Tandem Diabetes Care, Inc.
Q2 2018 Earnings Call Transcript

Published: 31 Jul 2018

[Operator:]

Good day, ladies and gentlemen, and thank you for your patience. You've joined Tandem's Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I'd now like to turn the call over to your host, Chief Administrative Officer, Ms. Susan Morrison. Ma'am, you may begin.

[Susan Morrison:]

Thank you, Hajib. Good afternoon, everyone, and thank you for joining Tandem's Second Quarter 2018 Earnings Conference call. Today's discussion will include forward-looking statements. These statements reflect management's expectation about future events, product development timelines and financial performance and operating plans, and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the risk factors portion and elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements whether as a result of new information, future events or other factors. I'll now turn the call over to Kim Blickenstaff, Tandem's President and CEO, who'll be leading today's call. Kim?

[Kim Blickenstaff:]

Thanks, Susan. And welcome everyone to today's call. Joining me is Leigh Vosseller, our Chief Financial Officer. It's been a tremendous first half of 2018. We began the year with big aspirations to grow product development and operational progress, and I'm proud that in the first 2 quarters we delivered on all fronts by meeting or exceeding our goals throughout the business. Some highlights of Q2 include

[Leigh Vosseller:]

Thank you, Kim, and good afternoon, everyone. As you saw in today's press release, we again demonstrated solid execution and strong results in the second quarter. We shipped approximately 5,400 pumps in Q2, which drove total sales to $34 million. It is the second-highest sales quarter in our history, representing an increase of 25% over an equally strong Q1 and 50% compared to the prior year. This brings us on a year-to-date basis to $61 million, or 52% growth year-over-year, even with the $1.5 million benefit recognized in 2017 related to the Technology Upgrade Program that was in place at that time. Since inception, we have now shipped nearly 78,000 pumps with over 66,000 shipped in the last 4 years, which we consider a reasonable estimate of our current installed base. Pumps continue to be the most significant driver of our growth at $21 million this quarter or 62% of sales in both this quarter and on a year-to-date basis. We shipped approximately 800 renewals this quarter, more than double the 300 renewals last year. As a reminder, we began shipping pumps in late 2012 and continue to see renewals from that time period. Based on a typical 4-year renewal cycle, this suggests that it can take 2 to 3 years to reach our ultimate goal of a 70% renewal rate. Supplies sales also increased significantly by 62% year-over-year to $13 million. This was a result of our increase in ordering customers, combined with the capture of infusion set sales to our entire install base for the second quarter in a row. Infusion sets were 26% of total sales at $9 million for the quarter. Similar to pumps, supplies overall increased 27% sequentially from Q1. Based on the strength in pump sales we have experienced so far and the high level of interest we are seeing in the new Basal-IQ feature, we are raising our 2018 sales guidance to a range of $140 million to $148 million from the previous range of $132 million to $140 million. Consistent with our historical pattern, we expect our sales to be more heavily weighted to the second half of the year and particularly the fourth quarter due to the timing of insurance deductible resets. As Kim mentioned, our new guidance range continue to have only modest expectations for our international sales beginning later this year. Growth margin in the second quarter increased to 44%, up from 38% in the prior year and 42% in the first quarter of 2018. Higher volume and process efficiencies continue to drive improvement in manufacturing cost as well as incremental profits from greater infusion set sales. As a whole, other nonmanufacturing cost, which primarily consist of warranty, freight, and new customer trainings also reflected improvement. Other factors that have and will continue to impact gross margin are seasonality, product mix and direct versus distributor mix. Our progression this quarter is in line with our goal of reaching a 55% gross margin at our cash flow breakeven point, which is anticipated in the second half of 2019. Operating expenses were $29 million in the quarter, up 8% over the prior year, due primarily to increases in R&D costs associated with our product pipeline and overall higher incentive-based compensation as a result of our above-expectation results. These increases were offset by reduced noncash stock-based compensation expense year-over-year, which dropped to just over $2 million in Q2 compared to nearly $5 million in the prior year. Overall, our 60% sales growth, 6-point gross margin improvement and the single-digit operating expense increase drove a 48 point improvement in our operating margin year-over-year to negative 41% in Q2. Total non-cash stock-based compensation, which includes amounts charged to cost of goods sold is now expected to be approximately $20 million for the year. This increase from the $45 million in our original guidance reflects the recent evaluation of employee option grant impacted by significant appreciation in our stock price in recent months. With that, we are adjusting our 2018 operating margin guidance toa range of negative 45% to negative 40% of sales from our previous range of negative 40% to negative 35%. At the end, this is primarily related to the increase in noncash stock-based compensation. We ended the quarter with $97 million in total cash and investments, which is approximately a $14 million increase from the end of Q1. In the second quarter, we benefited from an additional $22 million in proceeds from warrant exercises, bringing up to a cumulative total of $29 million for the year, which was well beyond our expectations considering half of the warrants did not even expire until 2022. Excluding these proceeds, our cash use was down notably to only $8 million for the quarter, which is 50% lower than in the prior year and nearly 40% better than Q1. Consistent with recent years, though, we do expect our cash use to increase sequentially in Q3 as we replenish our inventory level and prepare for a highly seasonal Q4.With regard to our outstanding debt balance, we continue to view it as a priority and have been carefully evaluating all options for addressing it. In summary, we are increasing our annual sales guidance to a range of $140 million to $148 million with an operating margin range of negative 45% to negative 40%. This includes approximately $27 million in noncash expenses for both stock-based compensation and depreciation and amortization. We are confident that our cash on hand is sufficient to sustain us to cash flow breakeven in the second half of 2019, at which time we expect to have more than 80,000 ordering customers in our installed base. With that, I will turn it over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of J.P. McKim of Piper Jaffray. Your line is open.

[J.P. McKim:]

Good afternoon, and congrats on the strong quarter here. I wanted to touch first just on guidance. And you've got a lot of great things going on momentum-wise, I mean, you've got international and you've got Basel-IQ launching here in August. So one can argue there's potential for an acceleration. So I'm trying to get a sense of how you're thinking about guidance now in terms of people's expectations. And should we look at kind of deceleration in the back half as more conservative or is this something we need to be watching out for more specifically?

[Leigh Vosseller:]

JP, thanks for the question. First of all, I just want to reiterate what our overall guidance for philosophy is. We continue to set the expectations that on based on the factors that we feel confident that we can achieve. And really, the change, a lot of it has to with the strength that we saw in first half of the year and the enthusiasm that we saw for Basal-IQ so far. It's still very early. So it's hard to see where things will go with that. But for the most part, we just want to make sure that we’re not getting ahead of ourselves. And so really, the guidance, other than those factors, comes down to what we expect for renewals this year and also for the growth in infusion set sales.

[J.P. McKim:]

Got it. So international is still minimal for the year. But it does sound like, in theory, you could get some shipments here in Q3 at the earliest. Is that fair?

[Leigh Vosseller:]

Yes. So we’re going to have a lot more color on international when we get to our Investor and Analyst Day at the end of September. And at that time, we look forward to giving you a lot more information about the opportunity as a whole and the timing of how long the things are starting.

[J.P. McKim:]

Got it. And just one last for me on Basal-IQ. A lot of our calls have suggested, like you alluded to, that the demand for Tandem has increased since you've got the Basal-IQ G6. So is there any way you could frame up kind of that jump in demand maybe by framing up the pipeline? And how the pipeline today has changed compared to maybe six months ago now that you have this approval?

[Leigh Vosseller:]

Yes. It’s a whole different world right now anyway than it was 6 months ago with the simple fact that we took the financial validity question off the table. And Basal-IQ basically came around the same time that we were originally anticipating when we developed our plans for the year. So really right on track and it just gives us even more confidence in raising the guidance range to that $140 million to $148 million.

[Operator:]

Thank you. Our next question comes from the line of Doug Schenkel of Cowen. Your line is now open.

[Doug Schenkel:]

Good afternoon, and thank you for taking our questions. Just starting on renewals. We believe about 35 - I'm sorry, 3,400 of the total over 9,000 patients that have come off warranty have purchased a new t

[Leigh Vosseller:]

Yes. So - and thanks for calling in, Doug. What I would say about that is we do expect that the advanced algorithms can be an accelerating factor to help us get to the renewal cycle, but it's still early to see if we had an impact because of adjustments we announced the approval of it. And mostly because there's a lot of communication that need to go out to those people so that they understand what product is available and what they could be looking forward to down the road. But again, we do think it can be accelerating factor for us on the go forward.

[Doug Schenkel:]

Okay. And I am going to take a shot at longer-term growth question. I am not sure if you’re going to answer it or not, but I’ll try anyway. You are on track to grow revenue well over 40% this year. Can you talk about what you believe is a reasonable expectation longer term? Consensus expectations are for 25% to 30% revenue growth next year. But even on this call and previous public appearances you've talked about numerous catalysts that, if anything, would seem to position you even better in the future. What's a reasonable way to think about this moving forward?

[Leigh Vosseller:]

I think one thing about this year, in particular, it has presented a very amazing opportunity for us. We had this narrow window of time where we are one of the key competitors in the market, and we have a really -- few really good products coming up this year and next year. So I'm not specifically going to give you any numbers for the long-term, but we do see a lot of opportunity. What we'll have to see is what happens with the competition and when other players come into the market. But we definitely plan to take advantage of this opportunity this year and next to capture as many customers as possible while we have this window of time where we're one of the few players in the market.

[Operator:]

Thank you. Our next question comes from Robert Hopkins of Bank of America. Your line is open.

[Travis Steed:]

This is Travis Steed on for Bob. Thanks for taking the question. Just wanted to take your comment on what you are thinking your pump market share and win rate can go a longer term with Basal-IQ and then again, with Control IQ? With G6 you've got a very competitive product, but that's obviously balanced with the size of your competition. So just curious from a high level to just kind of hear your thoughts on where those puts and takes play out in your mind?

[Leigh Vosseller:]

It's hard to say where exactly it can go. But I mean, truly, this is such an unusual time for us. With where we are right now, it implies, based on whatever your assumptions are about the market, that we have established 12% market share. And so with those Animas patients out there is still available to make their decisions and where that opportunity lies for us is to be seen. But I think, again, we have a really great opportunity to take a big position here as we report in the next year or 2.

[Travis Steed:]

Okay. And then just as a follow-up to that. I just curious that if you kind of talk about the impact of Medtronic's new performance guarantee you will have in the marketplace? And also, any more color in your conversations that you mentioned with the payers and some of the progress you're making there and contacting now that you have Basal-IQ coming? Thank you.

[Kim Blickenstaff:]

Thanks. Well, that program is not completely clear how it's actually going to work and who's going to be candidates to have that hospitalization cost reimbursed. I think it's sort of a negative implication. They have to guarantee negative outcomes. And our goal is to try to eliminate hypoglycemia hospitalization to reduce this as much as we can based on the outcomes that we saw from our clinical trials. So that's our strategy is really to save the system costs rather than have them incur costs from our system and then have to reimburse them. In terms of payer, I think the outcome question is really an important one. We're now in a position to really begin showing the benefits of our Basal-IQ system and going forward to the Control-IQ, and we're actively doing that. And we'll update you as we make progress with the major players.

[Operator:]

Thank you. Our next question comes from the line of Rick Wise of Stifel. Your question please.

[Matt Blackman:]

Good afternoon, everyone. It's actually Matt Blackman for Rick. A couple of questions. I'm going to start with the Animas international opportunity. And I think you've said in the past at least half of those Animas patients are outside the U.S. So can you talk a little bit -- in a little bit more detail about how concentrated that opportunity is in geographies? You've already disclosed your intentions to build talent capabilities. And then on top of that, how quickly can you get after that opportunity? And I guess the last part of it, are you going to be disadvantaged at all because Medtronic does have a bit of a head start in those regions? And I have a quick follow up.

[Leigh Vosseller:]

Sure. And so I'll just start by saying again, for the international opportunity, we look forward to the Investor Day to give you a more holistic view of the opportunity now and on the go forward. But having said that, you are correct, Animas had about what we understand is about 50% of their installed base was OUS. It's hard to say today where those people stand because that's where they were in October when they first announced their exit, but we have been actively engaged with many of this folks that provided their distribution network for them. And so we look forward to entering into those markets with an installed base that's pretty much established, so it should be a nice step into the international world. But again, we hope to give a lot more color on Investor Day to help understand how that will build up into business for us.

[Matt Blackman:]

Okay. I appreciate that. And then gross margin, obviously, another strong year-over-year performance, just curious if there were any onetime drags in the second quarter? And I ask just given the strong sequential revenue growth versus the first quarter. Gross margin is expanded, but perhaps not as much as one might have thought with the strong volume growth. Anything on that in the quarter on gross margins we should be aware of?

[Leigh Vosseller:]

No, actually. Everything is moving along just as we had anticipated for gross margins. As you probably have seen in the past, we fully expect for the gross margins to sequentially increase across the year as we get to that higher seasonal fourth quarter. But everything is right on track with what we thought we would do with our expectations to get to that 55% point at the back half of next year.

[Operator:]

Thank you. Our next question comes from Brooks O’Neil of Lake Street Capital. Your line is open.

[Brooks O’Neil:]

Thank you. Good afternoon. Can you hear me okay?

[Leigh Vosseller:]

Yes, we can. Thank you, Brooks.

[Brooks O’Neil:]

Hi, Leigh. I was just curious on the stock-based compensation, obviously, that number is bit have been higher than we were modeling. I am curious if you're issuing any additional units or is the entire effect related to the strong appreciation in your stock price this year?

[Leigh Vosseller:]

It's the latter, Brooks. So we had grants that we issued in the fourth quarter, actually December of 2017, as well as grants that were issued in conjunction with the approval at the shareholder meeting in June. And so it really is the growth and the stock price which, basically has been tremendous, but has this unfortunate consequence of trading that stock-based comp charge that we can’t get around.

[Brooks O’Neil:]

Absolutely. I understand that completely. Let me ask you a different question. So I think Kim was mentioning - I think, for the first time seen a notable number of Medtronics switchers, a) am I correct that this might be a new phenomenon? b) Could you just elaborate a little bit on what you're seeing and what you think you might see going down the road?

[Kim Blickenstaff:]

Yes, I think we’re entering a new area going forward where in the durable pump space is going to be us for Medtronic. And in past, you had Roche, Animas and Delta going some years back. So it's now a 2-player race. And I think the other thing that Leigh alluded to is the different year now than last year when the 670G really wasn’t available widely in the market and we didn’t have our advances in integration with Dexcom and then heading towards automation. So I think the number of choices are now -- have been reduced. So it’s a different dynamic. I mean, obviously, a patient can now choose to go on a pump holiday and go back to MDI, but that’s not going to be the preferred care going forward. So and also the transfer over to insulin has not been very high percentage when you are making this choice. So as we look at renewals, as we look at patients who -- at Medtronic who have been waiting, Animas patients who have been waiting, it's now down to 2 choices. And I think we have very, very good head-to-head product features and availability of those features and advances coming rapidly. And we weren’t there last year. So I think it’s a different world.

[Brooks O’Neil:]

I think it’s a different world too. I think it's very exciting. Is that your sense that Control IQ will allow you to leapfrog forward another step relative to the competition, specifically Medtronic?

[Kim Blickenstaff:]

Yes, I believe it will. I believe that ensures of bolus correction will be very important to achieving time and range and also avoiding high and low excursions. And I think, I said in my comments, the simplicity of G6 eliminating fingersticks is an enormous advantage for anybody using our system versus the Medtronic 670G. I don't think that's going to be resolved in the timeframe that we get our Control-IQ out. So I think that's going to be a further tailwind for us going forward.

[Brooks O’Neil:]

And to Kim, I'm excited about it. Let me just ask one last question. I'm curious, obviously, the Medtronic program that I think somebody asked about earlier, is relatively new. But I was struck by the fact we seem to be going after the payers and trying to incentivize payers to kind of exclude you, I guess, from consideration. It strikes me that your programs, your products are particularly appeal to the patients since you have so many patient features that are superior. Do you have any comment about that?

[Kim Blickenstaff:]

Well, I believe that it appeals honestly to the patient in terms of reducing burden and improving control. I think it's also going to appeal to the payers because if you look at the training costs, startup time of getting somebody on to a pump, we're going to reduce that. We're going to be reducing consumption of the blood glucose disposables that people currently use. We're going to be getting better outcomes, reduction in hypo and hyperglycemia. I think that's what counts eliminating adverse outcomes through extent you can rather than reimbursing for system that causes. So I just think that's sort of -- I won't give it any other term, somebody is standing there.

[Brooks O’Neil:]

No. No. I think it's pretty clear. Absolutely. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Steven Lichtman of Oppenheimer & Company. Your line is open.

[Steven Lichtman:]

Thank you. Hi, guys. Just a few follow-ups. First, you noted twice as many conversions from Medtronic and Animas year-over-year. Can you go through what those numbers, those percentages are? I know in the past you talked about low teens percent of new patients from Animas before they announced the exit. Can you give that Medtronic conversions before? Any details you can provide on that?

[Leigh Vosseller:]

Yes. We have talked to you a little bit in the past about the Animas converters as a percent of overall business. But on the bid day the dynamics continued to change what makes it hard to measure in that way. But what I'll say that's very interesting is that even with the increase in Medtronic converters, the increase in Animas converters, we're still seeing more than 50% coming from MDI. So we're seeing a nice healthy rise across the board. With way Medtronic and Animas has played out in the past and the way looking out it, it still typically follows the market share. So with Medtronic having the biggest market share in the market that they are the higher percent of the converters when it comes to that piece of it.

[Steven Lichtman:]

Okay. Thanks. And then, with Basal-IQ now M&A, I was wondering what your thoughts are about sort of returning back to United and having some conversations with them now with your more advanced pipeline coming?

[Kim Blickenstaff:]

Well, I think it's going to be an effort in the strategy for us to approach all failures in regard to what we can do to help them control costs and adverse outcome. So UHC we'll be on that list. We now have what they asked us to have 2 years ago when we didn't have it. And so I think that's a good -- we're in a good position to move ahead on that effort in the second half of this year.

[Steven Lichtman:]

Okay. Great. And then SG&A stay flat -- relatively flat despite the big sales growth. I know in the past you talked about keeping the sales force pretty steady at this point. Any updated thoughts on the sales force? Any thoughts about increasing it further at this point?

[Kim Blickenstaff:]

Well, Leigh and I want sales jobs.

[Leigh Vosseller:]

And we still committed this year to keeping the sales force at the size it is and we’ll continue to evaluate what we want to do or need to do in 2019 as we keep evaluating the market opportunity and what it might take to drive the continued growth.

[Operator:]

Thank you. And this time I'd like to turn the call back over to Kim Blickenstaff for any closing remarks. Sir?

[Kim Blickenstaff:]

Well, I just want to thank everyone for joining us today. I think this is the largest audience we've had in our history on a conference call, so it's good to be talking to crowd rather than to talk myself again. For the Institutional Investor and Analyst day that’s coming up, we hope you are going to be able to join us on September 25th here in San Diego. As a reminder, the registration information is available through the Investor Center on our website. We’ll also be attending a few conferences in the September. We’ll be in New York, the Baird Global Healthcare conference on September 5th, followed with the Morgan Stanley and Lake Street conferences on September 12th and 13th. So thanks again so much, everyone, for joining us today, and we're looking forward to keeping you updated as Tandem continues to progress during the year. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.