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

All right. Good afternoon, everyone. Welcome to the -- I think this is the final session for the second day of the 2020 Virtual Stifel Health Care Conference. Thank you for joining us. And closing out our day, we're thrilled to host a session with Tandem Diabetes, the leader today in the automated insulin delivery revolution we're seeing in diabetes technology. We're nearly a year into the launch of Control-IQ, which is fair to say the most advanced, highest functioning insulin delivery system on the market today. And it's evidenced by a really remarkable adoption trajectory over the last several quarters and all that despite a pandemic. And so we're going to clearly spend some time on that. We have joining us today Leigh Vosseller, Executive VP and CFO; and Susan Morrison, Chief Administrative Officer and Executive Vice President. Thanks so much for participating once again this year. And just a reminder to everyone in the virtual audience, if you have questions, just type them in the question box when they come to mind, and we'll do our best to address them when and where relevant. Just in terms of sort of laying out how I'm hoping to sort of attack this session, hoping to tackle sort of 4 basic topics. First, just talk about the macro. I want to talk a little bit about the macro backdrop in the third quarter, where things stand today with the virus and the recent vaccine updates? And how we should just think about sort of the puts and takes of COVID, in general? The second topic, I want to talk a little bit about UnitedHealth, the opportunity there, what you're seeing so far? And how we should think about the magnitude and duration of this incremental growth opportunity. The third touch on the pipeline, a lot of exciting stuff going on there as well. And then fourth, just get your views on the competitive pump landscape today and over the next 12 months. And then finally, if we have time, I've got some odds and ends that we can take through as well.

But maybe to start, let's start on sort of the macro backdrop. And look at -- the backdrop here is pretty dynamic with COVID. And I appreciate you reported a couple of weeks ago, and it doesn't feel that long ago. But to the extent you're seeing anything that's worth calling out here as we're now sort of roughly halfway through the quarter? Just wanted to give you the opportunity to sort of talk about any changes versus what maybe we were seeing a couple of weeks ago the last time we spoke?

Yes. I don't think there's anything we can point to that's changed dramatically in the last few weeks. I mean much like everyone else, we're hearing about the continued resurgence of COVID in the U.S. and outside the U.S., but nothing so far that's changed the expectations that we have for this year. I think the most important thing for us is that when it first came about in the second quarter, we pivoted very rapidly, and we found a way to be successful and operate in this environment. While we're still seeing pressure, I think it's been mitigated quite a bit by Control-IQ and the momentum that we've seen from there, and we're functioning well here. And outside the U.S., it's been a little bit more challenging. The world hasn't adapted quite in the same way, at least in the medical space as we've seen here, but we're managing through it, and we're still driving forward and meeting all of our objectives that we have laid out for the year.

Great. And that's a sort of a good segue as we sort of talk about the third quarter and get to know the lay of the land. Just in terms of sort of underlying trajectory, but also the impact COVID has had on the business. And maybe it would be sort of most efficient to sort of break it up geographically and talk about what you saw internationally during the third quarter. And may be helpful to the extent you're able willing to just give us some sense of sort of where you're most exposed from a country standpoint and anything we need to be sensitive to as we hear about increasing lockdown measures abroad?

Sure. So I'm starting with the markets outside the U.S. In the third quarter, in particular, we had 2 points of pressure. We had COVID that was pressuring the business as well as the typical seasonal holidays you see in Europe in that time frame. And so when I think about COVID and how it compares to when we first started, I would say in the second quarter, it wasn't as much pressure, but it's escalated a bit in the third and going into the fourth quarter. And a lot of that goes back to the fact that some of the OUS markets, I think, opened up more rapidly at the very beginning. But because they didn't adapt to that telehealth environment now that there's this resurgence, we're seeing more pressure because they did make that same shift or transition that we saw here in the U.S. And we took that into consideration in our expectations. And so as we go into the fourth quarter, while we'll see relief from the fact that the summer holiday season is behind us, we are expecting a little bit more pressure, which keeps us flattish in the fourth quarter. But we're taking advantage of this time, I would say, right now, as we think about what's happening there. We have the attention of the physicians are not necessarily seeing patients, but we're really focused on rolling out Control-IQ in those markets and training the physicians, training our distributors and their trainers as well as focusing on updating the patients who are on pumps today that can take advantage of the software update which we think will be very useful next year as we go into 2021 because a lot of the momentum you get is when physicians start to see the outcomes from people using the product. So if people on pump start generating those positive outcomes, physicians might be more inclined to prescribe it sooner rather than later as we go into 2021. I mean I'll let Susan talk a little bit about the U.S. market.

Sure. So domestically, as we commented, we're pivoting back and forth very quickly. And it just depends on where there's a resurgence and when. And the good thing is, our reps were able to, I think, really firm up their relationships with the health care providers and find a way to operate with them successfully in this virtual world. We did see a shift in the training between the second quarter and the third quarter. But as a reminder, the training takes place after the point of purchase. So where it was 100% in the second quarter as we saw things kind of ease up a bit in the summer, our virtual trainings moved to about 50-50, 50% live, 50% virtual. But that being said, with things starting to become more locked down, we're very easily able to switch back to the virtual trainings as well. So I think that our overall growth expectations can still be supported in this virtual environment because the sale doesn't actually correlate with the timing of a physician office visit. These are often longer-term conversations, heavily influenced by peer, social media, personal experiences. And I think all of those things contribute to being able to let us continue to see success even in this environment.

That's really helpful. Appreciate that. Maybe sort of circling back to international. Do you -- have you disclosed the number of countries you're in? What sort of the pump opportunity is in that footprint today? And then I think that the obvious follow-on is that you're going to launch in some more countries, I think, before the end of the year. How does COVID impact that thought process? Or does it not?

Yes. So today, we're in almost 20 countries around the world. And when you think about the opportunity outside the U.S., we usually frame it up in those markets. They're estimated to be about 400,000 existing pumpers. And pump penetration is far lower than what we see here in the U.S. It's in the 10% to 20% range. So that's why we're excited about our international opportunity because we think that the technology revolution, as you described it earlier, is going to start there much like we saw in the U.S. 2 years ago. Our primary focus for 2021 was less so on exploring or opening in additional geographies, but more so on furthering the pump penetration in the existing geographies and really getting a foothold with Control-IQ out there. We're in the process of rolling it out right now. We expect it to be in about half of the countries by end of the year and in the majority of our international markets by end of first or even second quarter.

Okay. And does your -- the guidance that you -- well, I just maybe back up before I get to what's contemplated in the international guidance. Is there -- when you launch in new countries, is there an upfront sort of if you're using distributors, which you are? Any sort of bulk purchasing as you start moving in? Or is that stuff already happened and flowed through?

Yes. That's pretty much behind us. Germany and France were the 2 largest new markets we entered this year, and they placed their first orders in the first half of the year. Those launches got a little bit displaced, I guess, I would say, by the COVID environment. But like I said, I think we're moving through rather well and focusing on the training and awareness with the physicians, at least, even if they're not necessarily putting as many pumps on patients right now.

And it may be hard to tease out, but you've got several distributors, but some of them, I think, are new to selling pumps internationally. And just how is that going, sort of these new relationships with some of these distributors?

Yes, it's going very well. So even if the distributors that we've partnered with have not had direct pump experience, they have either had other pump technology experience or insulin experience. So they had experience and exposure in the space. And so everything is rolling out very well. It's just an unfortunate time to try to launch in too many market.

Okay. That makes sense. And then maybe we'll transition and talk a little bit about the U.S. 4Q is always the seasonally strongest quarter of the year in a typical or whatever typical means anymore in the typical year. And just sort of thinking about -- again, we're clearly expecting that seasonality to play out here. Any concern at all, though, that given the strange year that it's been that there may have been a pull forward of some folks buying pumps that maybe -- again, I know a lot of it's tied to deductibles and such. But any concern at all that you may have had a pull forward of some of that demand that you were expecting -- you would expect to see in the fourth quarter may have come through sort of earlier in the year?

Yes. I'll start with the seasonality aspect. We do anticipate what I would call, to your point, whatever normal is, normal seasonality. But what I mean by that is majority of the pump purchases happened in the back half of the year, particularly even in the fourth quarter. Even though in some other areas, you might hear that not as many services are being performed in diabetes just because it's so costly, people are meeting their deductibles like we've seen in the past. I think what it might be a little bit different about the scale of that seasonality across this year versus what we've seen historically is looking at the other factors that occurred across the year. So for example, Q1 had no COVID impact. So obviously, that's going to make a little bit different tilt to our seasonality curve. I think another element that people have been very focused on just what that Q3 to Q4 trend is and how that's compared to the past. And that's a difficult comparison because in many years, I can name at least 3, we launched our product in the third quarter, which has been really catapulted the fourth quarter. So it's more timing of our product launch. This year, what's a little bit different is Control-IQ came out in the first quarter and started gaining momentum across the year. And so our Q2 to Q3 comp different than what we typically see was it was up sequentially on pump shipments in the U.S., about 25%. And so I would say from that step-up was on the higher end of what we've seen in the past. And so I think some of the momentum is coming a little earlier in the year, but we still expect Q4 to be very strong, great growth over last year and to show that same highest level that we would see in any given calendar year.

That makes sense. And then how does the -- since we last spoke I think we've got at least a couple of vaccine updates. Any sort of sense of how that changes your calculus on the fourth quarter? And again, you haven't guided to 2021, but as you think about sort of 2021, conceptually, does these updates and the timing of these updates change the way you're thinking about the near term?

I don't think it changes anything about the very near term other than it's extremely encouraging. And the sooner we can have all this behind us, the better. And it sounds like we're going to get there soon. So we want to get this out of the way, so we can really focus on the 2021 drivers that we're excited about.

Yes, I agree, certainly share that sentiment. I've got a question here that sort of fits into this discussion thread. So let me just read it out to you. And do you envision virtual training as being a large part of training going forward? Is the virtual training just as good as hands-on training? And if so, why not drive this as much as possible?

Yes. I think virtual training is here to stay at some level. The feedback that we've gotten from customers has been overwhelmingly positive. And I think as everyone's gotten more comfortable with the Zoom platforms even socially, it's I think, encourage people who maybe otherwise wouldn't have considered it, frankly. We are encouraging people to continue using it, but we're also trying to be respectful that people learn in different ways, and we want to be able to support whatever is best for the patient.

And does that lower the burden for your need for a large scale or a larger size sort of pump training force, if you can do everything centralized and have folks sort of bouncing around, you can do it from home. Does that -- again, does that change your calculus at all as you think about spend over the next several years?

So interestingly, training was one of our initiatives, before COVID even came about looking after gross margin opportunity. We had highlighted it with the idea that we could save dollars in the long run because of lack of travel, more concentrated focus. And so this just really, if you could call it, silver lining, it accelerated that initiative, and it's part of our gross margin goals of getting to 60% or better in the next 5 years. So we can at least think this environment for that occurring.

Okay. All right. So let's transition to talking about the next topic, UnitedHealth. Maybe Susan, maybe help us to just level set to the extent they're folks on here that no idea what we're about to talk about. Just the history there with United. And what happened earlier this summer that sort of open that opportunity for you? And then we can dive into some specific questions.

Sure, absolutely. So just for the piece of history, Tandem had access to UnitedHealthcare members through a distributor until basically halfway through 2016. At that point in time, they had signed a preferred contract with Medtronic. It really limited it, so that Tandem only had access primarily to government plans and then people under Medtronic's age indication. So fast forward 4 years, and this past summer on July 1, we actually gained access once again. And so it was a huge relief for the company and for the United members who had been waiting for our technology.

And I don't think you said explicitly, but do you have a sense of sort of the number of pumpers in the United network today? And we were playing with numbers here and its count was like 80,000. I'm not sure if that's in the ballpark...

Well, you're spot on, exactly aligned. If you look at the prevalence of diabetes with pump penetration, it basically gets you to an 80,000 pumper number, of which we assume the majority is Medtronic.

Got it. You still want my future questions, but that's okay. And so historically, I think United had represented sort of, let's call it, mid-single digits in terms of any given quarter's pump mix that went over 10% in the third quarter, I think, is what you said. And you're sort of talking about perhaps that moving lower, or maybe there's some pent-up demand. I understand that. But are you seeing -- so I guess the first question, did you -- is there a way for you to sense how much pent-up demand there was? I don't need magnitude, but just sort of anecdotally where there are folks that have just been waiting around for 4 or 5 years waiting for this moment to get off of a competitor pump that we won't name. Just how you sort of -- you came up with that 10% is sort of a threshold. And why that may revert lower or not?

Right. So I'm just going back a little bit to that historical time Susan was talking about. Prior to 2016, United represented just under 10% of our pump shipments. And so that was really our baseline. It's our only real consistent trend that we could point to. After we lost access to the contract, we were still seeing even up through second quarter about 4% to 5% of our shipments were to United customers. So when we got access again July 1, we looked back to what did our business look like before. And that's why we guided to you on that baseline of 4% to 5% at a low to mid-single-digit lift to that. And essentially saying, it would be like it was prior to 2016. What we did see was that in the third quarter, it was more than 10% of our shipments. And one of the factors that helped -- catapult that number, I guess, I would say, is that our internal team went back to everyone in our database and said anyone who started a pump purchasing process, but didn't continue through it because of that United restriction, we called them back. Where are you today? Are you still interested? Would you like to move forward? And we saw some of that movement happen in the third quarter, which has pushed us up to that higher level. For the near term, that's only one data point, so we're going to stick with our guidance we gave before until we start to see a different sort of trend. Now as you look forward, though, I think that we could expect with United representing roughly 15% of the market share in the U.S. that it could become ultimately 15% of our shipments in any given quarter. It might take some time to get there, while we can go after our renewal patients today, and it can help boost those percentages. We can really work on the MDI population that hasn't moved forward with pump therapy. Those people who are already on pumps, we have to wait for their warranties to expire. So over time, we think we'll move towards that 15% point, but we want to see what the trends look like before we start guiding to something like that.