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

Good morning, everyone. I'm Dylan James, Vice President of the Western region here at Nasdaq. Pleased to welcome the team from Tandem Diabetes this morning. So joining us is John Sheridan, President and CEO of the business; and joining John is Leigh Vosseller, CFO. [Operator Instructions] And so without any further ado, John, I'm going to go ahead and pass it over to you. Excited to hear the presentation this morning. And thanks very much for joining us.

Absolutely. Thank you, Dylan. And thanks to Nasdaq for having us. It's been a great conference so far. Well, I just want to start off by saying that Tandem has had a very strong third quarter. We had record sales. We had 30% -- or 31% year-over-year growth, and it turns out that our domestic growth was 25% quarter-over-quarter. We saw the strength really in Control-IQ. The product has just been amazing. We also had the benefit of a full quarter of being in network with UnitedHealthcare. We had our pediatric Control-IQ study published in the New England Journal of Medicine, which is the second one that we've had now in the New England Journal in the last 9 months. And we also began to roll out Control-IQ in our OUS countries. So today, we have nearly 190,000 insulin pumps that have been shipped worldwide in the last 4 years, which is approximately 40% of our goal to have 500,000 users by the time -- the 2024 time frame. Control-IQ technology is the most advanced system in the marketplace today. The -- our physicians, the endocrinologists, the HCPs have really grown to trust it. They have a great deal of confidence in it. They're seeing extraordinary results from their patient populations. And the people who are using it are just describing it as life changing. So it's just been fantastic to see the results that we're hearing about with people using the technology. We began scaling our international business in the third quarter of 2018, and it's been very successful since that point in time. Initially, it was primarily focused on converting the Animas business that had exited the market in the late part of 2017. And more recently, we've really gone into a couple of larger markets, and our focus going forward really is to grow organically in those markets. We have introduced Control-IQ in this -- the past couple of months, and we expect to be in most of these markets with Control-IQ in the next couple of quarters. And so we're very excited about that. We have, I believe, the most exciting pipeline in diabetes. We have 3 new exciting product launches coming up next year. We have our mobile bolus feature that will be on our mobile app. It will be available in the first half of next year. We have the t:sport system, our smaller-size pump that will be available with a mobile app control in the second half. And we also intend to make improvements to the Control-IQ algorithm as well in the second half of next year. So we think that it's underappreciated, the significance of these product introductions, but we are very, very excited about them. We've had significant sales momentum over the last 3 years. On the fourth quarter call, we obviously established our guidance. Because of COVID, on the first quarter call, we suspended it. We reestablished it on the second quarter call. We actually raised it on the third quarter call. So I think we've done quite well in this COVID environment. We made the seamless transition to working from home. Our technology has really enabled to -- our health care providers, the physicians to actually use the technology to conduct virtual office visits in their own home, which has been very important for them. And our training is -- it was -- our virtual training has also been very effective. So we have -- we recognize that COVID is somewhat unpredictable, and we can't control everything, but we feel like we've been very prepared, and we've executed very well in this uncertain times. I'll look at this. I'm having difficulty projecting -- getting this thing to move forward. I apologize. Let me just -- here we go. Over the next 3 years, our -- we'll become more competitive and less differentiated. We win in this environment by shifting the basis of competition from devices, algorithms and support to outcomes, insights and experiences, focusing on reducing the burden throughout the diabetes ecosystem. We believe that combining our best-in-class integrated pump with a digital ecosystem that provides data-driven products will reduce the burden and improve the experiences for all of the constituencies that are -- that we work with in this area. We think that if you just look at the patient's experience, clearly, they have the pump, the best in -- the pump. But with the mobile app, it really does give the patients the opportunity to interact with our customer service organization. You could order supplies. You can get frequently asked questions. We plan to integrate the app with other apps that provide diet and exercise support. There's decision support and potential coaching opportunities as well when you consider using the mobile app in this environment. When it comes to working with health care providers, we believe that we can provide decision support tools to make them more efficient, therapy guidance and optimization tools that will basically allow them to look at their broad patient population and make decisions even while they're not in their office or in virtual visits to support them. With caregivers, we believe that having this technology allows us to share information with the caregivers -- the loved ones of the family members who have diabetes so that they can actually keep track of how their loved ones are doing. And then with the payer organizations, there's obviously the ability to provide information, patient trapping -- tracking, outcomes data and just valuable population insights. So we think that having this ecosystem that surrounds the pump is an essential element of our growth going forward. The t:slim pump has been very successful in the market. We have -- our early design focus was really on developing products that are simple, intuitive and easy to use. We have basically focused on a concept we call user-centric design. It's a combination of human factors engineering and behavioral science and where we work very closely with the person using the pump to observe how they interact with it. We iterate the design to create the optimum experience. It's much like the experiences that you have today with consumer devices in the marketplace. We believe that reducing the burden of diabetes drives adoption. And so our focus is to make the devices simple and intuitive and easy to use. And by doing that, we believe that we can actually increase the penetration from 30% in the U.S. today to the 50% mark in the near future. We have a history of industry and company firsts. We are the first company on the market with a touchscreen, a rechargeable battery. And recently, we have provided remote updatability for our software. We've had a leadership position with the FDA in terms of interoperability, where we were the first company to integrate with an iCGM. We worked with the FDA to get the ACE designation and, more recently, the interoperable glycemic controller or the AID algorithm. And just this past few months, we've introduced our mobile app with both iOS and Android devices. We have been innovating faster than our competitors. Over the last 8 years, we've introduced 7 significant new products. We think that the ability to innovate really has enabled Tandem to come from -- when you consider -- in the 2012 time frame, we had delivered a pump that was delivering insulin. And today, we have a system in the marketplace that's actually delivering therapy. And that's a huge jump in terms of capability and experience for the people using our systems. We plan to continue to invest in R&D and to maintain our competitive positions going forward. The...

Pardon...

Go ahead, Leigh.

Pardon me, John. The slides are not displaying. Are you able to...

I'm sorry.

Sorry to interrupt your flow.

I apologize for that. I thought -- can you see them now?

Great. We can see your PowerPoint. If you -- there you go. Perfect.

Okay. I apologize, everybody. The factors that have made us successful over the past 2 years are still in place and will continue to drive meaningful growth in the future. It's all centered on our robust product pipeline. As I said, we have the most advanced technology in the market today. We think that's important as it does drive people to use our system. We are working in the U.S. and OUS, where both markets are underpenetrated. So we think that this technology that we're working on today will drive people from pens and needles into pump therapy. There's also the competitive conversions today. We see about half of our new pump starts are coming from competitive conversions. We are moving into OUS geographies, which I've indicated, have largely underpenetrated markets and also have the same competitive opportunities that we see in the states. And one of the things that's going to become a more meaningful part of our revenue stream going forward is the renewals. Renewals are now -- and particularly in an ongoing basis, as the revenue from the past few years become available for us to renew in the near future. As we continue to focus on these factors, it's really what's going to enable us to achieve our goal of 500,000 customers worldwide by the year 2024. We also intend to have gross margins in excess of 60% and operating margins in the mid-20s. As I've said, Control-IQ technology is really life changing. We see just amazing results from people who are using it today in the marketplace. People are -- they've been describing the experience of having moved from time in ranges in the 60s, up to the high 80s and low 90s, which is really where people who don't have type 1 diabetes have. The system has an advanced hybrid closed loop algorithm. It provides basal insulin modulation to prevent hyper- and hypoglycemia. It delivers automated correction bolus. We began launching it in the U.S. in early part of 2020, and we actually begun -- began launching it here in our OUS markets in the third quarter. And as I said, we expect to have it in most of our markets before -- in the next couple of quarters. We plan to continue to make improvements to Control-IQ. When we actually introduced Control-IQ, we collaborated with TypeZero, and -- it's a company that was associated with the University of Virginia. We worked with them to implement it on our system. TypeZero is now part of the Dexcom organization, an important partner of ours. We are working to develop the capability to advance algorithms internally. We think it's a core capability that we need to have. And as we look forward, we think there's opportunities to enhance the algorithm so that it actually continues to improve time in range, provides greater personalization and also has usability improvements, just improving the overall user experience when they're interacting with the system. So we think that this is an opportunity for us to continue to provide these capabilities going forward and use our Tandem device updater to make them available to our patient population. As I've indicated, we've had 50,000 people in our patient base update from Basal-IQ to Control-IQ, which is a very meaningful number. We think that what this does is it allows our patient population to have access to our new product pipeline. And that -- and as opposed to having to wait 4 years to have access to new technology, they actually have it available as soon as it's -- it'd been approved by the FDA. Our t:connect data management system is a system that provides data to both the pump user as well as the physician. This is the system that really enabled us to work with physicians over the past few months to bring data management to their homes so they could provide virtual office visits. It's something that we think is the backbone of our digital health initiative. It's a very important area of investment for us. And we think, as I said, it's really helped us to make this transition in the COVID environment happen very effectively. The t:connect mobile app is really the foundation of remote control and the foundation of the digital health experience that the patient population will go through. It provides wireless uploads to the cloud, which is very important, particularly now where physicians, for the most part, have to call patients to have them upload their pumps when they actually have virtual visits. With our system today, it happens automatically. Today, it's the secondary's display. It shows you all of the pump information as well as the CGM data. It's available in iOS and in Android. In the future here, in the first half of next year, we expect to have the mobile bolus feature. It's the #1 requested feature that we have for the system today. People basically don't need to take the pump out of their pocket unless they have to bolus for meals. Having that feature available on a mobile app really will increase and improve the discretion as they move forward. There's a great deal of opportunity we have as we move forward. As I mentioned, we can have -- the caregivers and loved ones can actually follow and share information that's on the mobile app, so they can see how their loved ones are doing. We think there's the opportunity for personalization. We think that the system can actually allow you to text with our customer service organizations. You can order supplies, just do things that you're used to doing on your mobile app for more consumer-oriented applications in a medical device setting, which we think will overall improve the experience. And we're very excited about our next-generation pump. The t:sport is going to come to market in the second half of next year. It's about half the size of the t:slim. We think that it can be integrated with a much smaller infusion set, again, to improve the overall experience. Wearability is a really important aspect. We think that people really like the flexibility of being able to share -- to change how they actually use and interact with this pump. It's something you could wear on a lanyard around your neck. You can put it in your pocket. We're looking at an adhesive patch that you can wear in your abdomen. And so really improve the ability for people to have the flexibility in the ways that they interact with this system. It will be controlled entirely by a mobile app. The way the system works is the algorithm and -- exists on the pump, and the sensor communicates with the pump as well. In that way, if you were to lose your mobile phone, the system continues to work because it does have the Control-IQ algorithm on it. There's also a mobile bolus button -- excuse me, there's a bolus button on the pump so that you -- if you do lose your phone, you have the ability to bolus for meals in that likelihood. We're very excited about this product. We think it's going to be a significant game changer for us. And as we saw with Basal-IQ and Control-IQ, we did see an inflection point in our revenue, and we anticipate that as Control-IQ -- excuse me, as t:sport comes to market, we'll see something similar to that in the 2021, 2022 time frame. And with that, I'll hand it over to you, Leigh.

Thank you, John. I'll take you through some of our key financial components, starting with revenue. Two of the metrics that we use to measure our business are the number of pumps that we ship in any given period as well as the size of our installed base, which drives our consumable revenues. As John mentioned earlier, we have nearly 200,000 people in our installed base today. Our pump sales typically represent 60% to 70% of the sales in any given quarter. An individual is eligible to purchase a new pump once every 4 years; and the supplies, they will purchase ratably over that 4-year cycle to the tune of about 120 units per year. Our domestic and OUS operations are very different, though, in how that reimbursement -- those reimbursement dollars apply to those products. In the U.S., we use a network of distributors, which primarily provide logistics services and access to insurance plans, which -- where we don't have direct contracts today. Because of that, we recognize about $4,000 for every pump we sell; and the supplies, we recognize about $1,000 per year (sic) [ $4,000 per year ]. So in total, over the 4-year life of a patient, it's about $8,000. From an OUS perspective, the distributors are very different. They build the entire sales infrastructure for us. So because of that, we give up reimbursement on the pump line. And we recognize, on average, just a little over $2,000 per pump. The supplies reimbursed is a bit higher. So over the 4-year cycle, though, when you compare a domestic customer versus a customer outside the U.S., we still recognize about $7,000 to $8,000 per customer in that time frame. Thank you, John. From a COGS perspective, the majority of our costs are associated with our manufacturing capacity. In -- we have capacity in San Diego to build approximately 180,000 pumps per year. We have capacity to build about 16 million cartridges per year, and we're rapidly expanding that capacity to where we can support more than 250,000 customers in our installed base. Part of that scaling up is incorporating a third-party manufacturer to help build that capacity for the long term. Our COGS, aside from manufacturing, also includes costs associated with royalty, warranty, customer training as well as freight, but the manufacturing expenses are the majority of that. As this translates into gross margin, today, we are recognizing gross margins in the low to mid-50% range. We have a long-term objective of achieving 60% or better in the next 5 years. And I say better because 60% is not the end point. That's our 5-year target, and we expect to improve beyond that. The major drivers of gross margin improvement come from 3 primary initiatives: the first one being reimbursement initiatives, to continue to shift more to a direct business in the U.S., to slightly increase that benefit that we get on the revenue line but also improve efficiencies in our operations; as well as to continue to talk to insurance payers about the value that we are providing to their system now that our product provides such significant clinical benefit and can really reduce the cost of care for a patient with type 1 diabetes. The other 2 primary initiatives are just continuing to expand our capacity efficiently and to scale up as volumes grow as well as the design of new products. With every new product that we launch, we are focused on improving the cost profile, whether it's from the learnings from the t:slim product that we build today or just a change in the materials and how it's designed. t:sport is going to be a great first example of that. And then I'd like to point out that we've achieved some significant financial milestones in the last few years. It began really in 2018 when we shored up our balance sheet. And we were able to secure some financings, which allowed us to pay off all of the debt that we had at that time. We achieved our first full year of positive adjusted EBITDA in 2019. Adjusted EBITDA is our measure of profitability, which excludes the cost of noncash stock-based compensation. Our long-term goal is to continue to improve those margins to a 25% or better operating margin. Today, we have approximately $465 million in cash on our balance sheet, which provides us great security and flexibility for the go-forward. So thank you for your time today.

Wonderful. Well, we're ready to take questions. And John and Leigh, I've received one in -- through the chat feature, and that was asking for your comments on the competitive environment as we look forward into 2021.

Sure. Well, I think that one thing that's very important to point out is that we have really established a great deal of momentum with Control-IQ. It takes time to really gain the trust and confidence of the endocrinologist community. And now having the device on the marketplace for nearly a year, we've really seen that happen where they feel very good about prescribing it. And so it -- and so I think it's important, as you consider the new devices that are coming to market, they have to also establish that trust. There's clearly going to be early adopters that might look as -- that new technology. But in order to get the entire and general population using a system, it just takes time. And I think we've got momentum behind us now. And we see that runway going into 2021. When you look at the marketplace, I think some of the dates are still a little uncertain to -- as to when our competitors are bringing market devices to market. But in one case, there's a durable system that is a tube system that's coming to market, we believe, probably in the midyear time frame. And we view that as having an incremental improvement to the algorithm that's on the system. But it still has the same pump and the same sensor technology that exists on the device today. And I think that when you look at the sensor technology, it's been problematic and a source of some of the issues that people experience with that system. So we think that Control-IQ on the t:slim X2 will do quite well against that device when it's on the market. We don't really -- I think there's going to be noise when it comes to market and some turbulence, as you would expect, but I think when it's all said and done, the Control-IQ system will compete very effectively against it. The next device is a patch system that's coming to market roughly in the same time frame. And I think, today, when you look at the patch system, as I -- when someone actually selects a pump, the next decision they make is to choose a tubed or a tubeless pump. The majority of people choose a tubed pump. And in that situation, we compete with one other manufacturer. The others go to the patch system. And so today, what we see, we see very little switching, competitive switching, between Tandem and this patch pump. So we expect that when they bring a device to market that has a sensor and an algorithm, Control-IQ will continue to compete very effectively against that. I think that, in the latter part of next year, when we bring t:sport to market, that dynamic is going to change a bit because the t:sport has the same form factor as the patch pump that's on the market. And it also is going to be controlled entirely by a mobile system -- a mobile phone. So we think that the form factor and the mobile phone will be appealing, and it's likely to change that competitive dynamic a bit. So -- but we still feel very confident that Control-IQ and t:sport are going to be very solid products next year. When you look at the end of the year, we expect that there's going to be again, a durable -- a new durable system, a new patch system. And then Tandem will have a portfolio of products. We will have the t:slim X2, which has a user interface, and you can interact directly with the pump. And we'll also have a smaller form factor that will be controlled entirely by a mobile app. So at the end of the year, we will have 2 of the 4 products that are available. And again, I think we feel very confident that our devices will be very compelling and continue to show us the growth that we've experienced in the past several years.

That's wonderful. I'm showing no more questions, but any other closing comments, Leigh and John, before we wrap up?

No, I think that we feel we've had a great year. The company has navigated the pandemic very effectively. Control-IQ has really been very strong, and we expect to have a strong finish to the year. We look forward to strong growth in 2021. As I said, I think that our pipeline is underappreciated. We think it's very compelling, the most exciting pipeline in the marketplace. And so we think that's going to take us into 2021 and '22 and continue to sponsor our growth. So Dylan, thank you very much for having us today. It's been a great conference, like I said, and we look forward to continuing to work with you in the future.

Likewise, and an honor to host you guys. And thank you so much for what you do as a business and, obviously, the patient community you serve.

Thank you.

Thanks, Dylan.

Thanks, everyone.