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

[Technical Difficulty] John Sheridan, President and CEO; and Leigh Vosseller, Executive Vice President and CFO. So the plan is I'm going to turn it over to you, John, and Leigh, who will walk us through the Tandem story, and then we'll have some time for Q&A at the end. John?

Okay. Thanks again. Well, good afternoon, everybody. Sorry that you've had to experience the inclement California weather, not what we anticipated, but definitely need the water. I just want to start off by saying that Tandem is a mission-driven company. We have 2,500 employees who are focused on improving the lives of people who live with diabetes through relentless innovation and extraordinary customer service. As a company, we have really focused on what we call user-centric design. We work with the people who are using our products, and we analyze how they use it, and we work to basically make it as simple and as intuitive as possible. The -- I think that the benefits of that are -- it's very much like the consumer devices that you use today. And so we get better compliance and that's a much better experience. And so we apply that same logic to our services as well. So the services and the products really have this ease of use and I think that ease of use is really what drives adoption in this market that we're in today. So really, what is the opportunity here at Tandem? First of all, we have 400,000 people currently using our technology. We have a cadence of new products that really defines strong execution over the last 10 years. Our products are innovative. We currently have the leading AID system on the market, even when you consider there's competitive threats that are out there for us today. It's clinically differentiated and the people who use it, the physicians in particular, describe it as just being a fantastic product. It's a growing worldwide market. I mean as we see new products and technologies come to market, we've seen an acceleration of the growth. We have certainly brought new technologies ourselves as our competitors and as our partners have and the new technology really is driving growth. So it's underpenetrated as well. There's only about 35% of the market in the United States that actually use pump technology. We think we can get that to 65%, which represents significant growth. And then OUS, there's about 20% of the people or maybe even less who use pump technology, and it's a much larger market. It's more than twice the size of the market in the United States and when you think about it, today, Tandem has one of 3 products that are on the market and I don't think that any real competitors are going to be coming to market beyond that. So we're one of the 3 large players in a very large compelling market and we have been investing in R&D substantially, particularly last year. We think it's incredibly important to drive growth. We see growth tied to our new product introductions, and we've got a very strong balance sheet. So I think we're in a good position to continue to execute and really affect in a positive way the diabetes community. If you look -- this is the last 10 years, and each of those circles represents a new product. And what you can see here over the last 10 years, we have practically introduced a compelling new product on an annual basis. You can also see that as we've introduced these new products, we've seen substantial growth, particularly over the last 4 years as we've brought automated insulin delivery technology to market, which has had a very substantial positive effect in growing the market and also growing our revenue. I'll also point out that while we have grown rapidly over the last couple of years, our growth is not going to be linear. There's going to be periods of time when we see moderated growth when we have competitive offerings that come to market, and we don't have a response that's specifically [ timely ] to that. But there's also going to bex when we bring our own competitive technology to market, and we see overweighted growth on our own side. So we have a great deal of confidence in our ability to execute. As I said, the growth rate is not going to be linear, but we have shown the ability to execute. There has been some concerns about the US sales at Tandem. I would say that when we entered this year, we anticipated that we would see some headwinds from COVID-related factors that have been driving basically staffing shortages in endocrinology offices. We have seen that. We also anticipated the competitive launch of a new product that occurred this year, midyear. One of the things that we didn't anticipate, we saw a significant impact of that in the second quarter was the macroeconomic effects, where purchasing decisions were being affected by people's concern over recession and inflationary trends, and they were pausing. And so we hadn't anticipated that. We saw it in the second quarter, and we saw it again in the third quarter. But I think when you look at what we've got going on, we have a growing renewals opportunity. If you look back over the last 4 years, our sales have nearly doubled each year in a row and those products become renewal to candidates as we move forward. We have, as I said, clinically differentiated technology with Control-IQ. It is the leading technology in the market today. We've done and implemented a -- we've had a payment plan, but we've begun aggressively marketing the payment plan. It's important that people didn't know we've had it in the past and we think this is a way to offset some of these macroeconomic effects that we've been seeing. We are just early into doing this, but we got it in place for the fourth quarter, and we anticipate that's going to have a favorable effect in the fourth quarter. And the third and fourth quarter are seasonal in that as deductibles reset more and more people purchase pumps in the latter half of the year. And typically in the past, we've seen growth of -- we've seen actually 30% to 35% of our overall annual revenue occurring in the fourth quarter, and we're entering that quarter right now. And as I said, it's a large market and underpenetrated and as new technology comes to market, we have seen growth in the number of people moving from pens and needles to pump therapy. We have chosen a portfolio approach. If you look at our competitors, our competitors basically have a single product in the market, and it's a linear progression. They add new features to the same product and only continue to have one product. We think it's really -- diabetes is complex. It's a very segmented market. It's not one size fits all and we think we need to have a portfolio approach of different products that meet the needs of these different segments. And so we plan to offer multiple [ form ] factors. We plan to have multiple sensors. We are looking at mobile and digital technology, cloud technology that really will advance the experience that people have and all in all, I think it's about choice. We're providing choice to people in this market and we think that by doing that, we will continue to take advantage, grow the market, and actually have our products in the hands of more people with diabetes. Right now, if you look at 2023, we have a couple of new, exciting products coming to market. We have Mobi. Mobi is a product that's about half the size of the t:slim. It's controlled entirely by a mobile app. It's very small, discrete. It does have a bolus button on it, and our competitors don't have the bolus button on their system. So if you lose your phone, the pump continues to operate, deliver insulin according to the algorithm. But if you need the bolus for a meal, you can still do that from the system. It's wirelessly charged, it's waterproof, and it's compatible with our current algorithms and sensors that are interoperable. So we're very excited about this market -- this product. We expect it to get clearance in the first half of next year, and then we would begin a rollout after that. We think that, as we have in the past, we think this is a compelling product that represents a strong competitive response to the current products on the marketplace. And we think it's going to continue to drive an inflection point in our revenue as we move from 2023 to 2024 and beyond. So we're very excited about this. We also have 2 sensor integrations that are going to occur this year. We've been working with Dexcom now for 7 or 8 years, and this is the fourth generation sensor that they'll be introducing. We anticipate that DexCom will get the approval from the FDA this quarter. That's what they're saying. We would expect that a quarter or 2 after that, we would have that device on the market integrated with our products. And then also, there's the app sensor. Also, we think that it will probably take us a quarter or 2 after the Abbott device has the counter indication relieved for use in an AID system. They're currently working with the FDA today. They have a great deal of confidence and they're going to be able to do that. And so we think that both of these are also compelling additions. People definitely will see the form factor benefits, and there's a market out there for Abbott. Abbott doesn't have an integrated pump yet. So there's a lot of people in Abbott's customer base that have type 1 and type 2 that represent big opportunities for Tandem as we move forward. So as I said, we currently have about 400,000 customers worldwide, about 280 in the US, 120 OUS, we have stated there's a goal to get to 1 million by 2027. In 2018, we said we could get to $0.5 million by 2024, and we're going to basically achieve that number about a year early. So we think this is driven by compelling new products and innovation, which I think we really have kind of led the industry in that area. And there's a couple of other factors as well. There's definitely strong clinical data that we've got. I think when you look at the benefits of Control-IQ technology, it really is clinically compelling. We know that it reduces adverse events, which really are directly correlated to hospitalizations and [ urge ] to group visits. So I think that when we are working with payers right now to show them the benefits financially in these payer organizations, and we would anticipate success in working with them to the extent that we can get -- we could share in the benefit by either reducing the burden or the hurdles that they have to get products -- people onto these products as well as basically increasing our ASPs over time. So a lot of opportunity here. There's a couple of factors that really are driving our growth. There's really 4. I think the most important really is the pipeline. We have to have the pipeline. We have to continue to execute, but we have demonstrated the ability to do that, and that's a very important part. One of the other areas that we have is there are competitive conversions. If you look at our revenue over the last couple of years, it's been half competitive conversions and half MDI conversions. And so we see that continue, I think that this opportunity exists for a couple of more years. I think that over time what will happen is the renewals that our competitors have will begin to wane starts to reduce, and this will drop in time. But in the next couple of years, we still think that competitive conversions drives a significant amount of growth for us in the market. US market is large. There's about 1.8 million people with Type 1 in the US market, only about 650,000 use a pump. So it's about 35% penetrated. As I said, we believe that by bringing new innovation to market Tandem, our competitors, and our partners are all driving to get an uptake. When maybe 4 or 5 years ago, I think that there was approximately 25,000 people who moved from MDI therapy to pump therapy annually. This past year, it was 70,000. We won't really be able to tell what's happening in 2022 until the fourth quarter is over. But we anticipate that this number is going to continue to grow in time. And I said our expectation, I think it's also commonly believed by the endocrinologist community is that this number can get up to 65% over the next 5 years. And I think this is a key assumption in the growth of the business in that time frame. The US market is even larger, it's roughly 4 million people in the markets that we're in today, and it's less penetrated. So the same technology and the same benefits of the technology that we have in the US are opportunities to increase the penetration of OUS, which we believe is substantial. So we're excited about US, but there's also just a great opportunity in OUS, and we're continuing to invest in our organization OUS as well as the number of countries that we're in, just to take advantage of those opportunities. And then finally, our renewals. I think when you look at our renewal opportunity, you can see here that this is the growth in terms of pumps shipped over the last 10 years and you can see that essentially in 2017 to '18, '18 and '19, we basically doubled that number. Every 4 years, those people can come up for warranty renewal and so the 2018 people are coming to market this year and '19 next year. And you can see that that's a substantial jump. We are -- we have a goal to get 70% of the people who are renewing into the Tandem family, one more time, have them renew pumps and purchase a new pump at the end of their 4-year warranty. And while it doesn't happen in the 4 years, it typically takes between 4 and 5 years for that to happen. We are seeing that we're successfully triangulating toward that 70% number. So we're excited about that. So again, new products that we have a competitive conversion opportunity. We've got market penetration US and OUS, a large market, increasing the penetration and then renewals. And we think they all drive growth in the business going forward. So in summary, as I said, we have more than 400,000 people using the product. We have the best -- we have the best technology in the market, and this is not from us. This is what our endocrinologists partners are saying, they think this is the best technology in the market even today. We have a very exciting pipeline. As I said, we have multiple form factors we plan to introduce choice in sensor technology. We have cloud and mobile applications, which we think provides discretion and convenience, which are very, very important. And we also have a number of algorithm improvements that will only enhance the therapeutic value of control like human time. And we have sales pipeline momentum. You can see here that we have grown significantly over the last couple of years. We expect to continue to do that. It's just not going to be linear, but we have a lot of confidence in the company and our ability to grow. We have a fantastic team, and we will execute like we have up until this point. I think that will kind of end the presentation.

Great. Thanks, John. Just a couple -- appreciate the detailed rundown. Maybe just to touch quickly on the long-term guidance, 1 million pump users by 2027. Just kind of walking through, again, the different drivers for this forecast, what it implies for pump adoption.

Yes. I mean I think the key is that we expect to see pump adoption improve in the US from 35% today to 65% in that 5-year time frame. And we also expect to see that the European or the OUS pump adoption to go from maybe 10% or 15% to 20% or 25% in that same time frame. So it's less. I think that -- driving that really is the -- it's a new product pipeline. We think we have the best pipeline that's in the market. It's exciting. We have multiple new products come into market over the next 4 or 5 years. I think when you look at our competitors, not nearly the same magnitude even in I think when you look at both their competitors together, I think that we'll have more new products on the market in that time frame and then we have this increasing renewal opportunity as well, which becomes a substantial portion of that. We're also looking at the type 2 market. Today, we're primarily a type 1 pump. It's not indicated for type 2 yet, but we have completed a number of studies with the type 2 group, and we intend to have a pivotal study done next year. That study will enable us to get the indication probably in the 2024 time frame. So near the end of that '25, '26, '27 time frame, we would anticipate that we would see an increasing number of people with Type 2 using our system. Today, we have about 20,000 people that are using it off-label. They see fantastic results. So we expect that's another driver kind of near the end of the time frame to 1 million users.

Interesting. Yes. I think the type 2 opportunities I think still maybe [ understood ], but gearing in on that, just as your rough type 2 mix today, how you'll pursue that more aggressively in the [ future ].

So there's about 2 million people in the US today that have insulin intensive type 2 and about 100,000 people use the pump. So it's about 5% -- 5% penetrated. We have about 20,000 people currently using a pump in our -- that use the [ t:slim X2 ] in the US and so it's not too far off from that number. I think that the number -- it's a much more complicated number. It's a much more complicated market. The segmentation is very different. And that's -- so we think it's going to definitely -- there's going to definitely be an update, but it's going to take us a little bit longer. It's going to be slower, but we do see adoption increasing in time.

Great. Just on the product pipeline for Mobi. Just thoughts around the launch, and that will take some time and just I guess, more importantly, how the product is differentiated from what?

Yes. I think the launch is going to take -- it will have various sort of ramping phases. I think the initial thing we want to do is make sure that the health care providers understand it. They have experience with it and they see it and feel it. They are trained to use it. I think we would go kind of to a limited or early launch from that and then more aggressively in time. There's a -- it is a brand-new product. We want to make sure that it's working properly with large numbers of people before you just step on the gas. But we do have confidence in its ability. As I said, it's about half the size of the t:slim. It doesn't have an user interface on it, and it's fully controlled with a mobile app. Mobile app, basically, depending on phones and things like that are accessible. There's a variety of different mobile apps and systems that will be -- it will be run on. And I think that the waterproof wireless charging. It's basically just a technology update, so that it's consistent with the current commercial consumer devices that you use today in terms of all the features that it will have. As I mentioned, it does have a bolus button so that in the event that you lose your phone or it dies, doesn't lose its power, you'll be able to bolus from the pump itself with a button that has predefined [ massive ] insulin that it delivers.

Great. Just -- R&D priorities. Just stepping back, looking at kind of the new product road map for the next year to 2 years anything you're excited about that you want to highlight?

Well, I think we have a couple of different factors. One, obviously, we have the pump now t:slim X3. We're going to be moving to Mobi here next year. After that, we are going to technology update t:slim. T:slim has been in the market for 8 or 9 years. And so we plan to update the technology so that it's consistent with everything that's available, microprocessors, all the electronics that go into it, just -- we don't want to have any supply chain issues with Mobi or [ start to see ] t:slim going forward. So we're going to update that and that will be T:slim X3. After that, we anticipate coming out to market with a tubeless version of Mobi. Today, Mobi is a tubed pump. It's -- you can use an adhesive patch on your abdomen, and you can use a 4-inch infusion set so that it's small, again, very discrete and very light. So you don't even realize that you've got it on after you've worn it for a few days. We are coming forward with a tubeless version of that. And basically, what is it, it's an infusion site that has a cannula in it, just like the other tubeless devices do, you insert the cannula and then you can actually snap the pump into the tubeless infusion site and it uses a different cartridge. So there's a new cartridge and infusion site that we're working to develop. But what it does is gives people the option to use tubes or tubeless implementations with the identical pump. The pump itself doesn't change, but you can use it in the tubeless manner. So you get choice, and we think that's very important. And I think that will be -- I think that will be a real differentiator, depending on what people are doing in their life, they have the ability to use either option. We think that's important. And then beyond that, we're obviously -- and we've mentioned working on our own patch device. That's an important part of the portfolio. We think we need that. So I think when you look at Mobi, one of the benefits of Mobi in addition to the technology ones we just described here is that it doesn't have the touchscreen. So it's going to have gross margin benefits for us. And I think that if you look at the numbers that we provided for 2027, we said we can grow from where we are today to 65% in that time frame. And we think that Mobi really is half of that -- achieves half of that step in terms of the margin of the system, including the pump and the cartridge. So the new products that we're introducing are important for us to get to these gross margin numbers as well.

Another question is just the target, I guess, what else is involved in terms of bridging from today that is 65% in 2027.

Yes. So yes, the new products are the primary driver there, as John mentioned, Mobi is one. Another product that we're super excited for that's not pump related but is the infusion set the extended wear infusion set, that will also provide meaningful contribution to that gross margin expansion. And then beyond new products that show normal type of activities. We continue to focus on reimbursement improvement. This year, we've been demonstrating a couple of points of growth year-over-year on our pump ASPs. And that's years of work by our market access team working with payers to get more direct contracts and for us to push more volume through those channels or do that channel in particular. And then it's lean initiatives, it's operating efficiencies, that sort of thing. But the new products are the primary driver for the gross margin expansion.

Understood. I guess on the payer front with CMS, I think you've mentioned in the past potential changes to the national coverage decision relative to insulin pumps, can you talk kind of broadly how that might impact the business?

Yes, yes. So when you think about CMS, a lot of their rules about getting people on technology are a bit antiquated. There were some recent changes in the CGM space, which are very beneficial, really just streamlines the process and it hopefully helps physicians who maybe didn't think it was worthy to go through all the work to get someone on the technology to move forward with it at a more rapid pace. The same coalition that supported some of those CGM initiatives, it's called the DTAC. Most of the industry players are a part of it. It's now very focused on the insulin pump side. And similarly, it's looking at what are some of the requirements in order to approve someone to move to pump therapy and even more so, the hurdles are higher in the type 2 space. And so it's something that we're looking to receive the benefit of that as they continue to look at those barriers, remove some of those requirements, and we think it will help with the traction on moving forward with [ further ] pump penetration. So it's slow though, the systems don't work that quickly, but we were encouraged by the changes from the CGM side.

Excellent. I wanted to spend a minute just to go back to international and how you're thinking about additional opportunities internationally, elsewhere in Europe or elsewhere as you look at it across the next several years?

Well, I think that the -- right now, we're in roughly 25 countries. And the large ones really are the UK, France and Germany. And we are just getting started there. We think there's a huge opportunity. Like I said, there's roughly 4 million people with type 1 of the markets that we're in OUS. So -- and I think just really looking at organic growth, working with our partners, in those 3 markets just to get traction. And again, we think that the same factors that affect the adoption of the states exist OUS. There's been a lack of technology that's been available there. And we think by bringing innovative products that have amazing therapeutic outcomes that are easy to use, really will continue to drive adoption. So that's kind of where we're focused right now. I think there's likely be a few countries here and there that we pick up in time, but I think over the next year or 2, really focusing on those 3 is what our priority is. And again, it's a large market. It's larger than the states. And I think by focusing on a variety of different factors, market development as well as the technology development. We think we can increase that substantially.

I wanted to touch quickly on upcoming clinical data readouts and kind of be on the lookout for and how they might impact payer relationships, utilization.

Yes. Well, we have -- we just presented data on our pediatric population from 2- to 5-year olds. We are currently approved for an indication of 6 years and older. That was approved -- that was presented at [ Ishpad ] which is in Abu Dhabi just a few weeks ago. And it was a very compelling strong data. We saw really great improvement in time and range in that population. It's a complicated population. It's also a small population, but it's incredibly important for us. So we're excited about that, and we'll be working with the FDA now to get that indication approved. We also are going to be presenting data -- next -- this week, I believe, at the DTM, the Diabetes Technology meeting, which is -- it's a US based in Washington. And it will be our type 2 from our early clinical trials that we've done on type 2. We've seen incredible results there as well. And what that does is it prepares us to actually work with the FDA on the trial design for the next phase of that. So we would expect that to start sometime in early 2023. The pivotal study that gets us the indication for type 2 and beyond that, we're working on a number of algorithm-related improvements that will affect Control-IQ. I mean we've said from the beginning that Control-IQ, it's a great algorithm, but we also want to make it -- we want to improve the personalization so that people can actually adjust settings on the system to meet their particular diabetes needs. We want to improve the meal bolusing, which is something that takes time today. And it's -- I think that people who bolus meals carefully great time and range with our products, like in the high 80s and low 90s. But there are groups out there adolescents in particular, who may not get great results. It's a substantial improvement from where they are, but not nearly as what these other groups are. So trying to simplify that so that it's easier for the groups to get through it. We'll bring the overall improvement benefits to everybody. So we'll be working on that. And then we think we can make the algorithm a little bit more aggressive so that it just gets to time and range and keeps you there longer.

Just a couple of minutes left, but could we quickly touch on the payment plan and kind of the impact, like you said -- you might start in the fourth quarter. Kind of how to think about that?

Sure. So the payment plan, we -- I guess I would start by saying we've always offered payment plans to patients who needed to support more assistance. It's really been offered though, on a more of an exception type basis and has not been front and center in conversations. And so what we did late in September was that we packaged it up and began marketing it much more broadly. So when our field reps are out talking to physicians and customers, prior to now, they've been focused on the hardware. They've been focused on the clinical results, the benefits of the technology itself. Now they can make the economic piece front and center part of the conversation. And what it means simply is that when a patient -- when they call in and start the ordering process, we verify their benefits and determine what their out-of-pocket costs will be, and we can finance that for them for as long as their warranty period and for as low as $50 a month. It's too soon to say how much a [ payer ] has been on the program itself, but I'll say the initial feedback is just the ability to have those conversations in the field is making a difference in terms of talking to people who are maybe more concerned about the financial effects of going on pump therapy.

Great. I think that's all we have time for here today. So thanks both for joining.

Absolutely. Thank you guys.

Thank you for having us.

Thanks, everybody.