Tandem Diabetes Care, Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Mar 2017

[Operator:]

Good day, ladies and gentlemen. Welcome to the Tandem Diabetes Care Fourth Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we'll be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Susan Morrison. You have the floor.

[Susan Morrison:]

Thank you. Good afternoon everyone and thanks for joining Tandem's fourth quarter and full year 2016 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 fourth quarter and 2016 earnings, which was issued earlier today, and under the risk factors portion and elsewhere in our most recent annual report on Form 10-K and in our 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. The company also announced today, in a separate press release, the commencement of an underwritten public offering of its common stock. The focus of this call is to discuss the company's financial results for the year and quarter ended December 31, 2016. In light of that and SEC rules and regulations, the company will not be discussing or answering questions about the proposed financing. Kim Blickenstaff, Tandem's President CEO will be leading today's call. And at this time, I'll turn over to Kim.

[Kim Blickenstaff:]

Thank you, Susan. Hello everyone and thank you for joining us on today's call. With me is John Cajigas, our Chief Financial Officer. I'd like to take a few moments to talk about 2016 as well as our overall progress since the launch of our first product in late 2012. Then I will be providing some perspective on how we are well-positioned to execute on multiple strategies in 2017 that set our business up for long-term success. First, in looking back at the highlights of 2016, we have continued above-market growth rates in sales, we furthered our product development efforts, and we made significant operational progress. We also saw the launch of our next generation t

[John Cajigas:]

Thanks Kim. Good afternoon everyone. Today I'll be reviewing the 2016 and Q4 results on both a GAAP and non-GAAP basis and discussing our 2017 guidance and cash flow expectations. In light of our technology upgrade program impacting our operations and financial results starting in Q3 last year, we believe that looking at our operating results on a non-GAAP basis provides useful information in comparing our financial results to periods prior to Q3 2016. So, today I'll be discussing both GAAP and non-GAAP financial metrics. Our non-GAAP results are adjusted from our GAAP results by excluding the impact of the technology upgrade program. In Q4, these adjustments included a deferral of pump revenues and cost of sales per shipment to customers eligible for an upgrade as well as the recognition of revenues and cost of sales previously deferred while we completed our upgrade obligations during Q4 as well as the incremental upgrade fees earned and the product cost incurred to fulfill the upgrade obligations. Until the technology upgrade program expires in September 2017, we will continue to show adjustments in future quarters. The reconciliation of our GAAP results to our non-GAAP results is included as an exhibit to today's earnings press release. Also as I discussed comparative metrics between Q4 and Q4 2015, I want to remind everyone that we launched the t

[Operator:]

Ladies and gentlemen, the question-and-answer session queue is now open. [Operator Instructions] We'll be taking our first question from the line of Tom Bakas from Piper Jaffray. Your line is open.

[Tom Bakas:]

Hi guys. Good afternoon. Thanks for taking my questions.

[Kim Blickenstaff:]

No problem.

[John Cajigas:]

Hi Tom.

[Tom Bakas:]

Maybe if I could start with guidance. Could you just give us a little bit of color on the drivers behind the full year range? Just given all that has been going on in the market and the backdrop with the 670G launch in the next seven months, just -- can you help us understand what's baked into your assumptions?

[John Cajigas:]

Sure. As we look at the full year, we think that the first half of the year, primarily the time prior to us launching our G5 integrated product with the t

[Kim Blickenstaff:]

I'll make another comment. When we just heard this morning that Medtronic is launching the 670G sometime right about now in a limited launch called priority access and we don't know how many people are in that. And then they are going to expand it in the June timeframe. So, they are sort of on the timing that we had in the planning cycle, but we really don't know the numbers and the extent to what this is going to be rolled out in a full-blown way until probably June.

[Tom Bakas:]

Okay. That's very helpful. Thanks. And then maybe switching over to gross margin. Just -- regarding, John, you're prepared comments on X2 platform, just the 20% reduction in the input cost, if I caught that correctly, as the mix shift to X2 continues, how should we think about gross margin throughout the year, maybe even looking out a bit further? And then along those lines, is there an improvement in the margin contribution from the t

[John Cajigas:]

Sure, so let's take those out one piece at a time. The 20% reduction that you are returning to is in the material cost for the t

[Tom Bakas:]

Thank you very much.

[John Cajigas:]

Yes, I just want to add one last thing on that while I did point this out in my prepared comments is while we'll gain greater percentage of our product mix into the infusion sets and pump supply and that may have a suppressing impact on our overall gross margins, I think the gross profit contribution is dramatic and very helpful to our drive to become profitable.

[Tom Bakas:]

Okay. That makes sense. Thanks. I'll jump in the queue.

[John Cajigas:]

Thanks Tom.

[Operator:]

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

[Ben Andrew:]

Well, good afternoon guys. Thanks so much for taking the questions.

[Susan Morrison:]

Hi Ben.

[Ben Andrew:]

John thinking about the gross margin targets you gave us of about 55% and 15% market share, how would that break down between pumps and consumables at that point?

[John Cajigas:]

Well, I still think that pumps will be a lion share of our product mix as we continue to have organic growth, as we launch the t

[Ben Andrew:]

And to that point, I was curious if you can characterize a bit the conversations with the current distributors about what would cause them to give up that volume in favor of you guys actually distributing the sets to more of the patients that you've been engaged in?

[John Cajigas:]

Sure, I think it's really a contractual arrangement that I don't want to get into from a competitive standpoint, but I think they also see the benefits of what we can provide with the infusion set and the custom lower and what the customers are actually looking forward from the benefit standpoint with our new infusion sets.

[Ben Andrew:]

Okay. That's helpful. And then I don't know if it's you or Kim or who would comment on this, but can you characterize at all a bit more of the impact of the United exclusive Medtronic, because I know you had a pediatric carve-out within that. Did you sell many or any units to that part of the channel in the back half?

[Kim Blickenstaff:]

Well, there is an exception process and we did work through that, but I don't think we've quantified how extensive that was. Do you have any comments on that, John?

[John Cajigas:]

Yes. There is an appeals process that we do pass on behalf of our customers that participate through. So, if they are interested in doing that, we'll help them move through that. Those are very individualized, so they are more one-off situation. Carve-outs are for individuals that are 18 or younger, we continue to sell to that segment of the market as well as those that are part of the Federally funded program, the Medicare Medicaid.

[Ben Andrew:]

Okay. And then just -- you kind of said right into the next question, so with the G5 getting the Medicare reimbursements now, how does that affect your planning for the launch of the product as you get approval of the PMA supplement later this year?

[Kim Blickenstaff:]

Well, haven’t we disclosed what percent of our base is, so -- Medicare, Medicaid, John?

[John Cajigas:]

It's roughly 15%.

[Kim Blickenstaff:]

Yes. So, -- that's obviously helpful to those that want to use both CGM and the pump and we think the two together will give better outcomes. But we haven’t brought that -- broken that out as a separate contribution to our growth next year.

[Ben Andrew:]

Okay.

[John Cajigas:]

I think what helps us is Ben, is just to be able to go into the HCP office and be able to address the entire population of demographics versus having to carve out certain either age sort of limitations or payer plan.

[Kim Blickenstaff:]

Yes. And the same for Dexcom because as they are trying to get into the Type 2 market more heavily as well as the Type 1 and Type 1 users are using pumps. So, that was good news for them and good news for us.

[Ben Andrew:]

Indeed. Thank you.

[John Cajigas:]

Thank you.

[Operator:]

Our next question comes from the line of Kristen Stewart from Deutsche Bank. Your line is open.

[Unidentified Analyst:]

Hi, this is Samantha in for Kristen. Thanks taking the questions.

[John Cajigas:]

Okay.

[Unidentified Analyst:]

I realize you won't be talking about the raise that you just announced to us to close today, but how should we be thinking about when that might factor into you reaching a breakeven? In your prepared remarks, you mentioned you might see profitability when you hit 15% of the insulin pump opportunities. So, I guess how should we think about that and when do you expect to get to that point? And what are the drivers there? Thanks.

[John Cajigas:]

Sure. I'd like to be careful about what we discuss here in relation to the financing and SEC rules regarding sort of the talking about the financing. I will say that we do believe that at the point that we achieve 15% market share, of which we are probably in the high teens -- I'm sorry the high single-digits today that we will have a 55% gross margin. And that's -- in 2017, we do expect the burn less cash than what we had burned in 2016. In 2016, we burned about $68 million. So, that's probably all I can really say at this point in time.

[Unidentified Analyst:]

All right. And then just a quick follow-up in your prepared remarks, you mentioned how clinical data was going to be more of an important part of the strategy. Can you provide just the bit more detail around that? And what kind of data we can expect from you guys this year? Thanks.

[Kim Blickenstaff:]

We'll have the results from our PLGS trials as well as our TypeZero trials that will be this year and next year. And that will be the -- really the first sort of multi-centered trial data that has control arms that we can point to better outcomes. We haven’t had that in the past because we've the basically on five 10-K tracks and we haven’t had to do clinicals. We also have through t

[Unidentified Analyst:]

Yes. Thanks so much.

[Kim Blickenstaff:]

Great. Okay.

[Unidentified Analyst:]

Thanks.

[Operator:]

[Operator Instructions] Looks like we don't have any other questioners in the queue at this time. So, I'd like to turn the call back over to Kim Blickenstaff for closing remarks.

[Kim Blickenstaff:]

Thank you everybody for joining us today. We look forward to talking to you next quarter about our progress on all of these initiatives that we've talked about and we'll speak with you then. Thanks.

[Operator:]

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may now disconnect at this time. Everyone have a great day.