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

Good afternoon, everybody. I am Travis Steed, medical device analyst at Barclays. And up next this afternoon, we're pleased to have Tandem Diabetes. John Sheridan, President and CEO; Leigh Vosseller, Executive Vice President and CFO; and Susan Morrison, is also joining us as well, Executive Vice President, Chief Administrative Officer and Head of Investor Relations. So welcome. I'm glad you could join us today virtually. Hopefully next year, we'll be in person in Miami. So just wanted to start out some of the long term, you're one of the few companies that really had long-term guidance and kept long-term guidance through COVID. You've talked about 500,000 patients in 2024. And just trying to think about, how do you feel about that number today? And do you think more of that's going to come from the U.S. now that some of the international markets are potentially a bit more challenged with COVID? And John, I think you're still on mute.

How about that?

Sure. I can hear you.

Okay. Yes. It's 500,000 in patients by 2024. Gross margin is in excess of 60% and operating margins at 25%. So yes, I mean, clearly, there's been temporary headwinds with COVID this past year. But I think that there's -- we feel very confident with the growth that we need to achieve to get to the 500,000 patients. If you look at this past year alone, we added 90,000 and we currently have over 200,000 people currently using our technology. So when you look at it, both the U.S. and the OUS markets are largely underpenetrated. And we think we can benefit from that. We think that we'll continue to see competitive conversions. Our renewal stream is increasingly important and our revenue actually go out in time. This year, it's roughly 15,000, but next year, it's on the order of 30,000 plus, and then it continues to grow from there. And we continue to innovate. Innovation is something that we think drives adoption, and that's been a very important part. We're very excited about our mobile bolus feature, which is going to come to market. Here in the first half, interestingly enough, in the last few days, we just received some questions from the FDA, which we think is a very good sign, since it's indicated that they're actually looking at it. Still hard to say when we get approval, but we expect that we're going to plan to be prepared to release the product in the first half of the year.

Any sense for U.S. versus OUS on the long-term plan? Or is it still TBD?

I mean I think there's a great deal of opportunity OUS. I mean, we -- in the markets we're in today, there's roughly 4 million people with type 1, 400,000 are using pumps. And so we think there's a great underpenetrated market and so we're going to continue to take advantage of that as we move forward. It's difficult to say which one is going to drive the growth to get to the numbers in 2024. But both markets are huge opportunities for us. And we think we're going to really start to take advantage of the OUS markets now that Control-IQ is beginning to roll out there.

One of the things I've struggled with is, let's say you -- when you do like in the 100,000 patients, it's about $2 billion in revenue. And what's the growth profile of Tandem from there? Is it more of a recurring business renewal business, still get some growth, obviously. But fewer new patients to go after? Or do you think you can be still growing double digits, 20% plus, even longer term beyond $2 billion. Any thoughts on like how you see the business longer term?

Well, I mean, clearly, we have innovated faster than our competitors, and that's really how we've got to where we are today. So we intend to continue to innovate and we think that's going to drive adoption. So -- but you're right, I think that the recurring revenue becomes a larger part, so does the renewal base. But we're very confident about continuing to see aggressive growth, and that's what we're going to focus our investments on. We continue to develop technology that drives adoption. And so we're confident in those goals and going forward beyond that.

And one of the questions I get from investors on the line is CGM pricing has been cut in half or more, and pump pricing has been fairly steady. And so what's going to keep pump pricing steady over the long term? It would not have another competitor come in and lower price there. Just keep your comfort level around keeping pricing steady over the long term here.

Sure. You mentioned CGM first. I think one thing about that is that there's been some channel shift there, and I'm not sure how much that's contributed to the price changes. We have seen incredible stability on the pump side. So one of our major initiatives is to continue to accumulate all this information that we're getting from patients who are using Control-IQ in particular and to build that health economic story and to share that with the payers and show them the real value that they're getting from the patients and their base using it and really seek to get increased reimbursement. But at a minimum to preserve the pricing that we've been fortunate to have for so long.

Okay. And maybe Leigh, while we have you here, just to think about the numbers for 2021. I was looking back, it looks like last year, just under 60,000 new patients in the U.S., just about under 30,000 for each MDI and 30,000 from competitive accounts. And when you think about what you're assuming in 2021, it looks like you're about 60,000, 70,000 patients, 35,000 -- roughly 30,000, 35,000 for MDI, 30,000, 35,000 for competitive accounts. Is that the way to think about the 2021 U.S. new patients?

I think that's a pretty fair way to approach it. One thing I'll point out is of those 3 different areas for growth opportunity. John, you may be on mute. Thank you. That we do expect that we'll improve in all of them. So whether it's from the MDI population from conversions from competitive wins as well as in renewals. There's opportunity for all 3 as we look forward. And so it's going to be another exciting year for us because really the things that made us successful in the past still continue to be growth drivers.

And I was looking, like last year, U.S. new patients grew roughly 28%. I think it's the math that I had. And then you're assuming kind of more high single-digit growth in 2021 for the guidance in terms of new U.S. patients. And so is the difference between what you did last year and this year, roughly 10,000 to 12,000 patients. Is that kind of what you would assume for competitive pressures or potentially some slower growth from COVID? I'm just trying to think about how you think about the guidance for 2021 and what you've built in for some of the competitive pressures?

Sure. I'll just go with all the factors. The tailwinds first, which is Control-IQ continuing to drive momentum in the U.S. like we've seen for the past year. And really, as John said, it's just now rolling out on a scale basis outside the U.S. as well. And we filed a good result in Germany, in particular in the fourth quarter. So those commercial launches that we were trying to be successful with last year, but it was difficult in the COVID environment are really going to come to fruition in 2021. And we have a bit of a tailwind from United as well in the U.S. But to the -- to your question on the headwind side, we factor in a couple of things. One really is that COVID will remain across the year. And it's not that we aren't optimistic that there won't be some change in the world, and there could be upside to that. But for now, we're reluctant to predict when or how much really comes from that. And then the other element of it is just considering the fact that there might be noise this year in the market with a number of conversations about competitive launches and doubt that we don't feel the ability to successfully compete in this environment. It's just that we tend to see positive in people's purchasing timing ahead of any launch. And so once the FDA approval comes and then once it gets in, then that time to get in people's hands, can cause some disruption. So we're being cautious about that this year.

Do you think the pause would come more after they get the FDA approval? Because at this point, I would think that some patients may wait before approval as well. And I think most patients, I would guess they have heard of Omnipod 5 and heard of 780G at this point. But you had a really strong Q4, which didn't seem like there was any competitive pressure in that Q4 number. So just trying to think about when that competitive pressure would show up that would show up.

Yes. It does usually start more around FDA approval time because that's actually the first time that a company can market to their product to their customer base, whether it's the physicians or the patients, there are -- there is a population of people who are very highly connected and they know about what's coming well in advance. But I would say the majority of people aren't watching things that closely. And so it's when the noise comes around the approval happens, the company starts doing their marketing and really until the product gets out in people's hands that's when people can really touch and feel and understand what it is that's available to them.

Okay. Makes sense. And then you did also mention UnitedHealthcare. And I was trying to do the math. I think you said 4% to 5% of shipments before the reimbursement coverage and going up to 10%. So that's about 2,500 patients in the second half that it added is the way to think about next year, you'll have 2,500 patients probably in Q1, Q2 and then kind of heads in the base at that point. So it's incrementally going to add probably fewer patients in the second half?

That's reasonable. I think just to start with, our expectation that we factored into this year is that it would continue to be about 10% of shipments, and it does have that seasonality impact to it. But I think one important point is the additional tailwind from it with United representing roughly 15% of the U.S. market share, we anticipate it will grow to that level over time, which adds incremental business for us since we didn't have access before. And the reason is, from day 1, we can easily go out and market and convert people over from MDI, we can easily move our own renewal patients over, but there's a fair amount of people who were on pumps already that are still within their warranty cycle. So over the coming years, we expect to tick up closer to that 15% number.

Okay. That makes sense. And when you think about renewals, John, I think earlier, you mentioned a 30,000-plus renewal number. I think '20 -- you basically were 12,500, 16,000 maybe in 2021 is what I have in my model, where you saying it could probably be closer to the 30,000 renewals in 2021?

So the way to think about the renewal number is, it's the number of new opportunities that will come to the table. And I'll start with by the end of 2020, there were about 50,000 people in our base whose warranties have expired. And we've renewed roughly 55% of them. That was actually a demonstration of great progress because the year before with the available opportunities, we had only renewed about 50% of them. So absolutely trending in the right direction towards our goal of 70%. When we go to 2021, we're adding about 15,000 new opportunities, and that's roughly in line with what we added in 2020. If you look back to that period in our business, we were pretty much flat year-over-year. So that steep acceleration doesn't really start until 2022, and that's when we expect things to really take off. And as John mentioned, renewals will become a much more significant part of our business, which is great because they're the people that are most familiar with us and they're the easier to attract and retain for the long term.

Okay. Yes. When I go back to you look at your shipments, 2018, 2019, 2020, you had a huge acceleration. When you think about 2019, you had 45,000 new patients, 2022, where you're going, you could potentially have renewing 40,000 to 50,000 patients a year. Is that the way to think about it, longer term, 2023, 2024, could be 40,000 to 50,000 patients, which is almost what you're doing in new patients today.

Yes. I think I'll start by saying the opportunity might be even bigger than what you just framed up. If you think about it in 2018 worldwide, we shipped 34,000 pumps. In 2019 worldwide, we shipped over 70,000 pumps. And so all of those people will come up for renewal opportunity. The one thing I always caution people, though, to think about is when you model, although it's a 4-year warranty cycle, what we tended to see is that it averages to be more of a 5-year renewal cycle. So you have to think about that time lag as it to be factored in as you think about the future. But I'm not uncomfortable with the way you're looking at it and the thoughts of that, how big it could be as a percent of the business.

Okay. Great. And then OUS will start probably in 2 to 3 years, adding renewals at that point?

Our first shipments were in 2018. So 2022 is our first chance to renew OUS, yes.

Okay. And then the other thing I want to touch on is it makes a lot of sense, the attrition would probably tick down with Control-IQ, but I was playing with my model a bit. It really feels like I have to change my assumptions on attrition. Are you actually seeing material changes in the attrition rate at the company? Or is that just maybe a little too early to see at this point?

I think I'll start by saying we were very happy to not really see a noticeable change. So the answer really is we haven't seen much of a change because there was the great possibility that in this COVID environment it might impact people deciding to purchase. But we've still seen attrition be roughly stable and consistent with what we've seen in the past. So nothing of a material nature.

Okay. That's fair. And then if I look outside the United States, about [Technical Difficulty] And you -- 4 years ago, you were basically there in the U.S. and look at the ramp in the U.S. and kind of where you've gone from 45,000 patients to closer to 170,000 patients in 3 to 4 years. Is that the fair way to think about the OUS launch over the next 3 to 4 years?

Yes. I think when you look at our competitors and our partners, I mean, their growth rates OUS are higher than they are inside the U.S. So we think that the opportunity OUS is very similar to what it is here in terms of the factors that have made us successful competitive conversions. It's underpenetrated, and we have new technology. We clearly benefited from the Animas exit early on, but now we're seeing strong organic growth. And I think the technology is really driving the adoption. We're confident that Control-IQ is going to compete as effectively OUS as we're seeing it here in the States.

What do you think your market share could probably be outside the United States. There's clearly some more competitors. I don't know how real those competitors are. There are some smaller companies and maybe less companies with less share they're not in the United States. Just trying to think about the market and how competitive it is outside the U.S. Can you be a 10% share player longer term, 30%, 50% share player?

Leigh, you want to get that one?

Sure. I mean, I guess it's back to John's point about it's, first of all, competition wise, it's the same. So it's fair to assume that Medtronic is the majority of the pumpers that exist outside the U.S. today. And so when we think about share, we've been very effective in the U.S. at gaining share with the products that we've launched. And so I think that's really going to continue to drive us outside the U.S. as well. I really think about the markets there just being a little bit behind what we've seen here. So we'll have to -- I think there's a lot to do to help continue to build awareness about the benefits pump therapy can bring. So that will help drive not only penetration of the type 1 population, which is about 4 million in the markets we're in, but also helped with inroads into converting some of the people who are on competitor pumps today.

Have you seen much of a stress with...

Travis.

Yes.

I was just going to say, when you look at the OUS market, it's really the same competition as we have here in the States. There's a number of smaller players that really don't have significant share. It's really still -- it's Medtronic and Insulet, who we are competing against OUS as well.

Okay. Do you -- have you seen much of a change with Medtronic 780G launch outside the United States?

You know it's early. We really haven't heard much about it. I know they mentioned it on their call a few weeks ago, but we haven't seen much impact and haven't had really any conversations with our -- we haven't seen anything meaningful in terms of conversations with our distributors.

Okay. And then switching quickly to t:sport There was a delay that you announced this past quarter with the human factors testing. And I just wanted to think about like the timing that you have on t:sport at this point, when you expect that to hit the market? And just to make sure there is not going to be other delays, like how confident you are that we're not going to see another delay at this point?

Yes. Well, I think that the factors that affected the delay, there was COVID-related issues in the mid to the latter part of the year that affected us. And then as we began to look at the results of the human factor studies, we just saw some things that we felt we could do a better job in. Our real claim to fame as a company is just developing products that are simple, intuitive and easy to use. And so as we went through the data, we thought that there was these improvements we could make. And we felt it was worth taking a few months to make those changes. So the product is excellent, not good when it comes to market. So that's really why we did this. And there's nothing fundamental about the product. It's really software associated with the GUI interface. And so we're making the changes right now. We're going to be testing them and doing additional human factors. So our plans are to make the filing in the fourth quarter. There still is some uncertainty because of the FDA, which we just have to manage. But we're making plans to have the product to file in the fourth quarter. And then we'll just go through the process to introduce it when it's approved in 2022.

Are you going to have an upgrade program for your current customers that are on t:slim? Just trying to gauge the potential for maybe pausing your own business as patients kind of wait for t:sport?

We really haven't talked about the commercial strategy yet, but you would think that, that would be something that would make sense just because we do want to avoid any pausing.

Right. Okay. That's fair. And then type 2, there's -- you've been talking a bit more about the type 2 opportunity and a competitor and Insulet has made a lot of headway in type 2 already. So just trying to think about, first of all, what are the barriers that you've seen mostly in type 2 today? I would assume like a lot of that's probably reimbursement is the biggest issue, reason we don't have more type 2 patients today? And how do you change that? Do you need data? Do you need to change like going from of the payers and really convince them to pay for this pump?

Yes. I wouldn't say that reimbursement is the issue -- the primary issue. I think that there's actually -- there's some movement to reduce some of the testing that is considered today to be antiquated, remove that from the process of actually getting people with type 2 onto a pump. I think it's -- there's a lot of complex factors that are involved. I think there's -- the things that we're focused on today really are. We're looking at the clinical data. We've shown that Control-IQ actually makes a significant impact on people with type 2. So that's positive. But we think that there is a requirement to simplify the device to really make it something that operates. It's very simple and discrete, which we think are 2 important characteristics of the product. So we need to look at that carefully. And then there's access, like you said, there's market access. Most of the people that have type 2 are treated with by PCPs. And so we have to figure out how to get into that channel. So today, we've got Control-IQ. As I've mentioned, we're in -- we're going to get that approved for the type 2 community. And we have t:sport coming up. And we think in an immediate term, like measured in the next year or so. We think that we can actually start to focus more on the type 2 community with those 2 products. While in parallel, we look at developing something that's more discretely targeted towards the type 2, which is probably measured in several years in time before that would be on the market. But we definitely -- it's an opportunity for us. It's a complex market. It's not nearly as homogeneous as the type 1 community. And so we're just going to understand what those barriers are, and we're going to try and start knocking them down.

Okay. And then when you get Control or I guess you would get Control-IQ FDA-approved for type 2. And you can do that with your current data or you need...

We're certainly hoping so. Yes, we're hoping so that we can use the current -- because we do have -- we still have a number of people -- a large number of people who are using it who are type 2. So there's a significant amount of data that we've got. It's been over a longer period of time as well. So we hope that's the case. We need to talk to the FDA about it first. And once we do that, we'll figure that. If not, then we'll just have to do a clinical study, and we'll try to get that done as quickly as possible.

And so today, if you're a type 2 patient, a doctor can't write a script for your pump at all or can they write a script for your pump?

No, it's off-label.

Okay. And then to getting that -- so at that point, you would still need reimbursement, I would assume, once you -- the FDA has the approval for Control-IQ and on label, then you would have to go into payer by payer and get reimbursement for that?

It's not quite -- does not quite work along those lines. So it just depends on the payer. In many cases, we have approval for the product. And so whatever it's indicated for, we would be able to sell right away and to bill for it.

Okay. That makes sense. And there's perception out there that the type 2 is more amenable to the pharmacy channel. And your pump is a durable pump, so by definition, doesn't quite fit into the mold of the pharmacy channel. And I'm just trying to think about, is -- can you do type 2 and build up a big business in type 2 through the durable medical equipment channel? Or is there ways for you to get into the pharmacy channel?

Sure. Well, John mentioned earlier that one of the problems today with type 2 is that there's been a higher level of burden to prove that a person is eligible for a pump or to get medical necessity approved for type 2. And there's a large coalition that's working towards looking at the regulations, not just for pumps, but for everything across the board for type 2. And so we're part of that advocacy trying to make those changes. But aside from that, it doesn't really matter which channel you're in. It really comes down to if the physician thinks the therapy is right for the patient. They will recommend it. And if we remove some of those barriers, it can be approved through either channels. You don't have to be in pharmacy. To the point though that pharmacy has a perception of having the more streamlined benefits, let's say, we're really looking hard at what some of those perceived benefits are, and we're looking to see ways that we can replicate them through the DME channel because there's things like just how you handle the paperwork upfront. There's that -- from the patient perspective, it's how often do they actually interact with the insurance payer, it's really once every 4 years when they're buying the pumps. So what can we do to streamline that part of the process? We have -- for the supplies purchases, we already have an auto reorder program in place. So a person doesn't even have to worry about it. They just give us their prescriptions, and we can verify and approve benefits once every quarter and send them their supply. So there are a number of ways where we can optimize the DME channel to have a little bit of that look and feel and make it a little bit more streamlined.

And when you think about the co-pay for the actual pump comes out over 4 years, but it's still -- my understanding is still a pretty big number for some patients as they are paying 20% of the $4,000. And so versus like the pharmacy channel where that pump could be more as a pay as you go. And so is there ways that you could streamline your business model towards more pay as you go? I don't know if that's more like you could rent the pump or have more financing it. Clearly, it would be kind of disruptive for your business model for 1 year, but I don't know if that's something that you would think about doing more as a recurring revenue stream for the pump portion of it?

Sure. I'll start just by saying that pharmacy doesn't equate to pay as you go. So depending on if we found an avenue to fit our pump in that channel, it doesn't necessarily mean there wouldn't still be an upfront payment. So that's something that we would still evaluate. So -- but from the other perspective of what could we do? We already today offer payment plans for patients. So -- or that co-pay, on average, is roughly $800 upfront for a durable pump. We offer people the opportunity to spread that over 12 to 24 months, sometimes even longer. We try to be as flexible and accommodative as possible so that, that doesn't become the barrier for someone from moving forward with pump therapy.

Okay. That's great. But I think we have time for one more question. And so John, Leigh, love to get your guess on where you think pump penetration is going in type 1 and type 2 intensive over the next 5 years?

Well, we said, we have a goal of getting it to 50%. We think we can get there. We think that the technology that's coming to market, not just from Tandem, but from our CGM partners and other competitors in this market really is reducing the threshold that people have to overcome to use the pump. So I think they see the benefits. They see the outcomes that are happening, and we're reducing the burden of using that pump in their daily lives. So 50% is something we feel confident we can achieve. It doesn't necessarily mean that we're going to stop when we get there. I think we're going to continue to understand and analyze the things that are preventing people from using the technology and just start to -- just -- once we get to 50%, we'll already be thinking about the things we have to do to get to 70%. So I think that's with the type 1 community. Clearly, the type 2 is even less penetrated today, I think it's roughly 5% in the U.S., about 5% of the people who have insulin intensive type 2 are using pumps today. It's a lot more complicated, but I think that's a number, at a minimum, we could double, possibly quadruple, get it up to 20% over the next 4 years or so. So that's something we haven't actually stated specifically as a goal. And as we begin to formulate our type 2 strategy and come forward with additional products to the market, I think we'll discuss that more.

Okay. Great. Thanks a lot for joining us today, and I think we're out of time at this point. But we'll hope we see you soon in person. Thanks.

Absolutely. Great seeing you, Travis. Thanks very much.

Thanks, Travis.