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

Good afternoon. I'm Josh Jennings, representing the Cowen medical devices research team, and we are happy to have members of the Tandem executive team joining us to close out our -- the management team track of the 42nd Annual Cowen Healthcare Conference. We have John Sheridan, President and CEO; Susan Morrison, Executive Vice President and Chief Administrative Officer; and Elizabeth Gasser, Executive Vice President and Chief Strategy Officer. Tim and team, thanks so much for participating in this year's Cowen Healthcare Conference.

Thank you, Josh. It's nice to be here.

Good to see you all virtually. I know this is the first time that our team is hosting you guys, and we're excited to -- for this discussion. Maybe willing to start, and I know you've had the fourth quarter earnings call update recently. You had a big Investor Day recently as well. I wanted to -- from the fourth quarter earnings call, just ask a question about the near-term competitive dynamics. And you were asked a couple of questions on that call about the potential benefit from Medtronic's remediation efforts with its FDA warning letter. And maybe just clarify how this was accounted for in your 2022 guidance, if at all? And then how does this opportunity potentially differ from the standard competitive conversion dynamic you faced for several years?

Yes, that's a good question. And I think that when you look at the warning letter, the warning letter specifically called out on it that it would affect their approval of the PMA related devices. And clearly, they have a 780G under review. And so that would suggest that they need to resolve the issue before the FDA will consider the approval of the 780G, and so this is probably the time to take to resolve these letters. It's not something that happens overnight. It's probably 6 to 9, maybe 12 months, really, I think, before you can get the issue resolved and then confirm and prove it to the FDA. So that would imply that 780G is really not going to be available in the market until possibly late this year or early the following year. And so it's -- I mean, this is a speculation on our part, but it's our assumption that Medtronic had baked into their revenue plan in 2022 revenue from 780G pump supplies and sensors, which was a substantial amount of money -- a substantial amount of revenue. And so I think what we believe is that as the 780G approval has been delayed, that additional revenue has probably been pushed out as well into next year. And so what that means for us really is it means that the competitive dynamic is really the same as it has been for the last couple of years, where we're competing against the 670G. And as we've been very effective at doing that, and I think we continue to see that unchanged in 2022. So I think that the guidance reflects that.

Excellent. I know [ this could be ] a tough question is because the product hasn't been launched yet, but just if one to 780G has been approved and is launched by Medtronic, I mean, does that change your view of the competitive kind of conversion dynamics in 2023, assuming that's the year where Medtronic has 780G on board.

Yes. When you look at the product itself, it's definitely an improvement from 670G. There's an incremental improvement to the algorithm. There is some improved -- depending on which sensors are approved. There's some improvement in the sensor also, but it requires a fingerstick still. And then the form factor of the product is the same as the 670G. So we believe that when it comes to market in the U.S., there will be noise, but we'll continue to compete effectively against that. And our confidence is boosted on that because it is in some of the markets that we're in to U.S. and we are seeing that we're being successful in these OUS markets where the 780G is in market.

Got it. I appreciate that answer. Sorry to ask about competitive platforms, maybe back to your business and your technology. Just on the renewal side, you discussed the opportunity increasing by roughly 30,000 per share than being back-end loaded and still a fraction of the pump business, your renewal revenues at around 20%, I believe can you discuss the efforts you have in place to facilitate the renewal process and potentially shorten the window between coming off warranty and renewing?

Absolutely. So in the last 12, 18 months, we put a number of initiatives in place. First is just a dedicated renewal and retention team, and that group is really focused on just making people aware of when that warranty expiration date is because oftentimes, people aren't even familiar with when that is. And if they are, then it encourages them to renew on a more timely basis. The other piece is just overall customer experience, ensuring that we've got multiple touch-points with the customer throughout their life because people's e-mail addresses change and their phone numbers change. We want to make sure that the first time they hear from us isn't about buying a new pump and that we're checking in with them along the way. And then the other piece I'd point to is just innovation. We offered the software updates, no cost. And so with that, it really encourages people to take a fresh look and say, Hey, there's a new feature that's available? Is this the right time for me to renew to have access to that technology? In combination with that, our renewals team is able to actually reach out to them again to say, are you aware of this new technology. And again, any time you have that touchpoint, it really benefits the efforts. And I think we're already really starting to see good evidence of the progress that they're making. In 2021, about half of our renewals were from people who actually -- I'm sorry, we actually renewed half of the people who were eligible for renewal in 2021. And so that's a meaningful progress.

[indiscernible] that is, we're going to ask about the software and how that kind of made -- gave you guys a kind of new advantage in terms of the level of software downloads, but that -- you answered that question already. And I think you've had a kind of a 70% kind of renewal goal historically. Is that likely to migrate higher given the expansion of the tandem portfolio since 2016 and kind of the innovation that you've instilled in the platform?

Yes, I definitely think there's upside opportunity there. That 70% was kind of a goalpost that we put into place based on some industry metrics that we had heard a long time ago. But if you look at it, I think we're making meaningful progress. And already, we've renewed about 60% of our cumulative opportunity that's out there. What you see is that denominator for the opportunity continues to increase so rapidly as you pointed out, 30,000 additional people this year. So I think it will take us a little bit of time to get to that 70%, and we'll reevaluate what the next [ well posters ] beyond that.

Understood. I wanted to ask about the mobile bolus approval -- congratulations. First the submission -- first, the summation was clear over it covers the iPhone 12 with iOS 14 and Samsung Galaxy S20 with Andriod 11 and maybe just to get an understanding of the percentage of the total possible user base that's addressed by these 2, I guess, phone generations and roughly when will be able to add more models and operating systems to the software?

That's a great question. We don't currently provide specificity on the relative percentage of our base of these [ best ] configurations represent. What I will say, though, is our approval for Mobile did actually also got approval for our compatibility plan, which allows us to expand the configurations that we support. And so we don't actually have to go back to the FDA for approval to add new model OS combinations moving forward. And so expect us through the year to be rolling out progressively larger base of device configurations with the mobile bolus.

Okay. Okay. Well, maybe I was going to ask a question on the status of the FDA backlog, and you guys got your mobile bolus approval. But is your understanding that the backlog kind of has been cleared? Or is there still a backlog with the agency for the diabetes device approval specifically?

I would say that it's too early to say. We have seen a lot of activity in the last month or 2 with obviously Omnipod 5 and Senseonics and now mobile bolus were all approved in a roughly month time frame. But the reality is I think all of those products have been under review for quite a while, and it took longer than we all anticipated to get the approval. So I mean, I think we have seen some movement of resources back to support the diabetes group, but not nearly what it was 2 years ago. So I think it's something that -- I mean, we'll have to wait and see. My guess is it will probably improve through the year as long as the COVID vaccines and the testing systems sort of stabilized in terms of the need for the FDA to support them. But it's too early to say. I hope that in the second half of the year, it's back to normal because clearly, that will benefit us when it comes to our mobile submission. But I think it's probably too early to say.

I wanted to ask a question on Mobi in a second. Well, maybe before we get there, just it's mobile bolus and the opportunity to launch that feature, OUS? And what's the current plan and or timelines on any initial international markets you'll target?

And so we will take it to international markets after it launches in the U.S. There are a number of things to consider, including with back-ended talks to regulatory environment. There's quite a few variables to work through. So we're not disclosing timing yet or initial countries, we'll have to watch this space for that...

Josh, I would say that as we are now an international company, we have to consider all of our products to be launched internationally. And I think that will be exactly what we do going forward. It's building the team and the capabilities and the processes to support the -- ultimately, the introduction of all of our products internationally.

Great. Wanted to shift over to Mobi in the initial filing. I think you're planning on that during the summer. And I mean, how could that filing? Or could that be delayed if Dexcom doesn't receive approval for the G7 -- or would you initial filing potentially be able to support competitively with G6? Or I just wanted to get a better understanding of, I guess, whether or not the G7 approval is something that you need to wait for?

They're really not connected. I mean, as we submit Mobi, it will be submitted as a [ waist ] pump. So it will be interoperable. And so that means that it can connect with other interoperable devices without any regulatory filing that's required. And so currently, the G6 has the ICGM. And I know that Dexcom is intending to get ICGM for G7 also. So that would just imply when G7 is on the market, we will be able to integrate it at that point in time. And we'll just have to wait and see when they get clearance and when we get clearance from Mobi, and we can make a decision that's best for the business at that point in time.

And just to be clear, I think you guys have been clear but Mobi approval or revenue contribution, not part of 2022 guidance, but just thinking about the timing of approval, as you think into the out years, how critical is a timely approval for Mobi for your growth goals for next year?

Yes, certainly, it's not part of this year, and we anticipate approval late this year, early 2023. And I think that just depending on the approval, let's say it happens in the first quarter of 2023, we have to do internal training. There's just a number of things that we have to do to get ready to actually commercialize it. And so it would probably be relevant to the second half of 2023. And I think that as we have a sense for timing, we would probably communicate what the assumptions are when it comes to guidance at that point in time.

Understood. And you've communicated Mobi at scale will be less costly to manufacture by 20%. And thinking about the currency of manufacturing costs for T:slim, -- do you have any current inflationary challenges? Or has there been any change of view on manufacturing cost progress, either from a timing perspective or an absolute dollar perspective?

Well, I think that there has been some pressure at the latter part of this year and there probably will be as we go through this year. We think it's transitory. We've seen some effect on shipping costs in the U.S. and our partners actually pay for shipping costs, OUS, but there's also some labor issues in terms of expense and cost of labor that have also been impacted. So I think these things are, as I said, probably short term and will work their way out. But you're right, when it comes to Mobi, Mobi has -- doesn't have a touchscreen obviously, and we have worked to assure that the components of both the pump and the cartridge are less expensive. So we would expect to see margin improvement based on its introduction.

Thank you for that. I just wanted to ask a couple of questions on 2022 guidance as a follow-up from the fourth quarter earnings call and with Tandem being a growth company and investors' expectations typically run up in front of quarterly performances and even relative to your guidance targets. But can you just review what's assumed in your sales growth guidance for '22 and what factors could work for against you in achieving that 20% to 22% sales growth that's implied by the -- or that you've provided?

Absolutely. So we're very confident in the guidance that we've provided. When you look at what's fueling that large underpenetrated market, both domestically and internationally, the continued adoption of Control-IQ, which is available, obviously, domestically, but is also just launching in some of our larger countries as of the fourth quarter of last year internationally. So I think that's going to really help to fuel it there. But over our -- I'd say, the overall guidance is some conservatism built around COVID. I think it's impossible to predict when the impact of COVID is going to end. And while it's not necessarily the case rates that directly impact us, a lot of it is just the broader market challenges, staffing in offices would be a good example of that. And so we're not trying to predict when that ends. We're just factoring that in as a level of conservatism. The other thing I think I'd highlight to internationally specifically is just the timing of their ordering patterns. And so when they're placing their order versus when they're expecting the delivery of sea freight shipments, for example. And so the variability in that ordering pattern also is factored in.

Understood. And that variability can you guys plot that out or just going to have a follow-up question just in terms of how should we be thinking about the quarterly progression of the international sales growth? And here's that the variability just as distributors put orders in that it comes in as they do.

Yes. So we can see some of it. First is just we expect that the first quarter will be a step down from Q4, and that's just based on some of the dynamics I was just mentioning really associated with the timing of sea freight and people potentially placing orders so that they were in a healthy inventory exiting the year, but then maybe they needed to place an air order to help tide them over until their sea freight arrived. So it's just really that timing of inventory. The other thing I mentioned is in the fourth quarter with the resurgence of COVID that happened, some people had placed orders expecting to be able to see patients or carry those through to patients, but they had to hold on those just as things -- as the COVID case rate started to decline. So now as they're putting them on patients, they had a little extra inventory, so maybe their orders in the first quarter are going to be a little bit lighter. So I think I'd just highlight that as the starting point for international. And then you'll see that continue to grow through the year with the exception of the third quarter, in which we always like to highlight that there's the European holiday season. So that's another thing to take into consideration.

Thank you. [indiscernible], just sanity check some of our -- physician expert checks, I think other investors have -- look for the KOLs to understand some of the dynamics that are ongoing. And then you do have a lot of endocrinologists talk about how the adoption of telemedicine and their comfort with prescribing remotely. And again, new patient starts not being impacted to at all. I think we just had a panel yesterday where both physicians anecdotal because there's only 2, but they both commented that they really hadn't seen any slowdown in new patient starts through November, December, January, and February. But we understand that there's a biased population that we're sampling and maybe just to get a better sense from you guys because you have a much better handle on how endocrinologists in the United States as well as abroad, have adopted this technology. And clearly, there is a headwind to the industry where new patients turn when these COVID surges hit. But any just perspective you can share just to kind of help us understand the bias of some of the checks that we perform.

Sure. I'd say endocrinology is particularly well suited for telehealth. And so with that also, we have our t:connect data management system that provides them with visibility into the use of the pump, the algorithm, the CGM. And so they're really empowered with a lot of data to be able to make decisions based off of. For new prescriptions, it's also very helpful because it increases their level of confidence and visibility into the patient use of the product after they start. And so I think those things in combination have allowed for, I'd say, diabetes technologies to be able to progress during this time where maybe other sectors have been more impacted. So as we look kind of on the go forward, I think that there will be continued use of telehealth in general. I think where we see it more so is office staffing, on some of the support functions that maybe used to be in office 5 days a week, maybe they're only there 2 days a week. And so it's a little bit more around navigating the way that their offices are functioning as opposed to the Endo's ability to see patients and prescribe pumps.

So I would just say that the demand and the interest still remains very high for Control-IQ, and it's just more of these macro factors, which is staffing that has created some perturbations.

Great. I wanted to ask about the reorg the sales force that you recently now going in 110 territories and just generally better prepared to support a transition back to in-person [ efforts versus virtual ] ones. Any update on the U.S. commercial effort coming out of your national sales meeting?

Yes, the expansion is now complete 210 territories, and that's coming from 95 territories in the fourth quarter of last year. And I think that if you look at the group, enthusiasm is very high for mobile bolus in particular, so excited to be training our sales folks up on that. And that in combination with the continued enthusiasm for Control-IQ gives us a lot of confidence going into the year.

Susan, you said 210. I want to make sure that, that was not construed to be 210 it is 110.

Oh, it is 110.

That's right.

Thanks [indiscernible]. I think I picked up on it, but thanks for the clarification, John. I wanted to also talk about gross margin guidance. I mean you have the 65% target by 2027. And we talked a little bit about it earlier in this discussion was about the current inflationary pressures and supply chain challenges and how impactful the are towards reaching your margin targets in 2022. But I think you level set with the original 54% gross margin guidance. But can you discuss some of your expectations for possible margin headwinds and how you gain confidence in that out your target? And how much margin improvement comes from increased sales or volume versus some of your cost improvement plans and the launch of Mobi?

Yes, [indiscernible] they'll fit in... Go ahead, Susan.

Please.

They'll fit in, right? That's all part of the equation. I think that clearly, we see rapid growth and adoption of the technology that's going to be driving the volume-based improvements that we have planned in. I mean Mobi itself is going to bring cost benefits. And so we expect to see a significant jump in margin as a result of that. And I think that the other thing that's important is that we're working on efficiency efficiencies throughout the entire organization. And the idea is to use technology to leverage growth in the headcount. And we have a number of customer-facing positions that if we were to let them grow at the same rate, obviously, we wouldn't benefit as a company as we wouldn't benefit from that. So we've been looking at the use of novel technologies, just various ways to interact with customers other than voice communications to, as I said, leverage that. And then -- and finally, I think that when you look at the relationships we have with payers and the reimbursement opportunities, we have demonstrated and actually published data that shows a substantial reduction in adverse events when people use Control-IQ. And the benefit of that is that adverse events essentially relate to hospitalizations and unexpected hospitalizations really is the majority of the cost that payers have to deal with when it comes to diabetes. So we think that by using Control-IQ and benefiting from the algorithms and the benefits of therapy that the algorithm provides, we're going to reduce the cost significantly in these payer teams, and we can go into them with dashboards show that [indiscernible] their patients and they're under their control. Here is the benefits they're seeing and here is the cost savings that you're seeing and actually look to share the benefit of that over time. So I think we're pushing on this every day. These are large organizations that take time to make these kinds of decisions, but we would expect that in time, we would see reimbursement benefits from our technology.

And I wanted to move on to just talk about some label expansion opportunities, Type 2 and pediatric. And then just first on type 2 and you running a feasibility trial, U.S. approval for Control-IQ is targeted for 2024. I know you talked a little bit about this at the Innovation Day or Investor Day, but can you outline how your programs converge on the type 2 opportunity. And for instance, how Mobi can factor in type 2, given the device suitability for these patients?

Right. As we've mentioned, we have about 20,000 people currently using Control-IQ that do have type 2. And in the real-world data that we've got, we see substantial benefits in their time and range and just overall diabetes management. So we know it works. And we have hoped originally that we could use the real-world data to go to the FDA and show them the benefits and actually possibly eliminate the need to have feasibility studies. But it turns out it's a very diverse population. There's -- I think there's different cardiovascular issues, weight issues, just there's a variety of complexities that are involved with the type 2 community that need to be evaluated in these studies. So that's why we're doing the feasibility study, and we're into it now. We probably will see it ending maybe late -- late next year, this data analysis has to go on to just work with the FDA to design the pivotal study. And we're hoping that the pivotal study begins late this year or early 2023 with a 2024 approval. Now the first focus really is on, let's take advantage of the existing products. We believe that Control-IQ will be approved for use with type 2. And we think that Mobi will be a very appealing product because of the size and the discretion that comes along with mobile control. So the first 4 really will be -- let's get Control-IQ approved, let's get that on to Mobi with Control-IQ, and let's market that aggressively towards the type 2 community. And then in longer term, we're looking at different look a different user interface configurations for the system to simplify it. We're also looking at different pump form factors such as the patch, which is something that we've discussed as well. So we think that Mobi patch will be very appealing to the type 2 community and we're looking at evolving the product line to support it because in the longer term, we think that it will be a larger part of our business.

Understood. And just thinking about getting to Mobi Patch, and the potential pursuit of just having patients having access to the pharmacy channel. Is there a path for Tandem to have -- provide access to the pharmacy channel, get pharmacy channel coverage with Mobi in front of Mobi patch? Or how are you guys thinking about that pharmacy channel and providing -- opening up access to your pumps?

I mean I would say that -- go ahead.

Well, just I don't think there's anything inherently magical about the channel. I mean, historically, [indiscernible]. But there are certainly business model innovations that we can contemplate that would allow us to expand that channel for customers of Mobi and we are starting to explore this.

Great. And then moving on to just the pediatric indication. And maybe just help us quantify the opportunity associated with expansion to patients younger than 6 years old.

It's just a very important group. It's typically where children actually have the first offset of type 1. And so we believe that the technology is life-changing and we ought to have it available for that group. It's also important that as people are first exposed to the technology they're exposed to the Tandem technology, then you have sort of the lifelong connection with the person and their family. So in terms of the initial impact, there won't be this significant jump in volume as a result of getting that approval. It's just as an important group that needs the benefit of the technology, and we see it as establishing kind of this connection and relationship with them and their family going forward.

I didn't leave enough time here to ask about the pipeline and you guys delivered a great update at Investor Day late last year. But you talked about X3 and Mobi 2 and the patch pump is a new product for the next 3 to 5 years. But any segment, how should we be thinking about tracking your progress? Or when will you kind of relay early development milestones to investors?

I think the most efficient answer is maybe to look at the macro time line, I mean, we set out a vision in December that stands in the period '22 through the end of 2027. And within that, we talked about 2 major platform innovations. First, the step from X2 to X3 which is a harder enhancement for the t:slim family. We talked about the addition of [indiscernible] option for Mobi. -- we affectionately call it Toby internally, but that then follows from there. And then we have a long-range program that is exploring the patch space that its past that. And so I would think about them just more in sequence versus each other over that 5- to 6-year period and less so through the lens of very specific milestones that you should track it to.

Okay. Okay. And then just lastly, just on the patch pump, what magnitude of growth do you see in the patch pump space upon the kind of approval or availability of a second option? And does that growth cannibalize current tube pump demand and current patch demand?

Well, I think today, as you look at the installed base, the tubeless category is probably about 25% of the installed base at least domestically in the U.S. As MDI flow into the market, we can test that pretty evenly between ourselves and the tubeless option out there. I think as we have additional wear options and potentially in the direct alternative, we'll continue to contest that MDI inflow and expect to do it aggressively with the portfolio.

Great. Great. Well, that I think brings us right up to the half hour. You did a great job handling a laundry list of questions here. So thank you for putting up with our list and giving us so many answers. It's great to see you all virtually and we're really thankful you participated in the Cowen Healthcare Conference this year.

Thank you... Great to see you, too.

Thank you, Josh. Nice to see you.

Great to see you too. Have a great rest of the day. Thanks so much.

You too. Bye-bye.