Tandem Diabetes Care, Inc.
Q1 2017 Earnings Call Transcript

Published: 28 Apr 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care First Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, today's program maybe recorded. I would now like to introduce your host for today's program, Susan Morrison, Chief Administrative Officer. Please go ahead.

[Susan Morrison:]

Thanks. Good afternoon everyone and thank you for joining Tandem's first quarter 2017 earnings conference call. Today's discussions may include forward-looking statements. These statements reflect management's expectations 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 the press release announcing our first quarter 2017 earnings, which was 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. In addition, today's discussion will include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. For additional information about our use of non-GAAP financial measures, please see the information under the heading use of non-GAAP financial measures in our press release. Kim Blickenstaff, Tandem's President and CEO will be leading today's call. And at this time, I'll turn it over to Kim.

[Kim Blickenstaff:]

Thank you, Susan, hello everyone and thank you for joining us on today's call. With me today is John Cajigas, our Chief Financial Officer. We're coming out of our first quarter performance with great confidence about our ability to achieve our key goals for the remainder of the year both operationally and commercially. Although it remains a highly competitive environment, we showed strength in our sales. We also continue to provide our customers with number one rated support and just as importantly we made meaningful progress on our automated insulin delivery pipeline. Across the company we are focused on furthering this momentum in 2017 and closely monitoring our progress toward all of our key goals. The competitive headwinds we expected in the first half of this year are there as anticipated but the reasons customer choose Tandem over the competition is for our best-in-class pump platform and the emphasis our company puts on customer care, and that's where we will continue to focus our time and attention. We understand that our customers have choices and that customers who chooses Tandem product rely on us for the long-term care and it is a responsibility we do not take lightly. To the contrary, we take great pride in the high customer satisfaction scores and we intend to continue to deliver on our new products and development and validate the great across that our customers have placed in us. As a reminder, in September of last year we launched the t

[John Cajigas:]

Thank you, Kim. Good afternoon everyone. Today I will be reviewing our Q1 results for 2017 on both the GAAP and non-GAAP basis. Our non-GAAP results are adjusted from our GAAP results by excluding the impact of our technology upgrade program. We believe that looking at our operating results on a non-GAAP basis provide useful information when comparing to our financial results for periods prior to Q3 2016. So today I’ll be discussing both GAAP and non-GAAP financial metrics. In Q1, the non-GAAP adjustments primarily included the recognition of revenues and cost of sales previously deferred as a result of technology upgrade program accounting for upgrades that were filled in Q1. We also recognized incremental upgrade fees and product cost incurred to fill the upgrade obligation until the program expires in September 2017 we'll continue to show similar adjustments in future quarters. A reconciliation of GAAP results to non-GAAP results is included as an exhibit to today's earnings press release. Also as I discussed comparative metrics between Q1 and Q1 2016 I want to remind everyone that we launched the t

[Operator:]

[Operator Instructions] Our first question comes from the line of Matthew O'Brien from Piper Jaffrey. Your question please.

[Matthew O'Brien:]

Thanks so much for taking the questions. Just a few from me. As far as the impact of 630 and 670G throughout that quarter, would love to hear about the progression of pump sales from January through March. Was there a demonstrable improvement that you as you exited Q1 as far as pump sales go? Or does that artificial deadline kind of constrain things even still through the end of Q1?

[Kim Blickenstaff:]

Well I'd say typically in Q1, there is sort of a drop off in December high as deductible reset. So January is typically very low, and then it progresses throughout that through the end of the quarter. We did see increasing sales as we move from month-to-month sequentially and March was higher than the other previous months. But I wouldn't sort of characterize it just yet without saying it completely months in a quarter here whether or not that is something that we are seeing. But we are comfortable that we are starting to see some impact to our sales trajectory because people are starting to see the benefits of our pumps. They know what the benefits of the Tandem Device Updater are as well as the X2 platform that where are associating with that Tandem Device Updater. But at this point, I wouldn't characterize it as a significant change at this point, but it is an upward trajectory.

[Matthew O'Brien:]

Okay. And then sticking with the salesforce and just the top one I guess, are you seeing given kind of the headwinds, competitively? Is your salesforce steady or you’re seeing higher attrition rates? I'm just wondering if they are willing to kind of work through kind of two-three quarters low before things kind of comeback post some of the Medtronic promotional activities?

[Kim Blickenstaff:]

No, we are not seeing any attrition due to that. I think the frustration is probably around the fact that the 670G launch keeps getting delayed. When it got approved, it was supposed to come out I think in April. Now it's into a limited launch mode. We’re hearing that they're only placing the 670G at the clinical trial sites that they had as a part of their study. So it just gets continued to be kicked down the road, and we’d like to compete head to head on features rather than sort of a promise of what the system is going to do. But I don't think there’s any disappointment on the part of the salesforce. I think they are anxious to compete.

[John Cajigas:]

And I’ll just add that the salesforce is anxious to see G5 approved with our X2 platform. And I think there’re anticipating when that comes out, that they’ll have a distinct competitive advantage that will be able to rely on as they go back to the docs and the patients.

[Matthew O'Brien:]

Got it. And then last one for me. Just on the gross margin side, understanding it was flat compared to this time last year, but it was higher than I was modeling on. The performance on the top line was a little bit below which it this time last year. So clearly you’re making progress there. Can you help tease out a little bit the big drivers of that improvement? And then just the durability because I know you have a number of different moving parts here. Be it on the disposable side versus some of the internal things that you're doing. But how do we think about that metric moving forward?

[Kim Blickenstaff:]

Well I think some of the things we talked about on our last call are starting to play out here in this year. And those are things like the manufacturing cost, the material costs associated with the X2. It is lower than it was with our predecessor pumps. So with over 90% of our pump placement being with the X2 platform versus the legacy pumps, I think that is helping sort of the trajectory. We have seen improvements on the pump margins outside that associated with pump warranty, I think we’ve talked about that on the last call as well that we are starting to see some activity there that’s positive. So those are the key things. And I think with the infusion sets also moving into the mix of being a fast grower in our platform I think that's helping us well. So those are probably the key things that are driving our trajectory as we move forward. And I think we’ll continue to see improvement as we gain volume on the cartridges, infusion sets, and t

[Matthew O'Brien:]

Okay. So just to be a little bit more clear though, I mean, just given the performance during Q1, do you think we could see a gross margin as we exit the year maybe in the 40% range for maybe Q4?

[Kim Blickenstaff:]

Well, it’s going to highly depend on what our sales mix is. And so that would be assuming that we have good pump contribution to the overall sales mix, as well as the infusion set margin sort of staying up high as we move forward and add that to the mix as we gain volume on infusion sets. Because as everyone knows, some pump supply of margins are lower than our pumps. And so depending on what the mix is on our sales that could drive the overall gross margin. I would say that if you focus on the gross profit, I definitely believe that our gross profits will increase as we move forward, and that have a positive impact on the P&L as well as our cash.

[Matthew O'Brien:]

Very helpful. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Taylor Levy from Wedbush. Your question please.

[Taylor Levy:]

Thank you. Just a couple of quick ones. On the replacement side, you mentioned that you are currently pleased with renewal interest. Any way to quantify that for us?

[John Cajigas:]

I think it’s just too early at this point to sort of talk about what the renewal rates are. I think we want to make sure we have a sustainable trend before we start talking about it publicly.

[Taylor Levy:]

And then just you mentioned that, earlier on, that you’re starting to see the market unfreeze and you saw some sequential improvement throughout the first quarter. As we think about the second quarter, should we use historical cadences in terms of percentage of revenues that you typically generate in the second quarter versus your full year guidance?

[John Cajigas:]

Yes, I think in the second quarter, we will continue to face the same competitive environment we talked about. As Kim mentioned, the delaying of the launch 670 is going to sort of continue to force us to be in this environment. Until we get the G5 out, once G5 is out, I think that will change the trajectory and that will be particularly helpful in the second half of the year when you layer on our renewal opportunities which are heavily backend loaded, as well as the infusion set increases that we expect with t

[Kim Blickenstaff:]

Taylor, it’s Kim. I’ll make one comment. It is known that the Dexcom G5 CGM is far superior to the unlike the powers of 670G. You have to caliber at last, it has better accuracy and you no longer have to do things confirmations at mealtime which is really going to reduce the burden of using a close loop system on the X2 platform. So we do know that, and we do know that patients prefer the G5. So I agree with John, I think we are going to be very competitive with that offering when we get that approved. We have 10,000 X2s in place, and we can push it out to as many as that want it as quickly as they can get on their computers.

[John Cajigas:]

And I think that - to your questions will it be backend loaded, I do believe it will be backend loaded. If you go back to when we launch the G4 it was backend loaded as well because of the anticipation for that product and I think there is anticipation for this product. And the opportunities for pump renewals as well, as pump organic growth is generally higher in the fourth quarter and late third quarter.

[Taylor Levy:]

And then just lastly, you mentioned that you’ve had some early discussions with the FDA on the PLGS algorithm and you’re going to file the ID here shortly. Is the agency giving you that comfort around that relatively quick turnaround post approval of the X2 G5?

[Kim Blickenstaff:]

I’d say the environment has gotten so much better over the last seven years. If you remember, we weren’t public at the time, but back in 2010, there were new guidelines on human user interfaces in medical devices and the direction was very unclear. And right now the direction on the whole automated insulin programs are getting far more clear, they give us good guidance and we’re having good interactions.

[John Cajigas:]

And I would say that as you look at our interactions with the FDA on our t

[Kim Blickenstaff:]

And let me just clarify, we did file the IDEE on the PLGS.

[Taylor Levy:]

Okay, great. Thank you.

[Operator:]

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

[Rick Wise:]

Hi, good afternoon everybody. Maybe John or Kim maybe talk a little bit more about the first quarter from another angle I mean it seemed like it came a little stronger than consensus numbers might have expected. And I want to understand from your perspective was the first quarter in line with what you thought three months ago was it ahead of your expectation and if it was a bit better it obviously with all the challenges you mentioned if it was a bit better why not expressed that maybe in a slightly higher range for the year just anymore color on all that those thoughts?

[John Cajigas:]

So what I would say is that we have a range of expectations as we exited 2016 at that point we knew where we were from a competitive standpoint what we expected to deal with until we launched G5. And so are we happy with where we are I would say we’re happy to where sort of the high-end of our expectation but there's still within our expectations. And I think for the full year I think this is just on par on what we might expect for the full year and that's why we reiterated our guidance to be same range as we exited the year.

[Kim Blickenstaff:]

And Rick this launch time on the 670G is a dynamic that has changed I don't know would it be resolved by midyear or whether even be launched this year we just don't know but as you know what they're doing they’re selling the 630G and they're doing what's called priority access. So if you want a 670G you got buy a 630G now and that’s being viewed as a bit heavy-handed and but anyway that’s the dynamic that – it will be a little bit different than we thought when we went into the planning for the year.

[John Cajigas:]

And then the last thing I'll add on this our sales guidance is 100 to 107 has a lot of the assumptions towards the backend of year associated with pump renewals, the approval and launch of the G5 product with the X2x as well as the t

[Rick Wise:]

Right and back to a couple of product questions let me come at the t

[Kim Blickenstaff:]

No, I would say the timeline with hold derivative item is was the updater, and so the updater has been tested for software upgrades to the base t

[John Cajigas:]

And then for new placements the pump hardware is exactly is the same X2 which we’re manufacturing today and is just the difference software low which is very easy for us to load on. So if we got approval early we could potentially be ready very quickly.

[Rick Wise:]

Okay. And maybe last from me as I had two more t

[John Cajigas:]

Yes, previous comments still hold really the reason there is transitions we want to allow our customers the option to potentially bleed down any old product they may have. And so we want to make sure we carry the old product for a period of time to allow them to use any product they have in their hands. And for any new customers there are able to get the new product t

[Rick Wise:]

Okay. Just last from me maybe Kim just with your larger perspective I feel like I want ask you which I might speak to you the diabetes industry there’s a lot of new technology out there not just 670G it’s actually about and there are a lot crosscurrents I mean my sense is that some of your other large competitors are maybe even in disarray. But when you think about the environment do you feel like this makes your job easier or harder as a company looking ahead like the flow of new technology the time it's going to take patients to look at every new approach to diabetes management and again these corporate complexities of assets for sale an operational confusion? Thank you.

[Kim Blickenstaff:]

Well as for the technology sort of improvements with the technology crosscurrents as you say those are companies talking to the investment community and getting a lot of press and they don't have products available to even be evaluated. So although they may be getting airtime when it comes down to seeing what products are available at their physicians office and what their nurse can show it, show a patient there was Roche, there is Animas, there is us and there is Medtronic and obviously insulin. And as we said before generally MDI patients go on the insulin first so it's really back down to the durable pumpers that we compete with on that piece of our business. And I say the exit of Roche and whatever is going on at Animas would be helpful for us that we would think do about and we disclosed how much would our sales are from Animas.

[John Cajigas:]

Of that 50% of the switchers it's a nice piece of that and so they probably have the largest installed base this confusion has probably helpful and I’d say all the noise about new technology is probably more at the investment community level at places like JDRF and other organizations but it does not - they are not approved the product for patients to look at.

[Rick Wise:]

Thank you so much.

[Operator:]

Thank you. Our next question comes in the line of Ryan Blicker from Cowen and Company. Your question please.

[Ryan Blicker:]

Hi, thanks for taking my questions. So you talked about the operational measures you’re taking to conserve cash and I recognize not all of it, are in P&L but you did reiterate your full year operating margin guidance. Can you comment at all on the magnitude of the expected benefits?

[John Cajigas:]

On the operational changes that we were making?

[Ryan Blicker:]

Yes.

[John Cajigas:]

I think a lot of the guidance in the operating margin is driven by sort of sales performance and gross margin performance. The cost controls and containment is really just trying to manage smart money and to manage our cash that we have to-date just creates the longest runway that we have possible. But the biggest sort of extension of that runways is going to be driven by sales and gross margin prudence.

[Ryan Blicker:]

Okay, understood. I guess I was just wondering because acknowledging that sales are definitely the biggest driver there you did reiterate your full year sales guidance so you has anything changed relative to last update I know you guys have been obviously focused on trying to conserve cash prior to this call but is anything changed relative to the last update on conserving cash and is there any manage due to want to share?

[John Cajigas:]

What we've done is implemented some formal controls on things like I mentioned on the call as we transition our manufacturing to the new facility, that facility as they’re vacating we're going to look at that facility and try to reduce the operating cost of that whether it’s utility, cleaning cost and so forth. And then look at the campus that we have here today with the four, five buildings and ask ourselves do we need to sort of shift people around and try to optimize how we spend our money on things such as utilities and cleaning cost as an example. The headcount as we’ve talked about also on the call as we don't expect to have a lot of headcount addition this year because of where we are and what we think we can do from an efficiency standpoint as we move forward during the next quarter or so. So those we’re just a couple of examples but those are just really again back to sort of where the cash runway gets extended is mostly but what we think we’re going to with the gross margin, gross profit improvements.

[Ryan Blicker:]

Understood, that’s helpful. And then you have 10 million on the balance sheet as long-term restricted cash I manage we’ll get some detail from the Q pretty soon but are there any scenarios under which you’d be able to access that cash this year and if so what are they?

[John Cajigas:]

So currently as listed as restricted cash and that’s restricted as part of our agreement with CRG. And so to be able to access that cash we would have to have a discussion with CRG on how they sort of access that cash. We do have a very good relationship with them, but at this point I do believe will be looking to sort of explore opportunities to get additional cash by the end of the year without having to tap into that 10 million.

[Ryan Blicker:]

Okay, thank you.

[Operator:]

Thank you. And this does conclude the question and answer session of today's program. I’d like to hand the program back to Kim Blickenstaff for any further remarks.

[Kim Blickenstaff:]

Well thanks everybody for joining in today. We will be attending the Deutsche Bank Annual Conference next week and we’re going to be making a presentation on the third and we are having investor meetings at that time. As for industry events we’re going to be attending the ADA conference here in San Diego that's June 9 to June 13 and then there's the Children with Diabetes Friends for Life Conference in Orlando, Florida on July 4 to 9. So we look forward to keeping you updated as the company continues to progress and we’ll talk to you next quarter. Thank you.

[Operator:]

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.