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

All right. I think we're all here. Good morning, good afternoon, I guess, it's one or the other, depending on where you are, but I think we'll get started. My name is Jeff Johnson. I'm the senior medical technology analyst at Baird. And our next presentation this morning or this afternoon is from Tandem Diabetes, a leader in the $3 billion global insulin pump market. With us today from Tandem, we're happy to have Chief Financial Officer, Leigh Vosseller; and EVP and Chief Administrative Officer, Susan Morrison. Leigh, I'll turn it over to you if you have a few minutes of prepared remarks you'd like to make, and then we'll go straight into Q&A.

Sure. So thanks for having us here today, Jeff. We're very happy to be here to talk with everyone. And one thing I'll just start out by saying it's been quite a wild ride at Tandem over the course of time since we first launched our pump in 2012, particularly in the last 3 years that we've gained so much market share. Just with the advancement of algorithms and all the technologies in the market today, we're seeing a significant shift of people to pump therapy more so than what we've ever seen in the past. And so with all of the things that we have on the horizon to with Control-IQ continuing to take hold, our booming international opportunity that we have out there, our renewal opportunities coming in the near future and all the products in the pipeline, there's a lot more great things to come for Tandem. So we're looking forward to the future and some really great growth down the road.

Great. Well, you've teased a few things there that I want to -- I definitely want to dig into today. But let me start first on kind of some short-term things just because there are the questions I've been getting in the last couple of days. I think you guys have been at 1 or 2 other conferences. I know your other insulin pump competitor has as well. Just kind of refresh us what you've been saying at those conferences or what you want to say at this one, about the U.S. market from a COVID standpoint. It sounds like we haven't really seen much of an impact from the resurgence of delta and U.S. demand trends. We'll come back to international in maybe just a second.

Sure. I'll start and Susan, if you want to chime in a little bit. So from a COVID perspective in the U.S. it's interesting. We started the year, and it started to look like things were going to open up and get back to what something -- that looked more like a normal environment for us. And as we got into the summer, we've seen a few changes of things that we didn't quite anticipate when we started off the year. And so the first one I'll start with is, first of all, the resurgence with the delta variant. So just when our field reps were starting to get back out in the offices, see patients in person, see physicians in person, we've had to have put some restrictions in place again. And so we're not able to have those open conversations, but it's not too bad. We've been able to pivot and operate well in a telehealth environment. It's just more of a mental or emotional fatigue if nothing else in that regard. The other thing that was a little bit unexpected is as things were opening up, I think I've heard other companies refer to it similarly as these reopening headwinds. So when we were able to start talking to people again and get out there, what we found was that it seemed like everyone in the U.S. went on vacation all at the same time. So more like that phenomenon, we see outside the U.S. in that August time frame. And what that meant was people just weren't there to answer the phone. We couldn't get in touch with physicians to push paperwork through. We couldn't get in touch with patients to finish off the ordering process. And the reason we bring all this to light, it's not that we think this is a long-term issue for us. It's more about just helping people understand the seasonality this year, where typically we see a step-up from Q2 to Q3. It might put a little more pressure on that seasonal change, but it just means that we'll have a more robust fourth quarter in that regard. So in the U.S., that kind of sums up what we've been seeing in the recent weeks. It was what we were seeing when we first came even at the earnings call. So nothing has changed since that point. It's just a similar dynamics are consistent today. And then the other element on the OUS side, as you said, it's been a little bit different. In that, I think over the COVID times, it's been more variable with openings and closings. And it's also different because we talk about it as one unit, but it's really a lot of different markets that are behaving differently at different times. And so I'll be -- I can't tell you how happy I will be to get past all this and not have to use the C word again in the future.

Yes. Okay. We had to think on that one again. Okay, got you. So good, good. Well, thanks for clarifying that on the U.S. Maybe I misunderstood that. I don't have direct access, obviously, to some of your other presentations. So I was just getting kind of thirdhand some of the comments you've made. But it sounds like even in the U.S., maybe a little more just more-than-normal seasonality is the way to think about it and then that sets up for maybe a stronger 4Q?

Yes, that's a fair way to look at it.

Okay. Fair enough. And then one other thing, I think, from COVID that I think we've started to see is, I do think COVID has driven even diabetic patients to better understand this -- the need to strictly monitor and track their disease state and really stay on top of things, things like that, whether it's diabetes or other aspects. So -- do you think COVID is -- once we get beyond all the noise in that, is it going to be supportive of stronger market growth? And what do you think once we get out of COVID, the U.S. and even the global kind of insulin pump market can grow at? We try to roll it up, maybe it's mid-teens kind of market growth, something like that. Is that a reasonable number to you? Or how to think about that?

Yes. Maybe starting with just COVID and the impact of that on pump adoption. I mean we do see where people have greater visibility or paying closer attention to their blood glucose trends and their diabetes management overall. And I think that naturally lends itself to the adoption of pump therapy, particularly with the algorithms. We've heard so many different anecdotal stories from people who have said either if they've had COVID or if they've had a loved one with COVID, that having the algorithm really has allowed for them to focus on their care or the care of a loved one and think less about their diabetes. And that's very powerful. And I feel like the peer-to-peer influence with that type of story also is powerful to drive continued adoption. So when you say mid-teens sustainable growth, that feels comfortable because I do think that there's a lot of opportunity just from Control-IQ. And then when you start to really introduce new form factors, addressing new segments of the market, there's a lot of opportunity for growth here.

Yes. And maybe, Susan, if we take that market growth and try to look at it as penetration rates, another way of thinking about the market, U.S. market is what, maybe low to mid-30%, call it, 33%, 35% penetration from an insulin pump standpoint. We've been saying, and we're not the only one saying this that we feel pretty good about going to 50% over the next few years because of AID systems. I think if you look at some of the Segro data that just came out in the last week or 2, now granted, Eric and his guys there, they survey some very big, high prescribers in that, so there's probably a little bias into those surveys. But he was looking at numbers 2, 3 years from now, 78% of those are those docs who are responding in a survey thought 78% of their patient base could be on a pump over the next few years. So does 50% feel right to you? Is it 50% with upside that it could go even further because of AIDs and the benefits those bring to the table? Just -- what's your latest thinking on like penetration rates?

Sure. So I guess I'd say I wouldn't look at 50% as a ceiling. And so when he sees 78%, obviously, that's extremely encouraging. But we look at 50% by year-end 2024 is still a very realistic goal. Obviously, part of this depends on what's happening with other players in the industry and overall momentum. But I absolutely think there's potential beyond 50%, but I still think that's the right metric to work towards in the nearer term. As far as overall penetration, I mean, I do think that we've moved -- it feels like we've been talking about 30% for a long time. But if you think about it, 5 years or so, it was more like 26%, 27%. Today, it's probably closer to like more like 35%. So there's actually been some meaningful movement there, and we're definitely seeing an acceleration.

Yes. No, that makes sense. And all those numbers, I think, Susan, that you're referring to, are all pretty much T1 numbers, correct?

Correct. Yes, we factor very little type 2 into our longer-term projection.

Yes. And on T2 and maybe we'll come back to that, what is it, it's a 500,000 pump long-range plan and all that, that I know you guys have talked about before. But with T2, Insulet is even worse than you guys have given us any numbers. You guys give us good numbers. They don't, and I don't mean that bad about them. They just -- they'll never give up patient numbers and that are very rarely do. But our math would tell us that they probably added, I don't know, 15,000 T2 users in the last few quarters, several quarters, 1.5 years or so. You guys don't have as many of those T2s. Do you think something like t:sport kind of gets you more into T2 over time? Is t:sport -- or is the T2 market going to be more of a pay-as-you-go versus DME? Is that going to be the hurdle? Is it going to be the form factor? How to think about where T2 could fit into your opportunity over the next few years?

Sure. And so right now, it's a little less than 10% of our overall installed base where people are living with Type 2 diabetes. But it's interesting because that's been pretty consistent and yet our market, our installed base, has grown so dramatically. So that naturally implies that there's been continued adoption within type 2, and we market very little to this community right now. I'd say it's very much a segment of the market that having full featured pump functionality really appeals to within type 2. One of the things we do here that I think there is the opportunity for greater market adoption is a greater level of discretion. And I think that t:sport begins to introduce or provide a solution in that direction. That being said, we also see where it really opens the door and addresses a new market segment within type 1 also. The other piece for type 2 is really an indication on the AID side. Control-IQ, as you know, is not indicated for type 2. That being said, it's prescribed regularly off-label. We just don't market to that community. So I think as you start to see increased automation, increased simplification of the user interface, greater discretion, all of those start to really appeal to a greater segment within type 2.

Okay. And one other question, I guess, on t:sport more so than just type 2. But on t:sport, I think understandable you're waiting, you're going to get mobile bolusing sometime hopefully by the end of the year. Any updates there on that, number one? But more importantly, once you do, then you kind of move down that time line on t:sport. I've heard kind of mixed things from different industry people on mobile bolusing. Is that a lot of the work that needs -- that will need to be done to have your mobile phone run t:sport? Or is there still a lot of technological hurdles beyond mobile bolusing to have a phone run a pump? So I guess my question in that is, once you get mobile bolusing, is t:sport technologically pretty much a done deal? Or is there still a lot of other kind of hurdles that you'll have to overcome over the next 6 or 12 months to get that launched in the market?

The technical hurdles are greatly addressed with mobile bolus. And as the update on that, we've provided our full response to the FDA, and it's in their hands right now. It continues to be under review. And our goal here is to be able to have clearance before the end of the year. So no change to those assumptions. So where we go from here for t:sport is, t:sport is the same foundational app. So so much of what you're working on with mobile control are things like cybersecurity, the infrastructure, communication protocols, none of that changes. What really is introduced with the full control is features that you don't use as often. Those tend to be more settings related. And so those are additional workflows. So the work associated with that are things like human factors, testing, implementation. But from a core functionality standpoint, the control of the device is established with mobile bolus.

Okay. And on the mobile bolusing the response to the FDA, I think you said that in the last couple of days as well, so that all makes sense. Have you heard anything at all from the FDA in the last, what's it been, 4 or 6 weeks since your call, your last update to The Street. With the resurgence of COVID, is that -- are they now back focused even more on COVID stuff and now that creates even more time line risk and all that for some of these diabetes devices? Any updated commentary or thoughts from the FDA on when they get around to diabetic devices?

Yes. I think current time lines or goal time lines that they used to work toward are kind of all out the window. They haven't said this to us as directly, but they've made broader statements that we have heard saying to expect continued delays at least through year-end. And so that's kind of helped to set our own expectations.

Yes. Okay. Fair enough. And then, Leigh, I guess, just on the international, you made some comments there, either you or Susan then -- some of the hospitals or some of the markets in Europe do have more hospital-based prescribing of pumps and things like that. So has there been any kind of step back there in those international markets that maybe isn't summer seasonality, maybe isn't just more people going on vacations, but if you have see incremental restrictions? Our checks would actually say most European markets are actually moving in a decent way. Obviously, Australia and Japan and some Asian markets have had some struggles here more recently, but most European markets seem to be moving in a decent way. So just any thoughts there.

I would agree with you. I think the environment has changed pretty significantly if I look back to a year ago and what it looked like in the OUS market. So they are, for the most part, open. Now what will delta variant do and any other variants that come along, how will it impact that? That's the caution that we've put in our guidance for the year. But at least for now, it feels like they are more open. Our distributors are able to engage with physicians and the patients there. So we're excited. I mean in that, that leads to or lends to some of the strength we've seen in the first and second quarter, in particular.

Yes. Okay. That's helpful. And then I think you have talked about reorder patterns. And I think if memory serves right, was it 4Q or 1Q, you've got probably a little bit of tailwind in Germany from some stocking orders and things like that? But you kind of blew right through any risks from that in the second quarter. Are we kind of the second quarter kind of a pull-through good end market demand number? There's still plenty of new markets that I know you're going into the next few quarters. How to think about kind of the growth profile of the international market?

Sure. So you're correct about the fourth quarter, that's when we saw the very large order from Germany, which was about half of what we shipped in that quarter. What we saw in the first and second quarter, which is very encouraging is that it was pretty much strength across all of the markets, which was unusual considering what we've seen in the 4 quarters prior to that. So it's only 2 data points. So it's a little early to call it a trend, but I think it's a good sign that we're starting to get some normalcy and starting to see some consistency in the ordering patterns. And our distributors are absolutely focused on that as well. I mean, they want to have consistency, too. They're still, overall, though, balancing all the COVID challenges that come with that. So as we said earlier, it is the way the markets have been opening and closing and just assessing what real demand looks like out. They are just because they haven't been able to have the types of interactions that they would like to have. And then throw on top of that, the logistics challenges around the world and trying to manage when and how they order. So there could still be some variability in the very near term, but Q1 and Q2, as I said, showed strength from all markets. So I think it's a good indicator of potentially a baseline.

Yes. Okay. That's helpful. And then Australia, that was one market where we have heard some incremental pressures here recently. Now you guys were off the market for, what, maybe 4 or 5 months or so. Remind me what that issue was? I think it was December through April or something, if my timing is right. Did you ever talk about what that issue was? And is Australia going to be a good contributor for you anytime soon? Or is it a pretty small market?

I'd say that it is a pretty small market. The main markets for us are going to be Canada, Germany, France. We never provided detail on that because, frankly, it kind of goes into the detail of regulatory conversations that you have. And I put it in the category of "We were getting to know each other." It was a new market that we were entering. And so the regulatory agencies really work very independent of one another. So as we kind of work through or had discussions with them, that's when we resumed sales. So it was only new pump sales, so we never halted supplies or anything. And it was just for a short period of time, and that's been cleared up.

Okay. Fair enough. And then, Susan, when I think about the penetration comments or conversation we had on the U.S. market and the international markets, obviously, pump penetration lower, I think, closer to 10% or so in at least the developed markets where you guys are at right now. I think some of that, you could chalk up to awareness, some of that in national health care, government or government-funded health care markets. It seems like there have been in some cost-effective studies that are mixed on whether or not there's a cost-effectiveness argument for pumps. But I think AID has really kind of shift that discussion. And so do you feel like the international markets are prime to get at least closer to U.S. penetration rates over the next few years because of AIDs? Or is it still going to be a cost-focused kind of government funded, "they're going to be tight with dollars kind of a market" that we'll have to think about in some of those markets?

Yes, I'd certainly say there's that opportunity just based on the underpenetrated nature of the market. And Leigh, maybe do you want to speak to the cost effectiveness discussions?

Absolutely. I would say that when we talk to our distributors, there is a bigger emphasis on those cost effectiveness studies, outcomes, type of data that they're using in the OUS markets. And I think it's encouraging because they're actually looking at it and asking the questions. And if you think about it in those markets where they are today versus where we are in the U.S., it's been 3 years here at least of these advanced technologies where we've seen a clear difference in the outcome when people use the advanced algorithms combined with the CGM and the entire system, if you will. And in the OUS markets, that's just beginning. And so the -- it's going to be -- I'm going to say, easy to show that clinical differentiation. And so that will support any questions or concerns that may have been had about whether or not pump therapy is more effective than just multiple daily injections.

Okay. Good. Well, that's helpful. And I'm just reading a question here. So sorry, you see me looking off to the side, but the question that just came in, are we at the therapy peak now? How do you drive Control-IQ renewals when people are already achieving 90% time in range in the real world? Are the upcoming developments and upgrades and actual improvement versa a must have to compete in the future? And I guess I'll leave it to you. But again, that maybe gets into the 4- or 5-year cycle, even if it's a damn good system, it doesn't mean you wouldn't want a new version of that system in 4 or 5 years, but I'll let you maybe take it from there.

Yes, I can start, Susan, if you want to chime in. But when we think about the renewal strategy, it's true. So people ask a lot, "Well, someone already has Control-IQ, why would they -- what do they need next?" And first of all, we've laid out a pathway maybe not completely clear to everyone outside yet that we have a pipeline of different Control-IQ innovations that will make it more effective, make it more appealing. There comes a point where for patients sometime too it's not just the clinical difference, but it's the personal burden that's reduced because of the system changes. So there's that element of it. Mobile bolus is going to be a great example here. It's not necessarily enhancing Control-IQ and the algorithm, but it's providing a level of discretion that people don't have. So it's more of a convenience feature if nothing else. So once that's launched that's a great conversation to reach out to all those people who've been hesitating for whatever reason and say, look at this next innovation that you might want, and you have to be in warranty to get that. So we have a number of initiatives to continue to propel renewals going forward beyond with what Control-IQ offers today.

Good. Well, on top of that, on the renewals, so I want to come back to that 70% number. I think you've been talking about that might take a little bit longer to get there just because some patients are on a 5-year rather than a 4-year renewal cycle in the U.S. Just remind me, is that 5-year cycle driven by some payers. I've always just conceptually thought of it as a 4-year cycle, but are some payers moving to a 5-year cycle?

No, it's really the vast majority are a 4-year cycle. Government plans tend to follow that 5-year cycle. Medicare is actually a 5-year cycle, if that helps. And so you don't see commercial plans, many at all follow that 5-year logic. So when we talk about 5-year cycle, what we've seen in our data so far is that even though it's a 4-year warranty period, so your warranty technically expires 4 years in a day, a lot of people aren't moving through the renewal process, until about a year later on average. So where I think about it as -- on average, investment, like I said, are 4-year warranty cycles, assume it from a modeling perspective to be about a 5-year renewal cycle. And so one encouraging point though, is as we've been getting more familiar with renewals, we've been improving our processes and just understanding what helps motivate people. We're starting to improve that. So at the beginning, we still see people, I should say, that renew at 2, 3 and 4 years after their warranty expires, but we're starting to see more people push to the front end of that cycle. So I think that's good news particularly as the number of opportunities will increase significantly next year. The earlier we can capture them, the better, obviously.

Yes. Okay. Fair enough. And then on the -- outside of renewals, if we look at your other 2 sources, obviously, they come from competitive converts, they come from MDI. When I think of the competitive converts, I'm kind of torn. Medtronic is still a big market share player. So that showed -- would tell you that, "Hey, there's still a lot of share to take there." We know their CGM technology is still lagging behind. So even with 780, I don't think we think that's going to completely close any kind of technology gap with Control-IQ and what have you. The flip side is the Medtronic sales reps are still pretty engaged, especially in the smaller offices. I think the big pump shops you guys have gone in there, not you guys, but I think the big pump shops have seen the benefits of Control-IQ. They've completely converted their business over to Tandem in the last couple of years. But I guess, as you guys go out there and look and dissect that market, small shops, small endo offices versus the big pump shops, is there still enough in the big pump shops of market share for you to take from a competitive perspective? When does Medtronic get down to where they just don't have as much share anymore in those big pump shops that you guys are going to be able to take?

Yes. We still have meaningful opportunity there. Just the fact I think to your initial point, Medtronic still does have majority market share. So just the fact that they have such a large installed base and that the renewal opportunity for those folks are governed by their warranty cycle, it really helps to extend this opportunity period. And so we absolutely have meaningful opportunity in large shops as well as the smaller shops, I think, to be able to continue converting the Medtronic installed base. And then what happens, though, is at a certain point in time in the future, our own installed base that's eligible for renewal will really begin to eclipse the eligible renewal coming from Medtronic. And so you may not see it coming from the same source, but it doesn't mean you don't see those purchases. Frankly, that's an advantaged position for us to be in because we've got a lot better visibility to that customer. We have a relationship with that customer. We know when their renewal is. And so I think that that's kind of a long-term benefit of our business model.

Yes. No, that makes sense. So Susan, help me out, I think up until last quarter, anyway, your supplies revenue was outgrowing your -- was growing faster than your pump revenue, if memory serves, and I'd have to open my model and look at that, but I think that's right. I would assume that for now because supplies are kind of a recurring revenue stream business that, that outgrows pump revenue at least for a while. Now once you switch over more renewals than -- rather than MDI or competitive converts when renewals are a bigger part, then at that point is when supplies growth starts to lag system growth. Is that how we should think about it? So for now, it grows above and eventually grows below because those patients were already buying supplies? I'm just trying to understand the mechanics of the supply side of your revenue.

Sure. I think a piece of it is mix of business, though, international versus domestic, because international obviously has a higher supplies revenue compared to the domestic piece. And so Leigh, I don't know, do you want to go into more detail on that?

Yes. No, it makes sense. It's that supply revenue per patient. So it's different dynamics because of the reimbursement structure where U.S. versus OUS pumps, the U.S. pumps represent -- I'm going to call it roughly half of what a U.S. pump reimburses. But outside the U.S., the supplies are a bit higher. So with the changing mix of our international versus domestic, it's going to play into a little bit of the assumptions that you use for supply revenue overall versus pump revenue.

Okay. Well, maybe I'll follow up with you offline. Maybe I don't know if I do that. International supply was higher there. I need to dial my model in a little more there, I guess. And then last question I had just on MDI. I think you guys in T1 anyway, probably have been taking 60% share of MDIs here in the last year or 2. You could cut the numbers and make Pod or Insulet look like they're closer to 50-50, but I think that's what the bigger contribution of T2. Where do you think that goes over time? If beta comes out sometime middle of next year, when '05 comes out, does that MDI share come down? And does it matter if it does, if we're going to really see that pump penetration move from 35% to 50% in the next 3 years? Is it the pie is going to get big enough that even if your share of the pie comes down, you still put up good growth rates within that market?

Our absolute number of people converting from MDI will continue to grow. So to your point, how that falls relative to other people coming from MDI who maybe are attracted to different technologies, that's kind of to be foreseen, but we absolutely anticipate continued growth in the absolute number coming from MDI.

Okay. And Leigh, I guess, just to bring it all together here in the last 2 minutes or so, we always think of your guidance as being pretty conservative or definitely for the last couple of years, you guys have been great about putting out very conservative numbers being able to beat them. With some of the comments that you led off with -- and especially U.S. maybe a little more seasonality, should we just think of the next quarter or 2 being maybe not as conservative in the past but still conservative? Just what's the way to position kind of how you're thinking about how you set guidance versus what you've seen now in the last month or 2 since guidance?

Sure. Just on an overall philosophy perspective, when you think about how we build out our guidance. We look at all of the opportunities that lay out there, and we never assume that all of them will hit. And frankly, the last 2 or 3 years, we've been pretty successful on all fronts. And so that's where the real overachievement has come in is, you never -- you wouldn't assume that, that could happen every single time. So when we think about the guidance going forward and where we are today, interestingly, when we started the year, our caution was more weighted towards competitive dynamics in the back half of the year. At that point, we assumed that based on everyone's time lines and FDA being able to get through the funnel, everything was going to come to market at the same time, and it was going to create more pressure than it might if the products rolled out at different time points, right? And so then when we got to middle of the year, particularly with the Q2 when we reset the guidance, it's flipped more. COVID where we thought it was kind of starting to relieve itself, has seen to create more variability than we anticipated before. So the caution now is more around COVID and the varying dynamics that might occur there. So you could say there's upside opportunity if the world starts to open up again and we get back to the normal environment. The competitive dynamics, we still have a little bit of caution in there, but not near as much as we originally anticipated. We think that will be more dispersed over time and less impactful in one single period. And so that's the thinking that went into setting the guidance for the remainder of the year.

Yes, that's helpful. And not to put too much of a fine point on it because I'm sure it's still all in flux. But we -- I think the WHO or W-H-O just put out a note this morning saying that first time in a long time, they've seen the number of global COVID cases tick lower. There's been some anecdotal reports in the U.S., especially in the southeast and midwest that maybe we've seen peak hospitalizations, although I think that's still questionable at this point. Just in the last couple of weeks, have you seen any change in the -- in some of those dynamics you were talking about initially like at least they're not getting worse from here or maybe even getting a little less bad, just the last couple of weeks versus maybe the peak of it in the 4 or 5 weeks ago?

Yes, I think it's still pretty consistent. I can't say that I've seen anything at a material level that says there's been a directional change at this point.

Yes. Okay. Fair enough. Well, good. I think that's it. I don't see any other questions in the queue. So as always, I appreciate the time. It's good to see both of you. And thanks for taking the time.

Thanks, Jeff.

Thanks, Jeff.

As a reminder, next presentation is set to begin at 1:25 Eastern Time include Syneos Health, Axonics, Spruce Biosciences and TrAMPoline Pharma. Thanks all. Take care.

Thanks.