Sigi (TNDM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Tandem Diabetes Investor Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Morrison, Executive Vice President and Chief Executive Officer. Please go ahead.

Thank you. Hello, everyone, and thanks for joining us this morning. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, product development time lines and operating plans and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in 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. In addition, today's discussion may include reference to GAAP and non-GAAP financial measures. For additional information on our use of non-GAAP financial measures, please refer to Slide 2 of today's presentation. Our call today will be led by John Sheridan, our President and CEO; and Liz Gasser, our Executive Vice President and Chief Strategy Officer. Following their prepared remarks, Leigh Vosseller, our Executive Vice President and Chief Financial Officer, will join for the Q&A portion of our call. [Operator Instructions] With that, I'll now turn the call over to John.

Thanks, Susan, and thanks, everyone, for joining us this morning to discuss an exciting acquisition of AMF Medical. Starting on Slide 3, 1 year ago, we laid out Tandem's portfolio strategy supported by more than a decade of research demonstrating that diabetes is a highly segmented market, and there is no one-size-fits-all solution for how people want to wear their insulin pump or how they want to control it. As you can see in Slide 4, we outlined our vision to be the first diabetes therapy company to move from serial product development into offering a family of insulin pumps. Today's announcement of our acquisition of AMF Medical reflects our commitment to this vision. As we've discussed on investor calls and conferences throughout 2022, we have been working towards delivering a dedicated touch pump in the latter part of our 5-year product road map. To this end, we pursued an internal design efforts while also evaluating the development stage patch pump landscape worldwide, for innovative technologies that can benefit the diabetes community with user-friendly differentiated features. This is where the Sigi patch pump being developed by AMF Medical and stood out. Turning to Slide 5. The Sigi patch pump upholds the Swiss reputation for quality and precision in small device design. It's an ergonomic low-profile patch pump that is compact in size and form and is designed to be part of an automated insulin delivery system. Importantly, it offers significant feature differentiation versus in-market patch pumps with the use of prefilled insulin cartridges, underscoring our shared commitment to making diabetes management easier and more convenient. It's also rechargeable, which further differentiates it among the past comp landscape as a more environmentally friendly offering, which was a consideration for us designing our t:slim X2 and Mobi products. From a strategic standpoint, and as you can see on Slide 6, we see significant potential for increased pump penetration with people who live with type 1 diabetes and with people who live with type 2 diabetes on insulin intensive therapy. We see Sigi as a market-expanding offering, furthering our goal to bring the benefits of our technology to more people living with diabetes worldwide. We conducted extensive user research in 2022 and believe Sigi wearability and focus on ease of use supports the needs and preferences of people with type 1 using multiple daily injections who have been hesitant to adopt pump therapy and the insulin-intensive type 2 community. Our 5-year goals throughout 2027 are primarily comprised of driving pump adoption with people living with type 1. When we look to our longer-term objectives, however, our efforts will have an increased focus on people living with type 2. This acquisition also accelerates our longer-term patch font objectives by reducing development risks while allowing for the addition of market differentiating features. In light of this and given the degree of target market overlap with Citi, we will be suspending our internal program on patch development. In our early development work and when considering our path towards a patch offering, we have also focused on how we can satisfy the environmental and sustainability concerns of the company and increasingly our customers. This has been a long-standing development consideration for us. And with the acquisition, we are making a conscious choice not to pursue a product that results in high-volume disposal of electronics and batteries which Liz will discuss further. I'll also highlight that Sigi's novel design provide the pathway for us to further explore business model optimization and channel expansion opportunities, which may ultimately allow us to increase customer access. Turning to Slide 7. The talented AMF team of approximately 20 employees is led by Co-CEOs, Mr. Tim Van Wisel; and Mr. Antwan Barro, who is also a co-founder. The team brings decades of experience from the diabetes device, life science space and watch industries. I've had a chance to visit the group in Switzerland last month and walked away very impressed by their engineering talent focus on design for manufacturability and passion for helping people living with diabetes. They've been advancing Sigi since 2014 and gaining meaningful momentum in recent years as illustrated by Sigi receiving breakthrough device designation from the FDA in November of 2021. With regards to integration, we value that the AMF team brings a wealth of knowledge along with intellectual property in this space. As such, we plan to maintain its business operations in Switzerland to ensure continuity and readiness for development efforts, which includes research and development and early manufacturing operations. As described in today's press release and as summarized on Slide 8, our cash payable at closing is CHF 62.4 million. There is an additional cash consideration of up to CHF 129.6 million based on the achievement of certain development milestones and regulatory milestones in the coming years. Each milestone signifies a meaningful step toward the value-creating event of product commercialization, which we believe will be in the latter part of our 5-year road map and has the potential to drive substantial long-term revenue growth. Subject to the satisfaction of customary closing conditions, we expect this acquisition to close in January. I'll now turn the call over to Liz, who will expand on the strategic rationale behind the acquisition and provide an overview of the Sigi patch pump system.

Thank you, John, and good morning, everyone. I would also like to share my excitement about this acquisition and appreciation for the AMF Medical team. We've previously shared our intention to offer a path pump as a key element of our portfolio towards the latter end of our product development horizon, which goes to 2027. As part of this commitment, we have been evaluating existing technologies under development alongside our own very internal efforts. The AMF team like Tandem is laser-focused on cincentive designs, the experience that their device off. than the customers they will sell. As you can see on Slide 9, the Sigi patch pump and bodies are shared values. As John mentioned, its thoughtful ergonomic design provides through a low profile on-body footprint. Additionally, the use of prefilled cartridges is differentiated in the patron segment and meaningfully simplifies the insulin fill process for users. It is also worth noting that Sigi is a durable patch meaning the pump body is rechargeable and reusable over a multiyear lifespan, thereby avoiding significant electronic waste. Further, as a multipart durable disposable patch system, we have more opportunities to pursue a diversity of extended wear options for the on-body infusion plant. In taking a closer look at Sigi's design, Slide 10 shows that use of the system only requires a few simple steps. It starts with a one-button push on the applicator which applies an adhesive pad with the infusion cannula. Next, users just insert the standard prefilled cartridge into the disposable cap and lock it on the pump. Next to Sigi's novel pumping mechanism, the pump is ready to go quickly. Then you attach Digit, the on-body pad with a simple click and done. Sigi's managed from a user's personal smartphone, so there's no additional controllers to carry. The system itself [indiscernible] rechargeable pumps with a sleek USB charter. The 1 is always ready to pick up, click and go. Consistent with our stated strategy, this acquisition also provides an opportunity to leverage Tandem's scalable software solution. We expect to develop the Sigi pump for compatibility with our market-leading Control-IQ AID algorithm and integration with our web-based data management platform with the goal of bringing Sigi market as part of a robust AID system. In looking at our criteria for M&A, we focus on addressable market expansion, enhanced user experience, market access and business model optimization. Additionally, we consider adjacencies to our existing offerings with the potential to leverage our sales force at the same core point, our data management platform and our customer service infrastructure. Most importantly, we look to continue delivering on our mission to improve the lives of people with diabetes. To date, we've been selective in our M&A activity and we believe that AMF Medical directly fits these criteria.

Thanks, Liz. This transaction demonstrates our deep commitment to expanding our product family to provide choice to the diabetes community, and we remain steadfast in our efforts and we remain confident in our ability to reach the longer-term objectives for 2027. While the acquisition will impact short- and medium-term profitability, we do not need to raise additional capital to support this structured transaction. We have a strong balance sheet, which is appropriately leveraged for a deal of this size, and we will remain disciplined in our spending efforts. We also believe the long-term potential of this valuable asset justifies the near-term impact to our profitability. We'll provide color on the near-term spending profile associated with AMF operation on our year-end earnings call in late February. In conclusion, our acquisition of AMF Medical positions us to further drive growth through innovation as we leverage our infrastructure and build our portfolio of diabetes solutions, bringing choice and the benefits of our technology to more people living with diabetes. We look forward to welcoming the AMF team to our Tandem family following the close of the deal and to working together in our collective mission to make a positively different impact on the lives of people in diabetes. I'll now turn the call over to the operator for questions.

[Operator Instructions] Our first question comes from Josh Jennings with Cowen.

Congratulations on the transaction. I was hoping just to understand whether Tandem had any historic collaboration with AMF and whether the integration of the Control-IQ algorithm has been derisked to any degree and just when first-in-human studies could be performed, but particularly with the hybrid loop trial.

Yes, I'm happy to take that one. So in terms of our collaboration with AMF to date, we have a long-standing interaction with them and have been talking with the company throughout much of 2022. There is no formal program in place for implementation of Control-IQ today. That is something that we anticipate working on after the close of the transaction. So we have done substantial diligence to substantiate our confidence that we have a clear path to integrating with CGM and to implementing our own outlook. In terms of first in human, we'll be providing more commentary on our plans for the future in human trials and clinical work first close.

Great. And I could ask 1 follow-up. Just as you vetted the path pump technology landscape. Do you believe Tandem will be second to market at the end of the day? Or are there other platforms that are further down the clinical development road that could be commercialized in front of Sigi in the United States.

Yes. As we said in our prepared remarks, we looked extensively at the inorganic opportunities ahead of us. and concluded that Sigi represents the best path for us to engage with the type of products that we want to bring to market, which is fundamentally a durable patch offering.

There are other patch companies out there, smaller companies that have devices on the market in OUS countries. So it's possible that they may get here before we do. But we think we have a highly differentiated product, which is going to be very positive in terms of just developing the market, both in the U.S. and OUS .

And our next question comes from Matthew O'Brien with Piper Sandler.

Just to follow up a little bit on what Josh was asking about. It sounds like you've been interacting with them for about a year now, but the landscape is littered with other patch pumps that didn't work, especially 2-piece patch pumps. So I'm just curious what you saw in Sigi that is so unique and differentiated and derisked that you decided to go ahead and do this transaction now? I know the upfront is manageable versus the milestones that are coming. But just given how much you're potentially going to pay for this? Why are you so comfortable that this pump is the 1 that you can get to the market in a couple of years?

Thanks for the question, I think to your comment about prior patch pumps in the space. But today, we successfully commercialized a multipart sister, which serves 400,000 users worldwide. And so it's not clear to us that componentry is the issue here. And so what has been appealing to us in engaging with the Sigi team is fundamentally the quality of the design economic its profile, it's well thought through. We have very much appreciated the fact that it offers differentiating features versus other available solutions. The use of pre-fill very much satisfied our goal for delivering ease of use to our customer base and is currently differentiated in the patch space. I think some of the other things that have really resonated with us as we've engaged with the team, as John mentioned in his prepared remarks, is that they come with a long-standing history of precision device manufacturing experience in particular, designed for manufacturability experience across this and other precision and small device industries. And so we've got a lot of confidence in both the quality of the design and the path to manufacturability. You added a comment at the end about why now. I think for us, the really important thing is to ensure that we have a good and close collaboration to bring the best of our Sigi integration expertise and our algorithm to bear on the product as part of a system over time. And so the timing felt right, the product is at the stage of being a functional prototype that is ready to embark upon this type of integration. And so that's why we show that now versus maybe deferring us until a later stage and pursuing alternate pathways and structures here.

Okay. Makes sense. And as a follow-up, and I don't know if this is for Liz or for John, but the model here being a reusable pump and then the cap that goes on top of it. Why are you confident you can go the pharmacy route with this or get better access with this technology?

Yes. I think from our perspective, it's certainly satisfies many of the conversations that we're having with pharmacy today around utilization, the ease of use and so I appreciate that there's not an analog in the pharmacy channel today for the cap type structure. And so the conversations that we will need to have conversations with our payer partners on how we bring this to market with them. I would say though we're very familiar with the economics of both pharmacy and the DME channel. At this point, we understand what we need to do to fit within that economic profile. And we have every confidence that the product itself will allow us to do that.

Next question comes from Alex Nowak with Craig Hallum.

I just want to confirm, is the pump design currently frozen or what other changes do you need to make to the hardware side before locking it down before starting studies?

Alex, I would just say that the design is a very advanced prototype and that I think that there's definitely evolution that has to occur between now and the final device. But I think it's a really strong prototype, we'll be working on issues that have to do with just testing for safety, reliability and manufacturability over the next -- sort of the next couple of years. And I think that the fundamental design, I think, is there and I think it's just really optimization CGM integration as well as the algorithm. So there's a few things that will have to change, but I think it's a really strong prototype at this point in time.

Okay. Understood. And I know you want to say some of the R&D cost expansion for the Q4 call. But I do think it's prudent to talk about it here since you are suspending the internal past development. So can you maybe just speak to what's going to happen is the team that was working on the internal patch, go to switch over to Sigi here. maybe just speak to kind of on a rough basis, what we should expect are ongoing R&D costs and then scale up.

I would say that there's going to be some people from Tandem who will be working closely with the Sigi team. But I think we want to keep the site attack. They've done a great job up to this point in time at duplet and we want to continue to see the progress that they're making out into the future. So I think we'll talk more about that, as we said in the fourth quarter call in February. But the team that we have in place, some will be sort of reallocated to support City, and there's a lot of other projects that we back going on in the organization, and I think that others will be working on as well.

Our next question comes from Travis Steed with Bank of America.

Congrats on the acquisition. I was looking back about old notes from AMF, and I think they were planning on submitting to the FDA by late 2023, early 2024 for the launch in 2024, 2025, are those -- just to clarify, are those time lines shifting out a little bit? Or I'm just kind of curious if you could give a little more color on the actual launch timing here?

Yes, I think that when we talked about asset availability, we've been talking about the end of the 5-year horizon. So I mean, we're thinking in the 2027 time frame. We think this certainly provides more certainty when it comes to those dates and have the potential to accelerate as well. I think we are comfortable in saying that we believe that there will be revenue in 2027 from this product.

Okay. That's helpful. And how do you think about the gross margin profile at scale. I'm sure that's something you thought about whenever you were doing the diligence here and revenue per year. Is it going to be similar to the other tax pump profiles or more of the durable pump profiles when you think about total revenue per year? And then, Leigh, I wanted to ask about the investment required to scale this. It does sound like it's going to impact short-term profitability. So is 2023 EBITDA as a message that, that probably goes negative in 2023? Or can you still maintain profitability?

I'm sure. Thanks, Travis. So I'll start with the revenue question in the longer term. As John mentioned, we do expect revenue in 2027 that we think about this more as a beyond the 5-year time frame in terms of meaningful contribution on the revenue side. And we feel confident that from a system perspective that we can achieve the same reimbursement levels we will have with t:slim and/or Mobi at that time. And so you can think about it from a system perspective in totality to be at least as good as or better from a reimbursement perspective. And then in terms of the spending as we look forward, just like our revenue levels in the next 5 years, we don't expect the spending to track linearly across the years. And we've always anticipated that R&D would be a heavier investment in the early years of our 5-year time frame. So as we look to 2023, just based on the indications we've given for top line, we likely weren't expecting to see expansion in our margins anyway, either gross margins or operating margins as in so -- we'll give more color to that at our year-end earnings call when we talk about profit targets for next year, but I wouldn't expect to get again expansion.

Okay. But still profitability potentially, still positive EBITDA?

Yes.

Next question comes from the line of Lawrence Biegelsen with Wells Fargo.

Just a follow-up on Travis' question. The fact that this is reusable, does that change how you're thinking about the gross margin, at least the path to a similar gross margin to what you have today or your long-term goals. It took insulin a long time to get to where they are. So does this change -- does this -- the fact that it's reusable expedite that?

Sure. So what I'll say is that we're still very confident in our long-term gross margin target, which is 65% in 2027. And considering that we'll have a portfolio of products, it will look a little bit differently when you think about scale because we already have Mobi and t:slim exfil driving significantly improved gross margins from where we are today. So you can think about fitting into that model for us on the go forward. And that, again, again, in that beyond 2027 time frame.

I was going to say that -- manufacturing capability capacity, while we absolutely expect this product to be automated, it's not going to have the same level of automation at a fully disposable password. So I think that the capital investment is going to be less for us to get to that point where we have higher margins.

Okay. And just for a follow-up. John, are there any other differences between Sigi and Omnipod besides the prefilled syringe and the rechargeability -- anything you can say on just kind of the dimensions, the weight. Anything else you would highlight.

I can jump in there actually on some of the product differentiation I think the other thing I would seek to highlight with regard to the product is the value of detachability. A lot of our user research over the past year has showed segments of the market placing a distinct premium on the idea of not leasing a slip should aside fail. And so I think in addition to the economic design, the prefill, the reusability, which speaks to many environmental concerns management of waste management of when you choose to wear versus not because it is a 2-part system does actually resonate well with the segment of users. I think the other thing I would highlight is also that because of the way the micro pumping mechanism is designed, it has very rapid inclusion detection, which is less of a headline feature in our announcement this morning, but it is nevertheless valuable feature for users.

And our next question comes from Joanne Wuensch with Citi.

Two questions. Are you going to be selling this as sort of a stand-alone pump as well as an AID system or just an AID system?

Joanne, I think it's going to be an AID system. It will be an ACE pump that fits into our portfolio of products. And so we'll have -- we intend to continue to sell t:slim Mobi and the Sigi patch. And we would expect that the algorithm that the -- whatever the revision of the algorithm is that's available at that point in time would be on the Sigi pump as well.

Okay. And a follow-up question then is, I'm trying to figure out how the market starts to look in terms of which patient chooses which product? Is this aligned as a direct competition or competitor to other patch plants? Or because of the uniqueness et cetera, it serves a different need. How do you see the portfolio playing out as sort of a sister question to that?

It's a great question, Joanne. I think certainly with this acquisition, we're acknowledging the fact that for a segment of Taiwan and insulin in terms of type 2s, the patch form factor resonates well. I think from our perspective, the goal is to really understand how the market needs segment and how to deliver a differentiated and competitive offering here. And so the work we've been doing over 2022 has really been testing focusing on the ideas of the ease of use and prefilled made, disposability and environmental friendliness, where and how the form the factors that aligned. And you do find very distinctive pockets. For example, teams the message of reusability resonates very strongly with them. Same with users in international markets where environmental concerns invest a little bit higher. And so our goal really is to focus on a highly differentiated offering here. And we're confident that the Sigi product allows us to do that. It's not a me-too offering.

And our next question comes from Jeff Johnson with RW Baird.

Most of my questions have been answered. But John, I just want to go back, when you were answering one of Larry's questions, you mentioned something in passing, and I'm just not sure I understand what you understood what you meant. You said the Sigi pump may not have all the capabilities of a fully disposable patch pump. I guess if you could just flesh that out or help me understand what you meant by that?

No, I didn't say that, Jeff. What I was saying I was saying that we don't need to have the same level of automation that's required to build a fully disposable system. And so the automation won't be as capital intensive as it would be for a fully disposable system. I would say that this device will meet all of the capabilities of a patch device. Again, it's highly differentiated. It's got a great form factor, and it has these really interesting features like the prefilled cartridge is environmentally sensitive and the ability to attach, which we think are all meaningful new features that will cause a great deal of excitement in the market.

Understood. That's helpful. And then just my follow-up on that is just I would assume this doesn't change anything, but what is the commitment then to move at this point, but also the capillary biomedical deal where that's going to have some cost next year on the pivotal as well. So just fully committed to both of those products still at this point after this deal?

Yes, absolutely. We're totally committed to Mobi. Obviously, it's under review right now by the FDA, and we're excited to bring that to market next year. And obviously, we're we've just recently invested in Capri. We think they have a great product, which is also going to help provide choice to our customers as well as help us on the margin side. So we're very excited and very committed to both of those.

And our next question comes from Jayson Bedford with Raymond James.

Just a couple of quick ones -- thinking through a few of the comments you made on the business model and approach here. Just to clarify, the expectation is that this product goes through the pharmacy in the U.S., correct?

We absolutely will be pursuing the pharmacy channel for this product. And actually, those conversations begin with Mobi today. So it's about -- part of it's about relationship building, and that's something we can start now. But we feel confident that the content into the pharmacy channel.

Okay. And on manufacturing, where will this be manufactured?

No, we really haven't -- I probably won't be discussing those facts for a little while here. I would say that we have the manufacturing facility here in San Diego. We have partners that are across the border in Tijuana. And it's just one of those things where we still are in the process of just analyzing the best locations for us.

Thank you. And currently, I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone, have a wonderful day.