Tandem Diabetes Care, Inc.
Q2 2015 Earnings Call Transcript

Published: 3 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care second-quarter 2015 earnings call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Susan Morrison, Chief Administrative Officer.

[Susan Morrison:]

Thank you. Good afternoon, everyone, and thank you for joining Tandem's second-quarter 2015 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 events 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, 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. 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 good afternoon, everyone. Joining me on today's call is John Cajigas, our Chief Financial Officer. Looking back at the first half of 2015 and the second quarter in particular, I'm extremely proud of the progress we've continued to demonstrate. A few of the highlights that stand out for Q2 are our achievement of 15.7 million in sales, representing a 53% year-over-year sales growth; our 60-point improvement in our year-over-year operating margin; the successful launch of our second commercial product, the t

[John Cajigas:]

Thanks, Kim. Good afternoon, everyone. As Kim mentioned, we are very pleased with our performance in the second quarter. I'm glad to see the continuing positive trends of our sales and operating margins as we look at them on a year-over-year basis and a rolling 12-month basis. Looking at some of the details of our sales and product shipments, overall, our Q2 sales were $15.7 million, a year-over-year increase of 53% from $10.3 million in Q2 2014. This is the eighth consecutive quarter of greater than 40% year-over-year growth. Sequentially, our Q2 sales increased 28%, from $12.3 million in Q1. Our pump sales in Q2 grew 48% year over year, while our pump supplies grew 82%. Recognizing that seasonality has a significant impact on our operating results, looking at longer comparative windows than individual quarters may provide a clearer picture in understanding the progress and trajectory of our business. Our sales for the rolling 12 months ended June 30 were $59.4 million, an increase of 63% from $36.3 million for the previous 12 months. Significant contributors to the rolling 12-month performance included the continued productivity progress of our expanded sales force as well as the initial t

[Kim Blickenstaff:]

Thanks, John. The momentum we've demonstrated in the first half of the year is encouraging as we continue to see strong adoption of the t

[Operator:]

Thank you. [Operator Instructions] Thom Gunderson from Piper Jaffray.

[Thom Gunderson:]

Hi, good afternoon everybody. So, Kim I want to focus on sales productivity. It keeps going up, as you predicted and you forecast for the end of the year. I'm curious, as you have your second product now and you're getting ready for your third product, where do you see productivity topping out? In other words, when do you think you might have to or at what level would you have to add more salespeople to keep that growth going?

[Kim Blickenstaff:]

Well, we suspect it's probably going to top out in the 20s. Low to mid 20s would probably be a good estimate of where that's going to top out. And obviously, we don't have the experience yet but we are seeing improvement and movement in that direction. We are taking a look at under-served territories right now territories where we believe there's more potential than we're currently addressing with the headcount available. And we'll keep you posted on when we think that we need to make another expansion. It won't be as grand as the last expansion but I think it will contribute additional acceleration of sales when we do make those headcount additions. So we're beginning to think about that. You're looking for some timing on that, but we're just beginning to think about that and look at where those territories might be.

[Thom Gunderson:]

Got it. And then, just so we have a sense of where you are now that average of 19, what's the range? Is it a two-unit range, a 10-unit range? What are the top guys doing?

[Kim Blickenstaff:]

Well, it is a large range and the top guys are doing extremely well. That said, I'm not going to give you a quantified breakout on it but there is an extreme range and we have some people that are doing extremely well.

[Thom Gunderson:]

Okay. And then I'll finish up. You've got AADE next week. Your product is arguably and by the surveys the easiest to use, which is something that the diabetes educators, I'm sure appreciate. Are there any papers planned or any training sessions planned that would increase the knowledge that these diabetes educators have of the product and how easy it is to use?

[Susan Morrison:]

Sure. We're actually hosting a large event, Thom, on Wednesday, August 5. At that event, basically, we go through the t

[Thom Gunderson:]

Got it. Thanks, Susan. I'll go back in queue. Thank you, guys.

[Susan Morrison:]

Thanks Thom.

[Operator:]

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

[Kristen Stewart:]

So I was just wondering if you could maybe provide, I guess your best guess at this point, since I guess it's sort of be as to your thoughts on how much variability there might be on people waiting maybe just in terms of thoughts on combined usage with pumps with glucose monitoring just in terms of the sensitivity you're thinking about in terms of how many people may be delaying as they're thinking through, what variability there might be around that $70 million to $75 million estimate that you see for the full year or how much room you think maybe t

[Kim Blickenstaff:]

Well, I think the t

[John Cajigas:]

And Kristen, it really depends on when we would get the approval of G4, what the timing of it would do and what it would impact on a quarterly basis. If we happen to get that approval sometime early on in the year, I think before the remainder of this year, I think its impact on the year and the $70 million to $75 million will be minimal as far as people waiting, because we will be able to service those customers within 60 days of approval. So we do intend to begin shipping product within 60 days. So if anybody's holding back, 60 days after approval, we expect to have their order fulfilled.

[Kristen Stewart:]

Okay. Can you maybe just remind us the process between where you are now -- I think last quarter you had said you were inspected by the FDA. That all went well, and then I know you can maybe ship within 60 days, but I guess you can't necessarily recognize revenue within 60 days. I think you have to wait until another 30 passes. Is that right?

[Susan Morrison:]

At first, we could recognize revenue that is at the 60-day mark.

[Kristen Stewart:]

You're right.

[Susan Morrison:]

The fact that we would take orders in advance of that. So if you look at the process, 30 days after we receive approval, we anticipate taking customer orders and beginning to process their insurance. That's typically a 30-day process, which puts us to the 60 days when we'd actually ship the product, and that's when you get that revenue recognition piece of it. As far as where we are with interactions with the FDA, it continues to be positive and we continue to be in the Q&A portion of it. It's hard to tell, though, where you are in that process. But to your point, the manufacturing portion really was wrapped up. We did have our site inspection. It went well, and all the questions associated with it are closed. So we're just in the remaining question portion, and we don't know the remaining timeline.

[Kim Blickenstaff:]

Yes, I've said we feel like we're grinding towards an endpoint, as we have with other filings that we've had. So we feel like we're in the neighborhood of getting across the line.

[Kristen Stewart:]

Okay. Hopefully, you'll cross that line soon, so push forward. I'll get back in the queue. No deflate-gate.

[Kim Blickenstaff:]

It would be peachy if we got it.

[Kristen Stewart:]

It most definitely would. Thanks, guys.

[Operator:]

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

[Kevin Strange:]

Hey, guys, this is actually Kevin Strange in for Bob can you hear me okay.

[Kevin Strange:]

Maybe just to start with your announcement this afternoon of the Dexcom agreement. Can you just put that in perspective for us a little bit? Does this agreement just give you access to future generation sensors made by Dexcom? Or should we think about this as a deeper relationship with Dexcom to develop future products?

[Kim Blickenstaff:]

Well, yes, it does give us access to future generations, which we're trying to stay up with their latest generations, obviously, as they make improvements and improve sensitivity and interferences and so forth, which does make it a better product. It also makes it a better product for our AP program, so those generations are going to be a part of what we do with our artificial pancreas program. So that is a deeper relationship, because we both want to get to that automated insulin delivery, both the shutoff aspect and then turning on. A two-step process, probably, in terms of how we develop those products. But I think it's signaling a deeper relationship, getting just beyond the display factor into the control factor.

[Kevin Strange:]

Okay, that's helpful. And then on the competitive front, one of your competitors made some positive comments earlier this quarter about the performance of their Vibe sales in the quarter. I'd just love to get your perspective on what impact, if any, the launch of that product is having on your business, and maybe even more importantly, if there's any impact from that product on the overall pump market that you're seeing in those far.

[Kim Blickenstaff:]

Well, within our range of expectations as to how we thought it would do, I don't know that I've heard that they've quantified how well it's doing. But it is serving a niche, and it is serving a patient population that does want that feature, which is why we're in that race to be the second to market with an integrated product with Dexcom. So I think the Vibe is doing, from what we can tell and what we hear from them, it's doing well. But it hasn't hurt our numbers.

[Kevin Strange:]

Okay, thanks for that. And then lastly, just on the contracting front, are there any direct contracts, meaningful direct contracts, that are in the pipeline that are being worked on that we could possibly expect here in the next 12 to 18 months that might meaningfully move the needle?

[John Cajigas:]

The larger plans that we've talked about out there are Anthem and Aetna, and you might know they're all involved in merger mania. So I think for us, it's really just business course as usual. We are signing other contracts as we move along, but the two major players are still moving along at a pace that I don't see that happening any time while they're in these merger discussions.

[Operator:]

Our next question comes from line of Rick Wise from Stifel.

[Rick Wise:]

Hi everybody good afternoon. Maybe we could start off with guidance. John just you had a $70 million to $75 million range that included one to three of t

[John Cajigas:]

I think it's primarily because the t

[Rick Wise:]

All right. And I wanted to continue on with t

[Kim Blickenstaff:]

Let's start with just the success of t

[Rick Wise:]

Yes. And the distributor direct mix and the new account, old account thing?

[Kim Blickenstaff:]

I think it's a variety. Obviously, having two products in the bags of our sales reps has helped them open some doors. I've heard of one specific circumstance where someone has called back and asked them to, to talk to us about it. And so that has helped open the door and that opens the door not just for t

[Rick Wise:]

Right. And gross margins on t

[Kim Blickenstaff:]

The price points on the ASP are exactly the same. The codes that we utilize are the same. As far as the gross margin, I haven't gotten to that level of detail but the manufacturing is generally the same, the pumps are generally the same, the cartridges are slightly different. I think I mentioned on the last call we do expect some early noise as we scale up that product, and we did have that happen here in the second quarter to a little extent-- not meaningful to the overall piece because of the small volumes. But for the most part, it's expected to be in the same range as t

[Rick Wise:]

Got you. And just one last one for me, obviously a great job controlling OpEx this quarter. But just thinking about gross margin and I appreciate your perspective in talking about the rolling 12 months; I think it's very helpful as a reminder. But I think you've made the point many times that 2016 is where we're likely to see more gross margin expansion. As the new products are all launching, you get the extra productivity, etc. But so scale, volume-- but I think you mentioned something-- at least I don't recall hearing the new automated equipment. Can you just remind me what that's about and what impact that could have on gross margin and when? You've called that out. Thanks so much.

[Kim Blickenstaff:]

Sure. Realize that we've launched our products in 2012 so it's roughly three years. So during the last year or so, we've been scaling up as we move along. We're making improvements in the manufacturing that have increased our efficiencies and have contributed to the gross margin improvements. I think we are now moving towards having three products. We are preparing to launch G4 here in the fourth quarter. And that is three products that need to be addressed, one of which is a PMA product which has slightly tighter controls on being able to make changes to the manufacturing line as we move along. So we are moving towards increasing our capabilities to deal with two products, one of which is a -- three products, sorry -- one of which is a PMA product and two of which are 510(k) products. And so we're just trying to create some flexibility and create some advanced preparation to the volumes we expect to see going into 2016.

[Rick Wise:]

Got you. Thanks very much.

[Operator:]

Our next question comes from the line of Jeff Johnson from Robert W. Baird. Your line is open.

[Jeff Johnson:]

Thank you good afternoon Kim, I just want to start with you. I don't think I heard timing on G5. Any mile markers you can give us over the next 12 or 18 months? I don't know what we should be thinking about progress there on the new agreement.

[Kim Blickenstaff:]

No, we haven't given any timing. That's really highly dependent upon what's going on in our AP program. We really haven't laid out milestones and timing for that, other than our pre-IDE that I mentioned. So no, we don't have any timelines laid out.

[Jeff Johnson:]

All right. And with t

[Kim Blickenstaff:]

Well, technically it's possible what you're describing, so I mean, we are thinking about that. That's in our development plans, and it's very technically possible. As far as t

[Susan Morrison:]

Yes, and to Kim's point, G4 is a separate radio, so there isn't a pathway for t

[Jeff Johnson:]

Yes, understood. And then the last question I had, I just didn't hear a number, maybe, on -- and maybe you don't update it quarterly; sorry if you don't -- percentage MDI versus competitive conversions?

[Kim Blickenstaff:]

It's still about 50-50. We haven't seen much of a change there, yes.

[Jeff Johnson:]

All right, very helpful. Thanks, guys.

[Operator:]

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

[Tao Levy:]

So a couple of questions on my end. If you get the lower age for the t

[Susan Morrison:]

At this time we don't have plans for a lower age indication for the t

[Tao Levy:]

Any reason why not?

[Susan Morrison:]

No, at this point, we really think there's significant opportunity with t

[Tao Levy:]

And if you think about the U.S insulin pump market, it's in the latest market research data. Do you think that started to grow a little bit faster, or penetration has finally moved beyond that 30% that we're always quoting?

[Kim Blickenstaff:]

Well, we don't have really good data that we get. But just from the industry information that we see, that Insulet and we are growing that portion of the type one market that are not currently on pumps. So we're doing that. It may be at fairly small scale to have, considering the base of users and non-users out there. But I think overall, the market continues to grow and continues to grow at a pretty healthy pace.

[John Cajigas:]

The question will become what does t

[Tao Levy:]

And a lot of that will depend on insurance? Is that your learning so far?

[John Cajigas:]

Correct economics insurance is going to be a big portion of whether or not people decide to go on the pump technology.

[Tao Levy:]

Okay. And then just lastly, just strategically, why aren't you offering some sort of upgrade, rebate type incentive so that you don't run into some of these potential headwinds in the second half ahead of your G4 launch?

[Kim Blickenstaff:]

Well, upgrades are something that we actually put a lot of thought into. And as a young company without other business units, we had to make a decision on how to best manage the business and not offer upgrades. We're trying through the Odyssey program to make the software upgradeable on t

[Tao Levy:]

Okay, great. Thank you.

[Operator:]

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

[Ben Andrew:]

Good afternoon John, just a question on gross margin for you. Can you help us think about what either the gross margin might have been, or maybe impacted revenue if that distributor percentage had stayed the same or trended lower in the quarter, because that continues to climb. And obviously, there's a lot of positives to that, but there's some negatives that go along with it.

[John Cajigas:]

It really would be on the ASP side of things, and as an example, a pump for a distributor is roughly $4,000 as a charge ASP and for a direct, it's anywhere from $4,000 to $5,000 so it's really going to be whatever pickup that is. Obviously, most of our business that's on the larger volume is closer to the-- is the $4,000 to $4,500 range on the direct business. So there's going to be that pickup and that's what the pickup would be.

[Ben Andrew:]

Yes. And part of what I'm getting at is obviously, the infusion sets and the extra revenue there. And do you make any money at all on those infusion sets when you do get them?

[John Cajigas:]

We do. There are positive gross margins for the infusion sets and currently there is negative gross margins for the cartridges.

[Ben Andrew:]

Okay, right, okay. That's all the same. And then switching gears on the AP product, Kim, I don't know if you've talked about it. Is it going to be a one- or two-hormone product?

[Kim Blickenstaff:]

It's going to be a one-hormone product. It will be regulating the administration of insulin. Shutting it off would be the first step, then turning it on if you're going low.

[Ben Andrew:]

Okay. And how far along are you? I know the software's probably written but how far along are you with the ability to convince FDA from a clinical perspective that that product is ready? And I know you're trying to define that path now but is that a two-year process? Because I know Medtronics has been working at this, the different projects, for 15 years so, is this a two- or three-year clinical program?

[Kim Blickenstaff:]

They seem to be more amenable to algorithms that do these kinds of changes both increasing insulin and decreasing insulin. The pathway isn't going to be defined until we get in front of them and begin to talk to them. I think the more problematic piece of this is actually turning on insulin. That has-- would be the second step, so we don't have a timeline at this time. And we-- I'm optimistic, though, that the climate has changed and there is amenability to looking at these algorithms for both these pieces of automated insulin that we're looking at.

[Ben Andrew:]

Okay, great. And what do you think the timeframe is after the G5 is approved when you would be in a position to bring forward a G5-integrated t

[Kim Blickenstaff:]

We haven't given that guidance.

[John Cajigas:]

It's too early to work on that.

[Ben Andrew:]

Okay. And then last question for me. Obviously, you talked a little bit about the potential disruption in patient decisions and maybe even a pause after the G4 integrated product gets approved. Your guidance does it reflect that fully in terms of if it happens at a certain point in time and kind of what's the-- ? I guess you don't have any direct experience but what's the range of outcomes if you see that happen at the perfectly wrong time in the quarter, if you will, or in the year? Thanks.

[John Cajigas:]

For the year, I don't think it will have an impact on the year unless that approval comes right towards the end of the year within that 60-day period within the year, so if it comes in say, mid-November, then again it will be 60 days after that by the time we fulfill that, so it could impact the year. So we're hopeful that it will come sooner than that and the impact to the remainder of the year and the full-year guidance is not going to have any impact. With respect to Q3 and Q4 it really is dependent on when it might come on, come through the approval and then how long it would take us to actually begin shipping, so the 70 million to 75 million does not include any G4 revenue, so just to be clear on that. So once we do get approval for that we're likely then to update our guidance and probably give some color on how we would expect that to impact the quarters.

[Ben Andrew:]

Just to be clear, the $70 million to $75 million does include some potential disruption within the quarters but not on the full year?

[John Cajigas:]

Correct.

[Ben Andrew:]

Okay, thank you. That's very helpful.

[John Cajigas:]

Yes and it only includes-- the impact is what it would do to the timing of decisions of people who signed up for t

[Ben Andrew:]

Of course, perfect. Thank you.

[Operator:]

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

[Ben Haynor:]

Good afternoon everyone, thanks for taking my question. Just a couple of quick ones here for you, I think you said last quarter about 10% of your customers being type 2 under the t

[Susan Morrison:]

We don't actually have an upgrade program in place and so people who previously chose the t

[Ben Haynor:]

Sure, but I guess my question is if someone already had a t

[Susan Morrison:]

Correct. These are primarily new customers.

[Ben Haynor:]

Okay. And then with Asante Solutions closing down midway through the quarter, did you see any benefit from their prior customers? I know they had a small base of customers but did you see any coming over to you guys?

[Kim Blickenstaff:]

It was marginal. I mean we really-- it was not something that we really noticed that had an impact on the quarter.

[Ben Haynor:]

Okay and then if I could just squeeze in one last financial one. John, I'm sorry if I missed this but what was depreciation and amortization, either for the half-year or the quarter?

[John Cajigas:]

I think it was about $1.3 million.

[Ben Haynor:]

Okay, great. That's all I had. Thank you very much.

[Operator:]

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

[Kim Blickenstaff:]

Okay, thank you very much. Thanks again, everyone, for joining us today. There's a little bit of industry activity and investor conference activity I just wanted to cover really quickly so you had times and dates. So for next week, we'll be at the American Association of Diabetes Educators conference, August 5 through 8 in New Orleans. This is a vital part of our diabetes community that we serve, so this is an important meeting for us, and we have a lot of activities going on there and a lot of educational activities, so that's an important meeting. We're also going to be attending a number of upcoming investor conferences. On August 11, we're presenting at the annual Wedbush Conference in New York City. Then on September 10, we're going to be at the Baird Healthcare Conference. And then September 17, we'll be at the Morgan Stanley Healthcare Conference. Both of those are going to be in New York City, so that's our schedule for the next couple of months in terms of investor activities. So in conclusion, we've got a strong first half of 2015, off to a great start with great potential for the back half of the year, both in terms of sales as well as R&D milestones. So we look forward to keeping you updated as the Company continues to progress and updating you on our next earnings conference call in the third quarter. So I'll close by saying thanks for attending and have a good day.

[Operator:]

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