for the net operating loss and research credit carryforwards that are projected to expire unused. In addition, future ownership changes under Section 382 may further limit the Company's ability to fully utilize any remaining tax benefits.
With respect to our NOLs generated in 2018 and thereafter, the 2017 Tax Act may reduce the tax benefit of our NOLs. Under the 2017 Tax Act, our ability to carry back NOLs incurred after December 31, 2017 to previous tax years is eliminated. Under prior law, we could carry back NOLs for two years and carry forward NOLs for 20 years. Under the 2017 Tax Act, NOL carryforwards may be carried forward indefinitely. However, for NOLs arising after December 31, 2017, NOL carryforwards will be limited to 80% of our taxable income. Our NOLs generated in 2017 and in prior years will not be subject to the limitations under the 2017 Tax Act.
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Accordingly, investors may have to sell some or all of their shares of our common stock in order to generate cash flow from their investment.
Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products.
The SEC adopted a rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to perform due diligence, disclose and annually report to the SEC whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, which could increase our expenses. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities.
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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. For example, Mr. Sheridan, our principal executive officer, and Ms. Vosseller, our principal financial and accounting officer, are involved in a personal relationship and share a primary residence. While our board of directors is informed of the relationship and appropriate actions have been taken to ensure compliance with Company policies and procedures, the existence of this relationship could create additional risk, or the perception of additional risk, that our controls and procedures may not be effective. In addition, any testing by us conducted in connection with Section 404(a) of the Sarbanes-Oxley Act, or any testing conducted by our independent registered public accounting firm in connection with Section 404(b) of the Sarbanes-Oxley Act may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
We are required to disclose changes made to our internal control procedures on a quarterly basis and our management is required to assess the effectiveness of these controls annually. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.
We may be at increased risk of securities class action litigation.
In the past, securities class action litigation has been instituted against companies following periods of volatility in the overall market and in the price of a company’s securities. We believe this risk may be particularly relevant to us as we have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business, financial condition and results of operations. Our stock price volatility and the increase in our market capitalization during the past year may also result in higher expenses associated with our directors’ and officers’ liability insurance program.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecasts of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.
Item 1B. | Unresolved Staff Comments. |
Not applicable.
Item 2. | Properties. |
Substantially all of our operations are currently conducted at leased facilities, including our manufacturing processes, research and development activities, customer and technical support, and management and administrative functions. As of December 31, 2019, we occupied facilities with an aggregate total of approximately 341,000 square feet, as follows:
• | Roselle Street Leases: approximately 88,000 square feet of general office and laboratory space located on Roselle Street in San Diego, California. All of our existing leases for facilities on Roselle Street are scheduled to expire in May 2022. We have a one-time option to terminate our Roselle Street Leases effective as of May 2021 upon delivery of advance notice to the landlord and the payment of an early termination fee. |
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• | Barnes Canyon Lease: approximately 48,880 square feet of general office, manufacturing and warehouse space located on Barnes Canyon Road in San Diego, California, which is scheduled to expire in November 2023. We have a one-time option to extend the term of the Barnes Canyon Lease for a period of not less than three years and not greater than five years, by delivering notice to the landlord at least nine months and not more than 12 months prior to the expiration of the lease. |
• | Vista Sorrento Parkway Lease: approximately 59,013 square feet of general office space located on Vista Sorrento Parkway in San Diego, California, which is scheduled to expire in January 2023. We have a one-time option to extend the term of the Vista Sorrento Parkway Lease for a period of four years, by delivering written notice to the landlord in accordance with the terms of the lease. |
• | Marindustry Place Lease: approximately 40,490 square feet of general office and warehouse space located on Marindustry Place, San Diego, California, which is scheduled to expire in April 2026. We have a one-time option to extend the term of the Marindustry Place Lease for a period of no less than three years and no more than five years by delivering written notice to the landlord in accordance with the terms of the lease. |
• | Shoreline Lease: approximately 94,562 square feet of general office space located on Shoreline Drive, Boise, Idaho. The Shoreline Lease term is scheduled to commence in July 2020, and expire in June 2027. We have a one-time option to extend the term of the Shoreline Lease for a period of three years by delivering written notice to the landlord in accordance with the terms of the lease. |
• | Boise Short-Term Lease: approximately 9,109 square feet of general office space located on Shoreline Drive, Boise, Idaho. This is a short-term lease that is scheduled to expire in September 2020. |
• | Markham Lease: approximately 667 square feet of general office space located in Markham, Ontario, Canada. This is a month-to-month lease that can be canceled by delivering written notice to the landlord in accordance with the terms of the lease. |
In January of 2020, we entered into a sub-lease agreement for approximately 30,703 square feet of general office space located on High Bluff Drive, in San Diego, California. The High Bluff lease is scheduled to expire in March 2022.
We believe that the facilities that we presently occupy will be sufficient to support our current operations and that suitable additional facilities would be available to us should our operations require it.
Item 3. | Legal Proceedings. |
From time to time, we are involved in various legal proceedings arising from or related to claims incident to the normal course of our business activities. Although the results of such legal proceedings and claims cannot be predicted with certainty, we believe we are not currently a party to any legal proceeding(s) which, if determined adversely to us, would, individually or taken together, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the merit of the claims raised or the outcome, legal proceedings may have an adverse impact on us as a result of defense and settlement costs, diversion of management resources and other factors.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
Our common stock began trading on the NASDAQ Global Market on November 14, 2013 under the symbol “TNDM.” Prior to such time, there was no public market for our common stock. The following table sets forth intraday the high and low sales prices per share of our common stock as reported on the NASDAQ Global Market for the period indicated.
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Price Range | |||||||
High | Low | ||||||
Year Ended December 31, 2019: | |||||||
First Quarter | $ | 74.81 | $ | 32.00 | |||
Second Quarter | $ | 72.19 | $ | 51.37 | |||
Third Quarter | $ | 74.30 | $ | 56.69 | |||
Fourth Quarter | $ | 71.99 | $ | 52.31 | |||
Year Ended December 31, 2018: | |||||||
First Quarter | $ | 5.23 | $ | 2.14 | |||
Second Quarter | $ | 25.50 | $ | 4.75 | |||
Third Quarter | $ | 52.55 | $ | 20.08 | |||
Fourth Quarter | $ | 44.10 | $ | 26.40 | |||
Holders of Record
As of February 19, 2020, there were approximately 48 holders of record of our common stock. The actual number of common stockholders is greater than the number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans, as set forth in this Annual Report under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in Part III, Item 12, is incorporated herein by reference.
Unregistered Sales of Equity Securities
None.
Repurchases of Equity Securities
We did not repurchase any of our equity securities during 2019 or 2018.
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PART II
Item 6. | Selected Financial Data. |
The selected financial data presented below under the heading “Consolidated Statement of Operations Data” for the years ended December 31, 2019, 2018, and 2017 and the selected financial data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report. The selected financial data presented below under the heading “Consolidated Statement of Operations Data” for the years ended December 31, 2016 and 2015 and the selected financial data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2017, 2016 and 2015 are derived from our audited consolidated financial statements not included in this Annual Report. The selected financial data presented below should be read in conjunction with the information included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and the consolidated financial statements and the related notes in Part II, Item 8. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
Consolidated Statement of Operations Data:
(in thousands, except per share data) | Year Ended December 31, | ||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Sales | $ | 362,305 | $ | 183,866 | $ | 107,601 | $ | 84,248 | $ | 72,850 | |||||||||
Cost of sales | 168,093 | 94,044 | 63,507 | 60,656 | 46,270 | ||||||||||||||
Gross profit | 194,212 | 89,822 | 44,094 | 23,592 | 26,580 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Selling, general and administrative | 165,735 | 105,226 | 86,377 | 82,834 | 78,621 | ||||||||||||||
Research and development | 45,199 | 29,227 | 20,661 | 18,809 | 16,963 | ||||||||||||||
Total operating expenses | 210,934 | 134,453 | 107,038 | 101,643 | 95,584 | ||||||||||||||
Operating loss | (16,722 | ) | (44,631 | ) | (62,944 | ) | (78,051 | ) | (69,004 | ) | |||||||||
Total other income (expense), net | (7,882 | ) | (77,929 | ) | (10,081 | ) | (5,411 | ) | (3,404 | ) | |||||||||
Loss before income taxes | $ | (24,604 | ) | $ | (122,560 | ) | $ | (73,025 | ) | $ | (83,462 | ) | $ | (72,408 | ) | ||||
Income tax expense (benefit) | 149 | 51 | 8 | (15 | ) | 10 | |||||||||||||
Net loss | $ | (24,753 | ) | $ | (122,611 | ) | $ | (73,033 | ) | $ | (83,447 | ) | $ | (72,418 | ) | ||||
Net loss per share, basic and diluted | $ | (0.42 | ) | $ | (2.55 | ) | $ | (12.87 | ) | $ | (27.30 | ) | $ | (25.04 | ) | ||||
Weighted average shares used to compute basic and diluted net loss per share | 58,507 | 48,129 | 5,677 | 3,057 | 2,892 | ||||||||||||||
Consolidated Balance Sheet Data:
(in thousands) | As of December 31, | ||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Cash and cash equivalents | $ | 51,175 | $ | 41,826 | $ | 13,700 | $ | 44,678 | $ | 43,088 | |||||||||
Short-term investments | $ | 125,283 | $ | 87,201 | $ | 479 | $ | 8,860 | $ | 28,018 | |||||||||
Working capital | $ | 176,745 | $ | 121,597 | $ | 28,071 | $ | 60,616 | $ | 80,464 | |||||||||
Property and equipment, net | $ | 32,923 | $ | 17,151 | $ | 19,631 | $ | 18,409 | $ | 15,526 | |||||||||
Total assets | $ | 326,110 | $ | 206,294 | $ | 95,346 | $ | 112,392 | $ | 124,725 | |||||||||
Notes payable | $ | — | $ | — | $ | 76,541 | $ | 78,960 | $ | 29,275 | |||||||||
Total stockholders’ equity (deficit) | $ | 194,979 | $ | 131,275 | $ | (29,148 | ) | $ | (5,927 | ) | $ | 63,468 | |||||||
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
You should read the following discussion and analysis together with “Selected Financial Data” in Part II, Item 6 and our consolidated financial statements and related notes in Part II, Item 8. The following discussion contains forward-looking statements, which statements are subject to considerable risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” in Part I, Item 1A.
Certain statements contained in this Annual Report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, and are subject to the “safe harbor” created by these sections. Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found under the caption “Risk Factors” in Part I, Item 1A, and elsewhere in this Annual Report. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.
Overview
We are a medical device company with an innovative approach to the design, development and commercialization of products for people with insulin-dependent diabetes. Our goal is to lead in insulin therapy management by building a robust ecosystem and portfolio of data-driven products and services around our flagship insulin pumps. We believe our competitive advantage is rooted in our consumer-focused approach, and the incorporation of modern and innovative technology into our product offerings. Our manufacturing, sales and support activities principally focus on our flagship pump platform, the t:slim X2 Insulin Delivery System (t:slim X2), and our complementary product offerings. The simple-to-use t:slim X2 is based on our proprietary technology platform and is the smallest durable insulin pump available. It is the only pump currently available in the United States that is capable of remote feature updates, which positions us well to address the evolving needs and preferences of differentiated segments of the insulin-dependent diabetes market. We aim to improve and simplify the lives of people with diabetes and those of their healthcare providers, by delivering innovative hardware and software solutions, as well as best-in-class customer support.
Since our initial commercial launch, we have been able to rapidly innovate and bring more products to market than our competitors. We have commercially launched seven insulin pumps in the United States since 2012 and two pumps outside the United States since 2018. Four of our insulin pumps have featured integration with continuous glucose monitoring (CGM) technology, and two have featured an automated insulin delivery (AID) algorithm. We believe that the three new classifications defined by the United States Food and Drug Administration (FDA) for the interoperability of devices for AID will help support continued rapid innovation by streamlining the regulatory pathway for integrated products. In June 2018, the t:slim X2 was the first insulin pump designated as compatible with integrated continuous glucose monitoring (known as iCGM) devices; in February 2019, the t:slim X2 was the first in a new device category called Alternate Controller Enabled Infusion Pumps (ACE pumps); and in December 2019, Control-IQ technology for the t:slim X2 insulin pump was the first automated insulin dosing software in a new interoperable automated glycemic controller category.
In the four-year period ended December 31, 2019, we shipped approximately 142,000 insulin pumps, which is representative of our estimated global installed customer base on the typical four-year reimbursement cycle. Approximately 118,000 of these pumps were shipped to customers in the United States, and approximately 24,000 were shipped to international markets.
Today, our t:slim X2 hardware platform represents 100% of our new pump shipments. It is the only commercial insulin pump that allows users to update their pumps’ software quickly and easily from a personal computer. We have offered in-warranty t:slim customers in the United States four different software updates for no-cost using the Tandem Device Updater, including our two AID algorithms, Basal-IQ technology and Control-IQ technology. Basal-IQ technology launched in August 2018 and is a predictive low glucose suspend feature that is designed to temporarily suspend insulin delivery to help reduce the frequency and duration of hypoglycemic events. Control-IQ technology launched in January 2020 and is an advanced hybrid-closed loop feature, designed to help increase a user's time in targeted glycemic range. It is the first and only system cleared to deliver automatic correction boluses in addition to adjusting insulin to help prevent high and low blood sugar. Outside the United States we began selling efforts with t:slim X2 with Dexcom G5 integration in the third quarter of 2018, offering no-cost software updates for Basal-IQ technology in the third quarter of 2019, and intend to begin offering Control-IQ technology updates in select geographies in the second half of 2020.
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Our insulin pump products are generally considered durable medical equipment and have an expected lifespan of at least four years. In addition to insulin pumps, we sell disposable products that are used together with our pumps and are replaced every few days, including cartridges for storing and delivering insulin, and infusion sets that connect the insulin pump to a user’s body.
Our insulin pumps are compatible with the Tandem Device Updater, a revolutionary tool that allows pump users to update their pumps’ software quickly and easily from a personal computer. This unique offering positions us to bring future innovations, including our next generation AID algorithms, to our in-warranty t:slim X2 customers independent of the typical four-year insurance pump reimbursement cycle, faster than the industry has been able to in the past. The Tandem Device Updater launched in the United States in the first quarter of 2017 and outside of the United States in the third quarter of 2019. Since its launch, we have offered in-warranty t:slim customers in the United States four different software updates for no-cost using the Tandem Device Updater, including Basal-IQ technology and, most recently, Control-IQ technology. Outside the United States we began offering no-cost software updates for Basal-IQ technology in the third quarter of 2019 and intend to begin offering Control-IQ technology updates in the second half of 2020, subject to required regulatory and reimbursement approvals.
For the years ended December 31, 2019, 2018 and 2017, our consolidated sales were $362.3 million, $183.9 million, and $107.6 million, respectively. For the years ended December 31, 2019, 2018 and 2017, our net loss was $24.8 million, $122.6 million, and $73.0 million, respectively. Worldwide pump sales accounted for 68%, 67%, and 66% of our total sales, respectively, for the years ended December 31, 2019, 2018 and 2017, while pump-related supplies and accessories accounted for the remainder in each year. Our accumulated deficit as of December 31, 2019 and 2018 was $624.8 million and $600.1 million, respectively. These amounts included $216.6 million and $147.4 million of non-cash stock-based compensation charges and non-cash changes in the fair value of common stock warrants as of December 31, 2019 and 2018, respectively.
In the United States, we have rapidly increased sales since the commercial launch of our first product by expanding our sales, clinical and marketing organization, by developing, commercializing and marketing multiple differentiated products that utilize our proprietary technology platform and consumer-focused approach, and by providing strong customer support. Our sales have further increased following our scaled product launches in geographies outside of the United States. We believe that by demonstrating our product benefits and the shortcomings of existing insulin therapies, more people will choose our insulin pumps for their therapy needs, allowing us to further penetrate and expand the market worldwide. In addition, we believe publications, such as the results from the study using Control-IQ technology that was published in the New England Journal of Medicine in October 2019, will be valuable in demonstrating the clinical outcome benefits derived from our system to healthcare providers and payors. We also believe we are positioned well to address consumers’ needs and preferences with our current products and products under development and by offering customers access to our future innovations through the Tandem Device Updater, as they are approved by the local regulating bodies. At the same time, by innovating and offering new product features and benefits using our t:slim X2 platform, we are able to leverage a shared global manufacturing and supply chain infrastructure. In the United States, we are able to leverage a single sales, marketing, and clinical organization, as well as our domestic customer support services. In Canada, we have a separate sales organization and our customer support infrastructure benefits from close collaboration with our United States organization. In other international geographies, we have contracted with experienced distribution partners to commercialize and support our t:slim X2 platform.
Products Under Development
Our products under development support our strategy of focusing on both consumer and clinical needs, and include AID system enhancements, a connected (mobile) health offerings and a next-generation hardware platform which we call the t:sport Insulin Delivery System (t:sport). We intend to leverage our consumer-focused approach and proprietary technology platform to continue to develop products that have the features and functionality that will allow us to meet the needs of people in differentiated segments of the insulin-dependent diabetes market, including the following:
• | t:sport Insulin Delivery System – Approximately half the size of our t:slim X2 pump, the t:sport pump is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump. We anticipate that t:sport will feature a 200-unit cartridge, an on-pump bolus button, a rechargeable battery, an AID algorithm, and a Bluetooth radio. t:sport is being designed for use with leading U-100 insulins, and we are evaluating the use of insulin concentrates to provide to people with greater insulin needs. We anticipate that t:sport will be our first insulin pump to support full pump-control from our mobile application, subject to FDA review and approval. A separate controller may be offered in addition to or in advance of full mobile control availability. |
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• | Connected (Mobile) Health Offerings – We are currently preparing for the launch of a mobile application that has been designed to utilize the capability of the Bluetooth radio integrated with the t:slim X2 to wirelessly upload pump data to t:connect, receive notification of pump alerts and alarms, and provide a discrete, secondary display of glucose and insulin data. Future updates of this app will integrate other health-related information from third party sources, and support future pump-control capabilities for our products under development. |
◦ | The launch of the first generation of this mobile application in the United States follows the roll-out of our Control-IQ technology and, by allowing for the wireless upload of data to t:connect, is intended to reduce patient burden and increase healthcare provider office efficiency by reducing the manual steps historically required for data extraction. |
◦ | Over time, we also intend to offer additional features and enhancements to the mobile application, including partial or full control of pump features. |
For additional information, see the section of this Annual Report under the caption “Business” in Part I, Item 1.
Pump Shipments
From inception through June 2018, we derived nearly all of our sales from the shipment of insulin pumps and associated supplies to customers in the United States. Starting in the third quarter of 2018, we commenced sales of our t:slim X2 insulin pump in select international geographies. We consider the number of insulin pump units shipped per quarter to be an important metric for managing our business.
In the four-year period ended December 31, 2019, we shipped approximately 142,000 insulin pumps, of which approximately 118,000 were shipped to customers in the United States, and approximately 24,000 were shipped to international markets. In the year ended December 31, 2019, we shipped 73,431 insulin pumps worldwide, compared to 34,493 insulin pumps shipped in 2018.
Pump shipments to customers in the United States by fiscal quarter were as follows:
Pump Units Shipped for Each of the Three Months Ended in Respective Years - U.S. | ||||||||||||||
March 31 | June 30 | September 30 | December 31 | Total | ||||||||||
2012 | — | 9 | 204 | 844 | 1,057 | |||||||||
2013 | 852 | 1,363 | 1,851 | 2,406 | 6,472 | |||||||||
2014 | 1,723 | 2,235 | 2,935 | 3,929 | 10,822 | |||||||||
2015 | 2,487 | 3,331 | 3,431 | 6,234 | 15,483 | |||||||||
2016 | 4,042 | 4,582 | 3,896 | 4,418 | 16,938 | |||||||||
2017 | 2,816 | 3,427 | 3,868 | 6,950 | 17,061 | |||||||||
2018 | 4,444 | 5,447 | 7,379 | 12,935 | 30,205 | |||||||||
2019 | 9,669 | 12,799 | 13,814 | 17,453 | 53,735 | |||||||||
Pump shipments to international customers by fiscal quarter were as follows:
Pump Units Shipped for Each of the Three Months Ended in Respective Years - International | ||||||||||||||
March 31 | June 30 | September 30 | December 31 | Total | ||||||||||
2018 | N/A | N/A | 1,055 | 3,233 | 4,288 | |||||||||
2019 | 5,063 | 8,459 | 4,025 | 2,149 | 19,696 | |||||||||
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Technology Upgrade Program
Beginning in the third quarter of 2016 through the third quarter of 2017, we offered a Technology Upgrade Program under a variable pricing structure, as a pathway for certain existing customers to obtain the t:slim X2. The accounting treatment for the program required us to defer up to 100% of sales at the time of pump shipment and recognize them in a subsequent period, either when the upgrade was fulfilled or at the expiration of the program. We recognized the deferred amount of sales and cost of sales at the earlier of when the obligations under the program were satisfied or upon the expiration of the program. If a customer elected to participate in the program, we recognized any upgrade fees that we received and the associated costs at the time of fulfilling the given obligation. For the year ended December 31, 2017, we recorded incremental net sales of $5.0 million with a corresponding increase of $3.1 million in gross profit as a result of the Technology Upgrade Program. The program expired on September 30, 2017 and, therefore, had no impact on our 2018 and 2019 financial results.
Trends Impacting Financial Results
Overall, we have experienced considerable sales growth since the commercial launch of our first product in the third quarter of 2012, while incurring operating losses since our inception. Our operating results have historically fluctuated on a quarterly or annual basis, particularly in periods surrounding anticipated regulatory approvals, the commercial launch of new products by us and our competitors, and the commercial launch of our products in geographies outside of the United States. We expect these periodic fluctuations in our operating results to continue.
We believe that our financial condition and operating results, as well as the decision-making process of our current and potential customers, has been and will continue to be impacted by a number of general trends, including the following:
• | market acceptance of our products and competitive products by people with insulin-dependent diabetes, their caregivers and healthcare providers; |
• | the introduction of new products, treatment techniques or technologies for the treatment of diabetes, including the timing of the commercialization of new products by us and our competitors; |
• | seasonality in the United States associated with annual insurance deductibles and coinsurance requirements associated with the medical insurance plans utilized by our customers and the customers of our distributors; |
• | timing of holidays and summer vacations, which may vary by geography; |
• | the buying patterns of our distributors and other customers, both domestically and internationally; |
• | changes in the competitive landscape, including as a result of companies entering or exiting the diabetes therapy market; |
• | access to adequate coverage and reimbursement for our current and future products by third-party payors, and reimbursement decisions by third-party payors; |
• | the magnitude and timing of any changes to our facilities, manufacturing operations and other infrastructure; |
• | anticipated and actual regulatory approvals of our products and competitive products; and |
• | product recalls impacting, or the suspension or withdrawal of regulatory clearance or approval relating to, our products or the products of our competitors. |
In addition to these general trends, we believe the following specific factors have materially impacted, and could continue to materially impact our business going forward:
• | continued increase in demand following the commercial launch of t:slim X2 and the demonstrated success of our Tandem Device Updater; |
• | anticipated new product launches; |
• | increased opportunity to achieve customer renewals as customers become eligible for insurance reimbursement to purchase a new insulin pump at the end of the typical four-year reimbursement cycle; |
• | benefit in 2018 and 2019 following the announcement by Johnson & Johnson that it discontinued the operations of Animas Corporation (Animas) and discontinued availability of Animas pump supplies in September 2019; |
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• | designation by UnitedHealthcare of one of our competitors as its preferred, in-network durable medical equipment provider of insulin pumps for most customers age seven and above; |
• | ability to enter into and maintain agreements with CGM partners for CGM integration; |
• | expansion and new product launches in select international geographies; |
• | accounting variability and complexity associated with certain commercial programs, such as the Technology Upgrade Program offered in 2016 and 2017 that provided a pathway for in-warranty customers to our next-generation hardware platform; and |
• | ability to effectively scale our operations to support rapid growth, including expanding our facilities, advancing our research and development efforts, increasing manufacturing capacity through third-party manufacturers, and hiring and retaining employees in customer service and support functions. |
In addition to working to achieve our sales growth expectations, we intend to continue to leverage our infrastructure investments to realize additional manufacturing, sales, marketing and administration cost efficiencies with the goal of improving our operating margins and ultimately achieving sustained profitability. We achieved profitability for the first time in the fourth quarter of 2018, and again in the fourth quarter of 2019, though we may be unable to achieve profitability consistently from period to period. We believe we can ultimately achieve sustained profitability by driving incremental sales growth in U.S. and international markets, meeting our pump renewal sales objectives, maximizing manufacturing efficiencies on increased production volumes, and leveraging the investments made in our sales, clinical, marketing and customer support organizations.
Recent Developments
In December 2019, the FDA cleared our t:slim X2 insulin pump with Control-IQ technology, an advanced hybrid-closed-loop feature designed to help increase time in range, and the first and only system cleared to deliver automatic correction boluses in addition to adjusting insulin delivery to help prevent high and low blood sugar. The system integrates with Dexcom G6 continuous glucose monitoring (CGM), which requires no fingersticks for calibration or diabetes treatment decisions.
Components of Results of Operations
Sales
We offer products for people with insulin-dependent diabetes. We commenced commercial sales of our original t:slim insulin pump platform in the United States in the third quarter of 2012 and continued to launch various iterations of that platform during the following years. In October 2016, we began shipping our flagship pump platform, the t:slim X2 insulin pump. The t:slim X2 hardware platform, which includes remote software update capabilities, now represents 100% of our new pump shipments. Accordingly, in the third quarter of 2018 we discontinued new sales of all prior platform versions. Our products also include disposable cartridges and infusion sets. In addition, we offer accessories including protective cases, belt clips, and power adapters, although sales of these products are not significant.
We primarily sell our products through national and regional distributors in the United States on a non-exclusive basis. These distributors are generally providers of medical equipment and supplies to individuals with diabetes. Our primary end customers are people with insulin-dependent diabetes. Similar to other durable medical equipment, the primary payor is generally a third-party insurance carrier and the customer is usually responsible for any medical insurance plan copay or coinsurance requirements. We believe our existing sales, clinical, and marketing infrastructure will allow us to continue to increase sales by allowing us to promote our products to a greater number of potential customers, caregivers and healthcare providers.
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In the third quarter of 2018, we began the launch of our t:slim X2 with G5 through distribution partners outside the United States, including in select European countries, Australia, New Zealand, and South Africa. During the second quarter of 2019, we began selling our t:slim X2 with Basal-IQ technology in certain of these geographies. Our independent distributor partners perform all sales, customer support and training in their respective markets. In Canada, we market with a direct sales force and, similar to the United States, use a distributor partner for certain billing and fulfillment activities. Historically, we have experienced consistent levels of reimbursement for our products in the United States, but we expect the average sales price will vary in international markets based on a number of factors, such as the geographical mix, nature of the reimbursement environment, government regulations and the extent to which we rely on distributor relationships to provide sales, clinical and marketing support.
In general, in the United States we have experienced, and expect to continue to experience, pump shipments being weighted heavily towards the second half of the year, with the highest percentage of pump shipments expected in the fourth quarter due to the nature of the reimbursement environment. Consistent with our historical seasonality, we also expect domestic pump shipments from the fourth quarter to the following first quarter to decrease significantly. Internationally, we do not expect this same impact from seasonality associated with reimbursement, although the quarterly sales trends may be impacted by summer vacations and launches into new geographies. While the opportunity to transition former Animas customers during 2019 positively impacted our quarterly sales trends worldwide, we do not anticipate future significant benefit.
In addition, our quarterly sales have fluctuated, and may continue to fluctuate, substantially in the periods surrounding anticipated and actual regulatory approvals and commercial launches of new products by us or our competitors. We believe customers may defer purchasing decisions if they believe a new product may be launched in the future. Additionally, upon the announcement of FDA approval or commercial launch of a new product, either by us or one of our competitors, potential new customers may reconsider their purchasing decisions or take additional time to consider the anticipated or new approval or product launch in making their purchasing decisions. For instance, we believe certain customers paused in their decision-making during the second half of 2019 in anticipation of the commercial availability of the t:slim X2 with Control-IQ technology. However, it is difficult to quantify the extent of the impact of these or similar events on future purchasing decisions.
Cost of Sales
Historically, we have manufactured our pumps and disposable cartridges at our manufacturing facility in San Diego, California. In 2020, we anticipate outsourcing a portion of our cartridge manufacturing to an experienced third-party contract manufacturer. Infusion sets and pump accessories are manufactured by third-party suppliers. Cost of sales includes raw materials, labor costs, manufacturing overhead expenses, product training costs, freight, reserves for expected warranty costs, scrap and excess and obsolete inventories. Manufacturing overhead expenses include expenses relating to quality assurance, manufacturing engineering, material procurement, inventory control, facilities, equipment, information technology and operations supervision and management. We anticipate that our cost of sales will continue to increase as our product sales increase.
Over the long term, we expect our overall gross margin percentage, which for any given period is calculated as sales less cost of sales divided by sales, to improve, as our sales increase and our overhead costs are spread over larger production volumes. We expect we will be able to leverage our manufacturing cost structure across our products that utilize the same technology platform and manufacturing infrastructure and will be able to further reduce per unit costs with increased automation, process improvements and raw materials cost reductions. Pumps have, and are expected to continue to have, a higher gross margin than our pump-related supplies. Therefore, the percentage of pump sales relative to total sales will have a significant impact on gross margin. We also expect our warranty cost per unit to decrease as we release additional product features and functionality utilizing the Tandem Device Updater. However, our overall gross margin may fluctuate in future quarterly periods as a result of numerous factors aside from those associated with production volumes and product mix. In addition, as demand for our products increases, we have begun, and may continue, to make additional investments in manufacturing capacity or increase our reliance on third parties for manufacturing-related services, either of which could have a negative impact on gross margin in the near-term. Specifically, in 2020, we plan to invest in additional manufacturing equipment to meet anticipated long-term demand for our cartridges, which may initially place downward pressure on the gross margin on our supplies.
Other factors impacting our overall gross margin may include the changing percentage of products sold to distributors versus directly to individual customers, varying levels of reimbursement among third-party payors in domestic and international markets, the timing and success of new regulatory approvals and product launches, the impact of the valuation and amortization of employee stock option grants on non-cash stock-based compensation expense allocated to cost of sales, changes in warranty estimates, training costs, licensing and royalty costs, cost associated with excess and obsolete inventories, and changes in our manufacturing processes, capacity, costs or output.
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Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses primarily consist of salary, cash-based incentive compensation, fringe benefits and non-cash stock-based compensation for our executive, financial, legal, marketing, sales, clinical, customer support, technical services, insurance verification, regulatory affairs and other administrative functions. We began expanding our U.S. field sales and clinical organization during the third quarter of 2019 to support an expected increase in demand. We expect to have approximately 90 territories by early 2020. Our existing territories are maintained by sales representatives and field clinical specialists, and supported by managed care liaisons, additional sales management and other customer support personnel. Our operations in Canada are supported by a direct sales force of approximately 17 field representatives. Other significant SG&A expenses include those incurred for product demonstration samples, commercialization activities associated with new product launches, travel, trade shows, outside legal fees, independent auditor fees, outside consultant fees, insurance premiums, facilities costs and information technology costs. Overall, we expect our SG&A expenses, including the cost of our customer support infrastructure, to increase as our customer base grows in the United States and international markets. We will continue to evaluate, and may further increase, the number of our field sales and clinical personnel in order to optimize the coverage of our existing territories. Additionally, we realized a notable increase in non-cash stock-based compensation expense allocated to SG&A beginning in the third quarter of 2018, and again in the second quarter of 2019, due to the valuation of certain employee stock option grants and the impact on the valuation of the significant increase in our stock price over the previous year. We expect higher non-cash stock-based compensation expense will be sustained through the first half of 2020 and will begin to decline in future quarters. Our SG&A expenses may also increase due to anticipated costs associated with additional compliance and regulatory reporting requirements.
Research and Development
Our research and development (R&D), activities primarily consist of engineering and research programs associated with our products under development, as well as activities associated with our core technologies and processes. R&D expenses are primarily related to employee compensation, including salary, fringe benefits, non-cash stock-based compensation and temporary employee expenses. We also incur R&D expenses for supplies, development prototypes, outside design and testing services, depreciation, allocated facilities and information services, clinical trial costs, payments under our licensing, development and commercialization agreements and other indirect costs. We expect our R&D expenses to increase as we advance our products under development and develop new products and technologies, partially offset by future expected declines in non-cash stock-based compensation.
Other Income and Expense
Other income and expense primarily consists of changes in the fair value of certain warrants issued in our public offering of common stock in October 2017, and interest earned on our cash equivalents and short-term investments. In 2018 and 2017, it also included interest expense and amortization of debt discount and debt issuance costs associated with our Amended and Restated Term Loan Agreement (Term Loan Agreement) with Capital Royalty Partners II, L.P. and its affiliated funds (CRG), and a $5.3 million loss on extinguishment of debt associated with the full repayment of amounts due under the Term Loan Agreement in August 2018. Prior to the repayment, there was $82.7 million of outstanding principal under the Term Loan Agreement, which accrued interest at a rate of 11.5% per annum. As a result of the full repayment, we did not incur any interest expense or costs associated with the Term Loan Agreement subsequent to the third quarter of 2018. Other income also includes interest earned on our cash equivalents and short-term investments. We expect other income and expense to fluctuate from period to period primarily due to the revaluation of certain outstanding common stock warrants, which expire in the fourth quarter of 2022.
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Results of Operations
Year Ended December 31, | |||||||||||
(in thousands, except percentages) | 2019 | 2018 | 2017 | ||||||||
Sales: | |||||||||||
Domestic | $ | 302,084 | $ | 174,188 | $ | 107,601 | |||||
International | 60,221 | 9,678 | — | ||||||||
Total sales | 362,305 | 183,866 | 107,601 | ||||||||
Cost of sales | 168,093 | 94,044 | 63,507 | ||||||||
Gross profit | 194,212 | 89,822 | 44,094 | ||||||||
Gross margin | 54 | % | 49 | % | 41 | % | |||||
Operating expenses: | |||||||||||
Selling, general and administrative | 165,735 | 105,226 | 86,377 | ||||||||
Research and development | 45,199 | 29,227 | 20,661 | ||||||||
Total operating expenses | 210,934 | 134,453 | 107,038 | ||||||||
Operating loss | (16,722 | ) | (44,631 | ) | (62,944 | ) | |||||
Other income (expense), net: | |||||||||||
Interest and other income | 3,271 | 1,462 | 239 | ||||||||
Interest and other expense | (78 | ) | (7,584 | ) | (11,341 | ) | |||||
Loss on extinguishment of debt | — | (5,313 | ) | — | |||||||
Change in fair value of stock warrants | (11,075 | ) | (66,494 | ) | 1,021 | ||||||
Total other expense, net | (7,882 | ) | (77,929 | ) | (10,081 | ) | |||||
Loss before income taxes | $ | (24,604 | ) | $ | (122,560 | ) | $ | (73,025 | ) | ||
Income tax expense | 149 | 51 | 8 | ||||||||
Net loss | $ | (24,753 | ) | $ | (122,611 | ) | $ | (73,033 | ) | ||
Comparison of Years Ended December 31, 2019 and 2018
Sales. For the year ended December 31, 2019, sales were $362.3 million, which included $60.2 million of international sales. For the year ended December 31, 2018, sales were $183.9 million, which included $9.7 million of international sales which commenced in the third quarter of 2018.
The increase in total sales of $178.4 million in 2019, as compared to 2018, was primarily driven by a 113% increase in worldwide pump shipments to 73,431 in 2019, compared to 34,493 in 2018. Worldwide pump shipments were positively impacted by strong demand for our products following the August 2018 domestic launch of t:slim X2 with Basal-IQ technology and the commencement of commercial sales of t:slim X2 with G5 integration in select international geographies beginning in the third quarter of 2018, as well as the fulfillment of international pump demand from backlog that existed at the end of 2018 due to supply constraints. In addition, worldwide sales in 2019 and 2018 were positively impacted by the transition of former Animas customers to our products. However, we do not anticipate significant benefit from conversion of Animas customers beyond 2019. Sales from pump-related supplies increased 91% primarily due to an overall increase in our installed base of customers reordering supplies. The ratio of the number of infusion sets shipped to the number of cartridges shipped was over 100% in both of the years ended December 31, 2019 and 2018.
Domestic sales by product were as follows (in thousands):
Year Ended December 31, | |||||||
2019 | 2018 | ||||||
Pump | $ | 205,492 | $ | 115,719 | |||
Infusion sets | 66,034 | 40,260 | |||||
Cartridges | 30,022 | 17,796 | |||||
Other | 536 | 413 | |||||
Total Domestic Sales | $ | 302,084 | $ | 174,188 | |||
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International sales by product were as follows (in thousands):
Year Ended December 31, | |||||||
2019 | 2018 | ||||||
Pump | $ | 42,094 | $ | 8,205 | |||
Infusion sets | 11,221 | 629 | |||||
Cartridges | 6,656 | 781 | |||||
Other | 250 | 63 | |||||
Total International Sales | $ | 60,221 | $ | 9,678 | |||
Sales to distributors accounted for 73% and 78% of our total domestic sales for the years ended December 31, 2019 and 2018, respectively. Our percentage of sales to distributors versus individual customers is principally determined by the mix of customers ordering our products within the period and whether or not we have a contractual arrangement with their underlying third-party insurance payor. Sales to distributors accounted for 92% and 100% of our total international sales for the years ended December 31, 2019 and 2018, respectively.
Cost of Sales and Gross Profit. Our cost of sales in 2019 was $168.1 million, resulting in gross profit of $194.2 million, compared to $94.0 million of cost of sales in 2018 resulting in gross profit of $89.8 million. The gross margin for 2019 was 54%, compared to 49% in 2018.
The improvement in both gross profit and gross margin was primarily the result of the increase in insulin pump sales which have a higher gross margin than pump-related supplies. Gross margin and gross profit also increased as a result of per-unit manufacturing cost improvements from higher production volumes and continued overall manufacturing efficiencies gained from our new manufacturing facility which became fully operational at the beginning of 2018. On an aggregate basis, other non-manufacturing costs, which primarily consist of warranty, freight and training costs, also reflected improvement on a per unit basis. Non-cash stock-based compensation expense allocated to cost of sales increased to $6.4 million in 2019 compared to $2.6 million in 2018, due primarily to the valuation of certain 2018 and 2019 employee stock option grants and the impact on the valuation of the significant increase in our stock price.
Selling, General and Administrative Expenses. SG&A expenses increased 58% to $165.7 million in 2019 from $105.2 million in 2018. Employee-related expenses for our SG&A functions comprise the majority of the SG&A expenses. These expenses increased $49.6 million during 2019 compared to 2018, which included an increase of $23.6 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our growing installed customer base, and a $26.0 million increase in non-cash stock-based compensation expense. Non-cash stock-based compensation expense allocated to SG&A increased to $42.9 million in 2019, compared to $16.8 million in 2018, due primarily to the valuation of certain 2018 and 2019 employee stock options grants and the impact on the valuation of the significant increase in our stock price. We also experienced increased costs for equipment and supplies, outside consulting and services, and travel of $10.9 million.
Research and Development Expenses. R&D expenses increased 55% to $45.2 million in 2019 from $29.2 million in 2018. The increase in R&D expenses was primarily the result of an increase of $4.8 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, and a $4.5 million increase in non-cash stock-based compensation expense. Non-cash stock-based compensation expense allocated to R&D increased to $8.8 million in 2019, compared to $4.3 million in 2018, due primarily to the valuation of certain 2018 and 2019 employee stock option grants and the impact on the valuation of the significant increase in our stock price. We also experienced increased costs for outside consulting and services, clinical trials, and supplies of $5.8 million.
Other Income (Expense). Total other expense in 2019 was $7.9 million, compared to $77.9 million in 2018. Other expense in 2019 primarily consisted of a $11.1 million revaluation loss from the change in fair value of certain warrants due to the significant appreciation in our stock price during 2019, offset by interest and other income of $3.3 million. Other expense in 2018 consisted primarily of a $66.5 million revaluation loss from the change in fair value of certain warrants due to the significant appreciation in our stock price during 2018, $7.6 million of interest expense associated with the Term Loan Agreement, as well as a $5.3 million loss on extinguishment of debt associated with the full repayment of our Term Loan Agreement in August 2018. Interest and other income primarily consisted of interest earned on our cash equivalents and short-term investments, for which our average invested balances were significantly higher in 2019 as compared to 2018.
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Comparison of Years Ended December 31, 2018 and 2017
Sales. For the year ended December 31, 2018, sales were $183.9 million, which included $9.7 million of international sales which commenced in the third quarter of 2018. For the year ended December 31, 2017, sales were $107.6 million, which included incremental net pump sales of $5.0 million as a result of the Technology Upgrade Program in place at that time.
The increase in total sales of $76.3 million in 2018, as compared to 2017, was primarily driven by a 102% increase in worldwide pump shipments to 34,493 in 2018, compared to 17,061 in 2017. Worldwide pump shipments were positively impacted by strong demand for our products following the August 2018 domestic launch of t:slim X2 with Basal-IQ technology, the August 2017 launch of t:slim X2 with G5 integration, and the commencement of commercial sales in select international geographies beginning in the third quarter of 2018. Additionally, sales from pump-related supplies increased 66% primarily due to the September 2017 launch of infusion set products using the t:lock connector, as well as an overall increase in our installed customer base of customers reordering supplies. The ratio of the number of infusion sets shipped to the number of cartridges shipped increased to over 100% in 2018 from 69% in the year ended 2017.
Domestic sales by product were as follows (in thousands):
Year Ended December 31, | |||||||
2018 | 2017 | ||||||
Pump | $ | 115,719 | $ | 71,518 | |||
Infusion sets | 40,260 | 21,444 | |||||
Cartridges | 17,796 | 14,173 | |||||
Other | 413 | 466 | |||||
Total Domestic Sales | $ | 174,188 | $ | 107,601 | |||
International sales by product were as follows (in thousands):
Year Ended December 31, | |||||||
2018 | 2017(1) | ||||||
Pump | $ | 8,205 | $ | — | |||
Infusion sets | 629 | — | |||||
Cartridges | 781 | — | |||||
Other | 63 | — | |||||
Total International Sales | $ | 9,678 | $ | — | |||
(1) International sales commenced in the third quarter of 2018. We did not have any international sales during the year ended December 31, 2017.
Sales to distributors accounted for 78% and 75% of our total domestic sales for the years ended December 31, 2018 and 2017, respectively. Our percentage of sales to distributors versus individual customers is principally determined by the mix of customers ordering our products within the period and whether or not we have a contractual arrangement with their underlying third-party insurance payor. The percentage was particularly impacted in 2018 by the mid-2017 launch of the t:lock connector, which resulted in greater purchases of infusion sets by our independent distributors during the period as compared to the same period during the prior year. Sales to distributors accounted for 100% of our total international sales for the year ended December 31, 2018.
Cost of Sales and Gross Profit. Our cost of sales in 2018 was $94.0 million, resulting in gross profit of $89.8 million, compared to $63.5 million of cost of sales and gross profit of $44.1 million in 2017, which included incremental gross profit of $3.1 million associated with the Technology Upgrade Program.
The gross margin for 2018 was 49%, compared to 41% in 2017. The incremental gross profit associated with the Technology Upgrade Program benefited our 2017 gross margin by one percentage point.
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The improvement in both gross profit and gross margin was primarily the result of the increase in insulin pump sales which have a higher gross margin than pump-related supplies, as well as per-unit cost improvements on all products from increased production volumes and manufacturing efficiencies. On an aggregate basis, other non-manufacturing costs, which primarily consist of warranty, freight and training costs, also reflected improvement on a per unit basis. Non-cash stock-based compensation expense allocated to cost of sales increased to $2.6 million in 2018, compared to $1.4 million in 2017, due primarily to the valuation of certain 2018 employee stock option grants and the impact on the valuation of the significant increase in our stock price during 2018.
Selling, General and Administrative Expenses. SG&A expenses increased 22% to $105.2 million in 2018 from $86.4 million in 2017. Employee-related expenses for our SG&A functions comprise the majority of the SG&A expenses. These expenses increased $18.4 million during 2018 compared to 2017, which included an increase of $11.6 million in salaries, incentive compensation and other employee benefits due in part to an increase in personnel to support our growing installed customer base, as well as the impact of our strong year-over-year sales growth on incentive-based compensation. Additionally, there was a $6.8 million increase in non-cash stock-based compensation expense. Non-cash stock-based compensation expense allocated to SG&A increased to $16.8 million in 2018, compared to $10.0 million in 2017, due primarily to the valuation of certain 2018 employee stock option grants and the impact on the valuation of the significant increase in our stock price during 2018.
Research and Development Expenses. R&D expenses increased 41% to $29.2 million in 2018 from $20.7 million in 2017. The increase in R&D expenses was primarily the result of an increase of $4.1 million in salaries, incentive compensation and other employee benefits due to an increase in personnel to support our product development efforts, and a $3.1 million increase in non-cash stock-based compensation expense due to the significant increase in our stock price in 2018. In addition, our strong year-over-year sales growth drove a substantial year-over-year increase in incentive-based compensation. Non-cash stock-based compensation expense allocated to R&D increased to $4.3 million in 2018, compared to $1.2 million in 2017, due primarily to the valuation of certain 2018 employee stock option grants and the impact on the valuation of the significant increase in our stock price during 2018.