Tandem Diabetes Care, Inc.
Q4 2017 Earnings Call Transcript

Published: 2 Mar 2018

[Operator:]

Good day, ladies and gentlemen, and thank you for your patience. You've joined Tandem's Fourth Quarter and Full Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [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. Good afternoon, everyone, and thank you for joining Tandem's fourth quarter and full year 2017 earnings conference call. Today's discussion will 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 our press release issued earlier today and under the Risk Factors portion and elsewhere in our most recent annual report on Form 10-K, and 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 we will discussing during today's call. 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:]

Thanks Susan, and welcome everyone to today's call. Also joining me today is Leigh Vosseller, our Chief Financial Officer. For anyone who has not have had the opportunity to meet Leigh, she assumed our CFO position at the first of the year and is already off to a strong start bringing in passion for Leigh's teams and delivering results. And looking back in 2017, it was a unique year, I am very proud of our ending results and the fourth quarter particularly. We demonstrated our more successful quarter to date with the greatest number of pump shipments and the highest sales in the history of our business, as well as continued gross margin in progress. We also successfully exited with several initiatives such as the launch of the t

[Leigh Vosseller:]

Thank you, Kim, and good afternoon, everyone. Closing the year with such a strong fourth quarter gives us great confidence moving forward. As the factors that positively influenced our results are not onetime event. We expect these same factors will be continue drivers of growth in 2018 and beyond and now we have had an inflection point where we can focus on leveraging our infrastructure investments while we return to strong sales growth. Our fourth quarter sales were approximately $40 million which with an increase of 39% compared to the fourth quarter of 2016 on a GAAP basis and an even more remarkable 62% when you exclude the impact of a technology upgrade program we launched in May, 2016. As Kim mentioned, sales in the fourth quarter were impacted by a number of positive factors, beginning in August with the FDA approval of the t

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Kristen Stewart of Deutsche Bank. Your line is open.

[Kristen Stewart:]

Hi. Good afternoon, everybody.

[Kim Blickenstaff:]

Hi, Kristen.

[Kristen Stewart:]

I just wanted to go over again the renewal assumption that you had stated, sorry I missed those numbers, what you were assuming in the model?

[Leigh Vosseller:]

Sure, it's no problem. Just to give a little bit of a high level on how renewals work, and generally there about a four year period and one important thing to remember is that renewals stop automatically at the end of the four year period. And so it could take some time after that in order to secure the sale. The industry generally on average experience about a 60% to 70% of renewal rate. Our goal is to hit the 70% rate but it will take some time for us to scale there. As I said, we shipped about 2,000 renewals in the 2017 which represents if you look back to 2013 about a 30% rate and still again, we expect to scale over the next year or two to the 70%. One important point to note as well as if you look back, to our most ten year customer both from late 2012 early 2013, we are hitting that 70% rate on those older pumps that we shipped.

[Kristen Stewart:]

Okay, so you're at the 70% renewal rate as it is stands today?

[Leigh Vosseller:]

On some of the oldest customers. But again we're still working, what we establish here with that we think that the competitive environment also impacted people's decision making process, so it's taking a little longer than just that straight four year cycle that you might expect.

[Kristen Stewart:]

Okay perfect. And then just with respect to your assumptions around the breakeven and being cash flow sufficient, are you assuming exercising that warrants with the additional 32 two million or are you just assuming that the cash that you raise from the 69 million is sufficient enough and what kind of I guess other assumptions are you making that gives you the confidence to kind of get to that breakeven out and try to maintain, maybe just give us a little bit of additional color to get us comfortable that that's possible? Thank you

[Leigh Vosseller:]

Yeah sure. As we went for the public financing, we had told everyone that we believe to they took 50 million to 60 million for us to get to that cash flow breakeven point. And we think that's really raise as you know $69 million. And so that is sufficient for us to get there. If the warrants are exercised that's just additional cushion for us to use our operating benefit. And when you think about that breakeven point, so we are looking to that to be in the second half of 2019. And what it really takes us to have about 80,000 customers are little more than that how are consistently ordering supplies. So it's going possible that we could pass that 80,000 points earlier in the year but it will be hitting that seasonal third and fourth quarter and those folks consistently ordering supplies will get us to that point.

[Kristen Stewart:]

And do you feel confident enough getting that supply margin up high enough over this period as well?

[Leigh Vosseller:]

Absolutely. When we're at that point, we expect to be at 55% gross margin and that's a combination of the pump and some of the benefits that we've put into the pump in the last year Q where we reduced the materials cost and we've improved the warranty experience as well as the addition of the infusion sets to the supply margin. And then now really it just becomes the volume story as we leverage our fixed overhead.

[Kristen Stewart:]

Okay, perfect, I'll let others for some questions. Thanks very much.

[Leigh Vosseller:]

Thank you.

[Operator:]

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

[Rick Wise:]

Good afternoon, Kim and Leigh. Let me start with a couple of things here. I am just trying to separating questions. Maybe I'll start with the gross margin as well. You used to phrase leveraging the infrastructure, just help us think through and maybe could frame out you know the big steps, the big drivers of - what that means to you and who we would you think about leveraging the infrastructure, obviously volume is a part of that, capturing some sales in the infusion that's part of that mix. But help us think through that and just as part of answering that, as you march towards your mid-50 gross margin goal, where would you hope to exit this year, I know you only got operating margin but where to hope to exit this year based on some of these infrastructure leveraging initiatives that you're talking about as well?

[Leigh Vosseller:]

Sure Rick. So really I mean as you already said the gross margin really is a volume story at this point. I'd point out that from 2016 to the 2017, we actually improved our gross margin by 8 points and a lot of that came from the fact that we have really focused in the last few years on shrinking down the materials cost and we've actually just had a lot of learnings from having the product in our facility and improving efficiencies and yield. And so one of the big investments we made this year what that means we moved our manufacturing facility in 2017. It's actually official started manufacturing in the early part of 2018. And with that we increased our capacity, we doubled it, but we hardly increased the cost of facility. So we can expect to see that same fixed overhead that we've seen in previous years but now we have the path to grow and appreciate increased volumes and not have to invest again to at least that cash flow breakeven point. And so really now that we have stripped down some of our materials cost, we've really improved our direct labor and yields and efficiencies. We do look now to just appreciate the increase in volumes to help drive the gross margin improvement going forward. I mean I'll just add one other point. Our warranty experience has improved significantly with the t

[Rick Wise:]

And again thinking about aspirational gross margin exiting 2018 trends own direction?

[Leigh Vosseller:]

Yeah, I would expect it, so for the fourth quarter in particular of 2017, our gross margin was - it was actually 44% on a non-GAAP basis and we think about hitting that 55% point at the end of 2019. So I would expect it to scale somewhat as we move across the years. So just keep in mind that the gross margin can be pressured early in the year because of the seasonality and outcome of the pump sale across the year. So pumps being the greater contributor to the margin. We will actually see a bigger improvement in the gross margin at the end of any giving year and it might reduce again at the begging of the year because of the seasonality.

[Rick Wise:]

Right. And Kim, maybe you want to talk a bit about market dynamics. I mean I keep reflecting amusing on fact that there really sort two games in town you and Medtronic and you're highlighting the acceleration in Animas customer capture here. But the two horse race if you will a factor how are you seeing that in your conversations with doctors and diabetes nurse practitioners et cetera, how is that changing it all the dynamic as your pipeline builds and you're offering to expand. Just maybe just in general talk about that?

[Kim Blickenstaff:]

You know as a group, a huge jump all for Animas business doing a really, Animas patients will tend to choose another durable pump and that's go to Animas, but the majority will either go to us or Medtronic. Probably the biggest competitive question last year when I talked in conference was you know our natural condition, I mean that what we were being sold against by our competition, now we are well financed, we have a good probability. That takes the headwind off the table. So it truly is just us and Medtronic and I think pace of our innovation has picked up here. If you go back two years ago, we were well behind in automated insulin delivery programs, well in the meantime the last year or so with the role out of the 670G and our own you know successful internal development, we're catching up, we're catching up quick and so that dynamic is going to be important this year because we got approval for PLGS before the second half of the year that's from the majority of sales happened. The GG approval last year, second half of the year was a big dynamic for us. So the innovation in the fact that it's a two horse race, we have your only Dexcom integrated alternative right now. So I think both are well for us.

[Rick Wise:]

Makes sense. Turning to Medtronic specifically, you know one dynamic that we've seen over the last whatever six, nine, twelve months is the - their sensor supply is use of the 670G. They seem to believe that that issue will be largely resolved in coming months for selling to their existing customers and fully resolved as the coming months unfold. How do we - you know as you look ahead of the next 12 months for Tandem, what well does that resolution their supply play in the debate and I wouldn't expect given everything on Tandem but should we be concerned at all that that might slow your momentum in any way say perform or change the debate on Animas conversion et cetera?

[Kim Blickenstaff:]

Well our problem last year, first half of last year and year before was the fact that the 670G wasn't available and so you couldn't put our products and get shared products, where you put our product against our premise. And so now it will be available to sensor for the 670G patients experience both products and make a choice which ones has a better CGM, which CGM has least calibration and no finger sticks, which pump is the easiest to learn which has ability there that's a fraction of the other, it's ability to stay in the automated mode and control nighttime hypoglycemia. All that stuff can now be tested head-to-head with real products. So we've been saying all along we just we wanted to be have them be in the market, so we can compete.

[Rick Wise:]

Just last one for me, Kim. This week we learned that Dexcom had participated in your offering and took a small stake and obviously it seems to be a smart thing to do and one of their most important customers, but how would you have us think about that, how are you thinking about it, what it mean, how do we reflect on it and again they have been asked publically, I am bit curious to hear your thoughts about it as well? Thanks so much.

[Kim Blickenstaff:]

Sure. So I think the major question about this last couple of financings was it didn't get us very far. And when we are came into this financing, the goal was to pick the financing question off the table. So we were pegging a $40 million offering and Dexcom came to us and said if that gets you through to the point where you get your innovation in the marketplace that's good for us and we'll invest and it helped us raise $69 million and have a successful offering. They publically stated yesterday they don't intend to get into the pump business, but I would say automated insulin delivery requires a very good sensor and the system requires a very good pump and great algorithm and so also the natural marriage of technology and innovation in my mind which will expand the market for both of us. So it was the wise thing to do and we appreciate it.

[Rick Wise:]

Yeah, congrats on the strong quarter. Thanks Kim.

[Kim Blickenstaff:]

Thanks.

[Leigh Vosseller:]

Thank you.

[Operator:]

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

[Steve Lichtman:]

Thank you. Hi, guys. Kim, when could we see the pivotal hybrid closed loop data with ADA be a possibility and what other data in general should we look forward to this year?

[Susan Morrison:]

Sure. And so we always work from major conferences. It's Susan. We put to the major conferences for opportunities we able to share data. I pay overall for our pivotal study for the hybrid close loop product that will be commencing here in the second quarter with the goal that really able to submit a rolling PMA in the second half of this year, a modular PMA in the second half of this year and the goal to launch in the first half of 2019. So we'll look for opportunities a long way in which we can give people a peek at the data.

[Steve Lichtman:]

Okay. Thanks, Susan. And then on international, could you give us a sense of how big the opportunity you think there is in Canada and then where should we be thinking about you guys expanding over the next 12 to 24 months in other words the release about Scandinavia. Can you maybe just walk us through your thought process of international expansion?

[Susan Morrison:]

Yeah, so I'll just start by saying what we know about the Animas business, they have 90,000 people on the installed base worldwide and we believe 50% of those are in the U.S. So as you can imagine, the remaining 45,000 is pretty right across the world. We see Canada has a really good opportunity just mostly because of proximity and we've developed some relationships there. So it's a really good start for us because it's a way where we can leverage our infrastructure here in the U.S. to support that business. So it's a natural starting point for us. As well as we are looking at I would say particular opportunities up U.S. or rest of the world I would say whether might be opening again where Animas be in the market had opened the door for us to some extent. But I would say for 2018 and it's really and that expected to be a modest benefit to the business as we work on getting in the door and just building the relationship.

[Kim Blickenstaff:]

But we do have programs in place for CE mark and multiple languages quite a long list. As we begin the look at these different opportunities, understand more about the peer environment, the overall size, that sort of thing, we'll have more concrete plan to give it later in the year.

[Steve Lichtman:]

Got it. And just last…

[Kim Blickenstaff:]

I has to be sales manager in both door and that gives a clue.

[Steve Lichtman:]

Good idea. And lastly, Leigh, you mentioned that infusion set revenue will increase to so closer to mid-20%, I think in cartridge sales still stay in a sort of low double digit 10%, 12% range?

[Leigh Vosseller:]

Yes, that's fair. And one thing I'll just mention about supplies, we mostly talk about the seasonality in the business in terms of pumps. We do tend to see a little bit of seasonality with supplies as well. So just like the pumps which tend to see debt in the first quarter and it's like increase in the fourth quarter as people use that whatever insurance they might have left.

[Steve Lichtman:]

Got it. Thanks guys.

[Kim Blickenstaff:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of JP McKim of Piper Jaffray. Your line is open.

[JP McKim:]

Hi, thanks for taking the question. I wanted to first start out on the international to see this year you're going to have an offer for Animas patient similar to what you did here in U.S. to attract those over more rapidly?

[Leigh Vosseller:]

Yeah. I think we're still early in expiration phase that what we're doing internationally right now and major focus is getting the pump the CE market for the pump and the products. And we will be thinking and talking about that more lately in the year.

[JP McKim:]

Okay. And then Kim, I was wondering if you could maybe just help us conceptually understand the main differences between your Hybrid Closed Loop system and the competitor, I mean obviously you got Dexcom G5 sensor which is more accurate and uses touchscreen, but can you sort of help us get to the key differentiator of the algorithm why that's still important and where you think that's going to be the real advantage when you compare the two and when the data does come out?

[Kim Blickenstaff:]

Right, well there is two dosing decisions, one is bolus doses and the other is basal rates. And so automating the basal part it takes static setting and make it responds to actual circulating glucose levels. So we both have that. The other piece probably the bigger piece is bolus calculation. That is the manual input by the patient. They do card counting based upon learning from the dietitian, what they are going to eat in meals, they enter those carbs. There is an insulin the carb ratio that's also an estimate and then you need your current blood glucose value to adjust that. That can be very error so what the system will do is look at the response to that dosing and make correction boluses if the patient has made an error. So it's really reduce both pieces of dosing error that takes place around the clock.

[JP McKim:]

That's helpful. And then last one from me. Just given all the data we've seen on your side and then to see innovation you have got in the new product launches over the next several years, is there any change you go back and you can reengage with some, one of the large commercial payers here in the U.S. and maybe get back on their covers list?

[Kim Blickenstaff:]

Yeah, I have said repeatedly we have had never done a clinical trial before to get approval of products. We didn't have to, there are over 5, 10-K or there are PMA with no patient clinical trial so we have no prospected data. Now we have a very robust well controlled clinical trial, I have two arms to it and we showed significant reduction in hypoglycemia without increasing hyperglycemia. So I think we've finally what we need to begin to have those conversations again and we will.

[JP McKim:]

Got it. Thanks for answering the questions.

[Operator:]

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

[Doug Schenkel:]

Great. Good afternoon and thank you for taking my questions. Starting on PLGS, it seems like Dexcom will G6 approved in the U.S. around the time you launch PLGS. Is there any way to incorporate G6 into your PLGS quickly after its approval or will patients not be able to get to use G6 integrate with Tandem until the launch of your Hybrid Closed Loop?

[Susan Morrison:]

So, that's going to be question that will be exploring, it's really a regulatory question. The trials for PLGS product were done using the G5 sensor. And so obviously we are going to be looking at that and then also the difference between that in the G6 approval timing to see time is actually bring the product to market for patient, also relative to time to bring the market to market our Control IQ product. So those all be different dynamics that we're looking at but again it's really more of a regulatory question than anything else, so something that will continue to explore as we move closer to both these approved by the FDA.

[Doug Schenkel:]

Okay. Yeah, I'm with you, I guess that's kind of the point is from a regulatory standpoint should - based on what you just described, I think that was, Susan the assumption should be you are going launch with G5 and you'll see what pathways is opened to you to move forward with G6.

[Susan Morrison:]

Exactly.

[Doug Schenkel:]

Okay. Pivoting over to I guess just thinking about Hybrid Closed Loop and in TypeZero, you've committed to not charging customers for any devise update or upgrades in 2018, however you know it's a huge step forward with your Hybrid Closed Loop product and given TypeZero is likely going to have a financial interest in sales associated with that effort. Is it further assume that you're going to charge at least some nominal fee at least for existing customers to upgrade to that product in 2019?

[Kim Blickenstaff:]

We haven't made that decision yet. We think the more appropriate router is to go to CMS and demonstrate that were actually cutting healthcare cost off and this significant new technologies that was developed that's unique and will they get reimbursement for greater safety and efficacy. So that's the approach that you know we will be taking. And I think that's probably the most prudent approach.

[Doug Schenkel:]

So, in ideal world that puts you in a better position both not just from a marketing standpoint but potentially from a pure economic standpoint and maybe that gets into a point where you don't need to change your approach in terms of software upgrades?

[Kim Blickenstaff:]

That's correct.

[Doug Schenkel:]

Okay. Alright, that's really helpful. Thanks for both.

[Leigh Vosseller:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jeff Johnson of Baird. Your question, please.

[Jeff Johnson:]

Thank you, good evening, guys. So first question you know you've given enough numbers I think we could back into it, but can you talk it all about how you think pump versus supply growth will look in 2018 just to level set us off on those two factors?

[Leigh Vosseller:]

Sure. So pump revenue have tended to be the majority of revenue. Back in 2017, it was about 65% to 67% of revenue and we expect it will still be the majority going forward. And again if you take that information along with the fact that infusion sets will be in the mid-20% range. I think that will help you get aware here.

[Jeff Johnson:]

Yeah, alright, fair enough. And then Kim, you know when I look at your development on the HCL, I had two questions, I guess the first one is you've come up with a way to have some of that funded by external sources which is you know obviously a helpful thing. When you get to a mid-2019 launch or first half 2019 launch, you know some of this cash that you raised will have been kind of burned away. So I guess my question is how big do you think your launch cost might be at that point, is that something where you could track down some external financing there or external help there as well, do you think you'll have enough cash flow to really go hard and heavy on a launch relative to what Medtronic been doing, just trying to understand kind of what happens as we get closer that HCL launch next year?

[Kim Blickenstaff:]

Well as you know we just upgraded the software, so we won't have a hardware replacement cost like our competitors. In terms of our marketing reach for now we believe our current sales force and support team in the field is adequate to cover the launch of both products, we'll play that by year. But I don't think there's much incremental cost to launch it. What you really need on the launch like this is a strong clinical prospected study that you can demonstrate the physicians and educate them. We're already trying to do them about few benefits of t

[Jeff Johnson:]

Okay, yeah and I would think more on the marketing side whether it's DTC reach out to docs things like that, it sounds like you don't think those costs will be significant anyway?

[Kim Blickenstaff:]

No, not incrementally higher than what we spend now. I mean ultimately we'll have to make a decision about when we expand a field sales force and we'll analyze that as we go along. Big component of that is our sales people now have set sales and renewal before saw just you know new organic growth. So as they become more productive, they may reach a saturation point and you know will increase territories when that makes sense, but right now it doesn't.

[Jeff Johnson:]

Alright, thanks. And then last question for me, just you know when I think about kind of the pathway you guys are taking to the HCL, obviously it's moving very quickly this time next year could potentially have one there are close for you. You know when I think of one of your competitors who's going to several IDEs at this point and may or may not hit pivotal later this year. They seem to be taking much more kind of piece by piece approach, you guys moving quickly. You know what are the risks in the opportunities in doing that and I think I know the answer to that but just kind of remind me what allows you to move so much quicker maybe than others as they develop these HCL systems?

[Kim Blickenstaff:]

There are probably two parts for that. You know we're really becoming a software company and software is quicker to develop than hardware as you know. Also with update that we can set out the patients very quickly. Also in our algorithm software development team, the majority of them are from aerospace and design the control systems that are used on the autopilots on commercial aircraft. So there's no more sophisticated closed loop system in use than no's. And so those folks really know what they are doing. They have a lot of experience in aerospace which is far more regulated than the FDA medical device world. So I believe those are two of our major advantages.

[Leigh Vosseller:]

And the trouble be worth noting to support the Kim's comments that we have been doing that IDE process as well for each phase. You know the international IDEs Closed Loop trial has broken into many different segments and we've just been able to move I think very efficiently through that process. I mean a big part of it is because we have the same exact hardware platform that is updatable. But we have had ongoing discussions with the FDA and so we are doing those stock in between.

[Jeff Johnson:]

Understood. Thanks guys.

[Leigh Vosseller:]

Thank you.

[Kim Blickenstaff:]

Thank you.

[Operator:]

Thank you. At this time, I'd like to turn the call back over for any closing remarks.

[Kim Blickenstaff:]

Yeah, this is Kim. Thanks for joining us today. Just an update, next month we'll be attending two investor conferences, the first one is on March 14th, Healthcare Conference in Boston and then on March 21st, we'll be at the Oppenheimer Healthcare Conference in New York. So thanks for listening to us today and asking great questions. And we look forward to keeping you updated as the year progresses. Thanks.

[Operator:]

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