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

Good afternoon, everybody. This is Travis Steed at Bank of America. And up next, we are pleased to have Tandem. We have John Sheridan, President and CEO; Leigh Vosseller, CFO; and Susan Morrison, Executive Vice President and Chief Administrative Officer. Welcome to our virtual Vegas. Hopefully, next year, we can be in person.

Just wanted to start out. Control-IQ got off to a really strong start. COVID hit kind of late in the quarter. And you've got one strong positive tailwind and a strong negative headwind. Just trying to see how balance those 2 dynamics playing out here in April, early May and over the course of the year?

Well, we were -- I think it was fortunate that we were able to get approval in December and actually commercialize the product in the January time frame. It enabled us to train probably 7,000 physicians in the use of Control-IQ. So that was just very fortunate timing. And as you've seen, I'm sure you've looked at the blogs and the web and there's just been incredibly strong support for it and a lot of enthusiasm. I think we had definitely done better in the first quarter without COVID-19, and we anticipated we would see some weakening in the demand of -- just in general demand in the March and April time frame. But it looks like the effect that Control-IQ is having is offsetting. Because we have seen strength in March, and we continue to see strength through April, so it was great to see that. We've got a few people who use Control-IQ that actually have COVID-19 or they have family members with COVID-19. And the product performed so well that they said they'd been able to spend most of their time just trying to take care of their health or their loved ones' health and not nearly as much time spending just managing their diabetes, which I think is very telling.

And so you provided a guidance for Q2, suspended the full year guidance, but any thoughts on how -- April revenues, I guess, are in the books, May orders are in the books. I guess June is kind of the wildcard. The $85 million that you assumed for Q2, are you assuming that orders are getting better over the course of May? Or are you being a little more conservative than that? Just trying to think of how you came together and thought about the Q2 guidance specifically?

Yes. So for April, yes, you laid it out exactly correctly about what we know and what we don't know at this point. And we actually started seeing pressure in April and May, but to John's point, far less pressure, we think, is a testament to the strength of Control-IQ. And ordinarily, in any quarter, actually and across the year, we see a seasonal build as you reach the end. We are not anticipating by any means that June is any -- is a recovery. So still expecting to see pressure through the end of this quarter. And then we'll think further about what that implies for later in the year. But at this point, I think anyone's guess is as good as ours on how a recovery might look and in what stages or phases that that comes about.

And I know it's early, but here, like the last few weeks, as some of the states are reopening, are you seeing patients go and visit the doctor? And some of the early indications on leads for new patients come in a little stronger or are starting to improve?

I think it's just too early to tell. That's just the very beginnings, and it's not even across the market, across the board. And in fact, even when we moved into the March-April time frame, you see different levels of pressure by physician office, where some are seeing hardly any patients anymore and others, we're still seeing 100% by telehealth. And so I don't think we can draw any conclusions yet based on what's happening in the market, but we are encouraged by the fact that things are starting to open up even if slowly.

Yes. And obviously, you pulled the full year guidance. The Street ended up at $416 million for full year, 15% growth. I know there's a lot of different scenarios you considered that could blow it put up in the back half. I don't know if there's any color on that 15% growth for the full year. Is that even a reasonable base case? Or theme of how things could play out this year?

Yes. I mean I don't think that's an unreasonable way. I mean you make a very good point. There's many ways you could draw the line of what happens. And I think that one implies that there's continued softness throughout the year. And so I don't -- I'm not uncomfortable with that way to look at it. I myself wouldn't -- would not try to project any sort of strong recovery this year. But like I said, we're encouraged that things are starting to open; we'll just have to see how quickly that progresses.

That's helpful color. There's been a lot of talk among you and your competitors about telehealth. And just trying to get -- I know you've got a lot of feet on the ground and just trying to get a sense for how widespread telehealth is now and how deep it is. In other words, like, the docs using it, are they still seeing the same number of patients or only a small subset? And then thoughts on -- is this really a lasting trend? And how does that change your business opportunity for Tandem longer term?

Yes. I think that most, if not all, of the physicians that we interact with have moved towards virtual visits. And we've -- we were in a good position. We actually have helped a number of them get set up in their home with our t:connect data management system as well as just familiarize then with Zoom or Microsoft Teams. We have great relationships with the physicians, we're continuing to interact with them. We see that when they're at home and they're not actually in the office having visits as frequently as they are now, we actually get more time with them. So that's been a real positive. We've also gone to 100% virtual training. And the good news is that we have been working on this for some time now, probably for the last year to 18 months. And we did it originally because there's a financial benefit. There's just the opportunity to make our clinical diabetes educators more efficient by just reducing the amount of time they spend in cars. So we have a process that's set up, it works very well. It involves us sending information to the pump -- a person who is going to be trained in advance. There's videos, we have a t:simulator app, which they can get off the app stores. And it allows you to -- it's an exact replica of the performance of the pump. So you can practice on it in advance, and then we conduct the training. And we have, from the very beginning, designed products that are simple and intuitive, and therefore, they're easy to use. And if they're easy to use, they're easy to train. So we have very good success with our training process. I think it's not really impacted at all by the -- by being virtual. So the training process takes about 2 hours, and then we follow up in about 3 days with the person just to be sure when they're doing a site change or a cartridge change that they're okay, and they're -- it's working properly. So I think that what we have seen is we've seen is a great deal of customer satisfaction. Actually, it's gone up when we've gone to virtual training. People, I guess, appreciate the fact that we're doing it, and they seem to like the flexibility of doing it in their home. We've also seen no indications that the training is causing more customer support problems as well. So the training is going well and the interaction with the physicians is going well. I think that it's hard to say how it's all going to shake out in the end, when this -- when the market opens back up and we're actually able to interact in offices. But my guess is that there are benefits from this virtual interaction. And I think that we probably won't go back fully to the way that it was before. And I would imagine that virtual interaction with physicians as well as the training will be increasingly a part of the practice habits. I mean just in running the company here, we've made the transition ourselves quickly, and it was effective. And I think that there's -- after we've been existing like this for a couple of months, it really makes you think about how do you go back and what do you take from this experience and apply going forward just to be a more efficient organization. So I think that there's -- we're interacting -- we're adjusting well to the -- to this new scenario. And I think it's -- if there's going to be some portion of what's happening now that will exist going forward.

There's this perception out there that it's actually probably a little harder to start a durable pump, especially through virtual training. I don't know, do you think that's a misperception that they -- the investors have and that maybe it's not quite as hard to start a durable pump? And then it sounds like your patients that are kind of new to pump therapy coming from multiple daily injections has really held in. Are you surprised by that? Or any sense for why that's the case?

Well, on the first question, I would say that, as I indicated, the pump itself is easy to use. People can pick it up and just without even getting training, they can figure it out. So of course, we don't want that to happen, we want to provide the training. But the device is easy to use. I would say the most complex element of the training process is probably putting on the infusion set. And there are people out there. I would say it's the minority, but there are people out there who aren't comfortable doing it in a telehealth visit. So we -- I'd say the majority of our training is done today virtually. There are a small number of people who aren't comfortable. They've already purchased the pump, and we'll just get to them when the situation opens back up again.

And to the part of the question about where we surprised, I think it was natural to assume, and we even made some of those assumptions internally as we try to think about the go-forward, that people who were renewing Tandem pump to Tandem pump would be less impacted. Maybe people converting from a different pump might hesitate a little more, and people come from MDI would be reluctant to try something like this. But we saw consistent ratios into April. And so we were surprised then at how it turned out versus where we -- how we originally went into it.

Okay. And the feedback on Control-IQ has really just been outstanding looking at tweets and blogs and so forth. And that's just looking at what the patients are posting. Is that starting to resonate within the clinical community? And any sense for -- I know it's in the middle of a pandemic, but doctors that really weren't big Tandem users or prescribers, is Control-IQ starting to resonate with those doctors in particular?

Yes. I think it absolutely is the case. As you said, the -- there was some disappointment with our clinical results at the -- when the pivotal study was presented a year ago at ADA. I think people now understand that. And I think that when you talk to physicians, they thought it was extraordinary, they thought the results were fantastic. But as you said, what we're seeing right now is we're seeing people who actually manage their diabetes carefully are seeing time and range improvements from the 60s and 70s to the high 80s and 90s. And in fact, I was talking to a physician in Tampa recently whose son is using our pump, and he started using Control-IQ in the January time frame. And he has a time and range right now averaging in the low 90s, and he's got days where it's at 100%. So it's just incredible the outcome. One of the things that's happened that's different than Basal-IQ is we currently have about 35,000 people that have updated their pumps, using the Tandem device updater. It was a slower uptake with Basal-IQ because I think people weren't as comfortable with the updater as they are today. And so with Control-IQ and with Basal-IQ, we built momentum. People, they start to use -- they start to prescribe it, they watch their patient population, they observe them in their first visit afterwards. They see the results. They're pleased with the results. And then we start to build the momentum and more people begin to use it. So I think we had a head start because of the people, again, the 35,000. But we're also at that point now where it's been roughly 3 months since the first few people were put on Control-IQ. And I think we expect to see a great deal of momentum going forward where we're going to build and do quite well. We're excited about the product, and we think it's going to, as I've said, represent an inflection point in our business, much like Basal-IQ did. But I think we just kind of have to get through the turbulence that the COVID-19 situation is going to create. But once we're beyond that, I think it's going to snap back and it will be a meaningful sort of bump after it's over.

And one of your competitors is planning to release their pivotal data the summer at ADA. And they've talked about the timing range, which is around 80, which is better than your pivotal data, but also not nearly as -- or kind of more in line or even a below what some of the patients are posting that they're getting, like you just referenced. Is there a chance that we could see some real world data on Control-IQ at ADA this summer? And/or anything else we should be watching for?

I think that it's -- we are definitely collecting it. It's unlikely that we'll have a presentation at ADA with real world data. We will see data though presented by, I think, Dr. Eric Renard from France, is going to be presenting pediatric data from France. He's got the 4 sites that have been on using it for probably close to a year now that'll be shown. There'll be additional data from the -- it'll just be -- they'll be cutting and looking at different information that they've been able to extract from that pivotal study data. So there'll definitely be information on Control-IQ and probably Basal-IQ as well. And I think that -- I think you're right. I think that we're supposed to see the data from Medtronic's 780G. I think they're obviously a formidable competitor. I think that the -- we feel really good about and Control-IQ, and we think it's going to compete effectively against that device when it ultimately does make it to the market. Travis, are you there?

Oh, sorry, I was on mute. So on -- so going to the United coverage, the Control-IQ seems to be talking to patients like they have UnitedHealthcare and they're asking for it, and in some cases, actually getting coverage through United. So I'm sure not all of them are, but just curious if you could give a sense for how many of your patients are actually on United? And just to kind of get a sense for how big of an uptick that we could see once United comes, and it seems a lot more likely now with data in the New England Journal of Medicine.

Sure. We look forward to the date when we can have full unfiltered access to United. But what we've seen in the past is, going way back to when we had unrestricted access, it represented roughly 8% of our business. And so as we move forward, we didn't lose complete access to the plan. We still through the end of 2019 saw about 4% to 5% of our shipments going to patients with United coverage. So again, we'd love to get back in the network, but it's not as if we lost everything all together.

Okay. That's helpful color. And I noticed on -- in the Q this quarter, the direct contracts. The first time I've ever seen a number below 70%. And is that really Control-IQ that's starting to tick that down? And just for everybody's benefit, can you help explain the benefit of half [Technical Difficulty] yourselves in the direct channel? And where you see that trending over the course of the year.

Absolutely. So we haven't used a network of distributors since the beginning of time. And at the beginning, it was roughly 75% to 80% of our business going through those distributors. And what they really do for us is they provide access to insurance plans where we don't have a direct contract. And so that's been continuing to shift even more so in the last year, and it's a response or it's an outcome of our managed care efforts. And I think that also comes from the fact that we have products with clinical differentiation. So when we go to an insurance payer now, we have more to talk about than we would just like to be in your network. Now it's -- let me tell you about our products and what it offers. And so it's a more robust conversation, which means we're getting to people within the organization at different levels than we were before. So to your point, our direct business, in the last quarter ticked up to 31% of our total shipments. The benefit that we can get on the go-forward by continuing to move that percentage, and our ultimate goal is to be at 50-50, is that there will be modest margin improvement or reimbursement improvement. Because we give up a slight margin to those distributors for that access and for the logistics services that they provide. But even more so, it provides efficiency within our own organization. Every sale today, for the most part, is generated by our sales force. And it first comes into our team, we do some level of work on it and then determine which distributor is the best one to use based on the insurance plan. And so we'll get some efficiencies within our own operations when we're not managing that back and forth with the distributors. And another added benefit is that when we have the direct relationship with the patients, we tend to see a faster renewal rate with that population. And it's just because we've been able to maintain the relationship over the whole full year cycle.

And so that would really show up on the P&L or the revenue model as more the pump ASP would start to trend upward a little bit. Is that the way to think about it in terms of the model?

Yes. That is correct. And I would stress modest. What we're focusing on with moving the needle on those plans is really the large national plans. And in some cases, just because of their leverage and volumes that go through it, where typically, insurance companies will reimburse between $4,000 and $5,000, the larger national plans tend to be on the lower end of that.

Okay. And then on Medicare, just curious if you're starting to ship there yet. I don't know if there was any shipments in Q1 or if there is a backlog for Q2? Is there any update on the Medicare?

Yes. So at this point, I guess I'll just give a little bit of the history again. We were awarded a new code for insulin pumps that had CGM integration. So we were very excited that now there's a differentiated code for a, what you would call a smart pump. And the unfortunate situation is that the pricing has yet to be established. And of course, everything that happened with COVID 19, I think, further delayed the ability to get that pricing established. So initially, when it was awarded and it was retroactive for us, we temporarily ceased shipping to Medicare patients while we better understood the risk of not having that information. And so since then, we worked with our consultants and even CMS to some extent and better understand the implications. And so we were able to begin shipping to Medicare patients before even the end of the first quarter. And we're able to fulfill those orders even now in the second quarter.

Okay. And then I did want to touch on renewals in the current world and environment. When we're thinking about our model, is -- the renewal is probably going to be fairly consistent. Those patients are coming in. I don't know if there's any color you can provide on how to think about that specifically over the course of the year.

Sure. So through the end of 2019, in aggregate, about 30,000 patients had warranties that had expired, and we had already renewed a little more than half of those. So that remaining population still is going to be an opportunity for us in 2020. As we talked about in the past, renewals aren't automatic. So even though someone's warranty may have expired in 2016 or 2017, there are still a fair amount of those people that are still exploring the renewal channel -- renewal process today. And so those remaining opportunities from the past as well as in 2020, we're adding 16,000 new opportunities. And with Control-IQ coming out, in particular, we think that will help push people through to make that decision to go ahead and buy their next pump. If you're not in warranty, you don't have access to our free software updates. So buying your next pump is the way to get access to that technology.

And we're all worried a little bit about a recessionary environment post-COVID. And your -- one of your competitors has a pay-as-you-go model that they highlight. And then you've also mentioned the opportunity for payment plans to help finance the co-pay that patients would have to pay. Is that going to be available for everyone? Or -- and just curiously, because that's something that you finance yourself in your own balance sheet -- how widely known is that program for patients? Just kind of curious how that's going to play out.

Sure. Payment plans are something that we've had in place really since the beginning of time, and the majority of our distributors also offer those to patients that aren't direct with us. And we've really seen little usage of it in the past. I envision that as we go forward here, more people might be asking for it and using it. And we continue to optimize what we offer to try to help people through this. So today -- or in the past, the plans typically average about 12 months. We're looking at extending those up to 24-month plans if that makes sense for patients. And so it generally is across the board. I'll say that there are some plans, interestingly, government plans in particular, that use a rental model already. So the payments are already spread out over 13 months in those situations. But we'll do what we can to try to reduce the burden for patients. We don't want that to be a barrier to them getting on the next -- our technology. Another thing or way to look at it, too, though, is for a person not on our technology, it prevents hypoglycemia or reduces it dramatically as well as manages against hyperglycemia. So with a product like ours, it can reduce the profitability or the risk that [Technical Difficulty] So if I could look at it as an investment in their health in the long run, they'll save money by being on our product, even if it means an upfront or a payment plan for a year or 2.

Okay. And then I did want to touch on the pipeline. You have t:sport and the mobile bolus for -- or the t:slim pump that were both planned later this year and next year. But given the COVID, there's obviously a delay. Should we characterize that as really a 1 to 2-quarter delay versus original expectations? And I think the main reason for the delay was human factor testing, if that's correct or not? Just would love some more color on how you think the pipeline is going to shape up here.

Yes. Well, let me also point out that we have the mobile app, which is a secondary display, that's going to be made available here in the next week or so. And we think that's going to be an important product, particularly with COVID 19. It's a -- as I say, a secondary display. So all of the relevant information that's on the pump can now be seen on the app. But more importantly, the app will upload data to the cloud real time. And that's important because today, in the COVID situation, physicians actually have to call patients and ask them to upload their pumps in order to see the data, so they can actually do therapy management. And we've talked to some practices, where they've had to bring on a number of people to help them do that. So having the data available real-time is a really big deal. It reduces that friction that the practices are experiencing today and even in the past in the pre-COVID situation. And then it actually just allows the physician to keep track of their patient population in a real-time basis. So you mentioned the mobile bolus. That's the #1 feature that people want to have on -- is the ability to bolus remotely from an app. And it's basically, when you think about it, the people who are living with diabetes, the only reason they need to take the pump out of their pocket or wherever they store it is to bolus for meals, when they're out and about. So that's a huge feature it's -- and we're excited about having it. And so you're right. We have human factor studies that are required. There's a regulatory requirement to make them and provide them with the submission. We, of course, use human factor studies to optimize and improve the utility of the pump and to make it easy to use. And as we've talked about, the simplicity of the interaction with the pump is largely -- it occurs when you iterate the design through these tests. These tests are not at all like a clinical study. They take a couple of days to execute the tests. We would do it in maybe 5 or 6 cities across the United States to make sure that we have the appropriate demographics of the participants in the tests, and it takes a couple of weeks after that to analyze the data. So we're prepared to actually implement these tests right now. We just need to wait for the markets to open back up so it'll be safe for our employees and safe for the people actually taking the test, doing the tests. So it's kind of a one-for-one situation, it's a day-for-day. Whatever days we've lost from the time that we had planned on doing this is how much the delay will occur in the submissions. We had planned on implementing or submitting both the mobile bolus and t:sport to the FDA in the late summer time frame. So that's obviously going to be a little later. We're hoping it's not 2 quarters, we're hoping that things free up here sooner than that. I would also say that we have interacted with the FDA and have had conversations with them about the possibility of doing remote human factors studies. And that may not be something that's implemented in time just to prevent any delays with the mobile bolus or t:sport, but it's definitely something we could potentially use going forward in the future.

Okay. And when you're going back and forth with the FDA, what's your sense on how FDA review time lines are changing in the midst of this? Obviously important for you, but also important for your competitors and some of the competitive launches that they were planning. Do you [indiscernible] sense that those things have lengthened out a little bit? And if so, what kind of opportunity do you think that provides you now that you've got Control-IQ on the market but your competitors are still waiting to get through FDA?

Well, we're still -- we have submitted the pediatric data to the FDA, and we've been interacting with them on that. And so I would say that they've been they very responsive. They've clearly got a lot going on. They're also working from home. And they've indicated that they -- we should anticipate there's going to be delays because of the COVID-19 situation. And obviously, they're prioritizing devices and drugs that are supporting COVID-19 over anything else that's going out in the market. I would say that there's the possibility that some of our competitors' studies will be delayed. And I think that we are likely to have a full year of runway with Control-IQ, which we think is great. As I said, we're going to continue to build momentum behind Control-IQ, like we saw with Basal-IQ. And so I think having a full year runway with that is going to be fantastic for our business.

All right. Thus, 40 seconds left, but did want to get to O-US since we haven't gotten there yet. But I was looking at the -- for model for -- and the guidance for Q2, looks like there's basically almost 0 patients that you're seeming to get added. Is that what you're actually seeing O-US? And then also in terms of the countries that you're adding, just curious, it sounded like those were still kind of on track for launching. Just any color there would be helpful.

Yes. So when we determined our view into Q2, we really have the anticipation that the O-US markets would be more heavily impacted by COVID-19. And it really comes down to the difference in where a patient visits their physician. Outside the U.S. that -- those visits seem to occur more in the hospital setting, which are far more shut down than some of the clinical and community practices and haven't necessarily implemented the telehealth opportunities. So that's what, frankly, why we were more or less optimistic about the international market. The guide does imply mostly the recurring supply sales with some very modest pump sales. And then we'll see how that progresses as markets start to open up.

Okay. Perfect. We're up against the clock. But thanks a lot for joining us here and everyone joining in on the webcast. Hopefully, next year, we'll see everyone in Vegas, and thanks again.

Nice talking to you, Travis. Take Care. Stay safe.

Thank you, Travis.