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

All right. Good morning, everybody. Thanks so much for joining us. I'm Matt O'Brien. I cover MedTech here at Piper. Really excited to have the Tandem management team here with us from the company is John the CEO; and then Leigh the CFO. Thanks so much for the time. I appreciate it.

Let's talk about the third quarter, which I'm sure you're tired of talking about, but it was a difficult time for the company. The September quarter really seemed to slow and it was surprising. It seemed like August went well and then September slowed down and what was it that really affected the company in September that made you decide to go ahead and lower expectations for not only just Q4 but also '23 as well?

Yes. It's a great question. And I will say the answer to this question probably 100 times in the last several weeks. I will just start off by saying that when we set guidance for the year, we anticipated that we would have headwinds from COVID and from the competition. And in the second quarter, we were surprised to see that there was more of an effect of the macroeconomic factors, people concerned about inflation and potential for recession. And so we saw a soft second quarter, obviously. And as we entered into the third quarter, we did our best to predict what we thought. We lowered guidance in the second quarter. We did our best to predict the third quarter. When we have historically looked at the end of the year, we see this momentum build that starts roughly in the latter part of the summer. And so in August, we began to see what we thought was a very predictable pattern that we have seen for years and years and years. And what happens is, unfortunately, it just didn't maintain itself. I mean as we entered into the fourth quarter, we just saw continued softness. And so rather than try to predict what the factors were and how these factors were going to behave, we just said it's time to take a more cautious approach and to reset, which is essentially what we've done. And I think that we've kind of looked back over the last 2 quarters and said, okay, we're going to use that to estimate the fourth quarter. And when you look at the year coming, 2023, we have a lot of new product activity coming. And I think there was some confusion as to how we were going to actually plan that in the guidance -- so we wanted to give the industry a sense for what we were thinking about entering into the year. And just to level set so that people were clear about what we were expecting as we go into 2023.

Got it. Okay. Makes sense. And I do want to get into that calculus for '23 in a second, but just some of the components of it. The renewal side, you had a really strong third quarter. I thought, I think you were 70% on the renewal side in Q3, and it's a seasonally softer quarter. So why are people renewing right now? I don't know if it's the mobile bolus capability or something like that, but why are people still renewing even though we're in a more challenging economic environment.

Yes. So we have seen strong trends there, to your point, not even just third quarter, it's been a continuous build over the past year or so. And I think it's a testament to the fact that people once they get on Control-IQ, that they're very loyal to it and it makes such a difference in their lives. They want to stay in warranty to get that in warranty benefit. And so even in a pressured economic environment, when people are looking at their own dollars and trying to prioritize where should they spend them, people who've already been on the product are already convinced. They don't need to be convinced that this will make a difference for them. And it's people who haven't yet experienced it. Those are the people who are waiting and saying, "Gosh, I don't know today if this is where I should put my money." And so those trends have remained strong and consistent. We expect that to continue. And as we look into next year, we're -- that's part of our guidance buildup is that same kind of progress.

Right. And you're not seeing any signs of the renewal slowdown I guess when you provided the guidance you provided, it wasn't because of the renewals slowing...

That's correct. Renewals have remained strong.

Okay. Okay. So -- and that's interesting because there's been a bunch of folks we've been talking to, and the renewal side sounds very strong. And then even some of the folks that have even tried '05, it seems like the algorithm there just isn't strong enough for a lot of patients, especially if they're coming off of Tandem and they figured that out pretty quickly and come right back to you guys. So is that a dynamic you're seeing as well?

Yes. I mean we have 15% of the workforce as type 1. And many of them have tried Omnipod5 and all if not -- I mean, most if not all, have come back. And we hear that consistently from other companies that have people with type 1 and just discussing this with our sales organization as they talk to people in the field. It was very easy to try it. And I think that, as you say, it's the benefit of Control-IQ it's immediate and sustained. And I think people really appreciate that. And it has -- as we said, I think it's a life-changing technology. And I think once you're on it, you love the benefits, you love the way you feel on a daily basis. And I think that's really what encourages people to continue to use it.

Okay. Okay. Appreciate that. So Leigh, from a guidance perspective for next year, the calculus I'm using is down 20% as far as new domestic pumpers between Medtronic and MDI and then renewals at the same rate as you're doing this year, so up because of the increase in numbers. Then a few more of the folks that didn't renew this year that will renew next year. And then -- the growth in the supplies business plus some international growth. I get to 12%, 13% you guys have said somewhere in that range. Is that about the right way to think about the components of getting to that growth rate for next year? Is there anything else I'm missing?

No, I think it's fair. And I think one thing I'll point out to the 2 pieces that are becoming much more predictable and becoming a much larger portion of the business are renewals and the supply stream. And so that's very helpful when you think about a solid baseline for next year. But yes, you've highlighted all the right points.

Okay. And your renewal plus supplies is what percentage of sales. Now I know the answer to this, I just -- I want to ask you this because I don't want to be a little insulated at all. Everybody loves that story because it's so recurring. But your piece of the business that's recurring now is, it's over 60%, isn't it?

In the U.S., we haven't given the actual number, but it's over half for sure. Yes.

Okay. Okay. So all right. I appreciate that feedback too. What about the financing program? How is that going so far? I don't want to get into the accounting of the deferral...

I don't either.

Because Susan went through with me, super confused. But how is that going? Is it really helping on the access side?

So I'm going to separate, there's 2 programs. One is the Tandem Choice Program, which is the one that creates the unusual accounting. And so that is more about a pathway for people who are in warranty to get to our next technology, next part are platform, Mobi. The financing program, which is the ability for people to spread out their coinsurance over a period of time. Both of those were just launched late September. So it's too soon to talk about data and information about how it's making a difference. But I'll say in the field, our field team has stressed how important it has been for them to have those conversations. So before their sale was all about clinical, it was about form factor. Now they can talk about the economic piece, especially when they're faced with conversations from patients who say, but I heard this other one, it's pay-as-you-go, then they can talk about, well, we can also spread your payments out. So it's the same look and feel.

Okay. And then last thing on the guidance side of things for next year. That does not assume any contribution from Mobi. That's fair.

That is correct. So the way, as John said it earlier, I always consider this a baseline. So it's a baseline off which we can grow, and it was to get everyone recalibrated before we put any opportunities in there such as new products. And next year, it's more than just Mobi. It's the CGM integration as well.

Got it. Got it. Okay. Okay. Okay. I want to get to that in a second, too. And then it also includes more competitive noise from Medtronic potentially getting back into the market with 780G, is that fair?

We do take that into consideration. In fact, we've been anticipating competitive noise from that product for a year or 2 now. So we're going to continue to assume that it could come to market and any new product that gets introduced create some sort of noise.

Okay. I was surprised last night, John, you mentioned some centers that still are massive Medtronic centers. I have no idea who these people are. I don't talk to them...

I mean they are definitely out there.

Yes, that's all right. I guess my population that I'm calling upon. But is there any -- are those completely loyal, they will never switch away from Medtronic or...

There's a portion of the business that's definitely Tandem. When you look at the sort of the competitive conversion rate at other clinics, they are not -- it's kind of a different ratio. We're seeing less there than had others. There's not many of them, but they're definitely out there.

Okay. Got it. So moving over to international, which I think is another huge opportunity for you all going forward. I think you're at what? About 80,000 patients OUS or something around that level, maybe a little more than that. But I think Medtronic is at 400 or something along those lines. So talk about the opportunity there. And then secondly, having another AID competitor there in Insulet in the middle of next year? How impactful could that be for you guys?

We have about, I think, 110,000 or 120,000 people OUS using the device. And we're in approximately 25 markets. And in those markets, there's about 4 million people that have Type 1. So it's more than double the U.S. right now. And I think that it's also much less penetrated. I think there's been less access to technology over there over the years and people have just basically stayed on pens and needles. So I mean, today, we're competing against the 780 in those markets. There is another AID system in the market, and we're doing quite well. And there's also Ypsomed is on the market as well. So there's other devices in the international markets we're in today that have AID systems, and we're competing quite well. I think that, we're still working through the competitive dynamic with Insulet here in the States. It's going to be different in the OUS markets because all of the health care systems, they pay fully for the technology, and there's no pharmacy benefit that people have OUS. And so there's that benefit, I think we have. And I think it will be a different competitive dynamic OUS with Insulet than it is here in the States.

Got it. Okay. Appreciate that. I think Medtronic is in 60 countries and you're in 25 now. I mean are your plans to expand into all of the 60 countries that they're in as well?

I think they have the benefit of the large company infrastructure. I mean when you consider that the -- I mean, 4 million people is a big opportunity for us, particularly when you consider it's only 15% penetrated. And so really, the big markets are -- it's the U.K., it's France and Germany. And that's really where we're focused right now is really trying to grow organically with our distribution partners in those markets.

How can you increase your market share in those geographies? Because, first of all, you're getting better time and range, you're cheaper than Insulet anyway, I mean they're newer over there, but you are cheaper than them as far as like the cost of the device over the 4-year life of it, how do you really go and drive more of that awareness among the payers and patients?

Yes, I think it's working with KOLs. I mean, making sure that we support our distribution partners with our own clinical staff, helping people understand the benefits of the technology. We've got very strong clinical evidence and so making sure that people are aware and educated about the clinical evidence. And then just general engagement shows and participates in a variety of different forms that are available for us. So it's just getting the message out. And I think that -- I mean, people are aware of the technology now. We've been there for 3 or 4 years. People are aware of it. And I think that as a company, we are now a geo- we're an international company, and we really have to focus on pipeline and getting the pipeline into those international markets as well, which is really a big emphasis for us internally.

Got it. So it's going to be more of just a steady progression and improvement versus anything that really flips in a step function goes?

I mean, I think so. I think -- I mean, we have to flip initially when we took the Animas business when we got in there with that. That was very beneficial to us. But I think from this point forward, it's just organic growth.

Okay. Okay. Leigh, you seem to be all over the distribution center change. Is there the potential to shorten the time frame as far as the disruption goes from that? Or is this a number likely going to be the number that's really going to take?

You can think about that as an overall average. And so what's really happening today is we are transitioning our European markets to that distribution center, but we're phasing in markets a few at a time. So if you started in the third quarter, a few more in the fourth quarter, it should be all complete by the middle of next year. But within each market, it depends on how much inventory they're carrying. And so I know in some of our countries that they have more than 4 months of supplies on hand. And that's the reason we're doing this. That's one major reason because of the challenges they've had getting inventory, causing them to carry so much on their shelves. And so they just really need to work it down to the point now where they're probably going to carry a few weeks of inventory as opposed to a few months.

We have accelerated the program as well. I mean, we've intentionally pulled it in a couple of quarters.

Okay. Okay. Got it. Coming back to the competitive side of things. One of your, your only tube competitor came out the other day and said they're not filing for a variant or the 780G product. And which is really surprising. Is the expectation now that, that's likely not going to be on the market until at least -- I don't know leaves the middle of next year, you're anticipating the market with 780G or if it was earlier, but it seems to me like it's more middle of next year now, calendar. First of all, any sense for why they didn't file for that? And then just any thoughts on timing of when they think it hit the market? And why is Medtronic not a potential threat to you guys? I think I know the answer, but I'd love to hear you.

Well, I mean it's a lot there to unpack in that question. I mean I really -- I mean it's hard to say what's why -- I mean I've read the transcript, and I understand what Q said was the reason for not doing it, and that sounds like a good reason to me. I would say that we are -- we have been competing against the 780 in these OUS markets, and we understand the device, how it performs, and I think we're in a much better position to compete here in the States because of the knowledge that we've got OUS. I still think it's sensor technology. It's an incremental improvement to the algorithm. And I think that there's -- I think that there's the need to have a more substantial improvement than this device is going to bring. I think when it does come to market, I mean, we anticipate it will cause turbulence in the market. There will be a lot of people who will talk about it. There will be interest. There'll be marketing and there'll probably be some pausing when it comes to market. But I think that we feel confident that we can continue to compete against it in the States as we are right now, OUS.

Okay. Makes sense. What about Mobi? Let's talk a little bit more about that. That's an exciting new product. Congrats on the filing, and that's a lot of work to get to that point. What's the expectation for the rollout of that product? Say you get it in June of next year, you'll be at ADA talking about it. Are you going to go slow, roll it out slowly? Or do you think you'll be a little bit more aggressive as far as the rollout goes?

Well, I think that we have been aggressive in the past when we've introduced software changes. And we've been able to do that because we've been able to use the Tandem Device Updater and make it available to everybody who is in warranty at once. With a new technology like this, we test it thoroughly in the organization. We did everything we can to make sure that we're sure it's safe and reliable, but you still need to take your time when you first get in the market and really get as much data as possible on the performance of the system in the real world. It will definitely be a phased rollout. We haven't been specific about how to expect it. But it won't be like the software releases where we -- it will be a phased rollout over time. But the beauty is, though, that once it's approved, we can start marketing it. And while most people here are probably aware of Mobi and people who go to conferences are as well, I'd say that general endocrinologist is not. And so there's a real opportunity, I think, for us to make people aware of the technology, the benefits it has the size, the discretion, the convenience in doing that, really build up a lot of momentum and interest in the product before it's actually widely available in the market. And the thing that we've done is we've introduced Tandem Choice Program, and choice allows us to give us people a pathway to go from the t:slim to a Mobi device when it's available in the market if they choose to do that.

Okay. And I also heard that you expect it to really call -- I don't know if that's the right word, but call to a new type of patient than you've historically seen? What kind of patient is that, that might be interested in that technology versus t:slim?

So it's about half the size of the t:slim. It doesn't have a touchscreen on it. So it's entirely controlled by a mobile app. It's very light and small. And so I think that there's a huge improvement in discretion. You can basically have an adhesive patch that will come with it. You can put it on your abdomen with a very short infusion set. And we've had clinical trainers who've been using it when we were doing our human factor studies, and they said they forgot they had it on. So I think that it's going to appeal to people who are potentially more mobile, people who really do have a strong attachment to mobile technology and really like to use mobile devices. And there's a great deal of convenience that comes along with the end discretion because you can manage your diabetes with a mobile device without anybody knowing that's what's going on. So I think mobile, convenient...

Okay. Okay. And the other question is on the pharmacy side of things. You think that you may be able to get Mobi through the pharmacy going forward. Why is that?

I would describe it as using Mobi as the entry point for conversations. And so we're optimistic that we have a chance with it. But most importantly, anything you do in the insurance world, it takes years to build it up. And we have strong relationships on the DME side. We're well rooted there. We know how to operate it. We have the right connections. On the pharmacy side, we don't have that kind of connection point yet. So we need to get in there and start to build the conversation. Mobi will be the entry point for that discussion.

Okay. But so then Leigh, if you start those discussions in the middle of next year, because I just don't want everybody getting super excited to be like, "Oh, this is going to happen in '23 or '24." I mean this could be more like a 25% or beyond event potentially get into the pharmacy.

It's going to be a multiyear activity. So it will start slow, and it will build over time. So stay tuned, we'll have more news as we have more of those conversations.

But I would imagine it potentially could go a little faster just because of the combination of -- there's already somebody doing that. And then your cost to the payer over the life of the product is lower than the only other company in that space, do you think there's the potential to do that? Or do you just think, "Hey, look, it's a lot of process and really don't expect it to get accelerated?"

Yes. I don't want people to get too ahead of us. So I'm always optimistic that maybe we can move things faster. But just the way the insurance world works, and there's convincing to do here. So this product technically is still a durable public consumables. And so we have to change the conversation and the mindset to some extent for them to think about it more as a technology solution, more about the innovation piece of it. And so that's going to take time to have that change in the type of conversations we have.

Okay. Okay. Mobi Tubeless, what are the -- that's another really interesting product that you guys have. What's the expectation for timing there and the potential impact on the business?

Yes. So when we described that in our R&D Day in December, we indicated that we had several products that would be coming to market over the next 5 years. And so obviously, Mobi is under review right now. The t:slim X3 is next, and then it would be Mobi Tubeless. And so it's probably in the middle of that time frame approximately. That's what I would say.

So 25-20?

Yes, I'd see roughly in that time frame.

Okay. Got it. So a few questions for Leigh on the financial side. But Leigh, you're carrying about 200 basis points of gross margin pressure right now from inflation and FX and all that fun stuff, giving everybody. When do you think some of those may abate? Do you think it's more back half of next year into '24? Or could we see it sooner?

Middle of next year. And really, the pressure that we're seeing is mostly from the fact that we had to purchase inventory at a higher cost earlier this year. So it's more predictable for us in terms of when that pressure goes away because we can model out as that inventory works its way through. So right now, we're forecasting it will be middle of next year. There will still be some continued pressure from freight and fuel charges, but that's smaller in nature. And our own gross margin expansion opportunities should help to mitigate that in the longer term.

Okay. And so that leads into the next question, which is 65% still out there. How do you go from mid-50s exiting next year to 65% in 4 years?

Yes, it's mostly predicated on new product introduction. And so Mobi is the first step. Mobi, the pump itself is about a 10% to 15% lower manufacturing cost than t:slim the consumables, the cartridges as well. We haven't really discussed from a quantification perspective, but it is a lot cheaper to make those cartridges too. So as Mobi grows in scale and we have a larger installed base using those consumables, we'll see that shift. And so that will get us more than halfway to the 65%. And then the next product that will have a very meaningful contribution will be the extended infusion set. So when that technology comes to market, you'll get another step change in terms of the gross margin.

Okay. So the 1,000 basis points roughly, about half of it's Mobi as you scale that all the way up and the other half is the longer?

Not the other half is in infusion, but it's a big piece of the -- and then they are other initiatives continue to be reimbursement initiatives, just regular lean initiatives, deficiencies, that sort of thing.

Yes. Is there the opportunity to take the price of the pump up another $1,000 just because, again, over the life of -- over a 4-year period, you're roughly about half of what Insulet is charging.

We do believe there's opportunity to pick up price the amount. I think I'd be reluctant to give a dollar amount right now. But it's twofold. It's -- as we think about the competitive products and where their price points are, but also the value of the information that we have from Control-IQ that we can use to help quantify the reduction in adverse events, and that's a high cost to the system. And so it's continuing to use that data and information to not only support the price point we have today, but to get price increases. And we've been successful. So this year, part of our ASP improvement has been getting more direct contracts. But on the contracts we already had getting higher prices on those.

And I would say we have 400,000 people using the technology today. So we're in a much different position, and we're talking to the right people in these organizations today. We've got strong clinical data that we've got and we share the data with them. They see it and they're impressed by it. And I think it's a matter of getting their data and our data together. So they can see that not only does this make them feel better, but it substantially reduces their cost, the payer costs. And when you're in that position, they see that, and they believe it, you're in a much better position, I think, to negotiate higher ASPs.

That makes total sense. Okay. Leigh, you didn't discuss the bottom line for 23, which is completely understandable, but you have a bunch of these R&D projects going on. You got to spend in support of Mobi. So should we expect another operating loss out of Tandem next year? Or do you think there's leverage points to go back to positive for a little bit and more of the positive operating margin side of things in '24 and '25.

Yes. It's going to be difficult next year to do much in the way of margin expansion, not only because we have the headwinds from supply chain challenges. We also have the Mobi introduction. And so before the benefit comes until we get to a level of scale, there will be some headwinds from that product alone. But I'll say on the operating expense side, we're very focused right now, particularly in this environment of where is the right place to spend. And we want to make sure we're still investing in the critical areas that are for strategic top line growth, which would be R&D also customer experience and the customer initiatives support initiatives. So those are the areas where we'll make sure we will be making investments, but we'll be thoughtful about other ways in which we're spending next year. We still feel very confident in our long-term target.

Got it. And it looks like we only have about a minute left here. Maybe talk a little bit about the type 2 opportunity in front of you guys, what's needed to really push there? And what are these new technologies, I don't know if it's Mobi or Mobi Tubeless, do you think fits best with that patient population?

Yes. I think that the -- first of all, there's about 2 million people in the U.S. today with insulin intensive type 2 and about 5% use pumps. We have about 20,000 people of the 400 that use it off-label. Currently, Control-IQ is not approved for type 2 use. And so we're involved in clinical studies to get the indication. And so we've done our preliminary studies. We're actually speaking to the FDA now getting ready for a pivotal study that will run next year. And that will enable us to get the filing and the approval which we would anticipate in the 2024 time frame. I think that -- and there's a negative social stigma that comes along with type 2. People believe that with diet and exercise, you can resolve that. It's not nearly as simple as that, but that's unfortunately the way people feel. So discretion is hugely important. And we think that Mobi, again, with a small size and the control by a mobile app is going to be very appealing to the type 2 community. So -- that will be the initial foray is to get Control-IQ approved onto Mobi. And then I would say that in time, simplification of the user interface is really important. Right now, the device is definitely designed for type 1 diabetics. And I think designing the product so that it's much easier to use, simpler to use for people type 2 is something as well that we're looking at.

Got it. Okay. Well, checking the clock here, and I think we are all out of time so we'll cap it there.