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

My name is Jeff Johnson. I'm the senior medical technology analyst at Baird. Our next presentation this morning is from Tandem Diabetes, a leader in the $3.5 billion global insulin pump market. With us today from Tandem, we're happy to have President and Chief Executive Officer, John Sheridan; as well as Chief Financial Officer, Leigh Vosseller. John, I'll turn it over to you if you have a few prepared remarks, and then we'll just go into Q&A.

Welcome, everybody. It's good to see you, Jeff. I think I wanted to start off by just clarifying some of the things that we said on the 2Q call. We indicated that we had experienced pressure in June and July from a variety of factors. And as we exit the month of August, what we have seen is we've seen a positive shift. And we think it's the beginning of the momentum build that lines up with the guidance that we gave during the call. So typically, what we see in the third quarter is third quarter is in line with the second quarter. We see because of seasonality, some small decline OUS. But I can say that the -- when you look at the month of August, we saw a 50-50 competitive conversions, MDI, that's where they came from, and we actually saw a very strong renewal performance. So, we're pleased with the results. And as I said, we think that pretty much lines us up to what we had said in the call regarding guidance for the rest of the year.

That's helpful, John. And then, I guess, if we take that as our starting point, do you feel like that kind of momentum coming back in August? Was that driven by patients and physicians and others coming back from vacations, kind of a tamping down of some of the BA.4, BA.5 headwinds that we saw in COVID, maybe earlier in the summer. Was it some of those competitive pressures that maybe caused a pause and then was releasing after a month or 2? How do you put kind of the 3 moving pieces there together with what might have helped that momentum come back?

Yes. I think the 3 factors that we mentioned in the call. That would be COVID. It would be competition and the macro factors. So, we think those still exist. I think what's actually going on right now is that we see seasonality as the summer ends and people's deductible reset. And so, there's just -- we just see this natural seasonality as we get. And we think that's just starting right now.

And when you say deductibles reset, just to make sure I understand it, just people have now kind of [indiscernible]. On the renewal side, I think one of the things that I've always thought is so great about DX2 and Control-IQ and before that basal was that ability to push those upgrades straight through the pump. So if I'm sitting there today, and I've got a 4-year-old pump, and it's time I can get a new one, but I've got everything on my pump right now, including Control-IQ. If I trade that in for a different pump, I'm not going to get any new features. So, what is the motivation for somebody at 4 years in this economy? Are you comfortable that renewals will stay kind of moving, trending towards that 70% rate that you've been hoping? Or do you think there would even be any macro pressures on the renewal side?

We've seen great performance on renewals over the last year. And when you think about it, the last software update we had was Control-IQ in January of 2020. And so even without any software updates, we continue to see more people renewing faster. And I think what it is, is people just are -- they see outstanding results using the system and they just want another one. I will remind you though that next year, we have a number of software upgrade updates. We have sensors. We have 2 sensors that we intend to bring to market, which we think will be appealing. And we also have Tandem source, which is coming to market, which will be -- it will be an updated data management platform that you'll be able to use on your cell phone. So, there's other software updates that we see coming, which we think will be meaningful to our customer base. But at the same time, I think we're seeing great performance right now and people who are using our system just love it.

And Leigh, maybe to bring you into the conversation then on that renewable side, should we think about kind of that 60% number continuing to trend towards 70% renewals over the next x number of quarters? How should we think about that progress towards 70%?

And I always like to clarify to not think about it on a cumulative rate basis for all renewals for all time, but think about it as cohort by cohort. And so, our trends have suggested in recent years and recent quarters that we're well on our way to achieving that 70% retention rate for every population that we have out there today with opportunities.

John, maybe just thinking about competition, that was one of the 3 factors you cited on the 2Q call. At the time, I think you hosted your call, I don't remember on a Tuesday night, maybe was it a Wednesday night? You said, look, I think there's some competition out there, just patients waiting to evaluate, and we think that will clear. And once it does, those patients will make their decision and come to Control-IQ. The next night, obviously, Insulet reported. They had a pretty strong quarter. It sounded like some good new patient start trends for them on the new O5 system. What's your view on competition now after you kind of had your quarter and then you got to see their numbers. Do you think there was the pause in some of those patients more than you expected went towards '05? Or did they pause and now they're coming back to Control-IQ, just to think about how that's playing out.

I mean, first, I'll say I think we still have the best product on the market. I mean we have the best technology. And I think we really believe that firmly. I'll also say that the device that Insulet has brought to market. It's a good product. But the reviews have been mixed. And as you probably have all seen. I would say that the competition every time a new product comes to market, there's turbulence. There is pausing. People are curious. They want to understand where it is. And Insulet, obviously, has made it easy for people to try it. So people have tried it. And so, a number of people within tandem have and they have come back to Control-IQ because they prefer that system more. So even when we introduced Control-IQ and people recognized it was going to be software updatable, if they had a pump, people still paused and back in the late 2019. So, it's not a surprise to us. And I would say that the level of competition and the effect we're seeing is in line with what our expectations were. So there's not really a lot of surprises there. And I'd say that normally, what we see is it takes -- there's a lot of excitement. There's noise, and I think that takes a quarter or 2 for this to settle down. So, we would expect now that it's in the full market release. It's out in the market. We can collect information. We can compete against it more effectively that we're actually seeing it in the marketplace. And I think that is, as I said, in line with what we expected, and we think that things will settle down in a quarter or 2.

Maybe switch over to the international market here just for a second. I think Control-IQ has been in France and Germany for nearly a year now, if I'm right on that. How has your share been trending then in those markets specifically with Control-IQ there? And then just from a macro perspective, any insights you can provide just over the last couple of months and especially Europe as well?

I think the product is doing extremely well, OUS. And I think that even with the competitive -- there are competitors OUS with the 780G obviously, is on the market. And so, I think we're doing quite well in those markets with that Dexcom market. I would say that we're seeing consistent growth. We're seeing a lot of excitement. And not only is it because of the technology, but we have a strong body of clinical evidence that's really beneficial for us, OUS. And I think that we've made strong inroads with a lot of the KOLs, and we're seeing continued uptake. We're not in all the markets that Medtronic is. We're only in 20 plus while they're in 60. So, I'm sure that they're seeing effective growth of their devices in these other markets. But I think when you look specifically in the ones that we're in today, we feel confident we're doing quite well, and we're seeing consistent growth in uptake.

So a couple of follow-ups, I guess, from your comments there. One, are there any new markets that you'd be entering here over the next year or 2 that could be sizable?

Not sizable. I mean there's a couple of tuck-ins that we're working on right now. But I think that when you look at the size of the market, the U.S. market is about 1.7 million people with type one. OUS in the countries we're in, it's about $4 million. So, it's over twice the size. And when you look at Germany, France and England, they are still very underpenetrated. And so, I think at least in the next year or so, our focus is really going to be on developing those markets and just growing organically there.

And I think there's a new distribution strategy there, some changes you've made there, just feel better on kind of sell-in and sell out, matching up pretty closely here going forward?

Yes. I mean I think the distribution center, we've actually established a distribution center in the --I can't remember. In the Netherlands, that's right. And we've got it there to basically offset some of the turbulence that we've seen in the shipping devices back and forth to our distributors, and mostly because of the shipping distribution has been very unpredictable. So, we put in that place, and we intend to, over the next year, pretty much get to the point where we have an inventory location there that is owned by Tandem, and we will ship from there and in doing that, eliminate a lot of the turbulence. So, we think it's going to be beneficial to our distributors, and it's going to even out some of the lumpiness that we've seen in our shipments to the OUS countries.

And thinking about the competitive market there. I mean, Insulet probably still a year away. It sounds like maybe even a little further than that from having 05 over there. But do you consider that kind of a 2-player market in Europe for AID systems. I mean, obviously, Ipsos trying to launch something Diablo's been over in a couple of countries. Do those kind of companies even hit your radar screen or hit the radar screen of physician and patient groups there? Or is it really kind of still a 2-player market on the AID side anyway?

I would say it's a 2-player market. We certainly keep our eye on some of these new start-up companies that are coming to. We want to be -- we just want to be sure that we understand how well they're doing it at this point in time. It's definitely a 2-company market. And I think they've had a reasonably good presence in the past. I think their share is declining. And I really do think at this point in time, it's Medtronic in Tandem.

And speaking Medtronic specifically, I'm always surprised it was nice to get back over to ATTD this year in Barcelona, a great place to spend a few days for sure. But I'm always surprised over there in those meetings that there isn't that kind of negative connotation even on Medtronic that you go to U.S. meetings and you can feel it in the rooms, right, of a lot of docs who just aren't happy with what Medtronic has been doing in the diabetes space, at least here in the U.S. Outside the U.S., you don't get that. And I'd say attitudes are still, I think, fairly positive towards the 780 system in that. So, you kind of mentioned your head-to-head. You feel like they're getting some of their growth in countries where you don't exist. What about the countries were you to overlap? How is the competition with Medtronic in the European countries where you are.

We definitely are aware that they're there. I would say that, as I said before, we are doing quite well in those markets. We're seeing steady growth. And I think that we expect to continue to see that happening over time.

Is your take rate as high, and I don't know what you guys call it internally, but your win rate against Medtronic conversions as high in Europe as it is in the U.S. Is it perceptibly different given that kind of difference in those feelings of U.S. versus international docs?

We really haven't spoken about that. And it's primarily because we don't have access to the information like we do in the U.S. So, it's hard to say. All I can say is that we feel very confident about where the markets we're in. We're doing quite well in those markets, and we're seeing steady growth.

Let's move over maybe to product pipeline. Starting with mobile bolus. I think that's been out now for a few months, fully available for a few months. I would assume everything we've heard is good on that and patients are really happy with that functionality, so just the updates there.

It's going quite well. In fact, you had a note about it in your report on Friday. And I think that everything that we've seen has been incredibly positive. I mean it really does make a difference in people's lives. We knew this is going to be important when we brought it to market. But I would say that the feedback that we're getting from people really is that, again, it's a life-changing benefit that they didn't anticipate. And they really didn't understand how important it would be until they started using it. But once they started using it, typically, if you look at how often people use their mobile apps, people will start to use it relatively at a high level when they first start, and then it kind of wanes over time. We are seeing steady, very high use of the mobile app because of the mobile bolus feature. And people really have come up with many creative ways to use that. We think that people are bolusing faster after they've had their meals. And as a result of that, we're going to see improvements in performance over time. So, it's overall a very positive thing. I think people really like it.

Had not really thought of that. I mean have you been able to tease out any kind of [ range ] moving to 72 instead of 71 or something?

It's certainly early. But I mean, I would say that if you actually -- we get a tremendous amount of feedback from people using the product today. And there are people out there that have time and range in the high 80s and 90s and even at 100. If you manage your meal bolting carefully, you can get very high range of system.

I remember this going off script now, but I remember back a couple of years ago, it seemed even cooler back then. I'm sure when technology was newer, but I was with some Dexcom people, and they were able to show me that they could toggle on and off like here are patients on this kind of insulin herewith patients on this, and they could literally turn it on and off, and you could see time and range and different factors for each of those patient cohorts just right out of their cloud data. Could you actually pull that kind of data? Could you like toggle on and off here are patients on who are using mobile bolus several times a day and here's not and actually look at delineate time and range between those groups and that.

We can. I mean a lot of the data that we published recently has just been a summary of collective information that we've got in our databases. But we collect every piece of information from every patient every 5 minutes, and it's the CGM, it's the insulin usage. It's how the pump performs, how they interact with the system. So that's all there and we definitely are looking at it. I think it's a bit early to try to suggest that. But we think absolutely, we could do it. And we do believe that there's a high potential that, that will be a benefit.

With mobile bolus now out there, I think you've always said Mobi would -- the filing for Mobi would come once you had mobile bolus. What's the timing on that? Have you filed that yet? Or when should we think about kind of that 6-month review clock starting maybe on Mobi?

We're very close. And I think that the FDA is definitely having resources come back to the diabetes franchise, which is really -- I think that's great for us to hear that. But I think the predictability of their schedules, I think they haven't reset that this is going to be the time for a 510(k) or for a PMA. So, we're basically planning on a 6- to 9-month review process. We would anticipate that we would be -- the approval will occur in the first half of next year for Mobi.

And then the time from approval to commercialization, just remind me what has to happen?

I mean we haven't spoken specifically about it yet, but there is just making sure that the commercial team, the training, the operational organizations are ready. We, of course, are working on that right now. We're actually building the product as we speak. But I would say that it's probably a quarter or so afterwards for us to get in a position where we would be able to start to ship, test in a limited release manner and just get the ball rolling. But I think in the second half of next year, we expect it to be a contributor to the sales. We expect to see growth as a result of this over time.

And then I think one thing I was hoping we could try to maybe dig in on a little bit or clarify. Last week, you talked about potentially pursuing the pharma channel, the pharmacy channel with Mobi. My definition, and I think this goes back a couple of years ago, even you and I have talked about this or Leigh, maybe you and I have is that Medicare especially has a couple of high bars to moving things from DME. You have to get to Part D, which is not an easy thing to do. And I think also, there's some definition issues of -- this is the way Medicare has explained it to me once before, anyway in this going back a couple of years ago, but as there's definition issues of if it is a piece of capital that the patient is reusing multiple times over many years, that by definition is DME and it can't go to pharmacy. So, how do we think about that pathway of potentially getting to pharmacy? What are the odds? Is there any way you can handicap that you could with Mobi get to the pharmacy channel?

Yes, it's a great question. Because to your point, we've talked a lot about product fit just based on its design alone. And I would say if in the pharmacy channel, if they look at t:slim, it very much looks just like what's already been defined as a DME product. But Mobi is slightly different. It's still a durable, but there's more about it, the size differentiation and some of the other features. And so, what this will be for us is the opening of conversations because partly in the insurance world, it's about building the relationships. So, we'll take it as a different, more unique product, and we'll really focus on the data and information that comes with it and think about more the innovation side. And that's where pharmacy tends to lean towards and be more open to innovative type products, reimbursement models. And so will Mobi be the one that gets us there? May not be that product in particular, but at least it can open the door for conversations so we can think about the remainder of our pipeline coming in over the course of the 5 years and eventually get into the pharmacy channel.

And I think, I mean, patch when you get there, it sounds like that should slam dunk, right? And then there's the intermediary, what is that Mobi...

Mobi Tubeless, exactly.

Tubeless, I knew there was less in there. Mobi Tubeless. That's the one you think -- is that how it would be like patch would almost be a sure thing. Mobi could be difficult, but maybe there's an intermediary there that could push that window a little bit to?

Yes, that's what we hope. And it's about having those real-life conversations and many times from the payer perspective, they only want to talk to you about a product that I would say is real. So, once you submit something to the FDA, it has more legs to it and they're more open to conversations. So, what this will do is to allow us to begin those conversations and really understand the root of what would be acceptable and what would not. And then we can start to forge our path for the future.

And that pipeline you've laid out in the past, conceptually, in my mind that you guys launched one new product a year or so. Is that right, every 12 to 18 months? Is that how to think about it conceptually? And so we've got Mobi, as you said, maybe second -- or first half of next year, however you just qualified that. And then 12 to 18 months later, would that be X3 and then Mobi...

We haven't said specifically timing, but I will say that with the exception of the time frame that during the COVID situation with the FDA, we were introducing a product every year to 18 months. I would say that clearly Mobi, early part of next year. After that, we intend to bring t:slim X3, which is a technology upgrade on t:slim to market and then follow that, it would be Mobi and then a patch device. Intermediate to that, we would see software updates that would allow us to integrate sensors type 2 indication and those things going forward.

All right. Great. Capillary Biomedical, a deal you guys did just what maybe 3 months ago.

Yes, short period of time.

How do we think about a 7-day infusion set really differentiating you versus others? And how is maybe capillaries infusion set different than the Medtronic 7-day, if at all?

First of all, I think that just going to 7 days is a big benefit for the patient population. And so, we certainly want to get to market. Medtronic has a device on the market already. So, we will be in the catch-up mode when it comes to doing that. The technology that Capital area has developed really is such that it's a more -- it's a painless -- when you actually insert it, it's painless. It's got technology that we believe will reduce the number of occlusions that occur and just make it a more reliable, better lasting experience for people using the system. So, I think that's -- there's definitely a patient benefit that we're pursuing. But the other thing about it is it's the same cost essentially as a 3-day set, and we get reimbursed for 7. So, there's a big opportunity, I think, to look at margin improvement from that. And I know we're going to talk about this in a minute, but I think when you look at, every time we introduce a new product, we definitely are working to improve the margins on those newer products. And that's really how we get to our longer-term objective of 65% is by new product introductions benefiting margin.

And just to clarify, a 3-day -- the cost of a 3-day infusion set, but you would still be reimbursed on like a per day basis or whatever. It's not like you would take whatever that would be 40% reimbursement because it's a 7-day infusion set going to -- from a 3-day right? It would be...

We would get an additional 4 days of reimbursement.

I'm just thinking in my model, the way I've got it set up, I don't have to take my infusion set and supplies level or revenue down.

That's correct. You can think about it as revenue being constant and savings on the cost.

All right. Great. And then on the R&D side, I mean, what was Capillary running about $10 million to $15 million a year? It looked like from your update on guidance anyway, that was maybe it. Would those costs be leverage able going forward? Or do those turn around in the light commercial and other expenses then once you get approval?

Yes. I would say the baseline run rate is far less than that. It's something we'll give more color to next year, in particular, because we will have to run a clinical trial, which will be a onetime incremental cost, I would say, in order to get that product launched. And then in the future, that team will continue to have a valuable contribution to our organization, whether it's on infusion sets or even other we offer.

And we'll get clarity on that, the size and timing of that pivotal trial?

Pretty soon.

And you'd expect that to run into '23?

Right. We're working very closely with our team right now, just digging into the details of the device. We're just understanding what testing is remaining for us to do before we actually get to the pivotal study. But I would say starting in early 2023 is good. It will probably take us 3 quarters then prep the filing. So, we file next year, near the end of the year, and we would anticipate it on the market in 2024.

And a fairly standard, I know you said a few quarters, but a fairly standard like a 6-week trial or something in just a few quarters to get the enrolment.

The trial is probably going to be more like 3 months. I don't remember the exact time, but I would say 3 to 6 months. I think that just -- it's probably 9 months total to get people enroll.

I think in the last 6 minutes here, I didn't want to kind of come back to the LRP or the long-range plan you guys laid out in 2021. So, Leigh maybe still comfortable with that 1 million user number by 2027?

Very comfortable. We have a number of ways that we're going to drive that. It's the products we just talked about. It's the CGM integrations, a lot of growth opportunity outside the U.S. That means the U.S. pump market gets to about a 65% penetration rate, and we see a path to get.

And I think at least by my math, where I have you ending this year on installed base, that would be maybe 18% to 19% annualized growth of your installed base over the next 5 years or so. Is that kind of the numbers that you would not disagree with? I mean you kind of are agreeing with it, I guess, you're still comfortable there.

I would say, yes, that's in the ballpark. And the thing I would point out too, it's not just new pumpers that help us drive that, but it's also reliant on retention of our installed base. So that strong retention effort of having people stick with us through the renewal process is important to meaning that 1 million patient goal.

And then just off the -- I think you guys have read around 52%, 53% gross margin this year, kind of going to be about breakeven operating margin. How do we think about the 65% gross margin target, 25% operating margin targets for 2027.

Unfortunately, I would start with -- we had to take a little bit of a step back this year because of the supply chain challenges in the macro environment, and that added a couple of points of pressure towards our progress. But we presume that will lift after this year, and we'll be back on track. And the progress we've been demonstrating, I would say, is modest and incremental so far, and that comes from our lean initiatives. That comes from just sheer volume growth and scale as well as some of our ASP improvement. But the real step changes come when you think about new products. So Mobi is going to be the first perfect example. The manufacturing cost of that is 10% to 15% less than t:slim X2. So as that starts to become a larger portion of our base, and we see it get to scale, we'll start to see that margin benefit in a pretty big way. I would say, think about that as roughly 12 months from the full launch. And then each new product is being designed, as John mentioned, with those cost savings in mind so that we can continue to drive to that 65%.

And I think, John, you made a comment last week that not all of these improvements will be consistent each year and that there could be some volatility, maybe a little back-end load to some of that? Just how should we think about the steepness of that margin improvement target? Is that something that all comes in the last 2 years? Or can it be fairly ratable over the next few years?

I mean, as we said, I think it's really -- it's associated with the introduction of new products. And so, when Mobi comes to market next year, it won't hit immediately. But once we actually start to get the volume up so that we utilize the capacity of the manufacturing line effectively, we would expect to see it having an appreciable effect on margins, probably more like in the 2024-time frame. But every time we like same thing with the capillary biomedical infusion set, same thing with the patch. As these devices come to market, we expect them to help us make incremental improvement. The ASP thing is also important. I think when you look at the -- we've got data that suggests there's a substantial reduction in adverse events when you use Control-IQ. And if it's correlated to hospitalizations and ER visits. So, we think that by working with the payer organizations and sharing this information with them, they will see the financial benefit they have in their own costs because these things drop substantially. And we think there's an opportunity to work with the payers to share that benefit and to let us actually see higher ASPs for Control-IQ.

One of the questions I was going to ask is, we started to hear a little bit about -- no, I wouldn't say pricing pressure, but just kind of normal DME guys taking a 5% haircut to pricing on some products and things like that. I think most of that is tied more to some of the sensors on the CGM side. But how have ASPs been and it sounds? What is your confidence of maybe having positive ASP growth as opposed to any kind of normal MedTech 3%, 5% a year kind of headwind?

We're not having the experience of price cuts. So, to John's point, we've been engaging in some very interesting conversations with payers where we're unveiling the data. And so, with Control-IQ today, we're able to take to them a snapshot of their subscriber base and show pre Control-IQ outcomes versus post Control-IQ outcomes. And what it's doing, it's initiating a different kind of conversation that we haven't had with them before. And as I mentioned earlier, payer relationships, it takes a long time to build these relationships and to engage in these types of conversations. But we're confident that it's going to move us in a direction where we're talking more about data, and we can use that as continued support for our price increases in the future.

And remind me, do you have any studies at this point? I mean the time and range stuff is always so cool when you guys unveiled bigger and bigger patient sets and it's going out to more people and yet you assume some of those patients in the periphery aren't as well controlled. At the time and range is staying solid at mid-70s, you're seeing to your point, the 80s, the 90s in some patients. So obviously, Control-IQ, we've got the time and range data that says, hey, in the real world, this is a fantastic product. Is there any economic data to back up like we can show Control-IQ number of hospital admissions, number of hypocrisies, number of whatever is less with control? I mean, do you have actual financial data you can take to payers on that?

We're building that. And that's the part where we need to engage with them because they need to match their data with our data. And so that's the point of showing them the information we have, which will cause them to dive further into their information, and we can have projects together with them where we can start to prove that kind of information. But we 100% believe that it's possible that we can demonstrate this.

The last one I had, just going back in my script, it was when we were talking about Control-IQ and that. But on the payment plan, you guys have recently introduced. One, what has the patient response been to that? And just remind me, Leigh, on any of the payment plans or structures you're looking at, I would assume rev rec issues we won't have to deal with, it would be all upfront still, right? There's no parsing out of that over a 4-year period or something?

That's correct. So just starting with the revenue piece. It doesn't change revenue recognition. It's more about -- it's a balance sheet transaction, putting it in accounts receivable and collecting it over time. It's that simple. And then from the perspective of the response to it, we haven't officially rolled it out, it will be out in the coming weeks. So, I would say imminent, our goal is to have it in place before the fourth quarter starts.

Well, I think with that, our clock just turned to red. So, thank you, Leigh. Thank you, John, for a wonderful conversation. Have a good rest of your day. And our next presentations set to take place at 10:15 Eastern time include Charles River in this room, NanoString in Ballroom A, OptimizeRx in Empire Ballroom B and Cellectis in the Morgan Suite. Thank you.