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

Running the Tandem Diabetes fireside chat. My name is [ Young Li ]. I'm one of the analysts on the U.S. Medtech team. I'm very pleased to be joined by John Sheridan, President and CEO; and Leigh Vosseller, EVP, CFO and Treasurer. Thanks for coming to our conference, guys and looking forward to the chat. So I guess maybe we can spend a minute just talking about the insulin pump market, penetration of the opportunity today? And where do you think this therapy is going over time?

Sure. Well, first of all, it's nice to be here. I would say that if you look back over the last couple of years, the insulin pump market has been accelerating. If you were to go back as far as 5 or 6 years ago, there was about 25,000 people, who came from MDI therapy annually to pump therapy. And around 2018, we saw that started to accelerate. I think it was largely driven by new technologies in the marketplace, technologies that reduce the burden of diabetes and just improve the overall experience. I think that it has continued to accelerate. This past year, we'd estimate that the market was about 70,000 people coming from MDI therapy to pumps in the U.S. If you go OUS, the markets that we're in today is about -- there's twice the number. It's about 4 million people that have type 1 in the markets we're in OUS and it's even less penetrated. It's penetrated maybe 10% to 15%. So there's a substantial opportunity here in the states, and there's 1 also OUS. We anticipate that in the next 5 years, we would expect to see the pump therapy penetration increased from 35% today to about 65%. And I think that's largely driven by technologies that we introduced, that our competitors introduced as well as our partners. I think CGM is -- we're drafting off CGM right now, but they are definitely a leading indicator of what's likely to occur where their penetration today is in the 70s and 80% in the U.S.

Okay. Great. And then within the market, can you maybe talk about Tandem's competitive positioning and value prop specifically?

Yes. And I'll start off by saying that -- we have been leading the insulin pump market in terms of innovation. We have been driving innovation in the market. I think that today, we're in a large underpenetrated market. We're 1 of 3 players. If you look at the end of next year, we'll have 4 of -- we'll have 2 of the 4 products that will be on the market at the end of next year. The -- I mean, arguably, we have the best technology in the market today, and this is something, I think, that we hear from physicians. Control-IQ is by far better than any of the other algorithms that are on the market. And we also have a very exciting pipeline. So I think that if you look -- we've outlined our pipeline to the market roughly a year ago, and we expect to introduce new technology to the market on about every 18-month cadence.

All right. Great. I guess just in terms of the competitive environment, can you give us a sense of how you compete effectively first versus Medtronic and then versus Insulet pod?

Sure. Well, the Medtronic 780G is not on the U.S. market yet, but it is on the market here in the United States and Europe. And we are competing against it in these markets, and we're competing against it effectively. When you look at the product, the product is an incremental improvement to an algorithm on the same device. And we'll have to wait and see what's going on with the sensor, but we anticipate it will be either the same sensor or a sensor that's still going to require finger sticks. So I think that our competitive position is actually strong against the Medtronic device. Certainly, when it does come to market, there'll be quite a bit of noise. It's not a surprise when that happens. I'm sure they're going to be marketing quite aggressively. But I think when things settle down, the Tandem device will still -- as it is today, and that's Control-IQ on the t:slim X2 will continue to compete effectively. When you look at the Insulet product that just came to market, I would say, prior to that being on the market, we saw very little switching between the Insulet product coming to Tandem and vice versa -- versus from Tandem going to Insulet. I would say that today with that device in the market, it's a good product. It's an effective product. It has a good sensor, obviously, and it has a good algorithm. I think that the argument still comes down to tube versus tubeless as far as we're concerned. And I think that the -- there are significant advantages out there when it comes to having a tube to pump as we do today. I would say that when we -- when you bring a new product to market, as Insulet has just done, it's not surprising that there's going to be quite a bit of a splash. There's a lot of excitement. There's curiosity. And certainly, that's going on right now. We would expect that this will moderate in the next couple of quarters. We see these -- this has happened in the past when new products have come to market, the first thing that happens is there is the early adopters who really want to get their hands on the product initially. I think then the physicians want to understand exactly how well it performs. And so they will take time and they'll observe patients that they have that wearing it. They will watch them for a couple of quarters. They'll make sure their A1cs are good, that they're actually in control and they appreciate the experience. They enjoy the experience. And I think that's where we are today. And I think that will settle down in the next couple of quarters. I think that the -- as I said, we have a better algorithm than that system has today. And I think we have a good competitive response next year when our Mobi device comes to market. We expect clearance for Mobi sometime in the first half of next year.

All right. Got it. So I guess just following up on that. I mean with [indiscernible] launch, what's your sense on market share changes? I know there's some trialing involved and -- but also your ability to continue to take share going forward?

Yes. I think that right now, there's a perception that there's a zero sun game that it's -- we're all competing for the exact same people in this marketplace. And I think it's important, as we just discussed, starting the conversation that the market is growing. And I think that as pod gets their device to market, they are going to grow the market. I mean, as I said, we believe it's going to go from 35% to 65%, and that's going to be driven by ourselves and our competitors. So they're definitely having a positive impact on this. I think in times like this, we see moderated growth when there's a new device coming to market. And we would anticipate that next year when Mobi comes to market. And we also have the G7 and the Abbott's Libre integration that both of those are going to drive more significant revenue growth in the year, as they are approved and on the market.

All right. Great. Very helpful. Let's see, I guess, so -- there's been some disruption this year, I would say. Can you maybe talk at a high level about just your level of confidence for the new guidance? And then your color on '22 to grow low double digits?

Sure. So we have seen some interesting trends this year in the last 3 or 4 months, which are unlike what we've ever seen before, and that's the combination of these 3 challenges that we're facing in the market today. So we recently rebaselined our guidance for the remainder of the year and even gave a leading indicator for next year and how to think about it. And we feel very confident that we can achieve these numbers. They are largely based on the trends we've been seeing in the last 3 to 4 months.

Okay. I guess maybe if you can just peel back the layers a little bit, how conservative is the rebase implied Q4 guidance? Can you maybe talk about some of the assumption that's in there versus what we saw happen in Q3? And what gets you to the high end or low end of the range? And what can improve quarter-over-quarter?

Sure. So we usually break down the guidance or thinking about our growth in terms of a couple of different factors. It starts with the renewal opportunity. And we've seen great progress this year. Even -- every quarter, we've been improving our renewal rates. And so as we look forward into the fourth quarter, we see that we're going to have a pretty significant step-up in the number of new opportunities. So that's piece number 1 that we expect to continue to drive growth for the business. The pressures that we've been seeing in the market though are more tied to the new patients. And so what we did was we anticipated that this would continue to persist throughout the end of the quarter and even into next year to some extent. And I would say this is a more cautious view than we've taken in recent periods for tend to be known as conservative when setting our guidance. But this time, we beared even more on the cautious side just because of the unusual nature of the trends that we've been seeing. So you can think about the guidance levels that we've set for this year and into next year, is almost a baseline of which we can grow. And as any of these trends might -- or that might dissipate in terms of the challenges that we're seeing that could continue to be upside opportunities for us.

All right. I guess maybe in hindsight, you mentioned there were 3 pressures, COVID, economic and competitive dynamics. Which 1 of the 3 do you think is impacting you the most?

Yes, it's always nice to have hindsight, right, to look back and think what went well and what didn't go well. What we learned, I think, the most is that, at 1 point, we were trying to tease out the 3 different headwinds that we were facing and try to forecast or predict how each 1 would behave independently. I think what we learned pretty quickly was that the combination of them together has made it a difficult, unique and more challenging environment than we've seen before. And so in hindsight, that's what we've identified. And as we look forward, we're going to continue to think about them as a single level of pressure. And then, again, as I said before, look for opportunities for those to go away.

Okay. Great. I guess how do you expect these pressures to persist? I guess when can each of them start to get better?

Sure. Well, we've been living with this lingering COVID effect now for quite some time. And so hard to say when that 1 will actually lift or go away. But it's at least now in the baseline year-over-year in the third and the fourth quarter. When we think about the competitive pressures, that's something that we've seen in the before. And as John mentioned, it usually takes 1 to 2 quarters as the physicians, as patients go through what I would call an evaluation period, as they're looking to understand what the new technology offers, how does it line up, to what else is out there on the market today. And as then people get that experience, then prescribing behaviors will start to continue at what I would call a more normal pace. The economic environment, obviously, very challenging to predict. I think everyone is trying to predict when it will change. What we've done right now in response is we're offering a payment plan program to help combat any of those pressures or experiences people are having where they are trying to gauge how can they spend their discretionary dollars. And so what our program allows us for people to spread their co-payment over an extended period of time for as low as $50 a month, it can go as long as 4 years. So we think that will be helpful to combat the economic pressures we're seeing.

So you launched the Tandem Choice program late in Q3 for patients that's waiting to upgrade. Do you expect that to be a significant part of the business in the next few quarters?

Yes. So the Tandem Choice program was specifically designed to be comparable to what we offer from a software perspective. So if you think about it, when someone is in warranty with Tandem, we promised free software for their warranty period. What we haven't talked a lot about because we haven't had a new hardware innovation in quite some time is what happens when a new hardware comes to market. So the Tandem Choice program is designed to give people that pathway to the next hardware innovation while they're within their warranty cycle. So right now, what it's about is just being able to talk and promote that you have that right or that ability. We don't expect to see any impact from it. There is a sales impact now, but we'll be reporting on a non-GAAP basis to take out that impact. People won't have the ability to elect it until the Mobi product is launched.

Okay. I guess are you still expecting, I guess, elevated levels of new patients coming from MDI to pump therapy for the market, I guess, similar dynamics to what we have seen in the past few years. Could we still see 70,000 or more patients converting in the U.S. versus a traditionally lower number?

Yes, I would say we expect to see that the market continue to grow. I think that right now, clearly, I think as the new devices on the market, it's having a favorable effect on market growth. They're seeing market growth. I think that when you look at our base business, we're not seeing attrition. And as Leigh said, we're seeing a significant increase in renewals. And so it's really the MDI conversions is where the battlefield is I think today. So as I mentioned, this is a time when -- as a new product comes to market, we think the market is going to continue to grow. We think that as new technologies come to market, it's going to drive adoption and it just doesn't happen in a linear manner. We have different devices coming to market at different times. I think they're all going to have impacts in the market if that occurs.

Okay. I guess what percentage of new starts were you getting before pod's launch? And then what do you think you get during or after the full launch?

No, we haven't been specific about the numbers. All I'll say is that we have consistently had half of our revenue coming from MDI conversions and half of our revenue coming from competitive conversions. And in this quarter, we saw the same ratio. So I think that what we have seen, obviously, is we've seen some muted effect on our new MDI starts. We're not growing as quickly as we have in the past. And that's largely due to interest in the new product. And I would say that -- as I said, we don't see attrition, and we've seen an increase in the -- our renewals. So I think that -- we think people right now are pausing. We think they're pausing to wait and see what their physicians say about the product when it comes to the market. And that is clearly having effect on us right now, and we've seen it over the last 2 quarters.

Can we talk about Mobi and what that launch could do for you competitively and how it could stimulate the market?

Yes. I mean we're excited about Mobi. We think it's going to be a significant product for us. We think it's going to actually have -- drive another inflection point in our revenue. I actually have 1 right here. So it's roughly half the size of the t:slim. It doesn't have a touchscreen and it's controlled entirely by a mobile app. So this is the t:slim right here. We have -- it's about half the size of the t:slim product. And it's going to be controlled entirely by a mobile app. It's got latest technologies. Oh, here it is. Okay. Thank you. This is right here. And this is the t:slim. Do we have the other pad as well we can show that? It's roughly the same size as the pod. This is the pod right here. The pod has an adhesive patch to it, so it's a bit larger than that, but roughly the same size -- the -- there's technology upgrades. It's wirelessly charging. It's waterproof. It has a bolus button on it. And so -- since it is controlled entirely by a mobile app in the event that you lose your cell phone, the algorithms on the pump, it continues to work, it continues to take the CGM signals from the sensor. And if you need to bolus for meal, while you don't have your phone, it has a bolus button on it. We preprogramed so that you can give yourself meal bolus. Again, I think that when you look at the device, it's roughly the same size as a pod. And I think that people make a decision with pod because it's tubeless, but they also make a decision because of the. And I think that this is an exciting product that's going to drive revenue growth for us next year. It will be also integrated with new sensors as well. And as we've talked about, we expect to have a tubeless patch that Mobi can fit into. So this will actually have the ability to be tubed or tubeless in -- at some point in the near future.

And I should probably highlight that the guidance that we laid out for 2023 is in the absence of new products. And so Mobi is not yet factored into that neither -- either of the CGM integrations that we're anticipating. So right now, you can think about those as upside opportunities for the business.

And the other benefit is that Mobi is -- it's less expensive to manufacture. It doesn't have a touchscreen. Touchscreen is roughly 10% or 15% of the cost of the product. So we expect to see Mobi drive gross margin improvements and the cartridge is also less expensive than the current cartridge. So both the cartridge and the pump are less expensive. . And I think we anticipate that -- as we've said that by 2027, we would anticipate that our gross margin would be 65%. We think that when Mobi is at volume, it will drive half that improvement.

Okay. Great. I guess, seeing is believing, so thanks for showing that. So I guess just following up on tubeless and patch, when should we expect it? Is 2025, 2027 reasonable for those? Can tubeless go through the pharmacy? Or will we have to wait for the patch?

Right. So we laid out a pipeline in December of last year. And the first product that we're going to bring to market after Mobi is the t:slim X3. So it's going to be a technology upgrade to this device right here, right. This device was designed about 8 or 9 years ago. And the electronics, a lot of the components that are used in it have been upgraded significantly and for less expensive cost. So it's an opportunity for us to technology upgrade the pump and at the same time, benefit some gross margin improvements. We said the next product would be roughly in the middle of the 5-year time frame. So that's roughly 2025, which would be the Mobi tubeless sled. And so that basically uses this pump. It's the exact same pump that's used in both the tube and the tubeless version. And I think that the way it works is you have an adhesive sled that you either attach to your arm, or your abdomen, you change this cartridge out to a cartridge that actually is used to integrate with sled. You would insert the cannula and then just snap the pump right into that sled. So it just gives people a choice. It gives people the ability to choose a tubed option or a tubeless option. And when people with diabetes have different things going on in their life, there's just different conditions, different times where a tubed pump or tubeless pump makes more sense and we give people a choice by having this. We have been working on a patch for quite a while. And I think that with the time line for the patch is probably more like in the end of the 2027 time frame. We haven't been specific on the times yet for them other than those high level comments. But I would just say that when you look at the diabetes market, it's not a one-size-fits-all condition. There are many different segments of the market, and we believe that by having these 3 products on the market that they appeal to the different segments of the market and that each 1 of them will drive growth for us in the next couple of years.

And to the part of the question about the pharmacy channel, t:slim was designed and fit squarely into the DME coding descriptions. And that's probably where it will stay rooted. With Mobi, we will start with getting it our DME contracts, but at a parallel path, we'll be looking for an opportunity to enter the pharmacy. So whether or not Mobi is the product that gets us there, at least can be a conversation starter. And then as you alluded to, we expect that 1 of the products within our portfolio in the next 5 years will be in the pharmacy Channel.

Got it. I guess maybe you can talk a bit about margins next year, if possible. This 2023 gross margin and EBIT margin pressures, how much of that will be coming from the Mobi launch? Any top line pressures that will flow into OpEx margins?

Sure. So for Mobi to be a significant driver of margin expansion, we need again to a level of scale, and that likely will come about 1 year from its commercial launch. And so you can expect the real inflection in gross margin to begin in 2024 and beyond. And as John said, it will drive more than halfway to our gross margin goal for the next 5 years. Next year, we still expect to have some of the headwinds we're facing from a supply chain perspective. We've had higher cost of inventory that we purchased earlier in the year, we expect that to be fully utilized probably by middle of next year. So we'll see some relief from that late in 2023, but you can think about Mobi as the next real opportunity for gross margin improvement.

All right. Great. So I think we're coming up a little bit on time. So maybe I'll just wrap up with 1 more question, pretty high level. Just -- what's most misunderstood about Tandem stock right now, the business or the industry? And then you guys just caught an upgrade, just now. I don't know if you saw it, so.

I would say that the perception is in the investment community is that the Omnipod 5 is going to come in and just take our lunch essentially. And I think that that's just not going to happen. I mean I think right now, when you look at the company, we're a much different company than we were 3 or 4 years ago, when we did have some serious financial issues and we were able to get through it. As I said, we're in a large underpenetrated market. We have the best technology out there for sure currently. We have the most exciting pipeline, and we've also demonstrated the ability to execute the last couple of years. We have been introducing new technology to the market on a roughly 18-month cadence. And I would say that we get no credit for that. We get no credit for Mobi. Again, there's a perception that the dynamic is going to change and it's going to move entirely towards the Omnipod.

Great. I guess we'll end it right there. John, Leigh, thanks so much for the time and for coming to our conference. Thank you.