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

Hi, everyone. This is Steve Lichtman, medical devices analyst at Oppenheimer. Welcome to the 31st Annual Oppenheimer Healthcare Conference. Very happy to have with us up next Tandem Diabetes Care. With us today is John Sheridan, President and CEO; and Leigh Vosseller, Executive Vice President and Chief Financial Officer. We will have a few slides up here upfront, and then we'll go into Q&A. If you do have a question, please key them in, and I'll get them right over to John and Leigh. With that, I'm going to turn the podium over to John.

Thanks, Steve. It's great to see you. And good morning, everybody. I'll just start off by saying that 2020 was a remarkable year for Tandem. We nearly eclipsed $500 million in sales. We launched Control-IQ, which is clearly the most advanced commercially available automated insulin delivery system. We have over 200,000 people using Tandem's technology. This year, we had the ad benefit of actually getting back into the plant. UnitedHealthcare, which was really a positive thing for us. And we strengthened our balance sheet at the beginning of the year, which has given us a lot more flexibility in terms of decisions that we make as we look forward to the future. I would say the big thing about 2020 really is the confidence that the physician community has in Control-IQ. They trust it, they see the effect on the patients that they take care of and the patients absolutely love it. We think that this is -- it's a huge momentum building situation for Tandem. And we see this momentum carrying us into 2021. And I think clearly, you saw our strong guidance. Our guidance is $600 million to $615 million this coming year with 20% to 23% growth. And we're excited about that. I'd say that the factors that have led us to be successful in the past couple of years really remain the same. I think we clearly benefit from Control-IQ. And as I mentioned, the momentum and the fact that so many people are using it and experiencing the very positive results. But the other factors are, which clearly, it's still even in the U.S. and underpenetrated market. It's even less penetrated OUS, and we've seen strength there. And hopefully, as COVID clears up here in the next few quarters, we'll begin to see the type of growth we expect OUS. I think that we're continuing to see competitive conversions. We remain confident in our technology, and we think that while there will be more competitive, the landscape will change this year. And next, we still feel confident that the innovations that we're driving are going to keep us in the lead. And they're meaningful -- meaningful innovations, I think, that are really going to benefit and continue to benefit the penetration rate of the diabetes community. And then I think lastly, the thing that's really important is the renewal stream. As you look back in 2017 and 2018, the number of pumps we shipped double. We went from 17,000 in '17 to 34,000 in '18. And again, in '18 to '19, we did something similar where we went from 34,000 to about 70,000. So the renewal stream becomes a very important part of our growth going forward and it's something that I think it's just important to know -- notice. So I think that we -- as I look into the coming year, we're scaling the business. Clearly, we've just announced we brought on Dr. Jordan Pinsker, who is a very highly regarded and renowned researcher and physician who's going to clearly help the clinical elements of the business. He's also going to participate and work closely with our R&D teams and also with our payer and managed care organization. So he is just a real superstar that we're really grateful to have join the team. And so we're looking forward to 2021 and beyond. We have confidence in where we're at. I think that we believe that we do things in a positively different approach. And I think that the one thing I'll say about Tandem is that while we recognize there's concerns about the competitive environment this year, the thing that we have done and the thing we can control is execution. Tandem has executed. We've executed as we said we would. And we plan to continue to do that in the future. And with that, Steve, I'll turn it over to you for some questions.

Great. Thanks, John, for setting the scene. So I wanted to talk a little bit about the pipeline first. We had it listed up there, of course. So the mobile bolus feature on t:slim, what does it do for patients? Talk about sort of the benefits of the mobile bolus beyond what t:slim obvious and then the updates on timing of getting that out?

Sure. Well, today, people who are using Control-IQ indicate that the only time they actually have to take their pumps out of their pockets or wherever they are storing it is to bolus for meals. Prior to Control-IQ, people would check their -- they would check the pumps periodically to see where their blood sugar was going just to make sure they understand -- understood how the pump was performing, how much insulin was being delivered. But since Control-IQ really takes over all of that activity, they trust it and they don't take it out. And so what control -- what the mobile bolus feature does for us is it provides the discretion of being able to provide that bolus on a mobile device. So people, they don't know you're providing -- giving yourself a bolus, you're interacting with your phone and people do that quite often these days. So there's the discretion. And there's also just a convenience that comes along with that. It's just easy to do. It's right there. I don't have to take my pump out. I can do it now on this mobile device. So we think that discretion and convenience really are big drivers. And while we don't expect the mobile bolus feature to drive revenue growth, but like Control-IQ did, we think it's definitely going to be a big positive benefit for us this year. We expect that the majority of people that have updatable pumps will want to have it. And so we're going to get a great deal of experience almost immediately after many, many people update the pumps and provide feedback to friends. So we also think it's likely to continue to help drive MDI conversions. We think that once people hear about this, they see the convenience and benefit of it, that they're going to talk to friends and others that they know. And so we expect that it's going to be a real positive for us when it comes to market. And from timing point of view, as I indicated a few weeks ago, we're interacting with the FDA, which I think is a real positive thing. We've gotten some questions from them, which we're responding to right now. And our plan is to have it commercially available in the first half of this year.

Okay. And then t:sport, of course, certainly, the smaller size stands out is a key upgrade versus t:slim. But can you talk more about what that could mean for the patient convenience and comfort? I mean where patients may be able to wear the pump and, et cetera, beyond just the obvious small size? What is it new for the patient?

It's, again, a big step forward in discretion because it is so small. And wearability is a very important factor for people who use -- who have diabetes. And we've done quite a bit of research in this. And I think that the flexibility of being able to move your pump, depending on what you're actually experiencing in life is very important to people. We anticipate that people may wear it on a lanyard around their neck. We have a -- we're developing an adhesive patch that you could put on your abdomen or other places and actually just wear it in that manner. And so I think that people can put at other places in their body as well because of its size. And there's just the -- there might be opportunities where you want to detach. Just a variety of different reasons. And with this system here, you can detach and then put it back on when you feel ready-to-use it again. So the flexibility that comes and the wearability that comes to the system is a big driver.

You talked on the last call about a little bit of a push in the timing of t:sport as you went through the human factors testing. Can you talk a little bit more about that what kind of works still needs to get done in order to submit to FDA?

Sure. Well, the interaction with a patient and our pump is hugely important to us. And from the very beginning, we've really focused on what we call user-centric design, where we go through iterative processes of looking how people interact with the system and then improving it so that it's just a very positive experience, very intuitive and easy to use. Those are really the primary design principles at Tandem and something that we feel very serious about. And we've done quite a bit of human factors testing in the third and fourth quarters, and we're continuing to do it today. And in December, we sat down and just looked at some of the results. And these are video taped interactions where you can watch somebody actually using their fingers to go through a script of instructions for the pump or you can watch their face and see is there any confusion or emotions that they're experiencing. And as we did that, the results were good, but they just weren't excellent. And so we feel, again, as I said, this is a primary design capability and principle of our devices that we want to have in place. And so we said, let's just take a few extra months and take care of these issues. Because we know that t:sport is going to drive long-term value for the business, and we want it to be right when it first comes to market. So what right now we're looking at a fourth quarter submission, we're actually in the process of addressing the software issues that we've identified. It's nothing fundamental to the pump. It's really just the user interface and the changes that are being made or to the user interface. And so it's what we have to do is we have to implement the changes in the software. We have to test it internally, and then we have to go back out and do additional human factor studies. And we're in the process of doing that right now.

Right. And before we continue on the revenue line, Leigh, I was wondering if I can bring you in here on the gross margin benefit of t:sport. How much of a contributor is that to your long-term goals? And what are the other initiatives we should be thinking about to expand gross margin over the next few years?

Sure. Thanks, Steve. I'll start with this year. Our guidance for gross margin is to be at about a 55% level. And our goal by the end of 2024 is to be at 60% or better. t:sport is one of the many drivers that will help get us there. For t:sport to have a significant impact, it will have to get to some level of scale in the organization. So that will be something more along the longer end of that range of time to get to that 60% goal. But that's one of our initiatives is every time we design and develop a new product now is to think about how to build in cost efficiencies as well as patient usability and wear. And so some of the other factors that are driving gross margin improvement would be our cartridge manufacturing expansion. Last year, we doubled our cartridge capacity and incorporated a third-party manufacturer in that. And so that should start to yield cost benefits this year and on the go forward. And we'll always continue to evaluate our processes and look for ways just through lean initiatives to pull cost out of the system, improve cycle times, improve throughput and those sorts of activities. But the last major area in which we're focused on in driving gross margin improvement would be on the reimbursement side. First and foremost, it's about getting more direct contracts with the insurance payers and that's expected to provide, I would say, marginal benefit. But it's really about deepening those relationships so that we can have that bigger conversation around the clinical value that our product offers and how that translates into economic benefit, both for the insurance payer and the patient. So those are the major categories that will help get us to that 60% or better gross margin.

Thanks, Leigh. Turning back to the top line. John, you mentioned earlier that the concern amongst some investors is on -- of course, on the competition and who have new competitors that are slated to come to market. We noted earlier, you're -- your confidence is high, and you put out firm guidance. So maybe delve a little bit more into why you think momentum can continue in the base of new entrants, both on the Q10 and people's side?

Yes. Sure. Well, I think that -- I mean, the first thing I'll say is that, clearly, we have 2 products that are going to come to market this year. And in one case, there's an improvement to an algorithm that's already on the system. And in the second case, this will be the first time. They'll have had an algorithm on the system. And I think that people believe that -- or the investment community may perceive that by having an algorithm, you can -- it by itself, can really differentiate the product and change the perception of the user community. And my belief is that the algorithm is only one of many factors that really affect how people interact with the system. You need to have appropriate time and range, but it also has to be simple, intuitive and easy to use, and the system has to reduce the burden of diabetes. And so I think that we feel like we're in a very good position when it comes to that, those psychosocial issues when it comes to interacting with our pump. But beyond that, it's also interacting with the company. Is it a positive experience? Do you have excellent customer service? Do you help people that might be experiencing issues? I mean is it convenient and easy to interact with the company? We think those are just as important. And that's why we're investing in this digital infrastructure. We think that by improving the convenience and interaction -- the interaction and the positive experiences, that you go a long way to driving an attachment with the patient community. And so while clearly, there are new products coming into market and I'm sure that the results that both of these companies are going to produce are going to be positive, it's more than just the algorithm. And I think that's -- and that's why we've had a product in the market right now for over a year. It's getting overwhelmingly positive feedback, not just from the clinical results, but also just in terms of the patient experience. And so we feel confident that it's going to continue to do that as we move through 2021 and '22 and beyond.

I wanted to shift to potential TAM expansion for you guys on the last call, so it's a little bit more on type 2.

Yes.

Where are you today in terms of the mix of type 2? And what are the key pieces that Tandem needs to expand that further as you look out over the next few years?

Sure. In the U.S. today, there's approximately 2 million people who have insulin intensive type 2. And of those, about 100,000 use our pump. So it's about a 5% penetration rate today. We're a little bit more than that at Tandem, but we're less than 10% of the people who currently use our pump have type 2. And so I think that we are definitely interested in this marketplace. We're going to kind of take a 2-phase strategy. We have existing products. We have Control-IQ, and we have t:sport, which we think are going to make a meaningful difference and be attractive to the type 2 community. And we also recognize, though, that we need to do more diligence. We need to do additional clinical studies. We need to do design work on the user interface. We understand the importance of simplification when it comes to this group. And then we also need to understand market access, interactions, how do we interact with PCPs. So today, the sort of -- our top priority today is to get Control-IQ approved for a type 2 indication. Currently, it's only a type -- it's only approved for type 1. And we can't market as long as that's the case. People are using it today, as I've mentioned, off-label and we've presented clinical data that shows they're experiencing a very positive improvement in the time and range as well as the experience that they're having from the pump. So we're going to be focused on getting this indication for Control-IQ. And then also, as t:sport comes to market, the size and discretion, the control entirely from a mobile app, we think will also be very positive. So in the short term, we're going to take advantage of our existing products. And when we can market to that community and look at ways to really do -- improve the penetration. And then in parallel, longer term, probably measured in 3 to 5 years, we'd be looking at a more discrete type 2 product that would be targeted directly at that community.

Okay. So that's interesting. So first, on the indication side, what's sort of the pathway milestones on getting that Control-IQ proof for type 2?

Well, we have -- as I mentioned, we have quite a few people who are currently using Control-IQ today that have type 2. And so we have a large amount of data that's available. We want to go to the FDA and share this information with them. And hopefully, they believe that what we've got is adequate to actually give us the indication. That's something we have to manage and schedule with the FDA. If that isn't what -- if they believe that, that's not adequate, we, of course, would have to do a clinical study. Right now, they're obviously very busy. They're still impacted by COVID and many of the resources that were available in the diabetes group are now focused on supporting the COVID teams. So we need to get in front of them, and we need to have these conversations. I think once we have the conversation, we'll be able to indicate pretty quickly what it's going to look like. But it's -- my guess is if it's a clinical study, it's going to take us into 2022 before we'd be in a position. And then there is also going to be just a review by the FDA. So it's probably late 2022 if there were a clinical study involved. If there is not, it would be sooner than that.

And then you also indicated that, I guess, in the R&D pipeline, there's technology being worked on beyond t:sport potentially focused on this community and maybe the type 1 as well. But just -- can you talk -- if you could talk about when will we hear more about it? What's sort of the general timelines on something like that?

Yes. I mean we're -- I mean, we have a team that's always focused on advanced technology, and we believe that maintaining a leadership position in pump technology is crucial to maintaining the position that we have in the industry. So we're investing in it. What I mentioned is that we're looking at a variety of things. We still believe that miniaturization, smaller, more discrete devices are going to drive adoption. And you can probably achieve that with concentrated insulins. So those are things that we have in mind, at least. We really haven't communicated what specifically we're doing in timelines. But that's stuff that will happen here in time. As we make further internal progress, we'll definitely share this. And as we continue to push out more innovation in our pipeline, we'll begin to share more about what's going on in the sort of the more research-oriented areas.

Got it. Okay. Great. Just also on type 2. Can you talk about the extent of type 2 reimbursement coverage today overall for 2 insulin pumps in Medicare and private pay? And how does not having pharmacy access impact your ability to go after that market?

Leigh, you want to grab that one?

Yes. Sure. So historically, I would say there have been higher hurdles or barriers for people who are type 2 getting on to pump therapy. In recent years, a lot of the commercial plans have done away with some of those extra requirements and they don't differentiate -- in whether or not you're a type 1 or type 2, just if you're insulin dependent. There's a major push across the industry, not actually just for pump therapy, but just across the board for type 2s getting access to advanced technologies. I'm working with Medicare to try to get some of those rules changed as well. So we're hopeful and optimistic that, that will be something that's no longer a barrier in the near future. So that step one is just reducing some of those antiquated guidelines. And then step 2, to your point about the pharmacy channel, is determining whether or not it actually does make a difference. What we see and hear today is that the channel through which we're reimbursed is not one of the driving factors for what's prescribed. The physician will recommend what is most useful for the patient that they will be likely to stick with and have the best benefit. And then many times, the patient's choice is just about the form factor, how they want to wear their pump with the tube or tubeless. And so those are the factors that drive the behavior of what people choose for their therapy. When you hear about the pharmacy channel, you hear about perceived benefits of it and some of the streamlined upfront processes in the ordering phase. So what we're doing today is while we continue to evaluate whether our product could fit into the pharmacy channel and whether we need to be there, how we can streamline the processes through the DME channel. We think there are a number of ways where we can provide solutions that will optimize it. So it will have the same look and feel. And so really, that's our primary focus today.

And along those lines, would that also include potentially lower upfront cost for patients? I think that's something you offer already, but is that sort of what you're referring to as well in terms of some of the enhancements?

Sure. I would say the enhancements point more towards our digital platform. So how do we streamline the paperwork process with the physician? How do we give more visibility to the patient where they are in the order cycle? If they're in the benefit verification stage? If the pump has been shipped, where it is? Think about the Amazon model where you know where everything is happening at any given time. And so that's where our primary focus is today. From the payment perspective, to your point, that's part of what comes with the durable pumps, and that might not go away if you're in the pharmacy channel. But what we do is we offer for patients if that's the hurdle that they can't get over that they can't afford that upfront payment, we give them the opportunity to spread that out over -- can be a lengthy period of time. We're very accommodative and flexible for people's individual needs so that, that won't be the barrier for them to decide to move forward with our pump.

Got it. Wanted to touch on international expansion as well. You guys have been relatively new entrants into the market outside of the U.S. One of the biggest opportunities that you see ahead that are additive to where you're at today, I guess, both in terms of penetration of current regions as well as entry into new countries.

Sure. I mean you hit the nail on the head. Those are opportunities. So I'll start with the fact that it's a large market. There are roughly 4 million type 1s in that countries in which we operate today, which is -- vastly exceeds what we have as an opportunity in the U.S. and there are only about 400,000 pumpers. So there's a great opportunity just to shift more people to pump therapy and that comes with broader awareness, advanced technologies. And so Control-IQ, for example, we just started rolling it out in the third quarter, and we're doing it on a scaling basis across the market. So by the middle of this year, we would expect it to be widely available in all of our geographies. And you can see what happened in the U.S. as Control-IQ became known and started gaining momentum, the kind of benefit that it drove for our business. So we expect to see that same kind of growth in the future in the OUS markets as Control-IQ becomes available. But the focus is, to your point is, it's getting further penetration in the markets in which we operate today. And the markets we launched into last year, those launches were really muted by the fact that COVID was occurring at the same time. So we really hope to get more traction on those this year. Germany was a great example where we started our launch activities in the early third quarter. But we didn't really see it come to fruition until the end of the fourth quarter, when we were very pleased and surprised to see such large demand come through for the product. So we're excited about where that can take us this year without being the second largest market.

Got it. Going back to t:connect and sort of data platform, maybe can you talk a little bit more about why we think sort of the ecosystem that you're creating can be a moat? And how does it -- what are really the barriers for others to do that? Can you talk about how you're sort of trying to build that moat along with the hardware?

Yes. I think that the digital ecosystem we're talking about is really -- it's data-driven products and services for both the person using the product and the physician. And I think we believe that this is -- it's an opportunity for us to create stickiness with both groups. And when you look at the mobile -- our mobile strategy, it's initially to implement control than full control on the mobile app. Again, this is discretion and convenience that you get from doing that. Over time, there's the ability to have a follow app where you can actually share your information with loved ones, and they can follow how you're doing and where you're at and those sorts of things. Ultimately, we believe that there could be a consumer-oriented element to the mobile app where you could purchase supplies if you want to from the mobile app. You could get information about troubleshooting your pump. You can have frequently asked questions where you have videos and things like that, that just show you how to get through issues you might be experiencing with the product. You could even call or text our customer service organization if you were having issues. And so this is something that people are used to today in their daily lives. They use their phones for so much. We believe that using and moving in this direction is something that's going to be very important about the experience that people have. And then you consider the physician. I mean the physician today has 15 minutes a quarter to interact with their patients and provide therapy management. We think there's an opportunity to provide additional data to the physician to help them manage their patient population. It could be that we just point out patients in their group that might not be doing very well. And so make recommendations back to them how they might improve the therapy management. We could show optimization of settings for the physicians. One of the issues that we face today is that if you talk to 10 different endocrinologists and you ask them what data do you want to see, you will get 10 different answers. So we think providing a customizable data presentation for them, so they can actually decide how they want to see it and what they want to see will be meaningful. And so there's just a variety of different capabilities that we want to build around our product. And by doing that, again, as I said, it provides convenience and it provides just a better experience for both the patient using the pump and the physician. And I think that drives stickiness. So that when it comes time to renew your pump, you absolutely want to stick and stay in the Tandem ecosystem. Same thing from a physician when it comes on to prescribe a new pump, you get so much benefit from interacting with us that you want to prescribe the Tandem system as well.

Got it. I wonder if you guys can update us on the potential timing for our connectivity with the Libre. Something I know you guys have been working on -- have in the pipeline. What's sort of -- what's the timing on that?

Right now, we're still -- we're trying to get this to market in 2022, right? We -- Tandem, of course, is working on integration of the system and the sensor, while Abbott is working on addressing the vitamin C issue. We're -- we've got 2 independent teams. We're working on that. And our expectation is that we'll have a product on the market as soon as possible in 2022. That's really what we're targeting right now is 2022.

Okay. And then what should we be looking for from Tandem in terms of algorithm enhancements in '21 and then maybe beyond?

Yes, we're already -- as I mentioned, we already have some improvements to Control-IQ that are and being reviewed by the FDA, as we speak. We have some more complex changes that were in the works on making, which will require some clinical studies, which we'll be initiating this year. So we're definitely continuing to move and advance the algorithm. We've talked about personalization is one, letting people adjust the set point. So it's just better enables them to manage their diabetes in terms of the way they'd like to see it. We're also looking at sort of more aggressive elements of the algorithm to improve time and range for everybody who uses this system. And then just simplification, trying to simplify some of the interactions that you've got with the system. When we initially implemented the Control-IQ algorithm, we implemented it identically to the way it was designed and tested at UVA and at type 0. And so I think now we've seen over the last year or so, opportunities to simplify the interactions that people have with it. Ultimately, our goal is to get to a fully closed-loop system. And we believe that we're going to take these steps on a periodic basis that will gradually get us there. And we think that's something that's incredibly important to our product and our product offering going forward.

Very quickly. And lastly, you've got a couple of positive things happening on the renewal cycle. Of course, you talked about the historical installed base. But maybe just talk briefly about the improvements you're making on the capture rate, where you were, where you think you can get to?

Yes. Yes. The first point, I think that John made was very important is where it's going in the future and how quickly business accelerated, that will start to become renewal opportunities in 2022 and beyond. But from a capture rate so far, at the end of 2019 of all the available opportunities from people whose warranties had expired, we had renewed about 50% of those. By the end of 2020, adding more to that population of warranty expirations, we had renewed about 55%. That's a pretty nice tick up of 5 percentage points. I attribute some of that to the fact that we had full access to UnitedHealthcare by the end of 2020. But also just improvements we've made in the process, the investments in the team that will continue to drive benefit going forward. And it's setting the stage just at the right time as we start to move into those higher opportunity bases in the future.

Great. We ran out of time. I really appreciate John and Leigh joining us today, and I thank everyone dialing in as well. And I hope you have a great rest of the day. Thank you so much.

Thanks, Steve.

Thanks, Steve. Great talking to you. And everyone, take care. --