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

All right. Good morning, everyone. I'm Chris Lin, one of the Cowen's healthcare analysts. It is my pleasure to welcome Tandem Diabetes Care to our conference. From the company, we have John Sheridan, who is President and CEO; and Leigh Vosseller, who is CFO. I believe John has a few minutes of prepared remarks before we jump into the Q&A session. So with that, why don't I just hand it over to John.

Thanks, Chris. It's great to be here today. I guess, I'd just like to start off by kind of just recapping some of the comments we made in our call this past week. We had a fantastic 2020. We eclipsed -- almost eclipsed $0.5 billion in sales. We had over 200,000 people using our pump worldwide, which is -- it's almost halfway there to what we said we would accomplish in the next 3 to 5 years. So we're very excited about that. We obviously got the UNC deal midyear, which was definitely very beneficial to us. And we, I think, most importantly, released our world-leading Control-IQ technology at the beginning of the year. And I think that was meaningful because we saw a substantial uptake throughout the year. It really drove our business throughout the entire year. And we're very excited to see the benefits it brings to people who are using it, but it's also very exciting to see just how much the health care and the physicians really trust and have confidence in the system. This year, we have over 100,000 people now using it, and that's because we have the Tandem Device Updater. And the majority of the people who have our pumps today have pumps that are updatable. So in 2 or 3 months, we've actually had 50,000 people. And at the end of the year, we have over 100,000 people worldwide using Control-IQ. And I think the benefit of that is that there are so many people now using it. There are so many physicians actually seeing the results. As I said, the confidence is extremely high in the product. And I think that we are leaving 2020 with great momentum as we carry that into 2021. And we're very excited about our prospects for 2021. The things that made us successful in 2020 will also be there in 2021. We have leading technology, which we're very excited about. The -- when you look at the competitive conversions that we saw, we anticipate continuing to see competitive conversions. We also expect to see -- sorry, acceleration in the MDI conversion rate as well. And I think more importantly, we have this giant bolus of renewable opportunities coming up in a 2022, which I think is meaningful. 2021 is going to be relatively flat in terms of our revenues back in that time frame. But when you look at 2018 and '19, we started to see meaningful jumps in revenue. And I think that's going to be reflected in the available renewals. And then finally, we have this OUS opportunity. It's less penetrated. And the factors that have made us successful in the states exist OUS as well. And as we've talked about, we're rolling out Control-IQ there now as well. So we think that COVID has clearly been an impact. It's impacted our performance in 2020. We're still a little cloudy here as we enter 2021. We are optimistic that the world will get through this here shortly and that before you know it, we'll be back on track and we'll expect to see the continued momentum that drove our success in the past.

Great.

With that, Chris, I'll let you start asking some questions.

Great. Thanks, John. I do want to dig in on some of the key points you made in your prepared remarks. But before I go there, I just want to review 2020 once more. I mean, you recently reported Q4 results that were much better than expected, even if you exclude the favorable Germany dynamic. Maybe can you just walk us through what were some of the key components of the upside relative to your internal expectations in Q4? And how do you think about the sustainability of those components in 2021?

Yes. So I'll take that. I'll point to Control-IQ and the momentum that we've seen. I mean, that's really been the star of the show for all of 2020, and it's the foundation for our enthusiasm for next year. We think it will help us to effectively compete against the other products in the market, and we'll continue to drive momentum as more and more people experience the benefits of it. So that's what we attribute a lot of the Q4 benefit to and expect it to continue.

Great. Actually, I want to build off that question just a little bit here. So in terms of 2021 guidance, I mean, I think Tandem has always been prudently conservative with setting guidance, especially at the beginning of the year. Could you just help us think about the philosophy behind 2021 guidance? What are some key factors that could lead you to hit the high end of the guidance range? And just -- really just on the points you just made. I think MDI conversions, at least what's embedded in guidance, you're assuming that's similar to 2020. For us, that seems a bit conservative just given the market acceleration we have seen over the past few years. So maybe could you just comment on the potential for MDI conversions to drive some upside here?

Sure. I'll start with -- I'm glad you mentioned our philosophy. It hasn't changed this year. We factor in things where we feel like we have a good line of sight into them or have better control, and Control-IQ is a great example in the U.S. with the momentum that we've seen. UnitedHealthcare is another opportunity for us, where, before, we didn't have full access, and it was running about 4% to 5% of shipments. But across the back half of the year, it jumped to 10%. So we expect that to continue as well. And then we're cautious on the other side about, again, the factors we don't have control over. #1 is COVID. You probably don't -- you hear that word too many kinds these days. But we're not yet at this point predicting or making any assumptions that it goes away, even though there's optimism in the world that maybe vaccines will be out there. Right now, we're assuming that it continues across the year. The other element that we're always cautious about is what happens when new products come to market. That means our own products or competitor products. It's very common ahead of product launches, particularly from that time where FDA approval occurs to when the products actually hit the market that there can be a pausing or disruption as people stop to evaluate, wow, what's this new thing? And should I consider it when I'm making my decision today. So that's part of what we factored into this year as a potential headwind as there's lots of talk about new products coming out, including mobile bolus, which we expect to launch in the first half of the year. And so those are some of the overriding factors in the guidance. You asked specifically about the MDI conversions, competitor conversions, renewals. We expect all of those to have some level of improvement over the year. From MDIs, we've seen such a significant acceleration in the last 2 years of the number of people coming to market. We're not making the leap to say it's going to be another significant jump, although I think there's a lot of signs pointing to the fact that there could be better opportunity coming from the MDI community this year. So right now, we're assuming at least as good as last year. We expect that we'll continue to make inroads on the competitive conversions. And we've been showing success on our renewal wins in the past year, particularly, we improved our cumulative rate from 50% to 55%. And that's a good starting point as we continue to migrate more towards our long-term goal of a 70% renewal rate. So it's another great year for us where we feel like we have a lot of factors in our favor. We're just being thoughtful about some of the pressures and other dynamics we might see in the market this year.

Got it. I actually want to dig in just a little bit more on the topic of competition here. I mean, I think 2020 was a relatively clean slate for competition. But this year, you do have Medtronic potentially launching. You also have Omnipod 5 potentially launching. So how do you think about building in -- factoring the competitive dynamics into your 2021 guidance? Do you think there's maybe a little bit more incrementally conservatism built in just because of more launches this year than last year?

Prospectively, definitely took that into consideration. And that's back to that -- it's not a fear of our ability to compete or to win against the products. It's just really about what you see -- you tend to see in the market. We saw pausing in advance of our Control-IQ launch in 2019 when people were anticipating approval, and they were waiting for it to come. And so it's that kind of pressure that we're anticipating could occur. It's not necessarily a long-term headwind. It's just a temporary disruption, if you want to call it that.

Got it. Maybe we'll move on to t:sport here. I mean, this is one of the more exciting product launches for Tandem, and I think in the space -- for the space in general. But recently, you announced that t:sport filing has been delayed a quarter from Q4 -- to Q4 of 2021 in order to make some changes identified during human factor testing. I believe this is the case, but could you just confirm that these changes are related to user interface and not to the algorithm? And also just rereading the transcript, I think you called out one of the plan changes as particularly challenging. Could you just elaborate on that?

You're exactly right. It's just user interface changes. When -- Tandem, from the very beginning, has really been focused on developing simple, intuitive and easy-to-use products. It's really our brand and it's our design principle. So what's happened is in the December time frame, we went back and actually looked at the results from the accumulation of quite a few human factor studies. And we felt that the results were good, but they weren't excellent. And I think that -- an example would be if you're in a particular screen and you're trying to navigate to the next screen, we want it to be very, very intuitive so that you can figure it out without having to be trained or read a manual or anything like that. And we felt that there was -- we watch people when they're actually in the middle of human factor studies. We've basically videoed their fingers and watch exactly how they interact with the device. We videoed them themselves, and we see if there's any frustration or concerns as they're moving through it. And so it just did not beat the excellent standard that we set for ourselves. And so we basically said it's worth taking a few months to get this right. And I think that we recognize that this product is going to drive a great deal of value for Tandem over the long term. And we think getting it right is the most important thing, and a 3-month delay is not going to really be that significant. And so you're exactly right. It's just more user interface software adjustments for that. Clearly, the algorithm is working extremely well right now. We've got a great deal of evidence of that. And there's nothing architectural about the changes as well. So we've actually made most of them right now, are getting ready to actually initiate additional human factor studies. So it's just -- it's a bump in the road, but it's just what happens sometimes, and we're still very excited about this product. It's still our top priority from a development point of view. And we think it's going to be a very competitive product when it does get out in the market.

Got it. Maybe could you also just touch on how much visibility you have on a time line here? Obviously, we can't control FDA timing, but curious how much cushion you may have built in as it relates to additional human factor testing.

Well, I think we've -- I think that the FDA is -- clearly, right now, I think they're bogged up because many of the resources they've got that -- focused on diabetes have now been diverted towards COVID. I suspect that as more and more of the vaccines come forward, and it does look like there's momentum building and people are beginning to be vaccinated, that those people are going to gradually move back. So my expectation is by the end of the year, things normalize to a certain extent, and that's roughly when we're going to be making that submission.

Got it. Beyond just the filing delay, are there any changes to your commercialization strategy that you could share at this point?

No. I mean, we're basically going to follow the plans we had followed before. We benefit that this pump will be -- it will be an ACE pump, so there will be no clinical studies required. We could integrate it with the Control-IQ algorithm, the Dexcom sensor, and we can actually bring it to market as that with limited clinical studies. So the commercial plan for us really is, once it's available on the -- and we've got the testing and we're confident with the results, we're going to move aggressively to bring it to market.

Got it. And maybe just -- could you refresh us on the status of your sales and marketing and manufacturing infrastructure as it relates to the t:sport launch? In the past, I think you said you talked about pursuing an aggressive commercial launch strategy. I think that's still the case. But sales and marketing and manufacturing infrastructure, is that ready to go? Or do you still need to make some additional investments there?

Yes. I mean we're definitely developing all of the manufacturing processes right now. The automated equipment has been purchased, and it's in-house. We're making -- the engineering resources are on it. And we're in that -- we're on schedule and on plan in terms of getting the manufacturing capability and capacity up to speed, so that when we actually do launch, we can meet the demand that we anticipate. And then as far as the -- we have to actually have approval of the device before we can market it. But clearly, the marketing team is getting ready. They're working on their materials. And this is the programs that we plan to launch once the product is approved.

Okay. Great. Maybe just one more question here on t:sport. In the past, I believe you have acknowledged that t:sport's discretion competes more directly with patch pumps and possibly more in the type 2 space. How are you thinking about competition as it relates to patch pumps? I mean what may need to evolve in your sales and marketing infrastructure to better get after this opportunity?

Yes. I mean, I think today it's -- we pretty much operate in different swim lanes. That's tubules, and I think that the tube market is clearly Tandem and Medtronic. And then obviously, Insulet is the only patch pump on the market today. It has meaningful market share. So we don't see a whole lot of people go back and forth between Tandem and Insulet or vice versa. And I think that that's -- it's a very different product than t:slim is today. But when t:sport comes to market, it's roughly the same form factor as the patch. It's still a tubed device. But our market research suggests that people like the flexibility and the wearability of a tube device. They can move it around in their body. They can wear it on a lanyard. They can put it in their pockets. And they can detach whenever they want to. And those benefits are something that are appealing to people. So we think that when the form factor is roughly the same size, there are people who select the pump because of the size. And so it will be interesting to see, but we think that there'll probably be more -- it will change the competitive dynamic from what it is today, which is -- it's clearly a tubeless situation. And I think when the device has the same form factor, and it has the added benefit of the discretion that comes from the mobile app, we think it will be appealing to a lot more people in the MDI segment, which is where Insulet gets most of their business today.

Got it. Maybe we can move on to another key source of revenue growth. Your cumulative renewal rate has increased to 55% at the end of 2020. As you alluded to, this is going to be a more important and a larger source of revenue for you in 2021 and -- especially beyond just because of the strong shipments you've had over the past few years. Now what are some of the key initiatives you have underway or plan to ensure renewal rates stay strong, especially as your competitors launch new products over the next several years here?

Yes. I'll start with -- first of all, we've made investments in just the team. So we've expanded the size of the team to get broader reach, and we've improved some of the tools that they use internally in order to reach out to customers. For a patient in order to get access to the latest and greatest technology, they need to be in warranty with their device, so they can get the free software updates. Once they go out of warranty, then they'll need to purchase our next pump. And that's why it's kind of important for us to continue to innovate rapidly to offer new advancements in the software and hardware platforms in any way, shape and form, so that a patient will be motivated to move forward with their next pump purchase. We've already demonstrated great progress this past year with some of the investments we've made in the team itself. And we expect that to continue as we continue to create more enhanced and robust offerings for the whole community.

Got it. Based on some bar checks and certainly based on your commentary, there seems to be a significant amount of pent-up demand for the mobile bolus feature. I was curious to get your thoughts on how this could impact the renewal rate in 2021, given that you're offering this for free to in warranty customers? I mean, could this actually improve the renewal rate in this year?

I mean I would say that all the features we add are intended to improve the renewal rate and to pull more people into the Tandem brand. That's why the update is so important is because the people who are using the pump today have immediate access to new technologies. And we -- I mean, we think that we've demonstrated now 4 or 5x the ease of use that comes along with just updating your pump. And people now, I think -- as I just said, we have 100,000 people, most of which came from using the updater to get Control-IQ onto their pumps. So I think that it will be available in the first half. We think a significant portion -- I mean, we have 80,000 people today who are using the existing mobile app, which is basically just a secondary display that automatically uploads data to the cloud. So we think this is going to be a big driver. It's going to -- again, it's going to improve discretion for people who are living with diabetes, which is hugely important. And I think that -- I think it's going to be just another step that we take to reduce the burden of diabetes to improve convenience and discretion. And I think that's going to drive meaningful interest. So I think that clearly -- MDI conversions, clearly, people who will -- who are currently using the Tandem pump, it just retains them into the Tandem family as we go forward.

Okay. Maybe just one more sort of related to renewals. I think the UNH mix was about 10% exiting Q4, so a bit better than what you had originally expected. What is the strategy to go after this opportunity? And how important it really is increasing physician and patient awareness that, hey, now you're back with UNH? And maybe can you just talk about where does that stand today?

Sure. The way I usually describe it is on July 1, our sales reps reach out to every physician they have talked to ever to let them know that we now have access again. And so I think that was the first most important step was for the physicians to be aware because there were times when physicians would make their decision on what to prescribe simply based on that. And it may have had repercussions across even other insurances within their practice. So it's just simpler to focus on somewhere where they have full access. And so we feel like the community has broad awareness. From the patient perspective, at that time, we reached out to everyone who had ever declined moving forward with the pump purchase because they had an insurance restriction. And that's why we saw a bit of a surge in the renewals and shipments in the third quarter as people realized they had open access again and decided to move forward with a pump purchase. Now where we -- do we expect it to go? We expect ultimately that UnitedHealthcare will settle in at about 15% of pump shipments, much in line with their overall market share. But that will take some time to get there simply because so many people are in a 4-year warranty cycle. We'll have to wait for them to come up for renewal over the next few years before we can, I would say, reach full potential. But for now, we have access to everyone who is in the MDI population on United and the people who've already started having warranties expire.

Great. Maybe we could transition over to Control-IQ here. So clearly, it has been a very successful product, lots of momentum for Control-IQ. I think you did mention this earlier in the prepared remarks, but could you just refresh us where is patient and physician awareness on this product? And how many patients do you have on Control-IQ today?

Yes. As I mentioned, we have over 100,000 people using Control-IQ today. I think the majority of the people who could update using the device updater have and most of the starts we have today -- I'd say the lion's share of new starts are all on Control-IQ. So I think that what's happened is that I think most of the physicians in -- most endocrinologists today are familiar with Control-IQ and have prescribed it. We said -- over the last 3 years, we've seen an 80% increase in the number of physicians that are prescribing Tandem products. And today, it's clearly Control-IQ. And I think the really important point though is that it takes time to get data. If you gradually rollout a product over time, before you get that momentum and the experience with the health care providers, it just takes months, could take years. With us, it took a year. And again, we have 100,000 people. So they have -- they see how it works on multiple patients, and they're very confident in the results it does deliver, and their patients love it as well. So it's been a win for us, and I think it's going to continue to drive momentum through to 2021 and beyond. And I think that when we get it onto t:sport, that's going to be meaningful. And as I've mentioned in the past, we don't intend to stop. I mean we have Control-IQ in the market today. We intend to make incremental improvements to it over time. And we think those improvements are going to improve the therapeutic value of the device, but it's also going to reduce the burden and just make it easier to use and interact with. So we are excited about that, and we're going to continue to innovate as we have in the past.

Okay. I think you're expecting to launch Control-IQ fully in all the existing markets by the middle of 2021. How do you think Control-IQ impacts the growth rate internationally? And maybe just a nearer-term question specific to 2021. But just given the demand that we've seen for Control-IQ since launch in the United States, should we maybe perhaps expect international revenue growth to be a bit more weighted to the second half of this year?

You're right. Our plans are to launch Control-IQ in all the countries we exist in OUS today by the middle of this year. So we're excited about that. And I think that these markets are underpenetrated even compared to the U.S. It's more like 10% to 20% of the people who have type 1 are using pumps. So I think that the response that we've seen so far has been exactly the same as we've seen in the U.S. It's just been amazing. People are excited about it, and they see the results there -- they're getting in there. I think it's going to -- I personally believe it's going to drive higher growth rates OUS than in the U.S., and that's what we expect to see.

Okay. Maybe I could just move on to a question on competition here. I think you touched on this a little bit earlier in your prepared remarks or in our conversation, but I'm curious if you think -- if you're seeing any pause in adoption of pumps as patients are perhaps waiting to assess a broader array of automated insulin delivery options available in 2021. We talked about Medtronic potentially launching, Insulet possibly launching. So do you think there could potentially be a pause here as patients assess the options?

Do you want to get that one?

Sure. I would say that we haven't seen any pause at this point, but we have factored in, at least to our guidance, that there will likely be pausing around the timing of those launches. And so it's something that we factored in. Just I can't underscore enough, it's not a matter of us having a fear of not being able to compete. It's just this natural disruption that you see in the market when these things happen.

Got it. Maybe we'll move to some product pipeline questions here. John, I think in the past, you may have mentioned that integration with Abbott CGM is probably a 2022 product. I mean is that still the right way to think about the time line? And can you refresh us on what's needed to integrate with Libre?

Yes. That's exactly right. We want to get this on the market as soon as possible in 2022. We've been working with them now for -- on a technical level, I'd say we've been working with them closely for over a quarter. The first few months of the relationship we just get together, get to know each other and really begin to plan out the product development initiatives. But we're now into deep development, and the teams are working well together. It's a great collaboration. The -- sort of the work that Tandem is doing directly with Abbott right now is really integrating their sensor into our system and figuring that out and making sure that it's a great experience for the people using that system. And then, of course, Abbott is working on their own initiative to address the vitamin C issue that they've got with the Libre 2. So we -- that's going on in parallel. And our expectation is they'll be complete roughly at the same time. And once that's done, we want this product to be introduced as an automated insulin delivery system. So we do not -- we want the Abbott to solve the issue, and we have confidence that they will and they do as well. They've definitely explained to us they understand the issue, and they're working aggressively to take care of it. So we think it's going to be a great product, and it's going to provide access to people who use their sensor worldwide.

Got. It. Maybe that's a good segue to the next question here in terms of your type 2 initiatives. It sounds like based on some of your recent commentary, you are working to develop a dedicated solution with a new form factor for the type 2 community. Could you maybe just elaborate a bit more on that? And what should we expect in terms of time lines?

Yes. We definitely -- we've talked a lot about this over the last couple of quarters, and we are definitely in a position today when -- we're moving forward with a multi-point strategy. And the strategy really involves the clinical work, the device work, market access. All of those are elements of the strategy. And I think that initially, our plans are to take advantage of the products that we have today and explore how the type 2 community responds to those products and learn from that, so we can actually continue to look at a more parallel activity, which would be to develop specific products for the type 2 community. So right now, the first step that we're going to take is we're going to work with the FDA to get an indication for type 2 for Control-IQ. Today, it's -- basically, it's a type 1 product. And we think that -- we already know because there are people who are off-label that are type 2 using it, and they're seeing great results, just like everybody else is. So we want to make -- that's really the first step. And of course, when t:sport comes to market, we think that the size and discretion that comes along with the mobile app will also drive quite a bit of interest. So that will be the first -- the next year or 2, we're going to be looking at, let's take advantage of the existing products and see how we can get more -- how we can be more effective at penetrating the type 2 community. It's complicated. It's not like type 1. It's not nearly as homogeneous. And then in parallel, work on separate devices, which I'd say they're out -- it's probably 3 years plus out in time from where we are today.

Got it. Maybe if we could just move on to a few more growth drivers in the few minutes we have left here. Just starting with international. I think you're in 20 countries around the world today. How many regions do you expect to launch in 2021? And are there any countries you expect to enter that could be more needle-moving from a revenue perspective, whether it's in 2021 or next few years?

Right. So we did end the year in around 20 countries. We expect to add about a handful more across 2021. They aren't to the same magnitude of what we did in 2020, where we basically doubled our opportunity. So when you put it all together, we're in markets with over 4 million people with type 1 and back to -- of which about 400,000 use pumps today. So as John was saying earlier, it's a great growth opportunity as we think about the potential to move more people from that MDI population to pump therapy just based on the advanced technologies that we're going to be offering.

Okay. Maybe moving to the longer-term growth targets. I think you exited 2020 just at about 40% of your 500,000 patient target in 2024. How do you expect to get to your 500,000 patients in terms of the mix? I mean, the pump market has clearly been growing -- accelerating over the past few years with MDI users converting. You're also launching t:sports, which could open up some new market segments for you. And you continue to do very well competitively. So with that in mind, can you just talk about what's assumed in the 500,000 target here in terms of patient mix?

I mean, I think you hit the nail on the head. I mean, we're going to continue to focus on the 4 things that have made us successful up until this point. I think it's all based around having the best technology in the marketplace. So we're going to continue to invest in R&D. We're going to continue to advance the functionality and the performance of our system, so that it continues to draw people to Tandem. But assuming that that's the case, we believe that we'll continue to take significant share in competitive conversions. As Leigh spoke about the MDI conversions are accelerating, and we think the technology that's on the market beyond Tandem's, it's the CGM, it's our competitors. Everybody is making big strides today to improve the overall experience that people who have diabetes have, and I think the outcomes are substantially better than they have today when they're using pens and needles. So we think that MDI conversions is going to be a continued benefit for all of us who are participating and competing in this market. I think that the other -- as we've talked about, our growth rate accelerated through '18, '19 and '20. And we're going to see the benefit of that in our renewal stream here beginning this year -- end of this year and into next, which is very important. And then finally, those same factors exist OUS. And so I think there's big markets in OUS that are underpenetrated. So I think that all 4 of those combined really do enable us to get to that number. And we have confidence in that number. And as you know, we're talking about type 2 right now. Type 2 is probably not going to be a significant driver, but I think when we're looking at the 2024 time frame, we'll start to see some revenue streams from that business as well.

Got it. We're just about out of time, but maybe -- and maybe one last question here on margins. Could you refresh us on the gross margin initiatives? You have a clear line of sight to 55% in 2021. Now how do you get to 60%? I mean, in the past, you've talked about reimbursement initiatives, manufacturing and leverage. Are these still the right factors? And maybe could you just quickly touch on what you're expecting for contributions from each of those?

Sure. So I'll start with -- to your point, you've already named a couple of them. It's in 3 broad buckets. It would be reimbursement initiatives, and that's to get further depth in our relationships with insurance payers and to focus on enhanced reimbursement that gives value to what we offer in our algorithms with better clinical outcomes. It's leverage. So we've expanded our capacity. And so as we continue to grow volumes, we will reduce that fixed overhead cost per unit. Part of that included expanding with a third-party manufacturer to be a part of the process where we expect to get cost benefits as well. And then the other piece is design of new products. t:sport is a great first example of the design of that pump with the cartridge to and have cost efficiencies related to t:slim X2. And every time we innovate new products, platforms, software, we're looking for ways to optimize the cost structure, so that we can have gross margins that achieve 60% or better in the long term.

Great. So with that, I think we are just about out of time. So thanks so much, John. Thanks so much, Leigh, for joining us today. And thanks for everyone joining us on the line.

Thanks, Chris.

Thank you, Chris. Great talking to you.