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

All right. Hello, everybody. Welcome to my final session of the 2021 Stifel Virtual Healthcare Conference. I'm Mathew Blackman, as a reminder, one of the senior medtech analysts here at Stifel. And for this session, we're thrilled to have the management of Tandem Diabetes, the leader today at the automated insulin delivery revolution we're seeing in the diabetes marketplace, not only here in the United States, but across the world. We have joining us today, Leigh Vosseller, Executive Vice President and CFO; and Susan Morrison, Chief Administrative Officer and Executive Vice President. Thank you so much for, again, participating this year. And everyone in the audience, this is a fireside-chat format meant to be interactive. And so if you have questions, please do not hesitate. Type them in the question box on your screen, and we'll do our best to address them when and where relevant. So little bit of an intro. I'm going to give you a sense of what we're going to try to tackle today in these 30 minutes, 3 topics come to mind. Maybe start with the third quarter, a little bit about the macro backdrop, what you saw in the quarter in terms of demand, U.S. versus OUS, how that rolls up into the implied fourth quarter guide. Second topic, how you're thinking about the competitive landscape over the next 12 to 24 months. And then third, we'll talk a bit about the pipeline, what to expect at your December 6 Analyst Day, any updates on some of the products that you have today that are sitting in front of FDA or will be in front of FDA in the not-too-distant future. So a fairly ambitious list to get through. Thank you again, both of you, for joining us.

Let's just start taking a look back at the third quarter. Leigh, heading into the quarter, so exiting the second quarter on the call, you called out a couple of items that we should be sensitive to, things like a more intense seasonality, particularly in the U.S. And then Delta emerged or really came to a head. So maybe take us back. And to the extent that there are other factors we should be thinking about, how that impacted the third quarter maybe relative to what you're seeing or expecting exiting the second quarter?

Sure. Thanks, Mat. We're happy to be here today and really great questions. It's funny when we were at the second quarter earnings call how much we were talking about this concentration of vacation season that we were experiencing, and so much changed after that. And I probably should even preface this by saying with all of the changes, the dynamics we saw in this quarter, we're really proud at how strong we came through it and how we were able to react and respond across the quarter. But that first one was really that concentration of vacation. And that was when it felt like everything was opening up, and the world was getting almost back to normal. So what it did was it took people away from the physician offices. It took people away from returning phone calls, and we were seeing a little bit of pressure there. It quickly turned into a surge in the Delta variant. And interestingly, then people started to go back home. And for our field reps, it was quite a swift change because they were just starting to get on their feet and go back and have in-person visits. And they were adjusting their schedules and their lives around that dynamic, and they had to quickly pivot back to the way it had been before. And that was part of the thing that was different. Of course, we've been doing this all through COVID, but it was the quick change in the environment. I think that was what struck us. And then to add to that, the third element, which everyone has been talking about around the world, which is the labor shortage. And so what we were encountering is when we talk to physician's offices, it's not so much that physicians or the health care providers themselves, but the support staff weren't all at full strength like they had been before. So a number of different challenges that we were encountering from this macro environment, but we still came through strong. We still are seeing and hearing the demand for Control-IQ. We still have a healthy mix of people coming from MDI versus competitor conversions. We saw progress on our renewal initiatives. It just wasn't what everyone anticipated from Tandem, which is usually in the third quarter in the U.S. at least, a modest step-up from Q2. But what transpired is, as we adjusted and acclimated, what we're seeing in October is actually the beginning of what we typically would see in that September time frame, which is as people are getting ready for their deductibles to reset, there's that surge of people that purchase pumps at the end of the year. And so like I said, October is really -- we're seeing the strong signals of a healthy fourth quarter.

Okay. And to the extent you want to comment, I assume there's no change in those trends since you reported?

Still very confident in our guidance number that we put out there, which suggests a step-up on the back end. I will say that we are thoughtful about the different COVID dynamics that could come. So as our usual in nature, we put caution in the guidance for those types of impacts that could occur.

And so, I mean, it clearly sounds like it's not a demand issue. This is almost a maybe a capacity issue, at least on the provider side. But patients are seemingly going -- are going back to docs now, and you're seeing that tracking with trends here in October. That's the sort of the take that we should have.

I think that's fair, yes.

Okay. Maybe we'll sort of -- we'll split up U.S. and OUS, some different dynamics going on there. I think the interesting thing walking away from the third quarter call and having covered you guys since you were a public company, you're now expanding the U.S. selling footprint. And it's not something you've done often. And so I think worth understanding, first of all, why the time is right now? And then maybe help us understand what you're coming from, and what the goal is in terms of whether it's number of reps, number of territories, however you want to frame it?

Sure. So we have about 95 territories today, and we're in the process of expanding to 110. In past years, we normally added just maybe a handful each year. But it always takes place right around this time. As we take a step back, we look at the opportunity in front of us with a upcoming year and really how to drive continued demand there. One of the things we recognized was there was an opportunity to have more feet on the street. So we've got -- whenever we expand our territories, it's typically a sales rep as well as an educator and then some people in the back office supporting them. And so this year, we recognize where there's a lot of interest out there. And we wanted to make sure that we were able to drive that demand and support it next year. So that was really the main motivator for the timing. And then the second piece is also we were hearing, especially in the third quarter, that as people were going back to more live visits, in combination with some of the physician offices being more resource-constrained, there was an extra lift that was really required of our sales reps. And because of that, there wasn't anything left on the table. But it was really causing a -- an issue with their work-life balance. They were working really long hours. And we really wanted to make sure that we were addressing that and that we were restoring a more normal balance on the go forward. So those are really the motivators for the timing.

So it sounds like both going deeper and so bringing some folks up and maybe bringing some support folks in to drive deeper and existing [indiscernible], but also to expand. And obviously, you're expanding a number of territories, so that makes sense. Are you -- so some of these new territories you're adding, are they opening up sort of the opportunity to go to accounts that you haven't been to at all? Or are these accounts that maybe just aren't getting the type of attention they may have gotten in the past because of the sales force being stretched kind of thin?

It's really to increase call frequency and so to drive penetration deeper into accounts, so that we're able to see them more to see their customer, their patients more, to be able to make sure that we're able to promote our products and provide them the information they need on a more timely basis.

Right. And you've begun to hire already or remind me again of the timing and will we potentially? Probably too aggressive, but could you just see some of this have an impact in the -- what's typically the seasonally strong fourth quarter? Or no, these are reps that are going to -- or support people are going to take some time to get to productivity.

We think they'll get productive very quickly, but the hiring process is happening now. And I would envision them being in place at the first of the year. So it's a 2022 event.

Okay. Maybe let's talk a little bit about international. It's a little harder for us, I think, on our side to get our arms around because it's multiple different countries, multiple different sort of dynamics. Maybe just give us a sense. It's been a tremendous sort of last couple of years. Where are you having success? And maybe sort of talk about that to the extent you want to talk about sort of regions, but also, originally, the initial set of rollout international is more about converting competitor pumps. But we all know how underpenetrated the international market is with pumping in general. Just the progress you're making driving penetration higher there?

Sure. I'm glad you asked about international. It's really exciting because the opportunity there is about 4 million people living with Type 1 in the markets in which we operate. So by far, larger than what we even have an opportunity for in the U.S. And to your point, with the low penetration rates, we want to do there what we've been doing here in the U.S. in the last few years, which is bringing these advanced technologies, which is encouraging more people to move from the sidelines and try pump therapy for the first time. So it's a healthy mix of people. Like you said at the beginning, it was mostly competitive conversions. We were very focused on those Animas patients who needed a new home, if you will. But we are making great strides in the MDI population as well as people are seeing these advancements and understanding the benefits that they bring. What's exciting about these markets is we are just getting our feet wet, and it's some of the larger ones. Brands in Germany we launched into last year, it's hard to say that they even -- we even exploited those like we would have been a first year ordinarily because of the COVID environment. So we're just getting those going this year. And now we have Control-IQ that has been scaling as a launch since the third quarter of last year, but only recently in Germany and France. So when we look forward, these provide great growth opportunities for us because Control-IQ if it takes that same momentum it got in the U.S., we'll really start to see that in 2022. And a lot of that's building -- still building the awareness of Tandem and supporting our distributors with the clinical story about the difference it can make in people's lives. So we're really excited about the OUS opportunity and the kind of growth we can get there in the coming years.

Is there any way to size the current French and German pumping market? I don't know if you guys have given us that in the past.

We haven't given specific markets size. I can say Germany is the largest of the markets outside the U.S., and France there is way up there at the top. It's one of the larger ones. But we're also fortunate to be in a number of other very large markets, U.K. being a great example and other countries in Europe as well.

And anything over the next 12 to 24 months of maybe not individually, but in aggregate of equal size or magnitude of opportunity like France and Germany? What else, I guess, is left out there beyond?

Sure. There are other markets we will explore in the longer term. I would say next year is really about penetration in the markets that we're in. It's getting everyone out of this COVID environment and really drive the awareness and the growth for Tandem with Control-IQ in particular. There's a lot of runway left with the penetration rates being between only 10% and 20% in most of these markets. And then we'll look around further in the future for other markets where we might be able to drive further expansion.

And is it fair to sort of look at your partner on the CGM side where they're having success in different regions maybe as a good leading indicator of where you ultimately may end up where you may not be today?

I think that's very fair. And soon enough, we'll have 2 partners on the CGM side, which will be another indicator of where we might have opportunity for the future.

Absolutely. And then I'm just thinking about this driving penetration. Obviously, you're working through distributors, so they're the ones doing the heavy lifting on that front. You said you're supplying them clinical data. What are the distributors doing in some of those markets? Obviously, in the U.S., there's a large -- you guys have a big digital marketing sort of campaign. Some of your competitors are going direct to consumer on TV. So give us a sense of the initiatives in place to help drive penetration outside the U.S.

There are some -- go ahead, Susan.

Please go ahead, Leigh.

Some similar dynamics in terms of how we market there. What I would point out is the distributors are responsible from beginning to end with that patient experience. And so what we do is we share with them best practices of how we've managed that in the U.S., including the renewal cycle that they're all going to start going through here very soon. And what we rely on them for is their wealth of expertise in how to approach their markets, how to approach the physicians, how to reach out to the patients, how to manage the reimbursement side of the business. And the value that we offer is that clinical piece of it. Let's help you educate the physicians on our product and the benefit it can bring to the patients.

I'm actually getting a question here in my question box about international, but sort of more about COVID. I guess we're all reading the headlines about some flare-ups in Europe we're seeing in the U.S. as well. But any change, any impact that you're seeing today from some of the more recent increases in cases in certain regions and some of these regions potentially going into lockdown again?

Nothing to speak to at this point. As I mentioned earlier, when we talked about the fourth quarter for the U.S. similarly with the OUS markets, we've taken some caution and conservatism around what COVID might bring to the business, but nothing to speak to today.

Got it. The last thing to talk about on the quarter, you don't break out renewals anymore, but how would you have us think about the impact of renewals in the third quarter, particularly in the U.S.? I know it's starting to walk higher. But any sort of metrics you compare maybe sort of year-over-year? Just give us a sense of where that is. I think 70% is a threshold you've talked about in the past. Anything to give us a sense of the progress you're making there?

Sure. As you mentioned, 70% is our long-term goal. The way we're measuring our progress today is we look at out of all of the people who've ever bought a pump from Tandem whose warranties have expired, what percent of those have bought a second pump from us? Last year, at the end of the year, that was a rate of about 55%. This year, we're tracking towards 60% by the end of this year. So you can see that we're moving along that curve. The dynamic this year to last year, though, was that the number of new opportunities was about equal. And so we didn't have a lot of new people to talk to, to go after. And what we're experiencing in our renewals initiative overall is that people don't renew immediately. It's a population do within the first 1 to 3 months. But we still have a fair number of people that extend out a lot further up to 2 and even 3 years. And so what I always ask people to think about for renewals is if you look back to what we shipped 4 years ago and then add about a year to that on average for people to go through the renewal cycle. So 2022 is going to be very exciting because we're stepping up our opportunities, up almost doubling what we did the year before. And so that means that it will bring great opportunity for us in order to convert those patients to a second pump purchase.

Okay. Actually, the last question I had on the quarter and more about sort of the near-term outlook, I'd be remiss if I didn't ask about everything we're hearing on sort of the supply chain side. And you obviously have complicated electronics that you're using with components that may be in short supply. Just give us a sense of where you are, your comfort level with supply and inventory? Are you seeing any issues that we need to be aware of?

Yes, we're not immune to the challenges that everyone is facing. And frankly, they are not that much different today than they were when COVID first began. And we've always had great relationships with our suppliers, but we've made sure to strengthen those over the course of the last 1.5 years, which has boded well in the recent months. As some of the challenges maybe have intensified for some folks, we're staying really close to our distributor -- I mean, to our suppliers. So we've managed to continue to meet demand. And there's nothing to speak of right now that's particularly concerning. It's just we're going to keep facing this as we get through the COVID environment.

And that's on the supply side. And what about on the cost side? Any sort of inflated input costs or component costs that we need to be sensitive to?

Yes. I think that's highly possible for 2022 as we think about our margin profile that we might see some headwinds on the cost side. We're continuing to look for our other -- we have many initiatives in order to improve margin overall. So we'll mitigate those -- any cost increases we might see as much as possible. So we're still confident in our long-term targets. We -- this is just a near-term issue that we're challenged that we would face and deal with.

Well, let's sort of transition and talk a bit about the competitive landscape. I asked the same question last year, and of course, there was no change to the competitive landscape. So I guess I'll try again this year. But potentially over the next, call it, 12 to 18 months, depending on FDA and I guess, the health of some of the submissions that are in there, there could be a couple, maybe 3 more systems on the market. So maybe just in general, how you're thinking about the competitive landscape. Obviously, I know you're confident in your position and your product, but how you think about the market overall and digesting more options for both patients, but also physicians.

I think you said it well when you started that we're the leader in technology today. And of course, we're not standing still. And so we've always anticipated there will be competition in the space. But at this point, there's nothing that makes us pause about where we are at the moment and what innovations we have in the pipeline to counter the competition. We still feel good about our strong growth profile, and we're looking forward to next year when we're able to get t:sport into the market.

And maybe give us a sense in the last couple of years, the market certainly has stepped up. You've been the primary driver of that, Control-IQ. Just where you think the market is shaking out in terms of new pumps or new pumpers coming to the market versus prior years? And whether you'd expect that to happen again in '22 and beyond?

It's been quite a movement in the last 3 years in particular, where once upon a time, we were -- it was scale. That got about 25,000 to 30,000 new pumpers coming to market. And each year, we've seen that step up about 10,000 more annually. And so this year, we think we're going to end up with something between 60,000 and 70,000 people coming from the MDI population to the market altogether. And that's across all of the companies who are selling into the space. When we look to next year, there's no reason to believe that we won't see more step up. In fact, this is all moving in a great direction towards that goal that we believe that there will be a 50% penetration rate in the coming years. And so we think that, that strength will continue.

And one of the things I've also often sort of thought about is how the market is going to handle having multiple options? Is it almost going to be overloaded with some of these physicians? And does that also increase the importance of having your sales reps in the offices to the extent that they lay out 5 different pumps that your sales force can push the narrative on Control-IQ? But do you think doctors' offices are able -- a lot of these endos I talked to are really stretched as it is. Can they handle -- to the extent they're prescribing Tandem today and they're happy with it and clearly, their patients are happy with it, do you think there's an appetite to add more pumps to the practices?

I think that's where we're probably at an advantage because we set a high bar with Control-IQ. It's the system that they're familiar with. It's the data management applications that they're familiar with. And so I really do think we've got a first-mover advantage here.

And I guess the other piece, too, and maybe this is a reasonable segue into the pipeline conversation. What's left to tackle from a technology standpoint, maybe even from a user experience standpoint to get us to 50% and north of 50% of MDIs on pumpers? So I guess, 2 things. What do you guys think when you look at the market, you look at the folks that have not yet converted, one of the biggest reasons. We'll put cost aside, I mean, that's always going to be an issue with technology. But from a -- whether it's a form factor, whether it's taking the burden off of patients even more. What do you think are the key things to tackle from a technology standpoint?

Yes. This is a highly, highly segmented market. So the motivator for someone's decision really varies person to person. And that might be a form factor. How someone wears their pump is a huge driver of decision-making. Also, as the algorithm start to require less from a person and giving them more from a clinical outcome standpoint, I think that's the other big driver. And then the other area that I'd point to is just starting to bring in all of the different consumer technologies that people use. So their diabetes device. I mean, we're just trying to -- the cusp, I'd say, starting to merge those with more consumer technologies. So the more that we can streamline that for people, I think it will drive greater adoption.

And I'm actually going to circle back. I got a couple of questions that are hitting here. So I'll feather them in here now. Got a question just about UnitedHealth and progress there. Any sort of context in terms of where you are in terms of penetration relative to where you might have thought you'd be?

Yes, we're exactly where we expected to be. I mean, the most important thing was that we got the access. And so right away, we saw a step up in terms of the demand that was coming from the United population, and now it's just a part of the regular baseline, the mix. This quarter, in particular, third quarter is the first quarter where last year we had it in the baseline. So it's where we want to be and where we need to be.

And then I allowed one more question here on the competitive landscape. I don't necessarily think that expanding the sales force is a reaction to impending competition. But is there anything you're doing or thinking about and whether it's sort of again, we've talked and I've asked in the past about maybe having a more of a presence on the DTC side. I know you do it on the digital side. Have you thought about investing in TV commercial? Anything that you're thinking about investing in here above and beyond perhaps you would have done in the past with the competitive environment maybe getting more challenging?

Yes. So we're really -- we believe we are where we need to be in terms of the reach to our patients or potential patients. I would say one starting place that people, I think, tend to forget is the physician has a heavy influence on what product a patient might choose. So just our field reps alone out there having those interactions and making sure we stay front of -- top of mind with the physicians is important. But our other marketing initiatives and the digital platforms, we focus on where we think the community connects and where we can get that direct reach most easily. So we'll continue to evaluate. Every time we try a new avenue, what do we get a real return on it? And if there are ways to spend more dollars to drive business, we will. But we think we're right set for where we want to be today in terms of reaching the Type 1 community.

Got it. So maybe we'll talk a little bit about the pipeline, and that's both products but also indication expansion. And maybe we'll do sort of rapid fire and ask you through the current status of some of these things and how we should think about timing and sort of the importance overall to the broader portfolio of each of these items. So mobile bolus, current status, time lines? And why is it important for the portfolio as a whole?

Sure. So awaiting FDA approval now where it could be next week, it could be a month from now. We don't really have any indication from a timing perspective, but we do feel as though we've moved considerably through the process right now. It's important because it's the top requested feature we hear from people. It adds a layer of discretion to someone's therapy management and really starts to incorporate back to that consumer technology and bringing in consumer technology for the control of diabetes management for the first time. So it's definitely an exciting, I think, innovation that we'll be offering.

And then FDA. Again, you said you made progress. You think you're making progress. Any way to characterize that? Is the -- I've heard other companies talk about being an active dialogue or the scope of the questions that we're getting or narrowing. Any way to frame that, if you're willing to?

I don't think you can compare it company to company because what happens during a review process is typically your lead reviewer is going to take the different sections, and they're going to parse it out to different groups depending on the area of focus. So some of those groups may have more capacity than others to be reviewing different submissions right now. And so I don't think it's necessarily comparable. We also don't know the time line of when we submit it versus when other people submit it. Already, even at the last batch of questions that we responded to, we've given the example of an in-app user guide that we included in that and that they had requested. So we were already talking about things regarding the user manual at that point. That being said, since we submitted at the end of August, it really has been other than acknowledgment of receipt, we haven't really heard anything. And so that's why it's very difficult to predict regulatory timing right now.

Fair enough. So phone control, current status, importance for the overall portfolio. And obviously, we'll go to t:sport Next. These are all interconnected.

Absolutely. And that's a great -- it's the perfect point. They're all interconnected because the mobile bolus app is really introducing phone control. It's the reason why people interact with their pump most frequently. So we'll be offering it on both iOS and on Android, which I think is very important. Majority of our customers do use an iOS system. So phone control is really tied to that mobile bolus clearance.

And then t:sport. And I guess maybe if you could talk about -- before we get into the timing and all that, obviously, these are all contingent on each other, sort of a domino effect. But maybe help people understand who the patient is. I've talked to several docs that are -- this is a direct sort of shot across the bow, so to speak, for a patch pump versus others that think this is a very distinct sort of in between option. So how do you think about who this is going to resonate with? And I guess, really, the end here I'm getting at is how much of this is an incremental opportunity to get after patients that perhaps are looking for a different form factor than a tube pump versus cannibalizing your existing opportunity for folks that just are excited to get to -- not just but get the algorithm, get the automated insulin delivery and all the other stuff that comes with it.

Yes. We really view this as a market grower. People who are using multiple daily injections who want the flexibility to detach and don't want to wear something on body but yet want something small, discrete that's controlled by a mobile device. So really, this is starting to address a new segment of the market. It does become more competitive with some of the patch pumps that are out there. It also does cannibalize some of the t:slim customer base. But for us, that's actually a good thing. It keeps people within the Tandem family, and it provides them the solution that they want. So we don't see any concern with the cannibalization part.

And we've talked about this in the past and more sort of theoretically, Leigh. But as we think about t:sport and obviously, to the extent it becomes a large portion of your revenues, a margin profile, we think at scale, would certainly be more favorable than the margin profile of the pump just given the lack of electronics that are on it. So maybe can you give us a sense of how we should think about the margin profile at scale of t:sport versus the current portfolio? I assume it'd be accretive at scale, but any sort of framework to think about that?

Absolutely. It is one of the main drivers towards our gross margin goals that we've set of 60% or better is t:sport starting to get to that level of scale. And then when you compare them, I think I don't know if it's fair to say less electronics, it's tiny, but it's mighty. There's a lot working inside that pump. I think the main difference is that it doesn't have that touch screen element to it. And so it is the pump and the cartridge. Both are expected to have benefit. And like I said, 1 of the 3 main drivers for our gross margin expansion.

Okay. On the last minute here, so maybe we'll talk about the December 6 Analyst Day, R&D Day. What are you guys going to talk about? My sense is you obviously will talk about some of the things we've talked about over the last several months and the last several minutes. But it all sounds like you may sort of pull the curtain back a little bit and show us what you've got going on longer term. Any sort of way to frame what we should expect?

Sure. The best way to think about it is how innovation will drive our growth over the next 5 years. So there will be new information shared there. And we really haven't talked about much beyond t:sport and beyond '22. So we're excited to be able to share more information with people.

And I have to ask, are we going to get guidance there for '22? Or are you going to wait till your typical fourth quarter? Anything on the financial side? I think you've been asked in the past that you're going to update your pump penetration targets. I don't -- I'm asking for a sneak peek, but in order to try.

Yes. The focus is on R&D. And we've not committed to any metrics that may be provided. You're right. Typically, financial guidance is provided at our Q4 call, but we've not committed to what we'll be sharing on this upcoming event.

Okay. I tried. I think that's it. As always, Leigh, Susan, really appreciate it. Thanks so much for the time. And thank you, everybody, in the audience. I appreciate you attending. I hope everyone has a wonderful Thanksgiving next week. And again, have a good night.

Thanks, Mat. Appreciate it.

Thanks, Mat.

Take care.