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

Good morning, everyone. I'm Steven Lichtman, medical devices analyst at Oppenheimer, and welcome to the 32nd Annual Oppenheimer Healthcare Conference. Next up for us this morning, very happy to have with us Tandem Diabetes. With us today are President and CEO, John Sheridan; and EVP and CFO, Leigh Vosseller. We'll be doing a fireside chat format this morning. If anyone does have a question, please key it in, and I'll make sure to get it over to management. With that, I would like to turn it over to John for a couple of opening comments, and then we'll dive in. John?

Thanks, Steve. It's great to see you again. I just wanted to say that -- I mean this is probably known to everybody, but we had a strong finish to the year last year, a great fourth quarter and a really good year as well when you consider the unpredictability of the COVID situation that we faced. I think it's largely driven by the momentum of Control-IQ. It's the leading AID technology in the world. And when people use it, they see immediate and sustained benefit. When we actually have the approval in the January time frame of 2020, we were able to use a Tandem device updater to update 20,000 to 30,000 people in the first few months of its availability. And because of that, the physicians actually got to see a significant number of their patients using it, they got to see the benefits. They became very confident in the performance. And it really has just generated a significant amount of momentum for us. And the people who use it, they just -- they call it life changing. So I think that that's really been a big benefit for us to really accelerate the introduction, the awareness of the benefits of Control-IQ with the endocrinologist community. And I think that, that really has helped us generate the interest in the product and the technology. So the good news is that as you look forward into 2022 and beyond, the factors that made us successful in the past several years really exists today as well. It's still a largely underpenetrated market in the U.S. and much more so OUS. We believe that the technology that we're developing is going to continue to drive penetration in the MDI community as well as continue to take share in the competitive conversion format. And then we have a large amount of renewals that will start to increasingly be a larger part of our revenue stream as we move into the next couple of years. So we've also announced that we're moving aggressively into the type 2 market. And we see just a great deal of opportunity to continue to sustain the growth that we've had in the past couple of years, and we're looking forward to 2022.

Thank you, John. So maybe we'll start with some near-term and build out. Relative to the impact of COVID and conditions on the ground, obviously, with the cases going down in the U.S., it's certainly seeming better on the ground. Do you believe that there is some backlog out there owing to COVID that could provide sort of a market tailwind and or staffing issues among your customers abating, anything you can provide in terms of what you're seeing on the ground as case numbers, at least are ticking down here?

Thanks, Steve. And it is certainly encouraging to see that the case rates are declining. That's good for the world overall. What we're seeing from a business perspective really is it varies a lot by geography. And even with the U.S., it varies region by region, practice by practice. If you spoke to our distributors or to our field sales force, they would tell you they're definitely still seeing some level of pressure probably not as significant as we have seen, particularly in the last half of 2021 and different times over the course of COVID. So we're hopeful that we won't see that -- the same kind of pressure in the coming year as we did in the past. We're still cautious and thoughtful about what could come, but I would say encouraged at this point.

Thanks, Leigh, and what about -- on that question of backlog. Do you sense that there is a sort of a pipeline of patients who are built as a result? Or is that going to be negligible in terms of the market dynamics?

Yes. I don't know that I would say there's a significant backlog. I think over the course now that people have lived with this for 2 years. Over the course of time, people who may be held off at first started to make their way through the pipeline. So I don't think we're going to see a big rush of people coming to the market that weren't already there today. But I think it certainly eases our ability to get people to go through the process faster. So people maybe won't hesitate as long as they had before, before they go through the purchasing process.

Got it. Also in the near term, of course, is mobile bolus feature for t:slim, which is fairly recently approved. Can you talk about what benefits you think that feature can have for your business? Of course, it certainly seems like a positive for patients. Do you think this new feature will help in accelerating new patient acquisitions? And any feedback from the deal so far on this product?

Well, there's certainly a great deal of excitement. I think when you talk to people who use Control-IQ today, the only time that they actually have to reach and take their pump out of their pocket or wherever it may be, is when they need to bolus for meal. And so the mobile bolus feature gives you the convenience of not having to do that. You can just interact with a system on your phone, and it's also a very discrete. So now you can be at lunch with friends and bolus for a meal at the table and nobody knows this is going on. So this is a big step up, I think, in just the convenience and discretion I mentioned. I think that the -- from a business point of view, I don't think this is going to be like a new product such as Basal-IQ or Control-IQ. But it definitely gives our sales organization the opportunity to go out and just talk to people, talk to physicians, share the information and just explain the technology to the people and to the market. So we think that by itself it does drive interest. We think there is a great deal of interest. And so we think that there's definitely going to be a favorable effect of it, but I don't think it's going to be as significant as some of the new products that we've had in the past.

Also very fresh is the approval of DexCom's G7 in Europe just yesterday. Can you talk about just generally what you think that process will look like in terms of both upgrading or integrating G7 into Control-IQ in Europe and then your thoughts in the U.S., how seamless do you think that, that could be?

Well, as you know, we've worked with Dexcom now for many years, and this will be the fourth generation of their technology that we've integrated into our systems. So we have a great deal of comfort. We have a great working relationship with their team. And I would say that since it's interoperable and the approval in the states, we anticipate will be an iCGM device. And because of that, we can integrate it without any regulatory filings of our own. I have said that we think that in the states it will probably take us a quarter or worst case 2 quarters to actually have the device available in the marketplace. And we would make it available using the Tandem device updater. So you would have to update the pump software using the updater. And then you would be able to basically integrate a G6 onto it. We do intend to introduce the G7 in the U.S. first, followed by the OUS. And I think we're still -- I mean, we -- it's not going to be a long time after the U.S. introduction that we have G7 in the OUS countries. But it is a bit early, and I think that we're still looking at the regulatory implications and trying to figure out exactly what that time line looks like. But I would say it's probably not unlike a quarter or 2 after the introduction in the U.S.

Next in the pipeline for you guys, from a hardware perspective, of course, is Mobi. Can you update us on the timing outlook there? And as we think about the first-generation Mobi before it becomes more tubeless longer term, what are the key features that you think of that first generation that will drive differentiation versus the competition?

Right. So today, we're in the -- sort of in the midst of very lengthy large human factor studies that are spread across the entire United States. And it's going to take us a few months to get through this entire process. So far, results are great. It's really exciting to see the people interact with the system and hear their feedback. But that's going to take us a few months. We're also doing the internal testing on verification, validation to be sure that pump rates and things like that are well characterized and understood. And so -- and then we're also -- we're building out the manufacturing capacity right now. We're actually building units, cartridges and pumps today as we speak. So these are all the things that will prepare us for a filing, which we anticipate will be sometime this summer. But I would say that the fact that it's, first of all, it's new technology. It's half the size of the t:slim. It doesn't have a touchscreen, as you know, and it will rely entirely on control from a cellphone. So we think that cellphone technology is going to be the interface of the future. We think it's -- again, it comes with discretion and convenience as we discussed just with the mobile bolus feature. And clearly, we had a strategy to introduce mobile bolus first followed by Mobi because we thought that the working with the FDA to get them to clear the interaction of a phone with the insulin device to deliver insulin is probably going to be the most significant thing that they wanted to get right. And so now that we've done that, I think we're in a position where we can move pretty quickly forward with the Mobi introduction.

And in terms of the pipeline beyond Mobi, I think you've chosen to sort of upgrade t:slim first and then go to the Mobi tubeless?

Yes, that's right.

What's the rationale for that? Is it just the work that needs to get done? Or what's sort of the thought process of not going tubeless with Mobi first?

I think it's all happening in parallel. I mean all this activity is going on today. It's just a matter of timing. I think that the work to get from test to t:slim X2 to t:slim X3, it just works out that that's not as significant as some of the mechanical engineering work necessary to design the tubeless wearable site.

Okay. Yes, we talked about DexCom. You guys obviously have a relationship as well with Abbott and Libre. To the extent you can talk about the type of integration work that can and is happening in parallel with the work that Abbott is doing on Libre 3 such that timing to launch may be relatively tight if Libre 3 does get full iCGM. What's the type of work that you're able to do today?

Well, we're still -- I think that the work that they're doing to address the vitamin C situation is really all contained within Abbott, and we're not necessarily involved in it at all. And so our teams really are working with their engineering teams to integrate the sensor. And I think that we can do that while they work in parallel to address the issue, so they're dealing with today with the FDA. So I think that we're hoping that these -- they come to an end right around the same time so that as soon as we've completed the integration and they've completed the work for vitamin C, we could introduce the product shortly after that. We would anticipate that it would also be iCGM and therefore, the regulatory burden for us after it's approved would be relatively small and that we could move pretty quickly. But we -- it's a good team. We've got a great relationship with them. And I think that teams are working well together.

You mentioned before, and of course, you've talked in the past type 2, John. What are the key pieces for Tandem to go after that market more? And where are you today in terms of type 2 mix?

Well, as we've talked about in the past, we currently have about 20,000 people using Control-IQ that have type 2. And the results that they are seeing are equivalent to what we see with people with type 1. So we know that clinically, it's going to provide a big benefit for that community. We had hoped that we could use the data that we had the real-world data we had collected as a means to sort of just eliminate the need for feasibility studies. But I think in working with the FDA, there's just -- there's a lot more different groups within the type 2 community that we need to evaluate. And so I mean, there's different body mass, cardiovascular issues, age, ethnicity. There's just a lot of things that we need to look at in the clinical study. So we've -- we're in the process today of running our first feasibility study. This will probably end sometime midyear to the fall. We would then take the data, accumulate it, speak to the FDA, and work on the plans for a pivotal study, which we expect would probably begin late this year, early next year. It will probably take us a year to do that. So the filing will probably be late '23 with a product in the market in 2024. And so I think that -- we think that Mobi because of its size and discretion with the Control-IQ algorithm that's approved for type 2 is really going to be the first product we go aggressively into the type 2 market with. And I think that's going to be a compelling product. In the meantime, I think that there's other features. There's other things that we need to learn about the type 2 community on the access points. Just their product features, I think, in terms of just simplifying the user interface. There's a lot of things that we're currently looking at as well. But Mobi with Control-IQ for type 2 will be the first product, and there will likely be follow-on products after that, that are more targeted for type 2 as we learn more and more about that market.

In your research on this market you talked a lot about just now about the product portfolio to go after it. What about from a reimbursement perspective, Mobi talked about, of course, about the pharmacy channel. How important is that in your mind or not to really going after this type 2 market?

Sure. So when we think about the pharmacy channel, a lot of it comes down to product fit. And so when you -- the pharmacy channel is designed more for consumables and disposable like products as opposed to the traditional durable insulin pumps. So as we look at our product portfolio over the coming years, which, to your point, is tied a bit to the type 2 opportunity as well. We'll be looking to see Mobi, Mobi tubeless patch if and when we can fit into that channel seamlessly and where it will make sense. And so that's something that we'll be thinking about down the road. But I would say, more near term, what we're really focused on would be medical policies associated with type 2 indications. And in some cases, there are higher barriers or hurdles to getting approval for an insulin pump. And so that's what we're focused on today is really making sure we can help bring down those barriers so that there doesn't exist in the future. It mostly comes with CMS. That's where I think the most antiquated rule still exists.

So can you dig on that Leigh? What are some of the opportunities there and what some of the work that you guys are doing to help usher that change?

Yes, it really comes -- I think it's more an industry-wide initiative. So there's a group called the DTAC that's really focused on helping change the medical policy through CMS. They recently were successful with some changes on approvals for how to get approval for CGMs and now they're really focused on insulin pumps. So I think there will be some movement there in the coming years. That will really be helpful industry-wide.

And is that -- you talked in the past about making the reimbursement process more streamlined generally without pharmacy coverage, not just for type 2. Does that one and the same or some other efforts underway for you guys?

From the DME side, the way we're really focused on optimizing that process. It's really reducing some of the paperwork burden that comes with it. So a little bit is medical policy related. Some of it is just process efficiency. So it's really breaking down the entire process from when an order first comes in the door all the way to shipment. And it's helping to make it simpler really from the physician perspective. There's, again, a lot of requirements at times for different payers of what they need in order to get that medical necessity approval. So we're looking at the ways that we can make that more efficient in a much shorter time frame. And then that way, you take away some of the I guess, the cons when people compare pharmacy and DME part of it is just the time to get the product out the door. You can take away one of those biggest arguments for why DME is it is, why people don't see it as opportune.

International, of course, has been a really positive part of the Tandem story over the last couple of years. As you -- as we look forward here, what are the -- any near-term challenges you're seeing or if it is COVID that we should be keeping an eye on? And of course, what are the biggest opportunities still to come outside of the U.S. as you look out over the next couple of years?

Sure. It's an exciting market for us. So today, we operate in more than 20 countries where there are approximately 4 million people living with type 1 diabetes, and only about 450,000 of those use pumps today. So a lot of room for growth there even before you think about expanding into other markets. What we've seen in the past few years, it's been a bit challenging because of COVID and the dynamics that it has presented. Our distributors are trying to operate in this high-growth environment, but also deal with what comes with COVID being able to get access to physicians and patients as well as just timing of when their inventory gets delivered. So that's more of the near-term challenge that we've seen, but it doesn't dispel the fact that we have a great opportunity there. Our distributors have reported to us that they're seeing demand for Control-IQ. It's a product that they've never been able to sell before, and they haven't seen this happen. So they're super excited about where this can go. We just need to get out of some of these COVID challenges that have been there for the past year or so. But as we look forward, we think there's a great opportunity to continue to penetrate the markets that we're in, and that's really where our focus will be in the next 2 or 3 years.

Thanks, Leigh. Shifting again to the pipeline a little bit longer term, what can you say about the patch pump opportunity as you guys see it? Obviously, Insulet is on the market. There are other companies talking about patch pump as well. And John, what can you talk about in terms of where you think the differentiation could come? And what are the next steps that investors could look forward to in terms of tracking your progress on that product?

Yes. I mean, we've spoken about this before, and we could currently -- we clearly recognize the type that diabetes is not a one-size-fits-all situation. It's a condition that has many different segments, people who have personal preferences that just vary. And I think that trying to come at it with just a single pump solution doesn't really provide that capability to a broader audience. So we think a portfolio strategy really makes a lot of sense right here. Clearly, Insulet has done a great job in developing the tubeless opportunity. And we think that, that is -- it's a real opportunity for Tandem. So we think that having a tubed pump and a tubeless pump really does make sense going forward. And I think that not only does it -- I think there's opportunity with the type 2 community when you consider the tubeless pump. And I think having a single pump, Mobi, for instance, that could have both a tubed and tubeless infuses that option provides a great deal of flexibility and convenience to our patient base. So we think that's going to be very appealing. And then as we look further out in time to our patch device, we're looking at something that's probably smaller than devices that are on the market today, something that would probably work with concentrated insulins. And I think that the differentiating element of that would really just be continued reduction in size. And we have a great deal of experience in doing the miniaturization. We've moved from t:slim to Mobi. And we think that moving from Mobi to a smaller device is something that definitely we can do. And we've been working on it now for a while. And it's just something that we'll be talking more about in the next several years as we get closer to an introduction.

Would you say you're in design phase? Or are you more -- now beyond that and then more of a development pace of the program? Anything -- any color you are willing to share?

We really haven't talked much about it at this point in time. And I would say that we're definitely well into design is what I would say, on the product.

Okay. As we think about the renewal opportunity, there's 2 components to it, of course. One is the facts, the math of 4 years ago. And then the other conundrum is a little bit harder to gauge with a win. When do these patients actually renew and your ability to capture them. I guess, Leigh, in terms of your ability to capture them, what has improved in your mind in terms of your ability to have a higher capture rate for you guys over the last couple of years? Maybe just Control-IQ, but there's something else that's going and certainly that's allowed you guys to bring more of those patients back in?

Right. A lot of it, Steve, is just the learnings of the process itself. So our first opportunity to renew patients was in 2016, and it was new for us. And at the same time, we also didn't have access to UnitedHealthcare customers at that point. So for a few years, we were battling against that restriction as well as just learning and understanding how and when people move through the renewal process, how to attract them to make that purchasing decision, how to reach them, frankly. And so what we've done over the years as we've evolved how we focus on it. And really, we focused -- we've added a piece to it where we don't just talk about renewals anymore. It's really the retention aspect. And so it's not about waiting until the 4 years is up and then going out and trying to encourage someone to come back and buy another pump. It's really about making sure they have a positive experience along the way, and they feel like we're there for them. So we have touch points early on to make sure people got acquainted to their products that they're using it that they don't have follow-up questions. They don't just give up, I guess, I would say, along the way, and they stick with us all the way through to the end. And so one part of it is really just keeping that retention aspect and that customer touch point. And then when we get to the renewal point, we've really been focused on how do we get people to come through the process more quickly. So we recently shared that our 2016 cohort, we've renewed more than 70% of those patients. We got to that point in early 2021. So it did take quite some time, but you can still think about the majority are coming in that earlier phase. And so we've been focused on how to get people in that 3- to 6-month time frame from when their warranty expires. And what we've seen over the years is the percentage of people renewing in that time frame has been increasing each year, year-over-year. So I think all of our efforts to streamline the process and to focus on the retention aspect have really paid off.

And in terms of the incremental opportunity from here, can you remind us, it sounds like it will be more towards the end of this year that we'll really start to see the benefits of that, is that right?

Sure. I mean, it follows the typical seasonal cycle for pump purchasing. And so when you look back to 2018, which represents the new opportunities we're going to see in 2022. About 40 -- more than 40% actually bought a pump in the fourth quarter. So that means a lot of that opportunity is very back-end loaded. But I think the important point is that the number of opportunities coming to market this year is about 30,000 in the U.S. and that's pretty much double what we saw come to the market in 2021. And that same trajectory continues on as you think about the following years, just following our growth pattern in the last 3 years.

And then, Leigh, just moving down to gross margin. Obviously, some pressures here in the near term. You have talked about still a 65% gross margin goal in 2027. Can you bridge investors in terms of how you're going to get from that to 54% that you're guiding to in 2022 to 65% out into 2027?

Sure. And you pointed out the near-term challenges. I would say that what's happening right now in the environment that's mostly related to COVID in no way changes our minds are our confidence in reaching 65%. And really, I usually bucket it into 3 main drivers to get to that margin goal. The first one is really just volume increases, cost savings and efficiency. So your standard focus in your manufacturing process to just eke out costs. And we've been demonstrating that each year as our volume has grown, and we've been reducing the costs. We've been seeing modest improvement in margins year-over-year, mainly from that factor. The other 2 though I usually point out really go to reimbursement and the introduction of new products. So from a reimbursement perspective, we're very focused on taking this clinical information that we have from Control-IQ, which is very powerful, as you've seen from the pivotal trial and our real-world results and sharing that with the payers so that they can understand on a global perspective how it performs, but also we can tailor it down all the way to their subscriber base and show them how their patients on our product versus not on our product are behaving and performing. So that can help feed price increases over time. It can help with that medical policies that we're trying to change in some of those factors. Just if you're on our product, you're going to get good results, and it will save costs for the payers in the system. So that's element #2, for gross margin opportunity. And then the third one is back to the new products. And so as we've designed new products, it happened with t:slim X2 versus the original t:slim. And we expect it to happen again with Mobi, significant cost reduction in the product itself. And so that as each new product gets launched, it gets to a level of scale, we expect to see gross margin benefit. So I would point to the new products as really where you should expect to see step changes in gross margin. The reimbursement piece of the volume and cost savings piece will be more incremental over time.

Got it. As we think to Mobi launch, how are you thinking about the transition for patients? Are there any concerns about people holding off? Are there any opportunities about bringing people on because then they can be personal line for Mobi? I mean how are you thinking about that transition or that addition on the hardware side?

Sure. We haven't fully disclosed our commercial launch plan, which we will do as we get closer to after the filing and closer to approval, but it's not the first time we've been through this. So I mentioned X2, switching from t:slim, t:slim X2 is a very big transition for our organization. And so we've managed through this before. In the past, traditionally, we've used a combination of upgrade programs and just good communication with the patients to understand where they are in terms of their purchasing cycle. And so we'll continue to think about that as we get closer to the t:sport launch, but -- or Mobi launch, but it is top of mind.

Okay. Got it. We talked a lot about hardware. Maybe relative to software and data, I know, John, this has been a big focus for you over the last couple of years. Can you talk about the moat you believe you're building as a result of the data collection that's already underway as other -- as competitors do come to market. How that help insulate Tandem from a competitive perspective?

Yes. I mean I think that there's a couple of factors. I think the moat that insulates Tandem really is our ability to innovate faster than our competitors. That's what we think, if you look back over the last several years, we've introduced one significant product practically every year, except for last and last was really impacted, I think, by FDA. So we're innovating fast. We're getting new products to market. And I think data is absolutely an area that we're focused on. We've made a lot of investments into the infrastructure of the organization. And we think that by delivering an ecosystem of data-driven products and services, you create stickiness with not only the person using the pump but with a physician and potentially even the payer. And I think that we've talked about we're rolling out our Tandem source product out into the -- going to initially go OUS. We're testing it right now, OUS. And the intent of this device really is to provide a much more effective user interface to the physician to provide them data that they actually want and the way they want to see it. Today, when you talk to endocrinologists, then you ask maybe what data would they like to see, honestly, they'll give you 10 different answers. And so Tandem source is customizable and so they can use tile technology to orient the data that they want to see on a report exactly the way they want to do that for their own practice. And so we see just other products in time that would potentially help with decision support, such as algorithms that exist in the cloud that look at large quantities of data and then that data can be fed back to the physician to help them in terms of providing therapy management for the patient population and making their practices more efficient. I think we also -- I mean, I think that -- yes. So the data is really important for us. I think that it also enables us to look back and see how the products perform, look for opportunities to improve the devices, look for -- there's things that insights into how the people are using the product as well as opportunities to make improvements so that as we look at our pipeline going forward, we can continue to provide the innovation that we have getting just up until this point.

Great. Well, it looks like we're out of time. So I want to end it there. But thank you very much, John and Leigh for joining us today. Thanks, everyone else, for joining us as well. And hope you have a great rest of the day. Thank you.

Thanks, Steve. It's great talking to you.

Thanks, Steve.