Tandem Diabetes Care, Inc.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the Third Quarter Tandem Diabetes Care 2016 Earnings Conference Call. At this time, all participant lines 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, 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, Jonathan. Good afternoon, everyone and thank you for joining Tandem's third quarter 2016 earnings conference call. Today's discussion 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 Q3 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 comparison to operating results across reporting period. 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. Hello everyone and thank you for joining us on today's call. With me is John Cajigas, our Chief Financial Officer. In reflecting on the year so far, and we're proud of all that Tandem has accomplished. For three consecutive years we have offered the number 1 rated insulin pump and maintained a number 1 customer service rating according to the dQ&A. resulting in the tremendous growth of our install base, which is now more than 46,000 people with Diabetes. At the same time, we've made significant operational progress and meaningful advances in our new product development efforts. We perceive regulatory approval for and delivered three new insulin pumps on time, including the launch of our first PMA product last year, and most recently the launch of our next generation t

[John Cajigas:]

Thanks, Kim. Good afternoon everyone. Today I'll be reviewing our rolling 12 months and Q3 results on both the GAAP and non-GAAP basis and discussing our updated 2016 guidance and our cash flow expectation. In light of our technology upgrade program impacting our operations and financial results starting in Q3, we believe that looking at our operating results from the non-GAAP basis provides useful information when comparing to our financial results for period prior to Q3. Our non-GAAP results are adjusted from our GAAP results by excluding the impact of our technology upgrade program. In Q3, these adjustments only includes the deferral of pump revenues and cost of sales for shipments to customers eligible for an upgrade. In future periods, we will continue to show adjustments for changes in differed amounts as well as any incremental upgrade fees earned and product cost incurred to facility upgrade obligation. Reconciliation of our GAAP results to our non-=GAAP results is included in our exhibit to today's press release. For our non-GAAP results, we do not make any attempt to quantify the potential pausing in the purchasing decisions of our pumps. Our customers as a result of our July announcement of the t

[Operator:]

[Operator Instructions] Our first question comes from the line of Kristen Stewart from Deutsche Bank. Your question please?

[Kristen Stewart:]

Hi, thanks for taking me for questions. Can you guys hear me okay?

[Kim Blickenstaff:]

Yes.

[Susan Morrison:]

Hi, Kristen.

[John Cajigas:]

Loud and clear.

[Kristen Stewart:]

Hi, perfect. I guess I'll start with I guess some of the comments you made about the general environment on aggressive market practices. I think you had said on pricing, correct me if I'm wrong with that. If maybe you can further expand on that and just anything that you guys can do to maybe help people thus speed up their decision making process or I guess better visibility on the fourth quarter or I guess looking a half out into 2017. I guess, will you have better level of, I guess, guidance stability when we get to January because it kind of seems like you're suggesting at this difficult feature product period could even flow into the first half of next year. I know that's a lot there but?

[Kim Blickenstaff:]

Yes, I get it. Just sort of delay the ground work, the 630G from Medtronic was launched first, got a first approval in the marketplace. So, we became the platform to then go to the 670G which got approved in September. So, one had a, first one had a predictable low group versus spend and the 670G is more of a treat-to-target type product.

[Kristen Stewart:]

Right.

[Kim Blickenstaff:]

And so, they have been talking to marketing a upgrade program by the 630G immediately and you can get that 670G once available and it's being said that it's going to be available on spring in next year. So, provides them a bridge to start basically selling the 670G now in essence and that makes it very competitive for us because they do have the ability to end market the 670G data because that product is approved. So, they can be very specific about the promise of all what the system will do. But between now and the time it's approved in the spring, the reality of how the system works is not going to be available to the customers. And you got to remember it's the system, now there's an algorithm in it, there is a sensor that is driving that the automated insulin delivering. And the data what patients are looking for is a reduction of hypoglycemia at night. Obviously they're using insulin to drive their blood sugar down, a major side effects is to get too low when you have horrible complications, especially when it happens at night. So, the promise is that it's going to reduce that risk. But the reality of it is we don’t know how successful it's going to be. So, that's why we've given the guidance that there isn’t a lot of clarity until that product is available in the market. And it commences with 530G at a low pressural suspend in a it did not do well in the market because it didn’t work. So, that sort of the timeline on why there is going to be that uncertainty until the product is presumably available next year. Did that indeed answer that?

[Kristen Stewart:]

Okay. Yes. And your low group suspend feature won't be available until late 2017, as our review had mentioned to the updater?

[Kim Blickenstaff:]

Yes.

[Kristen Stewart:]

Okay.

[Kim Blickenstaff:]

Yes. Think so we don’t as we share were some of this market research be updatability of the software during that four year warranty cycle is a big advantage and much preferred by customers. But we won't have that first algorithm until later in the year. But we will have the G5 as I mentioned which is this superior, yes G5 with superior sensor over the G4 and we're hopeful that that will be competitive of our drainy hiatus between now and the time we have our algorithm. So, that is obviously the benefit that we're selling.

[Kristen Stewart:]

Okay. All right, I'll let some other jump in with questions. I'll stick to that one long one. Thanks, guys.

[Kim Blickenstaff:]

Thank you.

[Operator:]

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

[Tao Levy:]

Great, thanks. Can you hear me okay?

[Kim Blickenstaff:]

Yes.

[John Cajigas:]

We do.

[Tao Levy:]

Yes, perfect. Will you tell me, I just want to talk a little bit about the guidance, $20 million sort of reduction, you're off 3 million from my number this quarter? So, the doubt in the guidance, you think is it where you a demand that could be just delayed or these patients might be purchasing competing devices?

[John Cajigas:]

This is John. As Kim mentioned sort of in his prepared comments, I think really what we're facing today is the uncertainty of where we are with the combination of facts was including the 670 launch is low as our people really waiting for t

[Tao Levy:]

Yes, John. In sort of maybe the patients or the pump that you sold in the third quarter maybe the preorder that you gotten for the fourth quarter. Where that business is coming from, these are sort of more MDI patients, you might be of the 670G and 630G is that. That doesn't seem to be a new pumpers first choice, it means a lot more complicated and than definitely probably for the more experienced pumpers CGM user? Though be I'm surprised that might be having as much impact sort of on new patients in the eyes than that I would have assumed?

[John Cajigas:]

Yes. Our business still continues to be about 50/50 between MDI and converters. So, that dynamic hasn’t changed. I think it's just they could potentially be not necessarily just a 670, it could have been also our upgrade program waiting for that. People are looking at CGM as an alternative as well. And there are other solutions to fax text come up here now the Avid Libre. So, people are maybe just pausing to digest all the new information that’s sort of coming the way as far as potential products that are coming into the market.

[Kim Blickenstaff:]

And so, we've done market research that definitely says that when people come up off the warranty, again that's not the MDI selection but these are our people that are on a pump, they bought see what new technologies are out in the marketplace. So, we know they do that and we believe that's happening. Part of the cost by Medtronic, part of the cost by us. So, we know those are definitely have an impact on what's going on.

[Tao Levy:]

Got it. And still lastly, you get the pediatric label earlier in the summertime, has that played a role and then obviously you're not enough to make up this shortfall but just wanting to better understand the dynamics of the pediatric penetration?

[Kim Blickenstaff:]

Yes. I don’t think it's had any pickup for its [indiscernible] been earlier, the tailwind at all. It will be an advantage when we get to G5 CGM and PLGS. What's the implication on Medtronic with that?

[Susan Morrison:]

I think it's at 16.

[Kim Blickenstaff:]

Yes. So, Medtronic has got 16 above and we've got that lower indication. So, I think that'll be an advantage.

[Tao Levy:]

Okay. Great, thanks.

[Operator:]

Thank you. Our next question comes from the line of Ben Andrew from William Blair. Your question please?

[Ben Andrew:]

All right, good afternoon. Thanks for taking the questions. Maybe talk a little bit about what you're hearing in terms of patient feedback as they evaluate and advice specifically. You've given this kind of the list of things that may have led to the delays. But do you see a substantial target patients going on CGM only and therefore just really on Canada that's just as they evaluate your pump and then you see a final decision?

[Kim Blickenstaff:]

Well, I think on the MDI segment on the market, I think Dexcom is promoting the concept that CGM should be at first step not a pump to bring your A1c down a period, you're not in control. And so, CGM obviously is lot of complex to use, you simply insert it and you watch a screen and you see so you are on a continuous basis especially at night. Whereas a pump has basal bolus settings and you got a bolus after every meal, so it's the hardest step. But I believe their attitude of in terms of giving better controls, so I think they go together very nicely as a pair and one adds to the others and you get greater control by using two of them. So, that's been probably somewhat of a headwind in the MDI part of the market but probably not somewhat over on the warranty renewal side of it where we're seeing that people pause to have evaluate what's new in the marketplace because they're making a change that's going to last four years. And they've had four years to wait for development. So, they're definitely going to go up shop and forth available. Now, just happens to be a lot of change in the marketplace.

[Ben Andrew:]

Is there anything that you're doing differently with your messaging, since you've seen this trend handover the approval of the 670G that can even partially mitigate it?

[Kim Blickenstaff:]

Yes. I think one of the secrets here is that the 670G and 630G depend upon a new interface that's a totally different device, it got bigger. The screen relative to ours is a lot smaller and the user interface is just frankly different than the old pumps that people would be renewing off of. So, everybody in their own customer base is going to have to re-haul -- re-learn how to use their new software suite that has different hard buttons on it on how to use it. And we frankly have heard that it is it's failing in terms of customer satisfaction on that parameter alone. And there was reports that in the study that the did to get approval. There was a lot of hand holding in extra tech training of the healthcare professionals in order to get them proficient to be able to do the training. So, that's the one way we can detail back and get people to buy end our product and the upgradeability that's going to be kind of coming down the line. So, that's how we try to counter it now.

[Ben Andrew:]

Okay. And John, you've obviously got the balance of the credit line out there that you are able to take before your end. And you mentioned looking at plans for additional fund raising, maybe talk through the options or different things we may see there in the next six 12 months. Thank you.

[John Cajigas:]

Sure. With respect to the CRG, it's likely that we will draw all the part of the money but it is part of sort of the overall strategy we're looking at now. So, I haven’t made any final decisions on that. And as Kim has mentioned, we're managing through a range of scenarios. So, really right now, I don’t feel an urgency to raise cash immediately. I think we are looking at potentially the cash historically within unlikely scenario or one of the more less likely scenarios. But with all that's gone on with the competitive environment changes, now something that's more likely and that likely has increased. So, it's come to the point where we are going to be looking at other alternatives. But at this point it's just too early to decide and talk about that publicly as we start to slip by that will probably talk about that probably on the next conference call.

[Ben Andrew:]

Okay. And then might we see anything next week at the Diabetes Technology Society meeting in Bethesda from you guys?

[Kim Blickenstaff:]

Not that I know of, no.

[Ben Andrew:]

Okay. Thank you, guys.

[Kim Blickenstaff:]

Sure.

[Operator:]

Thank you. Our next question comes from the line of Jeff Johnson from Robert Baird. Ask your question please.

[Jeff Johnson:]

Hi, thanks. Good afternoon, guys. So, really just one question, Kim and it's similar to a question I asked last quarter but I'm going to ask it again and that is as you go to the treat-to-range program, what I'm hearing tonight now is that you might have a bolus option in addition to a micro basal option. And so, just trying to figure out there how big, have you talked to the FDA at this point. If that's going to be one of the first studies out there really looking at and automatic bolus option. How big might that trial have to be, how costly might it be, I'm assuming that it'd be a sizeable post approval study that might be required. So, just anything you can give us on details there because I was a little surprised to hear on that auto bolus site tonight.

[Kim Blickenstaff:]

Yes. I think the best thing it points to our publications that have done based on this algorithm. Certainly not with our platform but I believe if we have the Dexcom CGM and how the algorithm will be using and use somebody else's pump but that's a least important part of the whole system as for the algorithm. And those publications are out there, if we get back to our press release when we announced the TypeZero deal back in July 21. There is a list of articles if you could take a look there, and certainly those were done with FDA granting approval to go ahead on those studies. And that will be good data that will be supporting what we're trying to do in our own clinical study. So, that have more data points in what we're doing.

[Jeff Johnson:]

Any idea with your pump the size of the study and you don’t add in or anything like that you could talk about?

[Kim Blickenstaff:]

Yes. We haven’t talked about that yet. But it can be recruited and completed in the timeframes that we've given you.

[Jeff Johnson:]

Yes. Understood, all right. Thank you, guys.

[Kim Blickenstaff:]

Okay.

[Operator:]

Thank you. Our next question comes from the line of Doug Schenkel from Cowen and Company. Your question, please.

[Unidentified Analyst:]

Hi, this is Ryan Blicker in for Doug. Thanks for taking my questions. I know you don’t want to give guidance currently. Can you give us an early indication for how you're thinking about 2017 revenue growth? Assuming the pump market continues to grow in the mid to high single digits, an Tandem continue to gain meaningful share next year in the face of competitive launches as it done, as it has done in years past or should we expect growth to move closer to the growth you are expected to generate in 2016?

[Kim Blickenstaff:]

Well, I think it's too early for us to give guidance on 2017. I think we'll see how the fourth quarter goes. I think common theme in our conversation today is that we do believe this is a short term dynamic and we have to tell with this in the past with the 530D launches while as the and the survive launching early in 2015. So, those were headwinds that took about a quarter or two to just sort of move past but you can see what we accomplish in those period where we are going 45+% growth obviously on the smaller base but still very good growth considering what we were facing at those time. So, I think at this point we'd like to see how the fourth quarter sort of plays out with the uncertainty that we have put out there and the guidance we put out there to address that uncertainty.

[Unidentified Analyst:]

Okay.

[Kim Blickenstaff:]

And then we will look at sort of where we are at when we talk about earnings in the place January, early February. Or is it late February.

[Unidentified Analyst:]

Okay. Yes, at the when?

[Kim Blickenstaff:]

Late February, sorry.

[Unidentified Analyst:]

Okay. That's helpful. And then maybe let's while as so wait until the till the February call. But any update as to how you're thinking about the salesforce currently and maybe any minor expansion as we get into next year? Thank you.

[Kim Blickenstaff:]

No. I think the salesforce is at the right side. At this point in time we don’t have any immediate plans to increase or change the size of salesforce. It's something we'll continue to evaluate I think longer term we can see an increasing as our sales grow and if the salesforce needs that capacity, we'll add it. But I think for now we're quite comfortable with the salesforce sizing we have.

[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:]

Yes. I just want to say that we're going to be at a number of healthcare conferences here in the next two months. I don’t have a schedule yet to give you. But we'll be making press releases on time dates and the names of the conferences that we're going to be presenting in. so, we'll be able to take obviously one-on-one meetings during those conferences we attend. So, with that I just like to thank you for being on the call today and I'll close the call out right now by saying thanks. Bye-bye.

[Operator:]

Thank you. Ladies and gentlemen, for your participation at today's conference, this does conclude the program. You may now disconnect. Good day.