Tandem Diabetes Care, Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care Third Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to, Susan Morrison, Chief Administrative Officer. Ma’am you may begin.

[Susan Morrison:]

Thanks. Good afternoon, everyone, and thank you for joining Tandem's third 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. 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 our Chief Financial Officer, John Cajigas. The third quarter was an exciting one for Tandem as we continue to achieve new milestones and advance our business. We received approval for our first PMA product the t

[John Cajigas:]

Thanks, Kim. Good afternoon everyone. Overall, we are very happy with our Q3 results and the addition of the t

[Kim Blickenstaff:]

Thanks John. I’d like to provide a few other updates on our products and development. I mentioned previously that we will be filing a 510(k) for a lower age indication for t

[Operator:]

Thank you. [Operator Instructions] Our first question is from Rick Wise with Stifel. You may begin.

[Rick Wise:]

Hi Kim, hi everybody, congratulations truly on an excellent quarter in a complicated period here.

[Kim Blickenstaff:]

Thanks.

[Rick Wise:]

There’s so many things to ask, I mean it seems like you are having great momentum with the new products, maybe start with some perspective, you mentioned Kim that, I think opening up of new accounts, help us understand the new accounts you are opening, are you being helped because of the, the three products is it specific to t

[Kim Blickenstaff:]

Well I can’t quantify and give you a number on the number of new accounts, but I’d definitely say the integration of CGM really is the leader in terms of opening up these new accounts, you have seen products available from Medtronic and then later animus that were integrated and so that was a feature set that we didn’t have. So, this really a land mark for us to be able to offer that product offering. Because it really does open up accounts that were dedicated CGM technology integration fans and we have been able to really play in those accounts. So, we are hopeful that it’s going to being to expand our penetration as we expand our sales territories as well.

[Rick Wise:]

Okay, and maybe John, just turning back to guidance here, you didn’t change your guidance range obviously, but I think I just read you correctly, the product guidance did not assume or include at least as best understood t

[John Cajigas:]

Well, I don’t think it assumes a 100% cannibalization, but there is a high level of interest in the t

[Rick Wise:]

I hear you, still hard to understand it seems like you got a lot of momentum, the numbers could prove conservative. Just one last question from me, Kim, you are adding 12 territories that makes a ton of sense just, what’s the timing of that, how you’re going to serve stage that or rule that out and obviously in the earlier stage of your evolution you increased territories and it was a little disruptive, should we be concerned how can you sort of re-assure us that we won’t see that same kind of disruption, we will get the good stuff and not the bad stuff? Thank you.

[Kim Blickenstaff:]

Well I think that what we are doing here is sort of filling black holes, areas that are poorly covered, areas that really didn’t have good representation, so we are hoping that we will be able to accomplish the expansion by the end of the first quarter. We are first starting on it now obviously and we would like to have that up and running by the end of the first quarter. We don’t expect to see the kind of disruption that we saw when we nearly doubled the sales force and changed every territory out in that process. So, we think it will be far more additive and less disruptive than the additions we have done in the past.

[Rick Wise:]

And just a quick follow-up, how quickly could those be incremental contributors to the top line, does it take 6 months, 12 months, what should we assume, thanks and I will stop there.

[Kim Blickenstaff:]

Yeah, 6 months to 12 months is a reasonable expectation for them being productive and adding to the top line. I mean that’s part of our goal for increased revenues next year, first line is new products, second line is expansion of the sales force.

[Rick Wise:]

Thanks again.

[Operator:]

Thank you. Our next question is from Tom Gunderson with Piper Jaffray. You may begin.

[Tom Gunderson:]

Hi, good afternoon everybody. I, just to start, couple of clarifications, Rick was talking about the 12 territories, just to make sure we have our words right, these are 12 new territories, commission carrying, not managers, not juniors, this is new territories, is that the way to think of it?

[Kim Blickenstaff:]

Yes, that’s right.

[Tom Gunderson:]

All right and then the other is, I know you got the FDA approval in early September, did you say the 487 is shipped all in the last week of the quarter?

[Kim Blickenstaff:]

That’s correct.

[Tom Gunderson:]

Okay. Then for the question, we’re all going to try and figure out how much is cannibalization and how much is going to be new and you commented quite a bit in your prepared remarks. I’m just wondering as you look at those preliminary orders that come through for t

[Kim Blickenstaff:]

The percentage of the pump orders that are ranked to the process now are highly skewed towards the Q4 and at this point it’s too early to tell whether that’s pent up demand or if that’s really a continuing trend that we’ll see continuously. The orders for t

[Tom Gunderson:]

Okay. And then final question, by definition everybody on the call has heard about these products and probably heard about these products for the last six to nine months but that doesn’t mean that all of your customers are as up-to-date particularly because you couldn’t market until after September 09. Can you give us a little feel of what’s happened between 09/09 and 10/09, 20/09 as far as informing the diabetes community about G4?

[Kim Blickenstaff:]

Certainly we had a strong effort in trying to inform our own customers who were in the queue as to the availability of the t

[Tom Gunderson:]

Okay. That’s it from me guys. Thanks.

[Kim Blickenstaff:]

Thank you.

[Operator:]

Thank you. Our next question comes from Ben Andrew with William Blair. You may begin.

[Ben Andrew:]

Good afternoon. Thanks for taking the questions guys. John, can you give us a sense what percentage of the orders went through distributors this quarter as you typically do?

[John Cajigas:]

It was consistent, it’s 77%.

[Ben Andrew:]

Okay, great. And then Kim I thought you said that you’re going to file for the G4 algorithm upgrade in the first half of 2016 is that right?

[Kim Blickenstaff:]

The algorithm upgrade?

[Ben Andrew:]

On the t

[Kim Blickenstaff:]

For AP?

[Susan Morrison:]

For pediatric.

[Kim Blickenstaff:]

Yes, that’s correct.

[Ben Andrew:]

Okay. I missed what that was for. So are you planning to file for the new software algorithm that Dexcom got I guess last fall?

[Kim Blickenstaff:]

No.

[Ben Andrew:]

Okay. And so the next upgrade is just you’re going to go straight to the AP versus anything else on the sensor side?

[Kim Blickenstaff:]

Correct.

[Ben Andrew:]

Okay. That’s helpful. And then just to clarify do you get a place advantage when you sell a t

[Kim Blickenstaff:]

No, they are build under the same codes among our three products, so there really is no differential in the pricing for us generally.

[Ben Andrew:]

Okay, great. And then it’s like early days as some of the other people we are asking about with the product in the marketplace and you talked about a majority of the pumps being G4 in the fourth quarter. Where should we look for that to be overtime? Is there consensus of all, we know it’s still early but what have you heard back from the user base both patients and physicians?

[Kim Blickenstaff:]

That’s probably really the hardest question to answer really at this point looking forward at what percentage of that base is going to be. The t

[John Cajigas:]

I think that longer term that we still believe that t

[Ben Andrew:]

Okay. And then Kim if you walk through the timing on the AP project a little more granularity at this time with the hypo and hyper algorithms. Is that just a function of the number of patients in the size of the trials perhaps that FDA would require to do both at once or what was the bad story there?

[Kim Blickenstaff:]

It’s the guidance that we got from the FDA that it was better to do it sequentially than it was to try to do it simultaneously or we haven’t given really any granularity what the studies are but there are decidedly different studies and they are step wise moving towards in home setting and so the revise [ph] that we got from the FDA that we put them up when we do it sequentially.

[Ben Andrew:]

Okay, great. Thank you. That’s it from me.

[Kim Blickenstaff:]

Thanks, Ben.

[Operator:]

Thank you. Our next question is from Doug Schenkel with Cowen and Company. You may begin.

[Ryan Blicker:]

Hi, this is Ryan Blicker filling in for Doug. Thanks for taking my questions. Starting with the pediatric indication expected for next year, do you believe the lack of a pediatric indication to date has been a real bottleneck or doctors have been comfortable offering t

[Kim Blickenstaff:]

No, I think we have been pretty strict about our marketing guidelines and so we cannot market below the age indication that we had approved. And so I think that maybe obviously since we can’t market it accurately, it doesn’t form the community obviously the availability of its core lower usage. There has been obviously physicians to make choice to prescribe it, but we certainly can’t promote that. So I think it’s a real opportunity for us to do marketing activities that we really stay away from including summer camps and activities where the lower age indication where we weren’t approved were present. So we’ve been hamstrung by the syndication in this. We’ll take that limitation away.

[Ryan Blicker:]

Okay. Thank you. That’s helpful and then shifting to the AP program, it sounds like you made some great progress. Can you provide an update on your search for an algorithm partner and when do this really need to be secured in order to remain on track with your timelines?

[Kim Blickenstaff:]

We haven’t really given the details of who our algorithm partner is and which one we are using. So I can’t really give you any indication on that but we have selected as it part of the protocol that we review with the FDA.

[Ryan Blicker:]

Okay. Thank you. And then last one from me with operating margin. After making some heavy investments in 2014, you‘ve done a great job managing OpEx so far in 2015 both with SG&A and R&D. Moving to 2016 with the sales force expansion you talked about as well as a number of ongoing R&D projects including your AP program, how should we be thinking about OpEx? Should growth here track a bit closer to revenue growth than what we’ve seen in 2014?

[John Cajigas:]

We are not giving 2016 guidance in particular at this time but I can tell you that we are moving towards trying to get to cash flow breakeven and we do expect that our progress that we’ve made on the operating margin line over the last year, year and a half is going to continue into 2016.

[Ryan Blicker:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Tao Levy with Wedbush. You may begin.

[Tao Levy:]

Great, thanks. Good afternoon. So maybe if I could ask a little bit on the September insurance verification that you talked about, do those start to kick in now in the October timeframe in terms of pumps that are shipped?

[Kim Blickenstaff:]

That’s correct.

[John Cajigas:]

Generally it’s a 30 day insurance cycle, sometimes it’s been run a little long with the G4 here because people are also looking to verify their CGM insurance at the same time. So now you are going to two processes at the same time.

[Tao Levy:]

Okay. It sounds that you’ve had one record month and then followed by another record month there, well positioned for the fourth quarter. Is there anything that could do real some of these trends that you’ve seen over the last I guess month?

[Kim Blickenstaff:]

The only question is whether or not what we’ve seen early on in the launch of G4 is a pent up demand that will sort of level out. But we don’t consider that to be a high likelihood. I think we hear obviously a lot of excitement from the customer base, feedback, our sales force is excited to have this attitude to their bag and it is also our seasonal high quarter where we generally see the most of our pumps sold. So I think we are highly confident we are going to hit our guidance range on sales for the year.

[Tao Levy:]

Okay, great. And anything, is there such a thing as g

[Kim Blickenstaff:]

No, there is not.

[Tao Levy:]

Is there a need or do you think in the marketplace?

[Kim Blickenstaff:]

We don’t say there is a need in the marketplace at this point in time, type 2 is generally or not to CGM by using patient population who we really don’t have in the pipeline.

[Tao Levy:]

But you’re saying if I understood your comments earlier on properly, you are actually seeing more uptick in the Type 1 than the Type 2s.

[Kim Blickenstaff:]

Correct.

[Tao Levy:]

Okay. And then just lastly maybe a clarification, when you talked about the sequential clinical trial process that the FDA is asking for the AP program, I think I thought I heard you mentioned that the agency wanted an easy use the most accurate CGM sensor for the second tranche of patients. Are you referring to the G5 and if so when do you start to talk to us about G5 integration with I don’t know which pump it will be, but…

[John Cajigas:]

Right, the integration roll out, we’ll probably give you more guidance on that next quarter. We haven't really disclosed which sensors we are using and in which trial, but we have discussed that with the FDA and we will give you more granularity when we have our next conference call.

[Tao Levy:]

Okay. Great. Thank you very much.

[John Cajigas:]

Thank you.

[Operator:]

Thank you. Our next question is from Jeff Johnson with Robert Baird. You may begin.

[Jeff Johnson:]

Thanks guys, just a couple of questions here. Kim, maybe just on the FDA feedback on the AP, would be interested in hearing why they thought sequential would be better than running them simultaneously as it just ease of looking at the data and I think I heard you it makes sense that you start hypo first but I just want to make sure that’s what I heard correctly?

[Kim Blickenstaff:]

Yes, you heard that correctly. No, the first one is just the feasibility study and the second study is more of a validation study and that’s very typical in clinical trial process with the FDA. So I mean this is sort of the normal standard way they will do about [indiscernible].

[Jeff Johnson:]

But I just want to make sure I’m understanding that you still will be going after hypo indication first and then through a hyper later.

[Kim Blickenstaff:]

That’s correct.

[Jeff Johnson:]

And you will have to get the hypo indication approved before you can start any work on the hyper, is that what the FD&A is telling you?

[Kim Blickenstaff:]

No, we haven’t really talked about that but…

[Jeff Johnson:]

Okay, that’s helpful and then just on t

[Kim Blickenstaff:]

It’s the latter. It’s really an added benefit we want to provide our customers and then also the HCPs.

[Jeff Johnson:]

All right, thanks. And then last question John I guess from me is just more than the cash burn rate, I mean it’s come down here in the last quarter I guess even if we adjust for the Dexcom payment, it came down even nicer. It looks like to me you could probably shake out in the mid 60s here for the year on a cash burn rate. As we go into next year, I know you’re not providing guidance but is some of the G 4 t

[Kim Blickenstaff:]

Again, not really given specifics on 2016 but again with three products going into 2016 versus going into this year we put single product plus we intent to hopefully get some approvals for some other products that we can offer next year that will help our credibility with the customers on the HCPs. I think you will see not only enough lift in sales but gross margins as well as operating margins moving towards that profitability.

[Jeff Johnson:]

Okay, that’s helpful. Thank you.

[Operator:]

Thank you. Our next question comes from Kristen Stewart with Deutsche Bank. Your may begin.

[Kristen Stewart:]

Hi, everybody, hope you’re doing well. Most of my questions have been answered so just a couple of clarifications. Just with respect to the sales guidance for the year, I always have thought that some portion of t

[John Cajigas:]

Sure. In the original guidance we provided at the beginning of the year, Rick was correct in what he understood and that it was 70 to 75 and did not include t

[Kristen Stewart:]

Okay.

[John Cajigas:]

And part of the reason we’re looking at this and not adjusting the guidance is that because it is early in the launch we’re seeing a high interest in t

[Kristen Stewart:]

Okay. So you always thought it was going to get approved this year, but never included any incremental revenues for it?

[John Cajigas:]

Correct. Well, the key new assumption is the cannibalization portion of that.

[Kristen Stewart:]

Right.

[John Cajigas:]

Yeah. At the level since we launched.

[Kristen Stewart:]

Got you.

[John Cajigas:]

Now, whether that’s just the pent-up demand, aspect or that’s the continuing trend remains for us to be evaluated.

[Kristen Stewart:]

Okay. So, the earlier approval certainly would enhance your confidence to get certainly to the range?

[John Cajigas:]

Definitely. We are highly confident we’ll be in the range.

[Kristen Stewart:]

Okay. And then can you just walk through again I just wanted to make sure I understand the expansion of territories correctly and the number.

[John Cajigas:]

We intend to have 12 territories.

[Kristen Stewart:]

Okay.

[John Cajigas:]

And we are working on recruiting those today and the timing of one that would come on board is highly depended on when the offers occur, but it’s probably, they will all be on board probably in the next six months and up and running and as Kim mentioned we’d like to see those become highly productive within six to 12 months.

[Kristen Stewart:]

Okay. Perfect. And then just the improvement in the operating loss this year what’s kind of driving that just controlling...

[John Cajigas:]

Obviously there is a sales growth component that you see overall. On the expense side, it really as we put in an infrastructure in place that we’re now beginning to leverage against the sales. I won’t say that we won’t make incremental additions to the operating expense infrastructure as the business grows and we will, but we expect that to be at a much lower rate than our sales growth. Another key aspect is, gross margin is improving as the volume has increased, we are also making improvements that have helped our warranty costs come down and that has also played a big portion of what we have started to see here in the third quarter.

[Kristen Stewart:]

Okay. And no improvements in terms of cost of goods sold for the disposables outside of just the benefits of increased scale?

[John Cajigas:]

There is increased scale. We’re also working on just improving our efficiencies in that process and that’s happening. Those margins are increasing as well.

[Kristen Stewart:]

Okay. Perfect, great, thank you very much and great quarter.

[John Cajigas:]

Thank you.

[Operator:]

Thank you. Our next question is from Ben Haynor with Feltl and Company. You may begin.

[Ben Haynor:]

Good afternoon, everyone. Thanks for taking the questions.

[John Cajigas:]

Hi, Ben.

[Ben Haynor:]

First off, how long was this suspension of shipments, I know you said you suspended them on September 09, was it just the two weeks in total launch on the 23rd or was it shorter or longer?

[John Cajigas:]

What we did was basically when we announced it on the 9th, we suspended shipments for three days, no shipments went out the door at all for any products and we did an outreach to all the customers that opened orders with us and basically informed them that t

[Ben Haynor:]

Okay. That makes sense. And then a couple of quick ones on R&D expense, first off kind of following on Kristen’s question I think was the Dexcom milestone originally included in guidance?

[John Cajigas:]

Yes.

[Ben Haynor:]

Okay. And then for Q4 would you expect that the total R&D expense to step down sequentially by about that amount or will some of the other development efforts cause the decline to be somewhat less there?

[Kim Blickenstaff:]

I think there will be a step down equivalent to that milestone payment. There will be some nominal increases in R&D as activity increases with the project that we are working on, but nothing extravagant.

[Ben Haynor:]

Okay. Great. Thank you very much.

[Kim Blickenstaff:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Bob Hopkins with Bank of America. You may begin.

[Bob Hopkins:]

Thanks and good afternoon.

[Kim Blickenstaff:]

Hi, Bob.

[Susan Morrison:]

Hi, Bob.

[Bob Hopkins:]

Hey guys, two quick questions. First, I’m sorry if I missed this, but can you give us a sense as to trends in terms of percentage of pump sales coming from wins over competitors versus MDI conversions, I’m not sure how closely you’re able to track that, but just curious as to trends in the quarter on that regard?

[Kim Blickenstaff:]

The trend continues to be consistent. We’re continuously right around 50% of our business coming from conversions from competitor pumps and 50% due to pump therapy MDIs.

[Bob Hopkins:]

Okay. And that’s been pretty similar to the last few quarters?

[Kim Blickenstaff:]

Definitely, that trend has been there for a while.

[Bob Hopkins:]

Okay, and the other quick thing I wanted to ask about is just, the consensus I believe is a little over $100 million for you guys for next year in revenues and you will talk about this more later, I realize, but I am just wondering are there any thing that you would have us consider either positive or negative for next year, obviously a lot of the disclosures today seem quite encouraging, suggesting that number might be pretty conservative. So, I just wonder if there is some things that at this point without giving specific guidance you would have us consider as we think about modeling for 2016.

[Kim Blickenstaff:]

Well, I will say that. We will go into 2016 with the three pump offerings that we have - that we didn’t have here at the beginning of this year, we had just t-slim and so us getting t-flex and t-slim G4 approved with the ability to have some experience in 2015 bodes well for us going into 2016. We wouldn’t be adding territories, the 12 territories have been [indiscernible] highly confident that the products that we’re going to sell during 2016 will be utilized by the sales force at a high level and then we will see some time to ramp, but I think 2016 the gross margin line will improve as well. I think from the other thing on the sales line to consider is that 2016 will be the first year in which renewals will become a portion of the business that we can basically go after, so that will be new incremental that we haven’t seen prior to, but that will also be not very much, I think it’s about a 1000 pumps starting in August of next year that we’ll be able to go after, but 2017 that number will jump to close to 6000.

[Bob Hopkins:]

Okay. Great, that’s helpful. That’s all I have. Thank you.

[Kim Blickenstaff:]

Okay. So, thanks Bob.

[Operator:]

Thank you. I am showing no further questions at this time. I’d like to turn the call back over to Mr. Kim Blickenstaff for closing remarks.

[Kim Blickenstaff:]

Okay. Thanks again everyone for joining us today. I’ll give you an update really quick update on two upcoming investor conferences that we’re going to be attending. On November 18, we are presenting at the Stifel Conference in New York City. So we will be there at that conference and then on December 01, we’ll be at the Piper Jaffray Healthcare Conference, which will also be in New York City. So we’ll be travelling to New York. So, thanks again for joining us on today’s call and we look forward to keeping you updated as the company progresses. Thanks for joining us today.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation and have a wonderful day.