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

Welcome to the Wells Fargo Healthcare Conference. Before we get started, if you are a member of the press or media, please disconnect at this time. This is a restricted line. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest extent of the law. Any unauthorized person, including the media, that is on the line at this time, please disconnect. Please note today's call is being recorded.

Good afternoon. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. It's my pleasure to host this session with Tandem Diabetes. With us from the company, we have Susan Morrison, Executive Vice President and Chief, I believe, Administrative Officer.

That's correct.

And Liz Gasser, Executive Vice President and Chief Strategy Officer. In terms of the format, it's a fireside chat. If anybody has a question they want me to ask on their behalf, please e-mail it to me. I think we have 1 polling question, which has so far worked pretty well. And so with that, that's Susan and Liz, thanks so much for being here.

Thanks for having us.

Pleasure to be here.

All right. So we'll get the COVID question out of the way. Basically, the question, it should be obvious, but what impact are you guys seeing from the Delta variant, if anything? Obviously, you guys have been less impacted as a diabetes company than a lot of companies in the medical device space, but doesn't mean you're immune from it. So Susan, what can you say?

Absolutely. I mean COVID continues to be a broad headwind is the way I would describe it. The beginning of the summer, things were really opening up. And the biggest challenge that we faced really related more to people actually being less available as they took some well-deserved vacation time. And then in late July, it was before we gave guidance, we really started to see a shift as health care practices began putting more like restrictions in place. And that's what's really been consistent, I'd say, over the past 6 weeks. Like the level of restrictions, I'd say it varies pretty greatly by geography. Some places, they've asked that we no longer have live sales calls. Other places have said that customer-facing events like pump nights, things like that have shifted more so to virtually. So it really varies, but I'd say it's been pretty consistent over the past 6 weeks.

And you guys had a really strong first half of the year. Your guidance assumes a pretty significant deceleration in the second half of the year. But what did you guys assume for COVID and new competition? And how is that playing out relative to your expectations?

Sure. When we raised guidance again last month, it was with the visibility that practice behaviors were starting to shift back to less in-person activities. So our guidance philosophy is unchanged. As we look to factor in the things that we can and can't control, COVID absolutely remains the biggest unknown. And so it's the biggest contributor to the conservatism in our guidance in terms of domestic seasonality resembling more like European holiday season as well as just the unknown of how the Delta or Lambda or new variants may impact behaviors here in the upcoming months. So competition is factored in, but it's to a much lesser degree than COVID.

But it was factored into kind of what we're seeing factored into the guidance.

Yes.

And maybe for Liz, for either of you, but a big-picture question. What do you see as Tandem's long-term competitive advantage? What do you think -- what are the key aspects of Tandem's moat, in your view?

Yes, love that question, Larry. And it's one I've been reflecting on a lot, especially as we participate in events like this and confront the question of competition coming and the fact that algorithms will continue to evolve and there will be more participants in the integrated CGM ecosystem. And it really is -- I kind of come back to some reaffirming core principles that I think are really hard to replicate. The first is during -- I mean, since I first met Tandem and as I've grown with the company here, that there is really an uncompromising focus on product usability. And it goes back to the inception of the company and from the first touchscreen pump, to thinking about how you make it more consumer-friendly and all of its features and attributes, to thinking through how do you enable continuous access to feature innovation through over-the-air software updates, to thinking through how do you deliver integrated therapy experiences across both the therapy data yourself through the insulin but also the outcomes data around blood glucose readings. And you have to have a pretty strong systems and usability philosophy to do that well in a way that advances the therapy experience for the patient. A simple example, as we think about how you start a CGM device when you're starting a new sensor, for us, making sure that's part of the integrated pump and application experience within that Tandem environment is incredibly important, things we're not willing to compromise and they make a difference for the patient. So that's kind of the first thing I would -- I really think is a strength. I think we've also got an interesting and differentiated approach to thinking about the device portfolio. I mean, historically, as you look at med devices is a linearity to the offerings, it's why they all have numbering systems, right, you go through your Gs and you ratchet up the device model number by 10 and it replaces the old. As you think about where we're going, within the next 12, 18 months, we will have the t:slim touchscreen pump and the t:sport phone-controlled pump as side-by-side offerings out there for the market. That comes from a place of really thinking through the segmentation of the user base and making sure we are satisfying the needs of multiple sets of customers. And so I think that's pretty different as well and not always an obvious thing for companies to emulate. And then I think the last pillar is I would look at here really anchoring the idea of digital and software. And the first would be, as you think about where we are with Control-IQ, obviously, we launched that at the beginning of 2020, we are now crossing 30 million patient days of Control-IQ data in our system. So that's just the data that has been uploaded. That puts us in an incredibly unique place for leveraging that base of data to allow continued feature innovation in the algorithms themselves and how you think about settings and how you think about user interfaces. And it's also a real value-add in building trust with prescribers and the physicians. They know we're working from a place where we have deep insight. And then if you step backwards -- back from there, you're really looking at that in the context of an end-to-end digital infrastructure that we've been investing in that is there clearly for the patient. We've also been putting in the pieces that engage the physician as you think about our road map around products like in Tandem Source, which is about customizable presentation of data to physician to help with the therapy discussion. And so I do think that is distinct and different from a lot of what you hear some of our competition talk about as well. And so those would be where I think we've got some interesting remote attributes in the coming few years.

That's very helpful. Let's move on to the -- get the 2022 question out of the way. Susan, you know it comes up in the September conference season. The Street's at about 8 22 for you guys next year, 20% year-over-year growth. Does the bar appear to be appropriately set, in your view?

I'd say 2022 is well positioned to be an exciting year for us. We've got growth drivers like the full year availability of the mobile bolus feature. Control-IQ is essentially going to be available worldwide for the full year, which is of particular note, I'd say, in France and Germany. And then we'll be increasing the rollout of some of our digital health initiatives like Tandem Source. And obviously, we're also preparing for the launch of new innovations like t:sport, and that's obviously a market growth catalyst as well as integration with our CGM partners with the Dexcom G7 and Abbott's Libre technology. And then underlying it all is obviously a large and underpenetrated worldwide market. So while we're not going to speak to any numbers yet for '22 specifically, it's fair to say that there's meaningful opportunity for both near and longer-term growth.

That's helpful. So why don't we touch upon some of those opportunities you talked about? I think you touched on a lot of them, but just starting with the pump market. By our math, the pump market grew maybe 15%, 20%. The worldwide pump market in the first half of 2021, but that was off of easy comps. The comps get a little tougher in the second half of the year. What do you see as kind of the CAGR for the pump market between both '21 to -- 2021 to 2025? What do you think the underlying growth is?

Yes. We look at this one quite a lot. I mean, there's some real fundamentals, I think, that sit behind continued growth here. I mean, Susan touched upon some of these entire comments, but at the heart of it is the advent of AID systems, right, the automation of therapy that radically reduces the cumbersome burden on patients and improves outcomes. But there are a couple of things. One, the patients want to go there because the therapy is easier to use. The physicians want to go there because the outcomes are better. And so we continue to see that as a driver domestically. We fully expect pump touch to keep moving up. We expect some of that to pull through on type 2, although not in quite the same magnitude. And then internationally, as Susan said, it's a 10% to 20% penetrated market in the countries we're in. There is no technology reason why that should not move up over time. Europeans are as apt to adopt tech as the U.S. is. So as physicians see the outcomes data as these solutions come to market, as national payers build in the reimbursement, we fully expect that to reflect that, too. And so when we run all that into our models, as you're looking at the '21 to '25 horizon, mid-teens growth feels like it's sustainable in the midterm.

Okay. That's pretty healthy growth. That's helpful. And you guys still -- Susan, I know we've talked about this a lot. You still feel good about that 50% penetration in type 1s in the U.S. by 2024? I mean it's at 35% now, at the end of 2020. It does -- it seems a little aggressive to me, but do you still feel like you can get there or the market at least?

Yes. I mean absolutely. I mean I think -- there's a rounding effect that I think kicks in, in the industry, right? When we're all in the high 20s, we round up to 30 and say it's almost 30. And so if you look back 5 years ago, and you said, my gosh, we've been talking about 30-something forever. No, it was kind of 28% 5 years ago and we were pushing 30%, and I'm cleared through the below 30s and now we're in the higher 30s. And so there's momentum that has been building over the past 5 years. And then as you look out, we're in the first inning on AID. Control-IQ is less than 2 years in the market, and we have, at an industry level, more options coming. And so as we look at that progression, yes, we do see continued room for that MDI migration to pumps to keep ticking up quarter-on-quarter. And so we're feeling comfortable with a 50% target. I've heard some higher numbers floated today from others in our space. And as we close in on 50%, I'd love to start talking with you about what we think it'll take to get past that. But we're comfortable with 50% as a technology-driven inflection right now.

Okay. Fair enough. A lot of other areas we could go to. I definitely want to cover international. But it does -- it seems like a lot of attention on new starts and what that means -- what new competition means for you. Right now, your new pump split is 50-50 from MDI and competitive conversions. How do you see this evolving over time with new competition?

Sure. So competitive conversions today are primarily people who are converting from Medtronic. And that being said, Medtronic still holds majority market share. So that means there's meaningful runway still to continue converting pumpers to our technology, particularly as we're continuing to innovate. But over time, our own renewal opportunity is really going to begin to eclipse the size of the opportunity from competitive conversions, but that really puts us actually in an advantaged position because we've got much greater visibility into our own customer base and we've got established relationships there. So I think that actually puts us in a good position in the longer term and, frankly, in the near term from competitive conversions. And then if you look on the MDI conversion side, I mean that -- it goes back to what we've been talking about. This is a large and underpenetrated worldwide market, and us launching new innovations is going to continue this acceleration that we've been seeing as far as just the rapid adoption of diabetes technologies.

You guys have obviously grown your new pump starts in the U.S. pretty dramatically since you launched Control-IQ. How should we think about new pump starts beyond 2021? Is it going to be -- does it get more difficult to grow year-over-year because of the law of large numbers and competition? In some areas, it just -- again, maybe just because of the law of large numbers. Susan, it sounds like you think you can continue to grow new starts.

We do. We absolutely do. And I know -- I mean, Liz does a lot of work in this area, and I think that we're not afraid of the law of large numbers. I think when you look at people and the reason why they first adopted our technology, it's because we launched an easy-to-use, differentiated hardware platform. Where you start to see inflection points now are with the addition of things like the algorithm. And then you think about new pump starts through things like expansion of the market by offering new hardware platforms like t:sport. So I think that when you look at the ability to grow year-over-year, there is the law of large numbers, but this is a big, big market with a big opportunity. And so we are confident in our ability to continue growing.

Okay. Why don't we do the first polling question here. [ Luke ]? All right. So the question is, do you believe that Tandem can continue to grow its new pump shipments in the U.S. once Insulet Omnipod 5 and Medtronic 780G are launched in the U.S.? Is it, a, yes; b, no; c, not sure? And it takes a bit -- there's a bit of a lag time here, so I don't know. I think we're going to bias the response here. But I guess you've already said, Susan, you think you can continue to grow through these competitive launches. But let's see what people on the line think and trying to think if I can get another question in here before the polling is done. [ Luke ], should I ask another question? Okay. So international. A lot of investors are interested and excited about the international opportunity for Tandem, given the results we've seen from you this year, which have been quite strong. And you also are launching Control-IQ in France and Germany, I believe, in the second half. But the guidance implies a deceleration outside the U.S. for the second half, right? So help us reconcile those and remind us of kind of the time lines for Control-IQ in France and Germany this year.

Sure. So when you think about the international assumptions, remember there is a distinct third quarter seasonality that relates to the summer holiday season. So that's factored in. And then sales activities really resume late in the quarter and full swing again then by Q4. So that's the biggest piece when you're looking at kind of the cadence of sales here in the back half of the year. Then the other piece of conservatism that we have built in is obviously just COVID. It impacts different countries and regions to different levels of magnitude, and it's really an unknown variable at this time. And it's difficult to predict. And so we felt it was prudent to include that as just an overall headwind in our guidance. So to your question on Germany and France. We are in the early stages of launch now, and so efforts are really gearing up here in the coming weeks. And we're really excited to bring Control-IQ. Obviously, it's made such a huge impact on lives here domestically and in the countries that we've already rolled out in, but to be available in essentially all the markets that we're in for the full year of 2022, that's really going to be a growth driver for us. So as far as other countries, we're going to add a few smaller markets, I'd say, in 2022. But our primary focus is going to be on driving greater penetration in the countries that we're in today. The opportunity is so great. I mean, as a reminder, where we are, OUS, we're in more than 20 countries. And in those countries, there's more than 4 million people living with diabetes, type 1 diabetes, and there's about 400,000 pumpers. So the bulk of the time that we've spent kind of in our international launches have been during COVID. And so I think that we really need to pay attention and drive penetration within these countries. And then we'll look to say where are there other established markets where we want to -- would that make sense to launch into next.

And Basal-IQ is available in France and Germany?

It is, correct. Yes, it launched in both last year. So this is really just the launch of Control-IQ, but the platform is available.

And France and Germany are on the same time line. It's not staggered at all?

Yes. They're, I mean, a little bit of part. But when you think about a launch, it's not a bright line. You used to kind of start training activities, especially we really partner with international distributors to do that launch. And so I think of it over a few different weeks. But they're both, I'd say, kicked off in the early stages now, and it will continue, obviously, throughout the second half of this year.

So some benefit in Q3?

You'll see some benefit, but I'd say that I wouldn't really make it anything of note because it builds over time. And so I'd say that we're still in the very early stages of launch now, and I would look at it truly benefiting 2022 and that those launch activities build throughout the remainder of this year.

Okay. Let's see if we have the polling results and if investors agree with you, Susan. What do we have here? Yes is -- all right, 50-40. Susan, are you surprised that there's more -- not more yeses or is that kind of what you expected?

Actually, I think if you would have asked this question 4, 5 months ago, it probably would have looked a little bit different. I think investors are getting more and more comfortable with the way that we are going to line up from a competition standpoint over the next 12 to 18 months. And especially, too, I mean, if you look at 780G, we're already demonstrating our ability to compete and that -- really, that product availability, OUS, it hasn't changed the competitive dynamics between us. And then with Omnipod 5, I mean, that's a launch that's going to take place over an extended period of time. And they've even been saying very open, this is their first time, where we're relying on years of experience of CGM integration and now years of experience with algorithm. And so they've got learning, obviously, that's going to be there. Also the product is going to be available on the Android platform and, it sounds like, select Samsung models. So that also kind of limits the market that, that product will address. And of course, it's just a domestic launch. So I think with investors having all of those different pieces of information, it's made them appreciate the Tandem story and the products that we offer. And increasingly, I think there's an appreciation that this is a highly, highly segmented market. And so someone doesn't need to fail in order for the others to succeed. There's a lot of opportunity for growth here. And I think we're really seeing that as you see the adoption of diabetes technology overall and just kind of the acceleration of the number of people converting from MDI.

And so you commented on not seeing an impact from 780G outside the U.S., something along those lines or you're continuing to grow nicely. They got a good label for Guardian sensor 4, no calibration, non-adjunctive claim. Do you -- what do you expect in the United States? They've said -- I mean they've been a little bit vague in the U.S. What's your expectation for that -- for calibration and non-adjunctive claim?

Yes. I think you need to always prepare that they're going to have the most favorable claims. But that being said, even if they have the most favorable claims, I think what we're seeing is that it doesn't change the competitive landscape for us. We still have a differentiated easy to use pump platform. We have a proven AID technology that's powered by the Dexcom sensor and all of the benefits that, that Dexcom sensor provides. So I mean we've been kind of preparing for the launch of that and the fact that it's been delayed, I think, just frankly gives us more time and more experience with that product, OUS. And so from a preparation standpoint, you always assume they're going to get everything. And if they don't for some reason, I think that just works in our favor.

Yes. And what do you think about the acetaminophen interaction issue with their CGM that we wrote about? Nobody else -- nobody seemed to care about, to be honest. I didn't get a lot of feedback or questions on it. Do you think that's an issue? They're going to have that with both Zeus and Synergy. The following generation, it sounds like.

You're right. It's hard to say on what the level of significance is going to be. But I agree with you. I mean, Medtronic did start speaking about that risk a lot more prominently at some of the shows this summer where we really hadn't heard about it a lot prior to that time. The other, I guess, point that I'd make is that we've seen FDA make restrictions with CGM use in AID systems based on the risk for interference to blood glucose readings. And so I mean we saw that in the Abbott clearance with the Libre 2, right, with the vitamin C interference and that that's kind of carved out from use in an AID system. So this is something we'll absolutely be watching, but it's an area of interest, and I think you're right for flagging it.

Okay. I got a question e-mailed to me, I'll throw it out there. The pricing of your product versus competitors compared to Insulet and Medtronic, any major differences in price? And maybe -- I know the U.S. pricing better than OUS, maybe touch upon that.

Sure. So domestically, we're pretty equivalent to Medtronic is the way that I would describe it. Those are well-established codes that are contracted to. So typically, you're not going to see any kind of pricing differential between those 2. Between us and Insulet, it's a different business model. And so with Tandem, there's the upfront purchase of the actual pump. That purchase can be actually spread out up to over a 48-month period of time if someone doesn't want to pay for it all upfront. That being said, we actually see very low utilization of those programs, which suggests that, that kind of is a big factor in people's decision-making. And then they pay out of pocket, which is much lower for their ongoing supplies piece. With Insulet's model, they've, through DME, at least -- that one, they're moving away from. They're moving more so towards the pharmacy channel. So that's probably more appropriate from a pricing perspective. They've made comments that it typically is about $50 per month per patient out of pocket. And so actually, over a 4-year period, that's a more expensive device than if you're purchasing the Tandem system with your DME co-pay. And so at this point, I'd say that price isn't a primary driver for people deciding which system is the best fit for them. Make it much -- comes much more so down to personal preference and how do they actually want to wear their device and then the features and benefits that it offers. And so I don't really see price right now as a differentiation in driving between patient preference between the systems.

Okay. So let's transition now to the pipeline. I mean you talked about clearance of the mobile bolus feature by the end of this year. That sounds like that's on track, Susan, based on your comments earlier today.

Yes, it's on track, and I'm happy to say that we've actually provided all of the requested information back to FDA, and it's currently under their review. And so it's hard to predict regulatory time lines, obviously, during this environment, but we feel as though we provided them a robust package and then look forward to really partnering with them to work through to the point of clearance.

Are you seeing any changes at the FDA's diabetes division? Just obviously, we know that they were refocused, some COVID diagnostic testing. Anything qualitatively regarding kind of movement there?

I'd say the individuals that we work with have been absolutely great. It's the broader review time lines where we've seen extensions. And so we really can't speak to anything as far as a change because I think we only know that in retrospect, frankly. That being said, there's been some comments made by the FDA to expect some of the delays at least through year-end. So we're kind of looking at those broader expectations that they've set and kind of setting our own expectations accordingly.

And then transitioning to t:sport, you've indicated that it's important for the mobile bolus clearance to come ahead of the t:sport filing. And I think you've said that's in early 2022. When -- is that accurate? When should we expect you to file t:sport? And is there anything that still needs to be done before you file that product?

Yes. We're in the kind of the final R&D stages now. Well, kind of keeps getting added to it is things that we learn from mobile bolus. So as we learn about a new feature or the way that FDA may want to see data associated with mobile bolus, we're able to apply those learnings to the filing that we're compiling for t:sport. So the product itself has, I mean, been designed. We finished up the user interface changes a while ago. Those have been tested. And so really part of this is just that finalization of the R&D time and also comparing to new information learned from mobile bolus. And that's why it's so important for us to finish up the mobile bolus filing first because it's the same foundational app that's really controlling both of them. And so anything that we learn from mobile bolus will absolutely apply to t:sport. And so I think there'll be a known expectation by the FDA that everything needs to be included. So things are moving along well from a t:sport's perspective and just need to kind of finish up mobile bolus and then we can get better time lines there.

So early 2022 is different [ eyes ] right now in terms of...

That's -- yes. Absolutely. Like we've got lots of different scenarios that are out there, and we do have scenarios that we're launching the product at the end of next year, absolutely. And so that implies that we're going to have an earlier filing timing. We don't know what that timing is going to look like, though, until we have mobile bolus in hand. And so that's why we're kind of reluctant to provide firm time lines because we just don't want to be shifting things a month or 2 or a quarter or 2 based on learnings by the FDA. Let's really get a good understanding with where things are for mobile bolus and then we can give you concrete timing that we really can plan to regarding t:sport.

That's fair. Susan, you guys have long-term goals out there for pumps and for P&L. On the pumps, you have a goal of 500,000 -- an install base of 500,000 by 2024. You ended Q2 at about 270,000. It looks like you might actually exceed your goal of 500,000. I mean, it's about a 16% CAGR, I think. So what do you anticipate refreshing kind of your long-term goal at some point?

Yes. When we think about our long-term goals, typically, we like to give a 3- to 5-year horizon. Obviously, we gave a lot of these goals, I think, at our 2019, it would have been the -- I'm sorry, September of '18 Investor Day. And so I do recognize that's 3 years ago, and we're kind of coming up on that time. So an Investor Day event, our Q4 results, those are typical times where we'll provide broader visibility into some of the longer-term goals for the company.

Are you guys contemplating another investor event?

We haven't announced anything, but I think it's always something to consider. We've got a lot of great things to tell about from a story perspective, and we totally appreciate where there's a lot of things that we've discussed regarding the next 12 to 18 months. But there's a lot of things that we're working on behind the scenes of the company that give us great confidence in kind of the longer-term growth trajectory for the business. And we're just looking at what is the right time to be able to share that story.

And then the operating margin goal of 25% plus in 2024, that one, though, seem like a little aggressive to me for a high-growth company.

We're always willing to invest in order to drive the top line. That is really our focus. Each of our business model, I think, is that you see benefit of that to the operating margin as you leverage the business. But when we look at it, we really would sacrifice there if it meant top line growth.

We've got a minute left, and I'm going to -- I'll give it to Susan or Liz, the underappreciated aspect. What is underappreciated about Tandem? We covered a lot of ground here.

I guess -- go ahead, Liz, please.

No, no. You answer and then I'll weigh in as well.

I'd say a few different things. First is just this is a large underpenetrated worldwide market. And so I think people look at this as fighting for a very small finite pool, but we've got new technologies that will address different segments of this market. There's lot of focus on competition. But again, competition oftentimes is addressing different segments of those markets. And so I feel like Tandem is very well positioned in both the near and longer term for growth based on our innovation, our own renewal opportunities, expanding efforts internationally and then, of course, our pipeline. Liz, what did I miss?

Yes. I'll just build on that with I think we've got some multi-access differentiation points. We've got a continued feature road map that spans hardware algorithms, user experience through applications and physician [ expertise. ] I'm feeling pretty good about our ability to continue to move the bar competitively and to hold our own.

Perfect. Well, that's a great place to end. I really appreciate both of you being here, and I hope the meeting is productive for you. So thank you.

Absolutely. Thanks so much for having us again.

Of course.