Tandem Diabetes Care, Inc. (TNDM) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us here at the Barclays Global Health Care Conference in virtual form. I am Kristen Stewart, the medical supplies and devices analyst. And it is my pleasure to be hosting Tandem Diabetes Care this afternoon. I have with us today, John Sheridan, the company's President and CEO. We also have with us Leigh Vosseller, the Chief Financial Officer; as well as Susan Morrison, the Chief Administrative Officer.

Going to kick it off with probably the topic that everyone's talking about and wondering about, which is the coronavirus. I was wondering if you guys could just maybe share with us your perspectives on what the current COVID-19 situation means for Tandem. It's obviously a very fluid and dynamic situation. I know you manufacture products in San Diego, but I believe, you use a small number of suppliers for components. Some of which are in China and Mexico. I think people are wondering what impact it could be just from a perspective of people going to doctors, inability of salespeople going to train new patients, et cetera, anything that you can help share with us to just get a better understanding of what the situation could be for Tandem. And thanks again for joining us.

Certainly. Thanks, Kristen. Nice to talk to you. Yes, of course, it's a very fluid situation, and we're keeping our eye on it. I think it's all about communication. We -- I can say that right now, we have seen no impact on demand at this point. Early on, a few weeks ago, at least, we began to talk to the suppliers that we do have that are in the affected areas. And fortunately, there hasn't been any interruption in the supply at this point with those organizations. We had -- we've -- 2019 was a year of building for us. We were building inventory, just trying to overcome that little speed bump we had in the fourth quarter of 2018 with our supply, and we've been fortunate to really -- we now have what we feel is very comfortable levels of finished goods and raw materials. So I think from a supply point of view, we feel very comfortable. Internally, in our offices, we've taken the precautions that people are recommending. We're not -- if anyone is not feeling well, they're staying home. If people have been to the affected areas, they're not allowed in the office until they're symptom-free. We've restricted travel, just basically to essential travel, limiting visitors in the offices, and we're just kind of taking more cautious housekeeping procedures just to make sure that we're doing the right thing internally. Susan, do you want to talk a bit about what's happening in the field?

Sure. So commercially, as a reminder, we have 90 territories right now, which are primarily comprised of a sales representative as well as a diabetes educator. And so typically, those folks are going into the endocrinology and diabetes centers offices to have conversations about our pump as well as to train patients. So at this point in time, what we're hearing is more of restrictions surrounding their visits, whether that be a disclosure that they haven't traveled to any of the affected region or just reinforcing that if they themselves are not feeling well at all that they're not to enter the offices. So we're not seeing a slowdown in customers coming in for their regular visits. That being said, it will be a situation that we really need to monitor over time because, as this whole situation develops, that may end up being an impact that people start to slow down in having their appointments. But at this point, we've not had any impact.

Okay. Great. That's perfect. So I think we'll just move on now. Let's talk really big picture. How do you guys think about the rate of pump adoption? We've seen a really large increase in the number of individuals adopting pump therapy over the past year. I think it's been mainly in part due to easier-to-use technology like yours as well as the integration of continuous glucose monitors, perhaps due to greater awareness of blood glucose levels, maintaining glucose time and range. How do you just think about the dynamics of the pump market, both from type 1 and, perhaps, ability to tap into that type 2 patient population as well?

Yes, I think you're right, Kristen. We have seen an acceleration over the last 18 months. I think 18 months ago, we basically had planned and actually planned for several years before that, that it was about 25,000 people would transition from MDI to pump therapy on an annual basis. And this past year, it was more like 40,000 to 50,000, and I think we would agree that the -- I think the sort of the dominating factor has been the advancement of technology, and the technology is basically making the diabetes therapy, it's just easier -- it's easier to use. It's reducing the burden. And this is not just with like Basal-IQ, for instance. I think it's Dexcom, no fingersticks. There's Dash with Insulet, and there's also Abbott. I think all 4 companies have really made significant advances in technology. And I'd also say, going forward, when you look at what's going to happen, I mean, we have Control-IQ coming to market now. We've got the t:sport coming to market in 2021, the G7. So there's continuing technological advances that are going to happen here, which, we think, is going to continue to drive adoption. And we have this aspirational goal of 50%. We think that's real, and it's something we can accomplish. Right now, if you look at the CGM companies, they basically have penetrated that to about 50% with a goal of 70%. And I think we might be behind them, but I think if they can continue to advance that technology into the marketplace, we feel like pump therapy will also -- I mean, and it's all about the improvement of the therapeutic outcomes as well as just significantly reducing the burden. When you think about the type 2 population, one of the things that we're aware of is that in type 2, people have been -- they've just been maligned to a certain part -- certain level about -- there's decisions they make on lifestyle habits, which results -- have resulted in diabetes. And I think that's not always the case. But as a result of that, people are -- they're very -- they're embarrassed to a certain extent that they've got it, and they don't want people to know that. So for them, discretion is a huge, important factor. So I think that, as we move forward with t:sport, which is a smaller pump, with full mobile control, again, now you've got a device that you use every day to control your diabetes, the level of discretion has substantially improved with that. So I think it's likely that we will see some uptick from the type 2 population as we move into t:sport, not unlike what Insulet's doing now with their pod.

Okay. That's helpful. And then maybe if we could kind of put that into the context of how you're framing kind of the 2020 outlook. If we look back at 2019, it was a very remarkable year for you on a lot of different measures. You had pump shipments up 113%, sales increased 37%, you did really great also from a profitability standpoint, gross margins increased 5 percentage points. And impressively, you had adjusted EBITDA of almost $15 million. You had Control-IQ data release, the publication in New England Journal. You've got clearance now, obviously, of Control-IQ. For 2020, you've guided just to an increase of 24% to 28%. So can you kind of just walk through, I guess -- 24%, 28% is certainly a good healthy level of growth. But I guess, why not, I guess, do you think you can do a little better than that? Is it just conservatism and maybe not thinking that the market expands at the same level that you saw? Maybe normalize a little bit more back towards that traditional kind of 25,000 to 30,000 rate? How are you just kind of thinking about 2020 from a sales growth perspective?

Thanks, Kristen. I think, first of all, it's very exciting when you list all the accomplishments that we had in the last year, and it makes me even more enthusiastic about where we're headed in the future. I'll start by saying both 2018 and 2019, we started off by listing the opportunities that could help our business grow. And they started with renewals, with the Animas conversion opportunity, with increasing MDI conversions as we move more towards the 50% penetration rate. And so what happened in reality was, it wasn't just that some of those came to fruition for us. All of them did. We felt a significant traction both in 2018 and 2019. As we move into 2020, barring the Animas conversion opportunity, which I'll speak to again in a second, all of those same opportunities still exist. And so when we think about how we establish our guidance, we tend to focus on the factors that we feel like we have more within our control. And we're a little more conservative on the factors that are more outside of our control. And while all the same opportunities still exist, it's hard for me to envision a world where everything seems to go in our favor again. So when we think about what's the 2020, we have to first remember that we have the Animas element that was there last year, which is going away. And so that's first to set down. So when you talk to our growth rate, it's hard to envision another 97% growth year, but that's one first element that comes out of it. And as we think about the MDI conversion opportunities, we're viewing that as it being as healthy as it was in 2019, which was a significant step-up from 2018 or even better. And then when we think about competitor conversion opportunities, we were very fortunate last year in that as our MDI conversions grew, the competitor conversions set pace with that. So we ran about a 50-50 ratio, very similar to what we've seen in the past. And so we anticipate we'll still make traction in that regard with the power of Control-IQ in the market, with mobile bullets coming in the summer and just with the updatability that our comps offer for future iterations of our algorithms to come. So we're really excited about 2020. We think there's a lot of opportunity out there. We think we've built up a guidance level that we feel confident that we can achieve, and we look forward to executing on that throughout the year.

Okay. Perfect. And I think since you last gave guidance, or maybe not, but be interested and curious on your thoughts for Medtronic's kind of 780G launch time lines or even Insulet's delayed launch for Horizon, whether or not those could be potentially some upside drivers to your forecast.

So the time lines that we're hearing, as you've mentioned, it's hard to know exactly, for instance, when the Medtronic launch will occur, and we've heard Insulet's time line. As we're thinking about our forecast, we're always thoughtful about the fact that any new product launches, whether it's our own or other company's, can be a bit disruptive in the market. So we're being thoughtful about that occurring as we progress throughout the year, and we've contemplated that in our forecast.

Okay. Great.

Kristen, I think when you look at 2019, we had Basal-IQ on the market competing very effectively with the 670G. And so as we move into 2020, we now are introducing and launching Control-IQ. So I think we anticipate that we're going to have a full year of momentum in 2020 with Control-IQ. I know the 780G is coming out at some point in time, but we competed effectively last year with a product that had time and range of 60% to 64%. So I think that there's a lot of other factors besides the algorithm that really drive the adoption of this technology. And I think, in our case, it's really ease of use. So we know that Control-IQ is just as easy to use as Basal-IQ was. And I think that when you look at the 780G, it has the same platform and sensors. So I think that's -- we expect to see some perturbation but not a significant competitive threat really. And then I think that, as you said, the Horizon system has been delayed to kind of first half of 2021. And I think that's essentially when we'll be introducing t:sport with full mobile control and Control-IQ's algorithm. So I think -- competitively, I think we feel good with where we're lined up right now.

Okay. And then you mentioned Control-IQ, and you did get approval or clearance of that in December. You have started the commercial launch of that. I guess that was more kind of January-ish time frame, and it just takes a little bit to kind of get out in the field. But could you share with us what you're currently seeing in terms of the uptake and interest with that product?

Yes. You're right, we introduced it in mid-January, and the demand has been fantastic. We've -- using our Tandem Device Updater, over 20,000 people have already updated their pumps. So there's another 10,000 that are kind of in the loop doing that right now. The enthusiasm and excitement has been tremendous. There's a lot of people that have been very visible in the loop community who have kind of moved over to Control-IQ now and are very pleased and speaking just openly about the benefits of Control-IQ. And people are basically saying it's life-changing. It's really having a substantial impact on their lives. The -- if you look at just the blogs, you'll see people who are seeing time and range in the high 80s for weeks on end. So the results have been great. One thing that I did want to let you know is that we actually -- we have this PAEDS data. We have submitted the PAEDS data to the FDA, and we've done that in the last several weeks. So we expect to get the approval for the pediatric indication, 6 to 12, before the summertime, which is really when we want it. So we're very excited about that as well. And I think that -- I think it's -- I do believe, with the full year of 2020, with really no competitive products in the marketplace, that we're going to see just building momentum. And I think it's going to be a lot like what we saw with Basal-IQ. It's going to have a real impact on our revenue through the year.

Great. And then you've offered this algorithm at no cost to your competitors. Do you still believe that longer term, you may be able to seek additional reimbursement at some point or...

Yes, that's one of our major managed care initiatives. First of all, let's start with just gaining more direct contracts and more direct interactions with the payers themselves. We have seen that just under 30% of our business is going through direct channels, and a little more than 70% is still going through distribution network. By getting those relationships, we think that can help us in a number of ways, one of which is to provide the clinical data in order to help prove that there are cost savings in the system because of the use of our product. And so we would like for that to turn into, at some point, additional reimbursement for our pump itself.

Okay. So basically, you think that -- do you think this will basically help both payers and Medicare see the differentiated value between your pumps and like a traditional pump therapy, basically?

Yes. So I can say, so far, from an overall perspective, we're having very engaging conversations on that front. The medical directors are very impressed by the fact from just this short -- the small amount of data they've seen so far, and particularly with the New England Journal article. And one new development, in particular, is that Medicare actually just recently established a new billing code. And what that code does is it distinguishes between a standard pump and pumps integrated with glucose sensing technology. And so that just actually was published very recently. So one hiccup right now is they haven't assigned pricing to it yet. So we're about to send out a communication to our field, letting people know that we're going to refrain from shipping to Medicare patients in the very near term, while that pricing gets established. So we think it will be resolved here in the next few weeks.

Okay. So basically, you're not going to be shipping new pumps, is that correct, until it's resolved?

And this is just to the Medicare population. There's billing risk to sending out of products with a QR code that has not -- does not yet have pricing established. So we think it's going to be just a very near-term challenge for us. And so we expect pricing to be established here very shortly.

Okay. And so presumably, the pricing will be at an uplift to what it was just for the pump itself, basically.

I could only speculate at this point.

Okay. Got you. Okay. And how would that basically be communicated? Would that be something that would be published externally? Or that would be something that you would put out a press release on? Or I guess, that would be something that we would all, basically, be able to find out?

Everything that Medicare does is all public record. So it will be easy to find out. If -- this is just a small piece of our business, just under 10% is Medicare related, so this is not something that, in our eyes, would rise to a level of a specific or special press release.

Okay. That's helpful. And just curious with the New England Journal, has that also helped some of the conversations more broadly with large payers? I know several years ago, obviously, there was the contracting with United. I know that you guys were pushed out at this time, I believe it was about 8% of your business had been going through United. They won preferred contract with Medtronic. Do you think that, with New England Journal, a lot more of this data, obviously, you could get back on that contracts and others?

Yes. From a United perspective, we can get -- oh, go ahead, John.

Go ahead, Leigh. Well, I was just going to say that, as Leigh said, we're having a lot of success right now talking to all the payers, including United. We have -- we -- and Kristen, as you've mentioned, we have both the New England Journal article as well as the product now launched in the markets that they've asked us, too. So they're a large organization. We're working with them. There's really nothing to report that's new in that regard. But I think we've got what they've asked us to do in the bag, and we just need to get moving on the agreement.

Okay. Perfect. And maybe we could talk a little bit about t:sport. John, I think early, you opened up about that product maybe being a little bit more helpful in tapping into that type 2 patient population. Can you maybe just remind us a little bit about what happened there in terms of the time lines with the FDA? It sounds like that did get pushed out a little bit into 2021, as you mentioned. How confident are you in terms of now the time lines for launch? And just kind of remind us, again, how big of a market opportunity could that really be.

Yes. We're very confident with the time lines that we just -- we announced recently. And what happened is the -- we had planned to submit the t:sport this summer with a remote -- a controller that was a remote controller. That wasn't just a design for people who weren't comfortable with mobile bolus -- or excuse me, with a mobile controller. So that's what our original submission was planned to be, and we're going to follow that with a submission that was just for full mobile control. And in conversations that we had with the FDA, the FDA indicated that what they wanted us to do was submit the t:sport with the remote controller and also follow that with t:sport with the mobile app. So that's going to take us a little longer to get through that process. And we really feel that the t:sport is a product that needs to be introduced with a mobile app, and that's what our plans are. So that's going to happen sometime in the first half of 2021. We're very excited about it. We think that mobile control is huge. We did also announce that we're going to have the mobile bolus capability for t:slim, which we also think is very important. It's really been the #1 requested feature that people would like to see, and it also, again, provides a new level of discretion for people who are just operating the t:slim pumps. So we're excited about that. When we did market research on t:sport, we saw that the greatest demand, the greatest preference share increase came from the MDI population and from pediatrics. So I think we expect to see t:sport really driving the conversion rate from MDIs as we talked about before. And also, I think that it's just going to help us get more securely into the pediatric market. And so we're excited about both of those opportunities.

So do you see this product more as one that would potentially cannibalize prospective t:slim users? Or would it be something that you think would just kind of go up and maybe be more competitive on those that would be, maybe, looking at potential like tubeless or considering like a pod?

Well, again, when we did market research on this. The way we did it is we actually compared t:slim and t:sport to the products that we believe would be in the market in 2021. And so that was Horizon. It was the 780G. It was a Bigfoot device, Beta Bionics. And we did each device -- first of all, we compared just t:slim to those products, then we compare it only t:sport to those products. And then we put t:sport and t:slim and compared them to all of them at the same time. And when we did that, we saw the greatest preference share increase at that point. There is still a lot of interest in both t:slim and t:sport. So we think this is actually introducing it. It's a portfolio of products. Now people can choose just based on what they feel will just help them manage their diabetes better. Either you've got a device that has a touch screen, that has -- is contained, it's 1 complete unit with 300 units of insulin, or you've got a device that's half that size, that's going to be controlled entirely by a mobile app with 200 units. So I think -- I'm sure there's going to be some cannibalization. We're going to have to just get early into the market and begin to just watch carefully as to what that demand shift is going to look like. But we are -- we're prepared. We're actually building the manufacturing capacity up right now. So I think we'll be prepared when we get to market next year.

And I think you said you're working on a new AID. What could that look like?

Well, when we first introduced Control-IQ, we intentionally did not change anything from what was designed by UVA and by TypeZero. And that was just to expedite the product through the FDA and the regulatory process, and we've been successful doing that. Over the last year or so that we've been looking carefully at opportunities to improve the entire technology, that would be the user interface, it would be the algorithm, and there's also the implementation of the algorithm. So we've been working on that. And I think we expect to have a relatively significant -- basically, an algorithm improvement introduced in the 2021 time frame. The things that we're looking at, we're looking at improving the time and range. There's opportunities we have, we believe, to be more aggressive at the high end and just reduce the amount of hyperglycemia. There's also a lot of interest in personalization, being able to set limits that better reflect the individual's desire in terms of where they want to manage their diabetes. And then one of the issues that we saw during the clinical study was just the -- some people just didn't bolus for meals. And I think the opportunity we have there is just to simplify that process, potentially going through small, medium and large meal amounts to reduce the interaction with the pump. And we think all of those are big improvements. We've had a number of conversations with the FDA now, and I think we're in a pretty good place in terms of knowing what we have to do and how much clinical work is associated with each of these changes, and we're kind of in the process of planning those things out over the next couple of years now. So this is the -- an iterative process where, annually, we would anticipate that we'll have improvements to the algorithm, and that it's not going to be static. This will happen, like I said, hopefully, on an annual basis, where we continue to make meaningful improvements to how the algorithm and the technology performs.

Okay. And then I just got a question coming in over the Internet here. The question is, from a corporate strategic perspective, do you believe, fundamentally, that a durable pump is the way to go? And you believe that it's better than kind of more of a patch pump from a patient perspective? Or would you be -- or would you also be open to developing more of a patch pump for either type 1 or looking into that technology from a type 2 patient population?

Yes. I mean I think as you look at the evolution towards t:sport, t:sport's half the size. Looks like a lot like -- a lot more like a patch pump than the t:slim. So I think we're clearly moving in the direction to reduce the size and basically, the discretion that goes along with that. And we are definitely evaluating a lot of different technologies right now. For competitive reasons, we really haven't disclosed where we're going. But I can say that we're definitely looking at what's after t:sport. And I think that in the near future, we'll probably come forward with some of our ideas. But at least for the time being, we're not going to say anything.

Okay. Perfect. Great. And then, I guess, just from a partnership perspective, do you have any updates on relationship with Abbott and its CGM?

We're continuing to work with Abbott. We're -- right now, our priority is to finalize the agreement. Abbott remains very confident that they're going to get the iCGM designation, and we have no reason not to believe them. So we expect that to happen. Once the agreement is signed, we can kind of jump into more of the technical assessment and understanding and planning. We think it's probably a year to implement the device. So I think that we should probably count on this as a 2021 product.

Okay. And then from international that's been an opportunity for you guys, you entered into international in 3Q '18. Sales have increased to $60 million in 2019. You're only projecting sales of $70 million to $75 million. I guess some of that was really capturing a lot of the Animas opportunity last year. What are your kind of priorities for 2020 in terms of really pushing the needle in international? Where do you see the opportunity for the most growth?

From an international perspective, we're making great strides. So you're right, it's hard to do a comp between 2020 and 2019 just based on the fact that so much of the early business came from the Animas opportunity. So the real, what I would call, more natural business model started in Q3 of 2019. And so that base number of countries that we were in at that time has roughly 200,000 pumpers in those markets, and we'll continue to drive business into 2020 as we continue to deepen the penetration there and focus on competitor conversion. But in 2020, we're doubling the market opportunity. We're expanding into countries, starting with Germany, France and the Benelux countries where there's another 200,000 pumpers. And so that will be the next leg of growth. We expect to start shipping there in the first half of this year, but we'll really gain more momentum in the back half and drive the years beyond. So we're very excited now that we've transitioned from this first great opportunity to switch the Animas patients and build a strong installed base to now really grow those markets on our own on the merits of our products. And to that point, one thing that we plan is Basal-IQ just started launching in the back half of '19, which will drive the market in the first part of this year. We'll start rolling out Control-IQ in the back half of 2020.

Okay. Great. And then last question, I guess, as we're running out of time. Just on the profitability, as I mentioned, I think you guys have done a great job of really pushing the profitability metrics. I know you guys have outlined some longer-range targets of getting to 60% on the gross margin line, 25% from an EBITDA perspective. How are you just feeling on achieving those goals?

We're well on our way towards that objective. In 2019, we made great progress in crossing the profitability mark. 2020, for us, so will be a year of investment. So we've guided this year, in particular, to flat margins year-over-year, but it's the important step we need in order to achieve those long-term goals. This year is about investing in the business to make sure we're furthering our R&D objectives. It's investing in the technology solutions that will make our support functions more efficient. We opened the Boise facility last year midyear, which is lower-cost labor, lower-cost facility. And so a lot of these initiatives were started in 2019 across the year, and we're going to see the full year impact in 2020. But as like I said, a necessary and important step to achieving those long-term goals.

All right. I guess on that note, John or Leigh or Susan, any closing remarks that you want to leave the audience with before we end the webcast? John?

I would just say that the things that happened for us in 2019 that helped us grow, are very active in 2020, and that we're really excited about our technology and our pipeline. We think that's going to drive the MDI conversions, the competitive conversions. And as time goes on, the renewals become a more increasingly meaningful part of our revenue stream. And then everything that happened in the U.S. over the last year really is going to be true OUS, where we have technology that's going to be very competitive. The market is underpenetrated. We've got great partnerships there, and we're really looking forward to starting to see the same sort of momentum OUS that we have in the States. So 2020 is going to be a great year. It's going to set us up for another great year in 2021, and we're really excited about our future.

Great. It sounds like everything is looking just peachy, as Kim would say. So with that, I will turn it back over, and thank you guys for joining us. I wish you a great rest of the day. Thanks for everyone's listening on the webcast. Stay safe out there, and have a great rest of the week. Thanks very much, everybody. Take care.

Thank you, Kristen.

Thank you, Kristen.