Tandem Diabetes Care, Inc.
Q4 2014 Earnings Call Transcript

Published: 25 Feb 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to the Tandem Diabetes Care Fourth Quarter 2014 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 follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Susan Morrison.

[Susan Morrison:]

Thanks. Good afternoon, everyone. And thank you for joining Tandem’s fourth quarter and full year 2014 earnings conference call. Today’s discussion may include forward-looking statements. These statements reflect management's expectations about future events, product development timeline 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 the Risk Factors portion or elsewhere in our most recent annual report on Form 10-K and in 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. The company also announced today in a separate press release the commencement of the 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, 2014. In light of that and SEC rules and regulation, the company will not be discussing or answering any questions about the proposed financing. Kim Blickenstaff, Tandem’s President and CEO will be leading today’s call. And at this time, I will turn it over to Kim.

[Kim Blickenstaff:]

Thank you, Susan. Good afternoon, everyone. Also with me today is our CFO, John Cajigas. So last year and the fourth quarter in particular were tremendous for Tandem in many ways, most notably, was our achievement of 71% year-over-year sales growth, our more than doubling of the t

[John Cajigas:]

Thanks, Kim. Good afternoon, everyone. As Kim mentioned, we are happy with our performance in 2014 as a whole and in particular, I believe we had an outstanding fourth quarter in many respects, from our sequential growth and sales to our operating margin performance. Turning to the details of our sales and product shipments, looking at Q4 first, sales for Q4 were $17.9 million, an increase of 75% from $10.2 million in Q4 of 2013 and growth sequentially of 32% from $31.5 million in Q3. Pump sales accounted for 86% of our total sales in Q4, compared to 87% for Q4 in 2013. t

[Kim Blickenstaff:]

Great. Thanks, John. I’d like to conclude our remarks by highlighting last week that we announced the release of our t

[Operator:]

Before we begin today’s question-and-answer session, I’d like to go ahead and turn the call back to Susan for additional remarks.

[Susan Morrison:]

Thanks, Kate. Just a comment for anyone who may have joined the call a bit late, the company announced in a separate press release today the commencement of an underwritten public offering of its common stock but due to SEC rules and regulations, we’re not able to answer any questions about our proposed financing on this call. I would ask that people please refer to the press release. We are happy to answer other questions though, so I’ll turn the call back over to the operator for our first question.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Rick Wise with Stifel. Your line is open.

[Matt Blackman:]

Hi, guys. This is actually Matt Blackman here for Ricky. You hear me, okay?

[Kim Blickenstaff:]

Yes. Hi, Matt.

[Matt Blackman:]

Hi. So just a couple questions, before congratulations on the quarter. I was wondering if you could sort of reflect on rep productivity, obviously you had a nice uptick here in the fourth quarter as expected. But as we think about sort of your reps broadly, is it a bell curve sort of distribution of productivity, or are there more reps that are further along than you thought they would be or less, anyway to sort of characterize that? And then as we think about sort of peak productivity a couple of years out, are we still comfortable with that 25 sort of per month as a metric to work with?

[John Cajigas:]

Sure. This is John. The productivity, we are not going to comment on the scale, but as you can image, there is sort of a range of productive reps with some very highly productive reps and some reps that are at the lower end of the productive expectations. But the average for the year was in the mid-teens, which we are quite happy with and the expectation is they will move towards 20 as the average for 2015. Longer term, I do still expect it to move towards the low to mid 20s as the potential for the overall productivity of the reps with multiple products.

[Matt Blackman:]

Okay. That’s helpful. And then John this one’s probably also for you. I am just curious your guidance for '15. Does it reflect any potential? I am going to call it sort of G4 sensor warehousing, in effect patients that may have been t

[John Cajigas:]

There is no sort of new sales impacted by t

[Matt Blackman:]

Okay. And I am going to sneak in one last one. Is there any update or do you want to provide any update on your thinking on a proprietary infusion set?

[Susan Morrison:]

It’s something that we’ve been interested and we’ve evaluated. But from an R&D perspective, we are always considering different things to address that issue at distributors that you are referring to from an R&D perspective as well as from just an overall business or agreements or different things with the distributors. So no definitive project actually speak to today other than to acknowledge it is something that we have looked at and we are considering, but we are heavily market research focused and we’ll continue to be.

[Matt Blackman:]

Thanks so much.

[Operator:]

Our next question comes from the line of Kristen Stewart with Deutsche Bank. And your line is open.

[Kim Blickenstaff:]

Hello, Kristine.

[Kristen Stewart:]

Hi. Thank you for taking the question and congratulations on the results. Kim, I was wondering if could just go in a little bit more detail to the extent that you can just on the G4 products. It sounds to me like relative to the last update you’re feeling a little bit more encouraged there. To the extent you can just comment on what these site inspections have and maybe timelines to where you might get a little bit comfortable with saying more definitively that you would be able to launch product in the second half of '15 versus something more closer to the end of the year? Thanks.

[Kim Blickenstaff:]

Well, there are a couple of key steps. Number one was that site inspection and have it competed before Christmas, I mean that was a big deal for us, I mean so I think that was one of the big things that are on the check mark, then responding to the deficiency letter is probably the second major milestone. We haven’t given any guidance about when that’s going to be. But we think it’s within that range of guidance that we have given that we can get that wrapped up and be into the marketplace in the second half of the year. So I think overall, our interaction with the agency was pleasing and I think they want the product on the market from what I can tell. So we’ll give you more warmth about how we feel about this as we move on, but we are preparing to commercialize.

[Kristen Stewart:]

Okay. And then just John, I just wanted to triple check. There is no assumption of any sales for G4 in this year’s guidance of $70 million to $75 million. Is that correct?

[John Cajigas:]

That is correct.

[Kristen Stewart:]

Okay. Great. And just on the warehousing issue, you have -- it sounds to me like taking into consideration the fact that the Vibe is out there and that there may be some patients trying to decide which product to use in light of that product or potentially your product as well. So that has been a consideration in that guidance as well.

[John Cajigas:]

It has been a consideration not only in the full year guidance but as well as what I talked about as far as how that quarterly distribution of the sales would be impacted.

[Kristen Stewart:]

Great. Okay. Thanks very much, guys. Congratulations again.

[John Cajigas:]

Thank you.

[Operator:]

Our next question comes from the line of Tom Gunderson with Piper Jaffray. Your line is open.

[Tom Gunderson:]

Hi. Good afternoon, everybody. You may have said this, I missed it. I apologize if I did. But did you just say anything about how much of your Q4 sales were coming from gaining share from competitor on their exchanges versus expanding MDI?

[Kim Blickenstaff:]

We did not, but it’s still roughly consistent with what we had in the past, which is roughly 50-50 split.

[Tom Gunderson:]

Okay. Thanks. And then, I know, this is difficult to do, but I am going to ask, if you can sort of give us some idea on predictive low suspend, there was quite a bit of talk at the Paris meeting on the 640G from Medtronic and that seems like that’s coming down the line, et cetera? The details you gave us, Kim, submit for an IDE in the middle or second half of this year, if we assume a PMA takes a year and maybe, I don’t know, just pick a number or year two actually do whatever the FDA ask you to do in an IDE, are we talking late ’17 or something like this at the earliest?

[Kim Blickenstaff:]

Yeah. That’s not an unreasonable timeline, that sort of big buckets of activities that would have to happen in order to get into the market.

[Tom Gunderson:]

Right. Right. And then just a quick follow-up to that and I will get back in queue is, whose PMA is that?

[Kim Blickenstaff:]

That would be our PMA.

[Tom Gunderson:]

Okay. But you would be using Dexcom, the Dexcom sensor, right.

[Kim Blickenstaff:]

The Dexcom sensor, yeah, we would be using the Dexcom sensor.

[Tom Gunderson:]

Right. But you have a, the only reason I asked and I am little confused, you have a 510(k) pump, they have a PMA sensor, but when you put them together, it’s your PMA?

[Kim Blickenstaff:]

It’s a PMA, correct. We don’t do the clinical trial part on the current products on the patient side of things, all that will be determine as we move into this predictive glucose suspend or the more closely based kind of algorithm that maybe trials that we are signing up for.

[Tom Gunderson:]

Got it. Thanks. That’s it for me guys.

[Kim Blickenstaff:]

Thank you.

[Operator:]

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

[Kevin Strange:]

Hi, guys. This is Kevin Strange in for Bob. Thanks for taking the question.

[Kim Blickenstaff:]

Hi, Kevin.

[Kevin Strange:]

I guess, just to starting up, I apologies, if I missed it earlier in the script. But in terms of your guidance, did your guidance assume that the rep disruption that we saw earlier in the year that that is really at this point have fully resolved or we still seeing some lingering results from that?

[Kim Blickenstaff:]

I would say it’s fully resolved, I think now it’s just working the productivity, up from the low expectations.

[Kevin Strange:]

Okay. Thank you. And then, on the -- your assumptions for next year in terms of percent of sales from distributors versus direct sales, what’s embedded in your guidance there? I think, the quarter came in little bit higher than we were expecting, a 79%? But how are you thinking about percent of sales coming from direct channels next year? And then, if you could comment on the trajectory of the conversation over the next couple of years? How we should be thinking about that that would also be helpful?

[John Cajigas:]

Sure. So it was roughly 80-20 and I think, now that we have a full quarter of United Healthcare being service by distributor, I think we have seen that sort of impact. Now that is the big sort of plan. So it may continue to slightly increase depending how the mix of payors sort of plays out and how we sign contracts going forward. But I think long-term, I still believe that we will move toward something like 50-50 as of -- sort of an achievable goal that we believe is a conservative goal.

[Kevin Strange:]

Got it. And then, just lastly for me on competitive front, I know it’s early in the launch of the Vibe, but could you just comment on kind of what you are seeing in the field, sales approach to proving that product? And then also if you could just touch on the Asante products, what you are seeing the field from them as well?

[Kim Blickenstaff:]

Well, on the Vibe, I think, the fact that it is sensor enabled, broadens the number of companies that are up a sensor enabled products, so that sort raising that issue as a sales barrier. So it’s important that we get progress on our PMA, so that we can normally be in that game of hopefully improve products over the second half of the year. So as John said, they are going to be pretty strong coming out of the gate, because they are number two with that sensor integrated offering. As far as Asante goes, I think, we were pretty clear last time that we are doing sort of free sampling program. Try it before you buy it. It was a regional offering, wasn’t nationwide. We haven’t really seen much change from that strategy, that’s a part of what we saw on the road show activity as that was one of their major selling features as that you could try without actually having to buy out. But we won’t know what the effect of the recent financing activity is going to have on their nationwide rollout plans which we have sort of factored into our guidance for the year.

[Kevin Strange:]

Great. Thanks so much for taking the questions.

[Kim Blickenstaff:]

Thank you.

[Operator:]

Our next question comes from the line of Shaun Rodriguez with Cowen & Company. Your line is open.

[Ryan Blicker:]

Hi. This is Ryan Blicker filling in for Shaun. Thanks for taking my questions.

[Kim Blickenstaff:]

Hi Ryan.

[Ryan Blicker:]

So looking at the sales to distribution going back to that, you touched on last quarter that greater alignment was needed to make the cartridge sales breakeven or profitable. Can you quantify a level of volume if necessary to reach breakeven on cartridge sales and whether or not you think you may reach this in 2015?

[John Cajigas:]

I’m not providing sort of a lot of detail at that level for sort of cartridge manufacturing or gross margins by product. I will say we are making progress, meaningful progress in that margin improving as we move along. But it is still something that we expect to see higher margins with our pumps than we would see in our supplies in the immediate year ahead of us.

[Ryan Blicker:]

Okay. Thanks for that. And then maybe just a little bit more color on the newly announced products. Can you talk a little bit more about the Odyssey software, you expect to file at the end of the year. Can you talk to what type of features will be upgradable of customers in the first generation of the product and maybe a little -- elaborate more on your long-term vision, just some understanding, it sounds like the plan is to one day make a decision support tool collaborating with payors?

[Kim Blickenstaff:]

The concept of it is that it’s a conduit to upload new versions of software to the various products that we’re selling. So obviously we’ll have the base t

[Ryan Blicker:]

I was asking to elaborate a little more on the long-term vision whether you see it as a decision support tool but that was helpful. Thank you. If I could sneak one more in on competitive bidding, I know the second round has ended recently. Have you seen any impact in the impacted regions and can you elaborate anything on what you’re hearing or seeing?

[Kim Blickenstaff:]

However, it’s quite a down. It is dropped off the math from our perspective. So competitive bidding really isn’t sort of the third was when it first raised it had about a year and year and half ago. In fact, it’s not part of the competitive bidding packages that are out there now.

[Ryan Blicker:]

Okay. Thank you.

[Operator:]

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

[Ben Andrew:]

Great. Thanks for taking the question. Two things, I guess, for us, one, talk a little bit more John about the distributor mix this year. Did I hear you right that we may see something higher 80-20 on a full year basis in ‘15 or you’re hoping that still starts to come down later in the year?

[John Cajigas:]

It is expected to come down later in the year. The 80

[Ben Andrew:]

Right. And then so what makes that happen because obviously you know it is 15% of the market and what allows that. Is that just your sales guys are kind of changing the focus or how does that actually happen in the field?

[John Cajigas:]

A lot of it is signing the contracts, a lot of it is just taking advantage of the contracts we have in place that have not been utilized.

[Ben Andrew:]

Okay. And then Kim, under the AP project, it sounds like you are starting to ramp that up and be more public with that. What do you think that project is going to cost, kind of, suite not to get even a first generation low threshold suspend kind of thing, much less than the second algorithm platform to market?

[Kim Blickenstaff:]

We don’t really have any guidance we can give you at this point in time but what we do is we have a clearing agenda on the part of our R&D group. Our R&D group in the last two years has been spending so much time on getting -- catch up 510(k) is approved, the PMA is approved, the development of flex and G4. And so I think capacity is going to free up to allow us to do more work but there is going to be a clinical component that we haven’t had to deal with before. I don’t think it’s tens of millions of dollars, but it’s going to be some incremental spend of what we’ve seen and we have not yet given any projections or really given any guidance about that.

[Ben Andrew:]

Okay. And then I guess one last question for us. You are closing in I guess, three years plus on the market now in the U.S. and closing on your fours. So you will have some of your own pumps starting to roll up later this year, maybe early ’16. How do you think about holding on to those patients, number one? And then a related question, what are you seeing on pump pricing as we went through Q4 and over the course of ’14 and what’s baked into guidance for ’15? You talked about competitive pressures but what you have baked in there, John. Thanks.

[John Cajigas:]

Sure. As far as the renewals, they will start to hit at the end of 2016. We launched in Q3 of 2012, so roughly a four year sort of renewal cycle that will start to see some renewal activity. Hopefully, at that point, we will have G4 on to the market, which will be hopefully an upgradeable option for these folks who come off our t

[Ben Andrew:]

Okay. And are you seeing a different level or any kind of change in kind of competitor responses or promotions aside from the Asante’s programs but in terms of the more substantial competitors?

[John Cajigas:]

As Kim mentioned, there is the Asante program that’s out there, as well as some of our largest competitor. Medtronic has used some economic incentives that have not -- hasn't changed during the last few quarters. It’s still a significant part of, sort of our sales barriers as we come up against them.

[Ben Andrew:]

Thank you.

[Operator:]

Your next question comes from the line of Tao Levy with Wedbush. Your line is open.

[Tao Levy:]

Yes. Hi. Good afternoon. I was just wondering just to be clear and maybe, I wasn’t sure about this. But the t

[Kim Blickenstaff:]

True. Different radios, there are some different innards on the inside that make them really different.

[Tao Levy:]

Down the road, would you have both systems at t

[Kim Blickenstaff:]

I think it’s going to be a matter of -- there are going to be separate SKUs. So they will be separate product lines that are maintained and their software’s will be slightly different because obviously one has integrated CGM display information, the other one doesn’t.

[Tao Levy:]

Got you. So it’s not just the software difference, right?

[Kim Blickenstaff:]

There is hardware differences, yes and even our future generations might be different pumps as well.

[Tao Levy:]

Got you. Okay. So that kind of leads me to into my other question, which is when is the right time to start to thinking about providing some of the promotions or upgrades to patients out there? I remember, Medtronic launch the 530G, a year early.

[Kim Blickenstaff:]

Yes. But we hope that we do not have feeling to this upgrade game. We hope that we are going to get approval quickly enough that those, just probably delay in volume purchase decision because they wanted to integrate that CGM, we will be able to access at some point later this year. And we will continue to hold volume to weight. They do have the discretion to keep using their pumps as long as they keep working and they delay that decision. So, we are hopeful that we don’t have to get into this upgrade game that others have tried to play in order to hold their installed base.

[Tao Levy:]

Okay. And then just lastly, so if you come in at some of the early end of your expectations that’s take 12 months for approval. How soon will you be ready to start manufacturing and selling the product?

[Kim Blickenstaff:]

So, we are starting to prepare a little bit now but assuming we get the approval, there will be some lag time from which the sales force we will have to get trained, developed their sort of marketing and sales strategies to be trained at. And then once they start to sell, we’ll have to go out through the normal cycle of generating sales orders, as well as going through insurance verification process, which typically takes 30 days or so. So it’s usually one -- two to three months after we start selling probably.

[Tao Levy:]

Okay. So similar to the t

[Kim Blickenstaff:]

Very similar, yes.

[Tao Levy:]

Okay. Great. Thanks a lot.

[Operator:]

Our next question comes from the line of Ben Haynor with Feltl & Co. Your line is open.

[Ben Haynor:]

Good afternoon, everyone. I just had a couple quick ones here. One of the things that we’ve picked up on in our survey work with some of the existing animus customers is that that also have the Dexcom CGM is that the G4AP algorithm with the CGM device have them so hooked that they would not be reluctant to upgrade to the animus Vibe due to it not having the G4AP algorithm. Would Odyssey be something, the Odyssey program be something that could enable that upgrade, or is there something that can be upgraded without Odyssey?

[Kim Blickenstaff:]

No, Odyssey would not be able to upgrade that.

[Ben Haynor:]

And is that something that would require an amendment to the PMA or how could you do that?

[Kim Blickenstaff:]

It would be a new PMA.

[Susan Morrison:]

Yes. Any future generation would be a tougher project.

[Kim Blickenstaff:]

Yes. We will address what our strategy is towards that sort of interim improvement in later date as we talk more about our evolving Dexcom relationship.

[Ben Haynor:]

Okay. Great. And then on the questions that you received from the FDA, can you kind of characterize those? Are they relatively easy to answer? Do they require a lot of additional work? How does that kind of shake out? And I will jump back into queue.

[Kim Blickenstaff:]

Relatively minor amount of work, some retesting, nothing that was fatally flawed, so with just want more time that rather than risk we feel. So we feel like we are in a good position to respond in a timely manner and deal within the timeframes that we’ve given.

[Ben Haynor:]

Great. Thank you very much.

[Kim Blickenstaff:]

Thank you.

[Operator:]

And I am not showing any further questions at this time. I would like to turn the call back over to Kim Blickenstaff for closing remarks.

[Kim Blickenstaff:]

Well, good. We appreciate Tandem approved today wide variety of different topics. So we had a little bit of cryptic because of the offering that we are undertaking. But we look forward to keeping you updated on our progress and talking to you on our next earnings call. We will talk to you then. Thanks.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a good day.