Tandem Diabetes Care, Inc.
Q3 2014 Earnings Call Transcript

Published: 9 Nov 2014

[Operator:]

Good day ladies and gentlemen and welcome to the Tandem Diabetes Care Q3, 2014 Earnings Call. (Operator Instructions) At a reminder, this conference is being recorded. I would like to introduce your host for today’s conference. Ms. Morrison, Ma’am, you may begin.

[Susan Morrison:]

Thanks. Good afternoon everyone and thank you for joining Tandem’s third quarter earnings conference call. Today’s discussion may include forward looking statements. These statements reflect management's expectations about future events, product development timeline, regulatory review process 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 statement. 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 Risk Factors portion and elsewhere on our most annual report on Form 10-K, quarterly report on Form 10-Q and 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. Kim, President and CEO, Kim Blickenstaff will be leading today’s call. And at this time, I will turn it over to Kim.

[Kim Blickenstaff:]

Thanks Susan and good morning everyone. Joining me on today’s call is John Cajigas, our Chief Financial Officer. Overall, we continue to demonstrate strong momentum in the third quarter by delivering high sales growth on a year-over-year and sequential basis. Our sales for the quarter reached another all-time high and grew 74% compared to the same period of 2013 and 32% compared to the same quarter of 2014. Our shipments in the first nine months of this year have already exceeded our total 2013 shipments. Other highlights have been our decreasing use of cash each quarter in 2014 and significant progress in our research and development pipeline. Our total sales for the third quarter grew to $13.5 million compared to $7.8 million for the same period of 2013 which was quite an accomplishment. In the first quarter we provided full year revenue guidance of $48 million to $54 million, this was largely dependent on the timing and rate of rep productivity following our sales and clinical field expansion from 36 to 60 territories. The majority of sales are anticipated to take place in the back half of the year due to the seasonal nature of our business. The third quarter provided clarity on our trajectory for Q4 and as you saw in today’s press release we have narrowed our guidance range to $48 million to $50 million and expect our operating margin to be between negative 150% and negative 160%. I think the previously discussed disruption of our sales force in the first half of the year did impact our sales trajectory in 2014 but we are continuing to see increasing productivity among our field sales and clinical teams. Our mix of third party payers also continues to be a key area of focus for our business. We saw improvement in our overall ASP this quarter, even though our sales to distributors increased quarter over quarter from 70% to 76% of sales. The largest contributing factor to this change was an increasing shipment to distributors that recently entered into exclusive distribution arrangement with certain insurance payers. We did not have a direct billing contract with one of these payers, so this new arrangement as afforded its members easier access to our products as an in network benefit. As a result, there was a significant increase in our opportunity to service all members of this plan. While we would have preferred to have shifted business to a direct basis, we believe this distributor arrangements will still provide a significant opportunity and improvement for our overall business. At the same time, we are continuing to sign new contracts with payers and we are in the process of developing initiatives to drive additional business through our existing contracted arrangements. Turning to research and development, I am pleased to share that we recently submitted a 510(k) for t

[John Cajigas:]

Thanks, Kim. Good morning everyone. Today I will provide some key details and color to our financial results, focused primarily on sales gross margins and cash flows for the quarter and then I’ll discuss our outlook for the remainder of 2014. Overall, I'm happy that in the third quarter we’ve continued to deliver high sales growth and improve our operating margin sequentially throughout 2014. Turning to our sales and product shipments, sales for Q3 grew 74% to $13.5 million from $7.8 million in Q3 of 2013. Year-to-date our sales were $31.8 million, an increase of 70% from the same period of 2013. Pump sales accounted for 86% of our total sales in Q3 compared to 89% in Q3 of 2013. t

[Kim Blickenstaff:]

Thanks, John. Cumulatively more than 14,000 people have chosen t

[Operator:]

(Operator Instructions).Our first question comes from Rick Wise of Stifel, your line is open.

[Rick Wise:]

Good morning, everybody. Thinking about your guidance when you talk about the original guidance and not moving to the lower end of the range, maybe it's a question for John here. And when you think about those variables which I think were sales expansion, disruption, the payer contracts, etcetera, the competitive dynamics that you highlight, which was the most significant that sort of prompted you to move to the lower end of the range. Or were they all equal factors? Or help us think through that a little more, if you would.

[John Cajigas:]

Hi, Rick its John. It is probably an equal factor among all of those. I think for us maybe a slight edge would go to the productivity of the reps and what the disruption has done to those folks and the depth of it, primarily how it affected our existing reps that were on board prior to the expansion.

[Kim Blickenstaff:]

Yes, I would say we underestimated Rick the disruption of the current incumbents that we had and what those territory splits might do to their productivity. So we probably have them a bit on the high side in our forecast, so I think that’s probably one of the biggest single affects we’ve had here on lowering that guidance.

[John Cajigas:]

I don’t think we’ve changed sort of what our expectation or what the ultimate productivity is, I think it’s just they’re moving slowly upwards. And I think there in the third quarter, we actually did see that progress take place, so I would shift the matter from watching it carry out.

[Rick Wise:]

So I’m hearing you say that things are trending in a positive direction or more as expected now?

[John Cajigas:]

Correct, that’s correct, yes.

[Rick Wise:]

Yes, turning to the new distributors, I just want to make sure I'm understanding your thinking here. Your language I think suggests you're a bit less optimistic at least in the near term on a better mix. So, given the trends over the last few quarters, is whatever, 76% right way to think about it for the next few quarters? Do you feel differently about your thoughts expressed in the past about a 70/30 direct distributor mix or that flipping? Where are we now in thinking about all that?

[Kim Blickenstaff:]

So these arrangements took place in the third quarter, so it’s in early stages and I think it is creating a lot of access for us on a network benefit which helps the patient sort of get to the pump a little quicker. So I think that may sort of move that percentage you know keep it there or maybe slightly higher in the near term. Our goal is still to move it towards you know as much business as direct as possible. And I think that is something that will sort of move to as we move along. But I think for the near term these two plans will create sort of a steady state of where we are today.

[Rick Wise:]

And just last one from me if I could. Kim, on the last quarter you said on the managed care front you are in the middle of negotiation with several payers out there, including a couple of large ones. Just maybe update us on your thinking there and where are you now? It sounded like you had hoped to conclude some more before the end of this calendar year? Thanks very much.

[Kim Blickenstaff:]

Yeah, I mean, we continue to make progress on signing payers on the United Healthcare front. We do have a contract now through a distributor with them, so we do have access to that major piece. We had announced Kaiser previously, but we continue to make progress with payers and we have a group in the field that is working on getting those contracts. We’d like to have direct contracts as much as possible, because obviously the pricing is usually more and more favorable than when a distributor is in the mix.

[Rick Wise:]

Thanks.

[Operator:]

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

[Kristen Stewart:]

Hi. Thanks for taking the questions. I was wondering if you could just maybe comment on just competitive landscape out there, what you're seeing during the quarter, whether it would be from Medtronic with their 530G or some of the newer entries like Asante. Anything changing there that you could point out to us?

[Kim Blickenstaff:]

No. There really hasn’t been any change. I think Asante's regional efforts have been effective in certain states. They have sort of free try it and buy it program that they are offering. That often catches people's eyes that you can try this thing out for nothing, and where everybody else you basically have to go through the process of getting payments and all that’s upfront. So that program has had effect in some limited areas. They are not national, so it not a national impact. But I’d say on the Medtronic's front, the 530G certainly did give them something to talk about. And as you know, early on it was aggressively marketed as the artificial pancreas. But I think that has sort of rapidly changed into more of an economic buy down programs. They do trade-ins on pumps. So they'll give you an allowance that will impact your co-pay that often can be a pretty weighty deciding factor when you get to the end of line on making a decision about the pump. So those are two major competitive sort of headwinds and really that hasn’t change quarter-to-quarter.

[Kristen Stewart:]

Okay. Thanks. And then just on the submission for the t

[Kim Blickenstaff:]

Right. I can’t really get into the details, but as I’d say this, the speed in which they’re responding to us and sort of the depth of the questions indicate that we’re in pretty good shape in terms of -- we’re not plowing new ground. The Dexcom PMA was a fresh one and our 510(k) for the pump has been refreshed. So I think the conversations are going. From our standpoint as well as we could expect them to go. But we still can’t change our timeline based upon what we know to-date we still have too much to do.

[Kristen Stewart:]

Okay. Perfect. Thanks very much.

[Operator:]

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

[Ben Andrew:]

Good morning, guys. So, a couple questions; as you think about -- I think, Kim, you said the percentage of patients coming from MDI is still over 50%. Is that true for the quarter as well as cumulative?

[Kim Blickenstaff:]

Yes.

[Ben Andrew:]

Okay. Thank you. And then John, maybe talk about the gross margin as you see it between distributors and direct. Is that holding steady with where it has been, or is it shifting? Is there some price dynamics that you all have used in the quarter?

[John Cajigas:]

The gross margin between two sort of areas are probably fairly consistent. It just the mix of what’s happening between the two.

[Ben Andrew:]

Okay. So there weren't any new promotions or other things like that that you guys used during the quarter?

[John Cajigas:]

No.

[Ben Andrew:]

Okay. And do distributors typically carry meaningful inventory as they are kind of anticipating new patient flows, and were there any kind of shifts there in the quarter for you guys?

[John Cajigas:]

No. I don’t think -- for the most part most of distributors run fairly lean operations, so most of them are ordering in sort of real-time.

[Ben Andrew:]

Okay. And then as you think about things that you guys can control, aside from direct rep productivity, have you looked at kind of the medical education, speakers bureau behaviors and kind of investments to try to stimulate interest both in your all product as well as kind of market conversion?

[Kim Blickenstaff:]

Yeah. I’d say, all those factored are being looked out. Probably our biggest headwind is that we just haven’t had much awareness because we have such a field salesforce. When you start of thinking about cracking with some of these accounts you’ll have accounts that have prescribed a Tandem pump. So getting them up or over the hurdle or thinking on a newcomer requires all those kind of tactics that you just mentioned. So we’re really beefing up in those areas, the plan of action really to begin to drive, accounts penetration going forward.

[Ben Andrew:]

Okay. There's another question, I think that…

[Susan Morrison:]

Ben, we'll have to ask you to jump back in the queue here. You can put one more in, but then we'll have to ask you to jump back in.

[Ben Andrew:]

That's okay. Thank you very much, Susan.

[Susan Morrison:]

Thanks.

[Operator:]

Thank you. Our next question comes from Thom Gunderson of Piper Jaffray. Your line is open.

[Thom Gunderson:]

Hi. Just a quick clarification; I thought you said in the script, Kim, that ASPs were up despite the increase in percentage to distributors. Did I hear that right?

[John Cajigas:]

This is John. Good morning.

[Thom Gunderson:]

Good morning.

[John Cajigas:]

Overall ASP is up, and that's primarily due to further revenue recognition associated with non-contracted payers, which is on a cash basis, so that sort of drive sort of the numerator of that ASP calculation.

[Thom Gunderson:]

Okay. And in your answers to Rick, I'm hearing that basically the change in guidance is maybe a postponement by one quarter of productivity getting back to normal, whatever normal is. Is that a fair summary of how you see it now?

[Kim Blickenstaff:]

Yeah, fair summary. I want to comment is this is exactly one quarter or not, but it is something we do believe the folks will get back on track and they are moving up that direction now.

[Thom Gunderson:]

So 89 or 90 days, right?

[Kim Blickenstaff:]

There you go.

[Thom Gunderson:]

And then on payers, my last question, Susan in case you're getting nervous -- on payers, Kaiser I think you said last quarter had been approved, but you weren't going to really get going until fourth quarter. We're five weeks into the quarter. Can you comment on that? And then if there any delay on United or is that up and running?

[Kim Blickenstaff:]

Kaiser is up and running, I really don’t want to comment on its impact to the Q4 so far. United has now being accessed through a distributor.

[Thom Gunderson:]

Great. That's it for me. Thanks.

[Operator:]

Thank you. Our next question comes from Tao Levy of Wedbush Securities. Your line is open.

[Tao Levy:]

Hi, good afternoon or good morning. Maybe you have already talked about the incumbent reps and their surprising loss of productivity. As Q3 unfolded, or as you have seen maybe in Q4 their progress, as their overall revenue declined, do they get made whole so that they are still incentivized to drive the business during this interim disruption period?

[John Cajigas:]

We do provide incentive program, but we don’t get into the details of that.

[Tao Levy:]

But there's – I mean there is -- okay, I just wanted to make sure that that wasn't a reason why we may not see the productivity get back to a level that we might have seen last year for example?

[John Cajigas:]

Absolutely, we do consider that sort of driving behavior in the right direction.

[Tao Levy:]

And can you just provide any sort of sense of attrition rate that you might be seeing in the business so far, in terms of pump?

[John Cajigas:]

In the past we’ve talked about it being low single-digit and that what we continue to see.

[Kim Blickenstaff:]

Do you mean attrition in reps or attrition in business?

[Tao Levy:]

Yes, sorry, attrition in pumps -- Tandem pumpers has been sort of different modality. And that's in that single-digit?

[Kim Blickenstaff:]

Low single-digit.

[Tao Levy:]

Low single-digit -- and then just lastly, and maybe it's just a clarification. You mentioned that the gross margin that you get from sales to distributors on the disposables is negative. Is that on the cartridge side and is there any way to make that not negative? I don't know.

[Kim Blickenstaff:]

My comment is that when we service a patient, a customer through distributor channel we typically lose the infusion set revenue which provide positive gross margins at a higher price point than the cartridge. And so, what's left there is a cartridge and at this point with the current production volumes we’re producing at it is a negative margin. And move it positive margin, it’s a volume story basically.

[Tao Levy:]

Okay, great. Thank you.

[Operator:]

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

[Bob Hopkins:]

Hi. Thanks. Good morning.

[John Cajigas:]

Good morning.

[Bob Hopkins:]

So first question, John, just on your comments about capital needs and being in good shape for the next 18 months, I'm just wondering does that suggest that there's the potential for a capital raise sometime towards the end of 2015? Is that the right way to think about it? I know at the time of the IPO, obviously, you said that you'd need to raise capital again. I'm just trying to set expectations on timing for when you might need to raise equity again.

[John Cajigas:]

There’s a lot of factors we need to sort of look at primarily just whether the direction of the business that’s moving as far as that cash burn. We are moving down in cash burn, we sequentially move that down. I continue to expect that that will continue to move down as sales ramps up. We are looking at where we want to be, where we want to look at sort of access to capital whether its equity capital or debt capital. And we do have $30 million available for us today through capital royalty that we may intent to utilize or adjust that agreement. So its something we just need to see how things play out over the next few quarters to see where we might need to sort of make that decision. I think we do have enough runways that will allow us to go a couple of quarters to see what that does to our cash needs long-term.

[Bob Hopkins:]

Okay. And then just a follow-up on a previous question when you were talking about attrition rates, and I think there was comments on attrition rates in terms of Tandem pump users that have moved on to other pumps or other modalities. But then also this question around attrition in the sales organization. So is the answer to those two different questions the same that turnover and attrition is for -- on both fronts is kind of in the low single-digit range? I just wasn't clear whether you were answering one question or the other.

[Kim Blickenstaff:]

My answer was to the sales installed base. But from the sales reps question we do have some attrition that’s low – very low.

[Bob Hopkins:]

Okay. And then just generally, from a big picture perspective, I know what you guys talked about in terms of the sales force issues. But just when you look at Medtronic specifically as a competitor, is it a fair to say that they've been a little bit of a tougher competitor than you thought in terms of turning Medtronic pumpers on to new technologies like yours? Is that a fair statement you think at this point?

[Kim Blickenstaff:]

Well, I’d say that the aggressive use of the upgrade program has probably turns the decision from product features to price, and that can be a tougher – that to be a tougher sort of decision point than just features alone. But we did expect that would be pulling out every kind of trick and stop that they have in their book. They obviously have coverage have huge coverage, I mean, they live in accounts and we don’t. And so they have the ability to do a lot of different things that really limit our access or your hinder accounts taking a risk on taking on a newcomer like Tandem. So, I think that has lot to with the lack of bodies that we have out in the field. So I think with the smaller field salesforce there probably a bit more effective than we thought they would be.

[Bob Hopkins:]

Okay. And then John, just lastly, the difference in pricing on accessories for a direct contract versus distributor, I know you talked about the pump a little bit. But can you just remind us on -- if you are using a bit more on the distributor side, how does that affect pricing on accessories?

[John Cajigas:]

On the direct basis a customer generally utilizes about $1,300 to $1,500 worth of supply in a year on a direct basis. And on a distributor basis we’ll lose the infusion set revenue, which is a big portion of that. Infusion set is generally priced right around $9 and cartridges right on $3, so you can look at the relative distribution of that revenue.

[Bob Hopkins:]

Okay. So that's something we'll consider as we take your comments into perspective. So great, that's it for me. Thanks very much.

[Operator:]

Thank you. Our next question comes from Ben Haynor of Feltl and Company. Your line is open.

[Ben Haynor:]

Good morning, and thanks for taking my questions. I just have a couple of kind of big picture ones and then one housekeeping one. In our surveys, it seems that some of the longtime pump users have an aversion to switching over to pumps that haven't really had a long track record on the market. Recently, we've kind of picked up on some of these people seeming to come around to the t

[Kim Blickenstaff:]

Yeah. I would agree with that assessment, when you’re making a full year decisions and you’re looking at a relative newcomer versus somebody that’s been widely prescribed at an account, you have the dynamic of healthcare provider who got to take on the learning of new device. And there are questions about whether the company’s customer service is adequate. What’s the reliability of the device? What’s the overall experience on the basis of patients? And so the incumbent does have an incumbent advantage and that mirrors what we have seen out in the marketplace as well.

[Ben Haynor:]

Okay. That's helpful. And then on some of these Type 2 products, the patch pens if you will, we are also picking up that they might ultimately become gateway pumps to more sophisticated pumps like the t

[Kim Blickenstaff:]

Well, I think that you’re right, there can be a gateway, because generally what you find is that people using pens I don’t know the exact stat that I’ve seen, but something like 50% to 70% of our people that are using pens and needles, don't use them when outside the home. So, wearing a patch and using insulin outside the home is a gateway that going on to a pump, because you don’t get more continuous insulin infusion therapy. So I do sort of view it as a gateway product. I don’t know what kind inroads those patch pumps have made. You probably have more direct market research than we do. But I don't think they’ve made a large impact today. But I do think that directionally you are right about what they could be.

[Ben Haynor:]

Okay. Thanks for that. And then, lastly just the housekeeping question. What was depreciation and amortization during the quarter?

[John Cajigas:]

About a [$1 million].

[Ben Haynor:]

Okay. Thank you very much, guys.

[Operator:]

Thank you. At this time, I’m showing no further questions. I’d like to turn the call back over to Mr. Blickenstaff for any closing remarks.

[Kim Blickenstaff:]

Okay. Well, thank you everybody for joining us this morning for little bit on the early side for the conference call. For those in the East Coast, it wasn’t too early. But we have two upcoming Investor Conferences in New York that we’re going to be attending. One will be the Stifel Healthcare Conference and we are presenting on November 18. And then at the Piper Jaffray Healthcare Conference and that will be on December 2. So that is sort of our conference schedule for the balance of the year. So thanks again for everybody for joining us today and all the good questions that came at the end of the presentation. And we look forward to keeping you updated as company continues to progress during the year. Thank you.

[Operator:]

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