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

Good afternoon, and thank you for joining us for the third day of the 2021 Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, medical device analyst and a member of the health care research team here at Morgan Stanley. It's my pleasure to have Tandem Diabetes with us today; John Sheridan, President and CEO; and Leigh Vosseller, EVP and CFO. Before we begin, I'll run through our disclaimer. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. [Operator Instructions] And with that, John, Leigh, thank you both for joining us today.

Thank you for having us. It's nice to be here.

Thank you.

Yes. And I wanted to start off with COVID. It's topical -- top of mind for everyone these days with Delta. But there are a lot of moving factors in your recent results, what you've seen out of your business to date in 2021, Control-IQ traction, U.S. and OUS, advent of telehealth, virtual adoption, increasing number of prescribers, UnitedHealthcare in the U.S. beginning third quarter last year, Control-IQ recently in Canada. Just I was hoping if you step back over the past several quarters, what have been the biggest upside drivers to your business relative to your expectations entering the year?

I would just say that the growth of Control-IQ has just been tremendous. And I think that's really driving the success of the business at this point in time. We've had it on the market now for about 18 months. And just recently, we actually have over 30 million patient days from the product in our databases, which is great in terms of product development and things like that, though. But I think that what's happened is that physicians have -- they've become very confident in using it and prescribing it. They trust it. And they see the results that their patients are experiencing and they're phenomenal that lead people describe it as life-changing, and it really is. And so I think that when you look at our physician population, every quarter, we're seeing new physicians prescribing Control-IQ. And then we're also seeing existing physicians prescribing more systems. So we're getting wider and deeper in the endocrinologist population, and we're seeing great results, both as you said, in the U.S., but also OUS.

Curious too, just what COVID-related dynamics, limitations do you continue to see in your business? And can you talk about the relative differences and headwinds if you are seeing them in the U.S. versus outside of the U.S.?

Sure, Leigh, why don't you take that one?

Sure. So I'll start with first the U.S. market. And it's a little bit different for us because in the U.S., we touch all the patients there. We have that direct relationship outside the U.S., we rely on a network of distributors, so they have that direct interaction with the patients and the physicians. What we're seeing in the U.S. And I think it's good fortune that as soon as COVID hit, when everything went to a telehealth-type environment, we were able to pivot very quickly and very well. So our sales reps quickly adjusted. We were able to keep those relationships with the physicians. As John said, we saw tremendous improvement in prescribing patterns, both depth and breadth because of Control-IQ. And so then when you get to this year, it looks like things are starting to open up around that second quarter time frame. And our sales reps are getting back out in the field. They were starting to have in-person visits. And then the Delta variant came about. And so we had to reel back just a little bit and move back to more of a telehealth environment. Luckily, we know how to operate in that environment. So it's not expected to be a major impediment of any sort. It's just that those changing dynamics that we continue to experience in COVID. Outside the U.S., like I said, we don't have those direct interactions, but through our conversations with the distributors, they've seen similar type dynamics. Those same fits and starts. It varies by geography. And in fact, it varies within countries within the markets themselves. Some areas are more open than others. One of the unusual dynamics that I would say we didn't really anticipate, but when we went into our second quarter earnings call, definitely took this into consideration was the fact that in the U.S., right before the Delta variant hit when things were starting to open up, it feels like everyone went on vacation. So normally in the U.S., we see a dispersion of vacations from the time when schools closed in the May-June time frame up to when they open in the August-September time frame. But what we were seeing this time was that it seemed like in that June, July time frame, everyone was on vacation at the same time. And I think it was this enthusiasm of being able to get out in the world again and do something. And so the way that impacted us was that when we make the phone calls to the physicians or to the patients to take them through the referral process, they just physically weren't there. People weren't answering our calls. And so it created a little bit of disruption. It's not so much about a permanency or anything that we're worried about. It's just more about thinking about how the seasonality scales this year compared to what we've seen in the past. And so those are some of the impacts that we've been seeing, and it's made COVID very unpredictable. Just when you think you know what's happening, something changes. And so we're still pretty cautious about it when we set our second half guidance for this year.

And I wanted to ask you -- and that's really helpful just to frame what's going on. But your second half guidance, you included both COVID conservatism as well as the potential for competitive noise, COVID really being the primary kind of factor that you baked into that, but just curious to, and you just talked about the seasonality, maybe enhanced seasonality that you're seeing in the U.S. How much did you really contemplate at that time for seasonality and relative to what you've seen play out, especially in the U.S. market to date?

Sure. So I'm going to go back to -- it was a little bit interesting at the beginning of the year, the cautions we put in were COVID and competitive dynamics. But I would say probably was more cautious about competitive dynamics with the thought that a lot of new products were potentially coming into the market at the same time. Now that sentiment has switched. For the back half of the year, we've put much more weight on the COVID dynamics. And it's just about not being able to predict that variability in the back half of the year. But the way it's impacting seasonality, so first of all, it's easier to talk about the OUS markets. There's a typical seasonality curve that occurs, a step down from Q2 into Q3 just based on the fact that pretty much everything goes dark in the month of August. And so there's just not much that occurs outside the U.S. or at least in the European markets. In the U.S., across the quarters, we typically see a step up. Q2 to Q3 a little more modest compared to the other sequential climbs. This year, we think it might be a little bit softer step up than what we've seen in the past just based on some of these varying dynamics in the market that I just discussed a few minutes ago.

Okay. And also 4Q acceleration drivers, as you think about them, what's transpired in 3Q thinking about COVID, extended vacations or holidays as well as Control-IQ launch that you talked about in France and Germany and the continued benefit of recent launch in Canada? I'm just curious kind of as you think about the various impacts of those different drivers as you contemplate the 3Q to 4Q expansion kind of -- what's -- what are the biggest drivers? And how would you break those down?

Sure. I'll start with just Control-IQ. I mean it's the theme of everything. It's why we've been so successful, and it's going to continue to drive that success, especially in the U.S. And part of that seasonality curve will really be also the typical dynamics we see where people are meeting their deductibles. And so the fourth quarter will be the highest purchasing quarter of the year. Outside the U.S., what's been great is where there's been a lot of ups and downs in terms -- or variability in terms of the ordering patterns. Q1 and Q2, we started to see strength coming from all of the markets. So it seemed like that we were breaking through and starting to develop some level of predictability. And in a number of the markets, we have launched Control-IQ beginning in the third and fourth quarter of last year, and that's really starting to get traction and take hold. Canada, Germany and France, they were on the very early stages. Canada just launched last quarter. Germany and France are just getting started right now. And so some of the dynamics when you first launch a new product, especially in the OUS markets where the distributors have a little bit more limited bandwidth, it typically starts with a heavy amount training. So it's training the distributors, it's training their clinical folks, it's training the physicians on what the product offers. It's also the process of updating the existing pumpers to the new software. So they usually get first priority. They've already bought the pump. And so everyone wants to make sure that they get the best benefit. And then it really pushes into launching to the broader market. So this year, in particular, we don't really anticipate much of a Control-IQ boost from Germany, France and Canada as much as we expected for next year. So that's how we expect Control-IQ to impact. And then another element that we didn't really talk about also would be our renewal trajectory. So if you look back 4 years ago, the fourth quarter of 2017 was the first real step-up that was the beginning of our inflection in the U.S. And so we'll have a larger number of opportunities coming to the market in the fourth quarter of this year than we've seen in recent quarters. And so that will be a nice step-up. It really starts a momentum drive into 2022 as well.

Just on the renewal side to -- 2Q continue to increase and this opportunity becomes incrementally more significant over time. But just what does your guidance assume for second half renewals and really your outlook to reach cumulative renewal rate of about 60% that you called out by year-end 2021?

Yes. So the way to think about applying that 60% is looking back to everyone who purchased the pump up through the end of 2017. At that point, cumulatively about 60% will have renewed. And so -- and as I just mentioned, Q4 is a new step, a new phase for us in terms of renewal opportunities and the growth that will come from that. So we really expect that to start to accelerate more in the fourth quarter, but really driving into next year. So renewals have a good opportunity for -- to position us for the go forward.

And do you have any active initiatives encouraging or promoting timely renewals? And if so, what type of impact has this had?

Absolutely. So we have made a lot of investments in the team that focuses on renewal and retention because that's as important as the renewal initiative. When people first buy their pump, we make sure we build that connection and we keep that connection across the 4 years. And we've been very successful and what we're seeing is that as we've progressed across the last few years and learn more about renewals, we're not only renewing more people. So we're getting higher cumulative rates in each cohort or population when they come up for their warranty expiration. But we're also starting to do it faster. So we still see laggards. We see people whose warranties expire that don't renew for 2, 3, sometimes even up to 4 years, but what we're starting to see is that more and more are pushing to the front end of the cycle. So we're getting more, and we're getting better.

I just want to add that the other thing that we were doing to incent people to renew was just to provide software updates for in-warranty customers free of charge. And that would include Basal-IQ and Control-IQ and mobile bolus will be coming out, hopefully, later this year. And I think that's -- when people know that they have access to our technology, and they can only get access to the technology when they're in warranty, that's another incentive.

How should we think about to -- just with a greater base of installs coming up 2022, 2023, how are you thinking about just the trajectory of the business based on that renewal opportunity coming to you in that time frame?

Sure. So the major 3 areas of where our business comes from would be the people switching from MDI, people coming from competitive pumps and the renewals. And today, the balance has been very heavy to people that are new to Tandem. But as the renewal opportunities begin to scale, that's going to become a much more meaningful part of our business. And while we still anticipate significant movement from the MDI population, and even with competitive conversions, this will add more fuel to the fire, so it just gives us a larger base off which to grow.

Okay. And I wanted to turn back to Control-IQ launch in France and Germany. But just really what have you seen recently from initial days but Control-IQ-driven momentum broadly OUS, especially just early days in Canada? And what type of impediment did COVID have on driving initial adoption? And how much growth do you see selling from markets you're currently in as COVID pulls back?

Yes. So we're getting the same feedback when we talk to our distributor partners similar to what we experienced in the U.S. At first, it's about educating physicians, and it's about getting patients on the pump. And then patients come back for their next visit, and they see the remarkable change in their clinical outcomes for the patients. And so it's that kind of building momentum that we're starting to see. A little early to see it in Canada, for sure in France and Germany. But we're getting some initial feedback in Canada that it's exactly the same excitement over the product itself. So we're really excited about where that will take us for the longer term, particularly now that we've developed such a large installed base outside the U.S. There's already this brand awareness for Tandem. And now we're adding to that by having the best most advanced technology out there.

I would just add that on our -- when you actually consider some of the countries where we had Control-IQ in place for a while, our distributors are seeing more growth than they ever have with Control-IQ. And as Leigh just said, the same sort of excitement that the physicians and the patients have experienced in the states, we're seeing that in OUS countries also.

As you look further in terms of OUS growth, France, Germany really, you talked about being more of a 2022 dynamic to start to see that impact. But what are other -- are there other geographies really at this point that you still need to roll that out in? And I guess, how much of an incremental impact could that have beyond France and Germany coming online?

So France and Germany are the last few of our large markets that don't have Control-IQ yet today. So that's why we talked about it more about a next year dynamic. And in all the other markets, it's widely available. To John's point, it's very well accepted, and it's starting to build the momentum. The distributors are thrilled to have that to be able to sell as a product. And so Germany and France, this year will just be about seeding the ground, and then next year is when we'll really start to see it flourish.

And you talked to guidance a little bit about competition that you factored in, and obviously time lines have become extended in many cases. But as you think about OUS, just the potential to drive further inflection from a Control-IQ in 2022 with all of these drivers as you think about potential competition coming in. I'm just curious how you balance those dynamics today, given -- I realize there's a lot that's still unknown from a timing perspective. But just as you sit here today, how do you think about those different dynamics playing out?

Sure. We've already had some great experience. You can use Germany for -- as an example, where we've only been shipping Basal-IQ and the 780G launched late last year. And so we've been competing very well with -- on paper what might appear to be an inferior algorithm against that 780G. So I think it also [indiscernible] 2 things. One is that Basal-IQ competes against it well, and it says a lot about what Control-IQ can do against it when it launches more broadly. So from a perspective of our caution around competitive dynamics, that has helped us to, as I said earlier, we kind of switched the balance on where we put the caution and we put much less on the competitive dynamics now.

And I guess to just longer-term OUS geographic footprint, balance between driving deeper penetration in the existing about 20 OUS markets you're in today versus driving further expansion into new markets, just specific OUS initiatives to drive current pump penetration higher in your current market. Just how are you thinking about those different dynamics over the next several years as the biggest growth opportunities for your business?

I think that the greatest growth opportunity in the next year or 2 really is to focus on just organic growth in France, Germany and Canada. When you consider the 20 markets we're in today, there's about 4 million people with type 1, and it's also very underpenetrated. So there's -- that's roughly twice the U.S. opportunity. So I think that there's just focusing on what -- where we're at today and just really working on just broader expansion of the product in these markets is really where we're going to be.

And again, looking to 2022, but compared to your outlook entering 2021, what dynamics in your business are really ahead of your expectation? And then how has COVID impacted either from a positive or negative stance, deviated versus your outlook, given you enter 2021, this COVID overhang was already in place. But just curious kind of how different drivers have played out relative to your expectations entering the year?

Well, certainly. The OUS opportunity has exceeded our expectations. We did think that there'd be more muted response because of COVID in the OUS countries. But now certainly, that's not been the case. And so that's been quite exciting.

I guess to just other topical outside of COVID, but supply, supply dynamics, supply chain issues, just curious if you could comment on any challenges you've seen to date or expectations as you look out. Just trying to get a better sense of kind of what's going on from your level in the field today.

Yes. I mean our team has been really focused on the supply chain for the last 1.5 years. It's been something that we really have to micro advantage. And at this point, we've been fortunate really not to have any significant issues. I would say the one thing that has, if there is anything, it's really been the cost of just transportation and the predictability of transportation. That has been affected. But when it comes to specific components and elements of the product, we've been in pretty good shape, and we feel like we're in good shape for the next at least 3 or 4 quarters.

Okay. Understood. And turning to kind of your pipeline, t:sport, can you walk through different factors contributing to and impacting your potential filing time lines at this point and outlook around your initial commercialization of the product?

Yes. Well, we're excited about t:sport. We think it's going to be a great product. As I mentioned on the call a few weeks ago, we have begun just building up our manufacturing capacity and capabilities. The development of the product is going great. And as I said, we're very excited about it. I think the one factor that we're focusing on the most really right now is the FDA's involvement with the mobile bolus feature. We really believe there's a lot to learn there. We think that when you look at t:sport, it will have full mobile control. But the mobile bolus feature is the one thing that we think that has the greatest sensitivity with the FDA, and that's why we filed it first, just so we could learn from that. And so we've now submitted all of the information back to the FDA, and we're waiting to continue to interact with them, to get approval for that. And we think that there's going to be ongoing communications and there'll be additional lessons learned between now and the end of the year. And so we really want to get that feedback from the FDA before we make any commitments on what the t:sport timing looks like at this point in time. So we're going to wait until that happens, which we anticipate that the mobile bolus will be approved later this year. And once that -- once we see that and we understand exactly what they're going to ask us to do, we can basically estimate what the impact is going to be on the schedule and timing of the submission for t:sport. We certainly hope it's a 2022 product. But we really have to get through this first step, really, which is the mobile bolus approval.

And post approval kind of as you think about what has to happen on your end before you can file t:sport, is there anything you would highlight, again, post approval, just the processes between that [indiscernible]?

Yes. I think it's just [ assessing ] the design requirements that may come from lessons from mobile bolus that need to be applied to t:sport and the effect that, that's going to have on the timing.

Okay. When you think about t:sport's impact on your competitive positioning, how does the introduction change pump competitive dynamics in the market, especially as you think about 2 versus patch pump dynamics that exist today?

Yes. I mean I think that clearly today, when someone decides to select the pump, the next decision they make is tube versus tubeless. And it turns out that roughly 70% of the people choose a tubed pump. And I mean, we think there's a variety of issues with flexibility, wearability, the size of the actual site that is contacting your body. There's a variety of reasons that people choose that. I think that when -- I mean, the competitive environment is there will be a patch pump on the market here in the near future that will have an algorithm, that will have sensor integration. We think that when that product comes to market, Control-IQ as it is today will compete quite effectively. But when we do bring t:sport to market, it has the same size. It's the same -- roughly the same dimensions as the patch product. We think that changes the dynamic, and we will see people selecting t:sport that might have chosen the patch device because of the flexibility benefits but also now because it's comparable in size and the discretion that comes along with it.

And kind of along those lines, how do you think about the evolution of your specific user base and the split really over time between t:sport and t:slim?

It's difficult to say at this point in time. We know there's going to be meaningful uptake on t:sport, but I think we're going to really have to wait to early days just to see what happens as people have experience and as we're able to get out and market the device.

And the impact of full mobile control, what have you heard from patients, providers about the specific aspect as a driver of adoption?

It's the #1 requested feature right now for people who are using Control-IQ. When you use Control-IQ, the system just operates in the background. And so unless you have to bolus for a meal, you really don't interact with the system. In the past, before we had control, people would take out -- they would take out their pump and they'd want to see where their blood sugars are going or they would want to see what was happening with the system. But with Control-IQ, it just does it for you. So I think that the mobile bolus feature will basically provide discretion and convenience that people are really looking for. And you could be at lunch and as opposed to having to take your pump out of your pocket to bolus for a meal, you now can use your mobile app to do that. So we think it's convenience discretion and there's a great deal of demand for it.

And as you think about to just new patient starts from MDI, how does the percentage of your new patient starts over the next several years evolve relative to about the 50-50 split between competitive conversions and MDI today? And as you think about it, too, what would you highlight as accelerant to the MDI conversion over the next few years?

Well, we believe that MDI conversions are going to grow from probably in the low to mid 30% today to about 50% in the next couple of years. And we think that the driver of that really is the technology renaissance that I think we're experiencing within diabetes. I mean it's not just Tandem, but I think our CGM partners are also making incredible gains in technology and ease of use as our competitors are. And so I mean, really, we really believe that ease of use drives adoption. And as we said, we believe that we can get to 50%. Others have said maybe even 70% MDI conversions. And for the time being, in the next couple of years, I would anticipate that the percentage of MDI and competitive conversion will continue to be approximately 50%.

Okay. And you contemplated 500,000 worldwide customers by year-end 2024, can you talk through just U.S. versus OUS contributions versus growing your customer base versus your current customer mix as well as expectations around growth, new customer acquisitions stemming versus -- from MDI versus competitive conversions?

Sure. One thing I'll point out when we set that target, that was in the third quarter of 2018, and that was actually when we just first launched into the OUS market. So you can imagine there was a lot for us to still learn about where those markets could go. And that's been, as we said earlier, one of the surprising elements of this year, in particular, is how much strength that we've seen. But when we set the 500,000, there are a number of ways we devised that we could get there. So we run a number of different financial models. So we never particularly broke out the U.S. versus the OUS component because depending on how things played out in either market, it could go either way. And I will also add, we never set a target that assumes everything goes well or perfectly well. So if we continue to have strength in both markets, we're well on our way to achieving that goal. I don't think anyone even second guesses whether or not we can hit that by the end of 2024. But as John said, that the key drivers of where our business comes from really would be that continued penetration in the MDI population, the continuation of those competitor conversions and then our growing installed base, which becomes our own -- fuels our own growth with the renewal opportunity. So all of those will continue to be the drivers behind why and how we can get there. And I think we have great -- we're seeing greater opportunity outside the U.S. than we ever envisioned before.

Okay. And I wanted to ask, too, that outlook that you provided, was it just type 1? And then as you think about -- and the type 2 opportunity, how do you think about type 2 conversions -- sorry, contributions on top of this target? And as you think about kind of the ability to start to see type 2 gain traction, kind of how do you think through what needs to happen in the market before you can really see that begin to contribute to your business?

Sure. I'll just start with setting the target. And then John, I'll let you talk about the type 2 opportunity. But type 2s today represent under 10% of our shipments and of our installed base. So when we set that target, it was assuming the same mix of type 2 in our business as we have been seeing. So it wasn't anticipating that there'd be any significant trajectory change or difference in the business model than what we've seen in the past. But John, if you want to talk to type 2 and where we stand on that initiative.

Yes. I think that the type 2 market is -- it's very segmented. It's very different than the type 1 market. Right now, as Leigh said, there's about 2 million people with insulin-intensive type 2 in the United States, and it's about 10% penetrated, 5% or 10% penetrated. We think that there's a lot of learning that we have to do really to take advantage of this. And so we have a 2-part strategy. The first part really is let's get Control-IQ approved for the type 2 community. Right now, it's not. It's -- and so you have to get that taken care of. We're working with the FDA. We're planning clinical studies and we expect that to happen in the sort of the near to midterm. Once that's available, we can put that on to t:sport. And we think that the discretion is hugely important for people with type 2 due to the sort of the negative social statement that comes along with it. So we think that, that will be -- sort of the first strategy is to get Control-IQ approved and then get it on to t:sport and then really focus on marketing that product to the type 2 community. In the meantime, there's a lot to learn there. We believe that there's product features. There's channel access. There's just working with PCPs. There's a lot of different elements to the type 2 strategy that we need to often understand. As I said, it's very segmented. And so there might be different product features that are required or even different products that are required for these different segments. So we're working on a longer-term strategy now while we just, as I said, get Control-IQ approved here for our existing products.

Okay. And I know we're running out of time, but I did want to ask the Control-IQ feature update. You talked about the agency wanted to see more information, but just curious kind of where they would focus. And then as you think about the time lines to a more material software update, how do you think about that today?

Well, first of all, I just want to say that we have a great relationship with the FDA and that they've encouraged us in the past to look at new avenues, to get data that can basically represent clinical information. And so in this particular case here, we put a filing back in the fourth quarter of last year. That was an update to Control-IQ. And in it, we had simulation data, and we had real-world evidence. We just -- again, we thought that was a reasonable approach to trying to characterize the safety and efficacy of these changes. But discussions that we've had with the FDA, they've asked us for additional information. So now we're off collecting that information for this version of Control-IQ. And fortunately, we indicated that we are initiating a type 2 study. We'll be able to use that study, and we actually have a pediatric study that's underway today. We'll be able to use that study also in order to collect the information that will provide the evidence that the FDA is looking for this first version of Control-IQ. That being said, we're also working on more advanced features and attributes for Control-IQ, things that we've talked about in the past, which would be personalization, adaptability, improved time and range. We're continuing to work on those things, and those will require additional clinical studies that we're in the midst of starting here shortly.

Okay. And last question. I know we're almost out of time, but CGM integration with G7 highlighted target of launching commercially in the U.S. within about a quarter of FDA clearance of G7. Can you walk through the processes on your end? You've gone through this before, but just outlook around the pace of rollout and integration that you're contemplating today.

Well, we have a great relationship with Dexcom. We've been working with them now for many years. We're on the -- this is the fourth generation of CGM integration that we'll have implemented onto the Tandem systems. And so we have a great deal of experience working with the team. They're just around the corner from us, and we have a great deal of experience with our technology. So I think that approximately a quarter is still a good estimate. And I think that we need to wait for Dexcom to get approval. I know that they're aggressively working with the FDA right now. They've indicated that, sometime in 2022, they would expect to see it available. And we will have a product in the market, as I said, shortly after that.

Okay. Sounds good. John, Leigh, we're out of time, but I want to just thank you both for the time this afternoon. It was great getting to chat with you. And again, thank you for running through the story with us.

Sure thing. Thank you very much.

Thank you.

Thank you.