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

I'm Josh Jennings from the Cowen Medical Devices team, and we're going to kick off the afternoon medical devices channel and a great way to kick it off is to have the executive team from Tandem joining us today. We've got John Sheridan, President and CEO; and Leigh Vosseller, Executive Vice President and CFO.

It's good to be here, Josh.

Great to have you guys. Thank you.

It's a big day. Big day.

So much for participating in the Cowen Healthcare.

Yes, absolutely.

And maybe I think you said big day for a reason and there's some news out here this morning.

That's right. It looks like Abbott got the FDA approval for both Libre 2 and Libre 3 in an AID system, which is something that I'd say we're very happy for them. It's a big accomplishment. I know a number of people were skeptical that this would even happen. So it's big news as far as we're concerned. When you consider the size of the market that Abbott has today with their sensor in the U.S., there's roughly 300,000 people in the U.S. and much -- with type 1 and a much larger group of OUS. And there's about 1 million people in the market in the U.S. with type 2 and again a larger. So this is a new opportunity for Tandem because none of these people use integrated AID system. And we're currently working with Abbott to integrate our system with them. So this is -- it's great for us. Again, it eliminates a lot of uncertainty. We were going down a parallel path where Abbott was working to fix the AID indication with the vitamin C issue. Now that they've got that taken care of, it's really just an engineering challenge for us to integrate the 2 systems. And it's something we've done many times. We'll get that done with them as well.

And then you can share just in terms of the development work, it's already kind of behind you in terms of integration?

Yes. Sure. We've been working with them now for quite a while. It's a very strong team, very capable. It's interesting. When you look at the product that's on the market today, it's been developed to be an independent sensor. And because of the interoperable conditions that the FDA defined and we're able to work with Abbott to develop a code to allow our pumps to talk to their sensor. And so that's really what we've been doing with them. We're developing a code that allows us to communicate and control the system in a safe and secure manner. And so it's relatively complicated. There's a lot of work that goes on in doing that. Like I say, we've been working with them now for just over a year, maybe 1 year, 1.5 years, and we expect to bring that to market this year.

Anything more detailed in this year, I mean, you think about…

Well, it's interesting because one of the things that they indicated in the press release was that there's -- they have to modify the sensor in order for it to be used in an AID system. And so that is not -- that modified system is not going to be available, I think, to the second half. And so we really need to understand their timing on commercialization. And I think that we will in the near future. Again, this is -- we've known about this for 24 hours now and really haven't had a chance to talk to them in depth about it. But we would expect that we're still going to be aggressively moving to bring this product to market. It's important for us. And we'll talk more about it on our earnings call in April.

And then just some of the excitement with the --you're leading off the thing, it's the big day, is primarily just the potential to accelerate MDI converters that are using Libre today.

That's correct. I mean I think when you look at our growth over the next -- next 4 years, we said we were going to get to 1 million people using Tandem's technology by 2027. And this is an important element of that. I mean there's both U.S. and OUS, that Abbott integration is an important element of that.

Were you surprised that Libre 3 got the…

That was a surprise. I mean, I'm not surprised that Libre 2 got approved. I am surprised. I think it's great that the FDA did that. It does present some decisions. We've got to make some decision now about that, but I think it's great that they got both of them taken care of.

And is there any reason for investors to think that the Tandem with Control-IQ algorithm plus Libre 3 in the modified form, does Tandem have an advantage with that collaboration over, say, any competitor or primarily insulin where it's probably hard to know in terms of how advanced they're in terms of the…

I don't know where we stand, honestly, relative to the competitors. Clearly there's a device on the market OUS that's using it. We're working as fast as we can to go to market. It's important for us, and we're working as best as we can to do it. So we'll just have to wait and see.

Well, that is an exciting event for the whole diabetes space.

Yes. It's great.

Great to -- great to see. And maybe to talk about some more exciting Tandem specific or even more specific to Tandem action, maybe start with Mobi and I wanted to just check in on the -- I think you related to the FDA gave some question on the filing and responding to the -- any way you can characterize the nature of the questions and do you think it is likely to be the product amendment or rounder? I mean it's probably maybe hard to say, but just…

I think from -- I mean, typically, for competitive reasons, we wouldn't want to say anything about specifics of the questions. Other than to say, we filed it last year. We got the questions in late December. We've been interacting with the FDA now for the last several months. I would say the interaction is normal. It's which you'd expect to have happened at this point in a review cycle. Some questions that I have received over the last couple of months are whether or not these questions would require us to do any additional human factors or clinical studies. And our belief is that it's not, we will not have to do any additional clinical work or human factors work, which we think is a positive. So as we look at it today, I don't think that there's any showstoppers out there. It's just there's work for us to do though. And we're all about making sure that we're prepared for commercialization. It's difficult for us to predict exactly when we could anticipate approval just based on some of the changes that have occurred within the FDA and resources now coming back, but still maybe not as familiar with our products as they have been in the past. So we can't really predict when it's going to happen, but we're going to be ready for approval in the second half. And I would say that we would be in a situation to have a product in the market, roughly a month, excuse me, roughly 1/4 after we get the approval from the FDA.

And just on the manufacturing side for Mobi and just the readiness of Tandem to launch. I mean, just any issues with component supply or capacity ramp as you see it once you -- to get that approval and quarter later launch it?

Yes. I don't -- I mean, we've been working on it now in manufacturing for quite a while. We've purchased all the automation equipment or a great deal of the automation equipment that's required. I think our manufacturing processes are developed. We're just -- and we are building some inventory. So we're still in the preparation phases, but I think that we feel good about that. I don't think we don't see any or foresee any supply chain issues. Our supply chain team has been working overtime for the last 2 years just to make sure that that's the case. But at this point we don't see any issues.

I wanted to touch on just the revenue guidance you put forward for 2023. I think it's appropriately conservative. You have assumed a decline in the patient starts and also no contribution for new products like Mobi, I guess, having recognized that that's pretty straightforward. But just in terms of U.S. Mobi launches, is there kind of, I guess, which is the bull case in terms of, I guess, for 2023, I know part of it would be dependent -- the early the approval and launch the better second half approval, a quarter later launch would probably be a little bit of a stub in 2023 potentially, and maybe thinking about the early part of 2024. But what patient segments do you think will be most interested in Mobi versus T2?

Yes. So we -- as I said, it's difficult for us to predict exactly when we're going to get approval. So we're going to be ready for commercialization. That's really our -- we'll be ready in the second half. So that once it does happen, we can respond quickly to it. And that's really where our priority is. I think that when it comes to the segments, I mean, we believe we need a portfolio of products because diabetes has many different segments in it. People want to use the product, they want to wear it differently, they want to interact with it differently, they want to control it differently. And Mobi is half the size of the t:slim. It doesn't have a touchscreen interface on it. And the interface is entirely controlled by a mobile app. So there's a great deal of discretion that comes along with that, and there's a great deal of convenience. I mean people could interact with the pump using the mobile app and basically no one will know you have diabetes, which is very important to people who live with diabetes. So when it comes to trying to define the characteristics, we have done a great deal of market research on Mobi over the last couple of years. And we've done competitive assessments where we've looked at the existing competitive AID products in the market. And we put t:slim in there first as it's currently defined. And t:slim did quite well in these competitive situations. And then we put Mobi in the same by itself, in the same competitive assessment with the other products that were on the market, and it did quite well. But when we put them both in there, we actually got 50% of the preference share. So I mean there's definitely a group of people out there that are interested in each, and we plan to have a portfolio with both. At the end of this year, we'll have 2 of the 4 products that are going to be on the market in diabetes pump technology. So I think that when you look at it, it's going to be tech savvy, people who want to be mobile, people who -- maybe they're just -- they have more active lifestyles. There are definitely people out there that like the idea of having the controller on the pump. I mean, there's possibly a fear of losing your phone or something like that, that might drive people towards that feeling. The beauty of the Mobi system is, though, it's all of the algorithms are on the pump and the sensor talks to the pump as well. And if you were to lose your phone, it has a bolus button on it. So the algorithm continuing to control and deliver your insulin, but you can bolus from the pump at the same time with a preprogrammed amount. So we've considered that as an option. But like I said, there are people out there that just may not be comfortable with it.

Just thinking about headwinds and tailwinds in 2023 versus 2022. You did have some COVID restriction and staffing headwinds that you faced in 2022. How should investors think about those rolling over into 2023 or have they eased? It seems like they've eased a little bit at least. But just can you -- could you see a nice kind of comp setup on those 2 headwinds easing?

Yes. I think we've dealt with COVID now for over a year. And so we've been -- we've recognized it's going to be a part of the market we have to deal with. But I mean, in addition to COVID, there's obviously been competitive challenges as well as just the macroeconomic factors. So all 3 of those have kind of blended together in the last couple of quarters to impact the business. I would say that what we have seen in the most recent, say 4 months, is we have seen some stabilization where the market for us hasn't gotten any worse and it hasn't gotten any better, but it has stabilized. And we think that's a positive. And I think that when it comes to 2023, our guidance really assumes that these 3 factors remain unchanged for the entire year. And that's the way we're moving into the year with that, again, a conservative assumption that they remain unchanged. So I think that when it comes to tailwinds, certainly, we have new products that are planning to come to market, we're planning to bring to market this year, but they're not figured into the guidance at this point at all. And so any one of them that do and when they do, we will definitely see the benefits of that happening.

If we just think about a headwind, I mean, you called out this European distribution center startup, about $25 million in 2023. How should we think about that level? I mean are there any other distributor moves that could come into play in 2023 or could that number move higher? Or is that pretty just a solid number that investors think it's not really going to move much?

Yes. It's -- we feel like it's a really strong estimate based on our interactions with our distributors, the level of inventory that they're carrying today, the level of inventory that they're targeting. And I guess just a little bit of background, if you're unfamiliar, is that our distributors outside the U.S. were sourcing their inventory from us in San Diego. So it created a lot of complications in getting inventory from point A to point B and cause them to drive up their inventory levels to something higher than they would ordinarily carry, in some cases, 3-plus months of inventory. So now we're at the point where we've established an operation in the Netherlands, our distributors in Europe will be able to source their inventory from that location, which means they will bring their inventory levels down to something more in the 2 to 4-week range. And so we had a little bit of headwind from that in 2020 to about $6 million. $25 million is about what we expect to have left mostly in the first quarter. So it should be pretty much behind us by middle of the year. And I think one important point to note is what this does for us in the future where it's been difficult to measure our progress outside the U.S. because of these ordering patterns that have been somewhat variable from our distributors, you'll start to see closer alignment with what they're ordering with what true demand looks like. And so this does represent or covers about 70% of our OUS operations. So I think it will be a good positive difference for us once we get past this transition.

Back to the Mobi launch and just thinking about pricing and the potential to see that Mobi has achieved a secured price premium for Mobi, is that how investors should be thinking about the launch of Mobi the United States? Could it be priced at a premium to t:slim X2?

I would start with expectations that we have priced equally. We will continue to pursue any opportunity that we can to get price increases. It could mean it's for both products, it could mean it's for Mobi. Our starting point right now, as we're preparing for the commercial launch, is to get Mobi on every one of our DME contracts so that we can be ready to go when the launch occurs. Simultaneously we're pursuing the pharmacy channel for Mobi in particular. So that's something that we are looking into as a potential avenue to broaden access for all of our customers. And so we'll have to see where we get with Mobi itself. But if nothing else, we want to build the pathway for Sigi down the road and other products in the future.

And just on the pharmacy channel and just to think through that, I mean, are you -- in terms of the discussions you're having prior to them when we see approval and launch? I mean, could those be definitive discussions or kind of learnings that you could share with the investment community or do you think you need to have a product that's approved and launched before you kind of have anything formal from payers where they open up this pharmacy channel for, I guess, a non-disposable system?

Sure. You can't execute a contract with the payers if they don't want to until you have clearance. It doesn't really can have the conversations now. I think that it's something we will be talking more about down the road because the other element of this is pharmacy. This is something that's going to take a while to build that capability. It's not something that can turn on overnight. So when we have something material to discuss in terms of the direction we're headed or the opportunity that's there, we'll be happy to discuss it at a future date.

We should be thinking about, I guess, that the evolution of your team's thought process on where the pharmacy channel can open up is that probably more detailed understanding in 2024? Is that kind of a message you have?

I think that's fair. And it's not going to be a complete on-off switch. We're going to probably have many different variations of what we're capable of achieving with it. And so stay tuned, we'll be happy to share that. But like you said, I would say not really to expect anything before 2024 in terms of conversation.

And maybe just one last question on the pharmacy channel. I mean, and just reviews any of the positive signals. I mean, what's given you optimism and that you -- without a fully disposable platform that the pharmacy channel could open up for Tandem and their products or their next-generation products?

Yes. I think the world of reimbursement is evolving to some extent. If you would ask me a year or 2 ago, I would have said you have 2 sides of the house, one is DME, one is pharmacy, and they don't really talk to each other. But I think as the insurance plans are continuing to evolve, you're seeing them come together more. And so you're seeing them under the same umbrella of leadership. And so for us, it's about talking to people at the innovation level within the insurance plans and helping determine what the right path is, and we've seen openness in some of those introductory conversations. So we're encouraged that it's possible. Again, it will -- Mobi be the one that gets us in there initially, it at least gets us the relationship.

You get to a conversation further down the road.

That's right.

I mean my understanding of some of the largest DMEs in the United States, they have a DME business, and they also have a pharmacy business that they're distributing product out of as well. Is there anything there to just think about? I mean, that that channel could open up because you have for that channel side-by-side at some of these DME -- biggest DME companies out there.

Yes. And that's a true statement. I would say, in some cases, that capability exists within the DMEs that they might have a pharmacy access. And so we're exploring that with our current partners as well to see what capabilities they have because those relationships obviously have been very valuable to us over the years. When you think about the fact that even on the DME side today, they still represent more than 60% of our business. So without the distributors in place we've had, we wouldn't have the broad coverage that we do. And so when it comes to market access, our primary goal isn't necessarily a channel. It's about getting the best access for the patient, the simplest access for the physician and the best price point for the patient. And so that's where our focus is and where that takes us, will probably continue to evolve over time.

And just a follow-up on access, you know, the patient assistance program that was initiated. How should we think about that in 2023? I know the goal is to bring, I guess, the monthly average cost down for a patient in that $50 range? And how is that program taking off and relative to internal expectations? And could that -- I mean, I know the guidance is we assume -- we believe -- sorry, I should assume what we believe is relatively conservative about a decline in new patient starts. But how should we think about the patient assistance program supporting new patient start levels, if not growth?

Sure. It's been a helpful tool. We just launched it late in the third quarter, the fourth quarter, you don't tend to see the same level of interest in programs like that, considering many people have met their deductible, it's more valuable in the early part of the year, which we're into right now. And the feedback has been this. The field sales reps when faced with a conversation about economics, about payment offerings or reimbursement levels, it's been something they haven't been able really to engage in because they weren't empowered with this tool. What it's doing today is it's helping them bring takeaway one objection point. So when a customer's response is or a physician says, but your reimbursement is typically structured this way with the high upfront, they can respond to, don't let that deter you, you need to call in because we have programs that can help spread that out. And so it takes one objection off the table because many times people wouldn't even make that first phone call to find out what their out-of-pocket actually looks like. And so it's helping from that perspective.

I mean, should we think of it as a potential tailwind in '23 on the new patient start side or even on the retention side?

I think it's one of many useful tools. I don't think it by itself is going to be a direction changer for us.

Maybe also we could talk about the Tandem Choice program and just thinking about the participation rate in front of Mobi's U.S. launch. Could we see more -- do you expect any more significant numbers in the kind of GAAP to non-GAAP spread in the first and second quarter as we're getting closer to the Mobi launch? And, yes, let me start there.

Sure. Yes. This program has created some confusion around what our sales numbers look like and what they represent. It's actually a program today that's use as -- for another objection. So if people start to ask about Mobi and start to discuss the thought of maybe I shouldn't buy your t:slim today because I heard Mobi is coming. What it does is it offers -- it lets them know that we will have a pathway program. So the program exists today, people don't sign up for it. They don't elect it. So we don't really have any idea today based on current conversations of how many people will. We have history from a former program that says how many people typically take advantage of a program like this. So what we're sharing today in terms of our results, the GAAP results have some very complex accounting associated with this program. The non-GAAP results is where I want to try to direct everyone's attention because it's framed in the way that our normal sales would be framed. And so it's the same -- for example, the economics are already the same. We still ship a t:slim today. We collect at the same time and get reimbursed by insurance, the same. So we're reflecting the accounting, the revenue, just so you can compare it to historical periods. And so we're trying to take away this noise you're going to continue to see with this program that you'll see deferrals each quarter until approval. Then when we start asking people to make the election, that's when you'll start to see revenue get recognized, which can be very sporadic and unpredictable. So it's back to, if you use the non-GAAP sales, you'll be able to better compare to historical periods.

And if we think about that delta, I mean, is that giving you a signal of future Mobi demand? And I mean, how do you think about just the progression in front of the Mobi launch is -- do you think that the more patients that are participating in Tandem Choice that are current users of the technology or patients of the technology? Where do you expect kind of just a pent-up demand to build and then once launched and patients will access it that way, maybe hard to answer, but what do you guys expect to…

Yes. It's a good question. I think the way we get signals from this program, since people don't elect in advance, it's a matter of if and when they choose to down the road. The signal will be how many people are asking about it. How many times are having to talk about the program and that we do have this pathway offering for them. And so that's when we'll start to determine if there's noise around pausing that may come from people, who are looking ahead to Mobi. At this point, we haven't really had to talk about the program much. We're not hearing noise in the market. And nothing that would indicate that people are waiting for Mobi to come in order to purchase. We do anticipate that noise could come usually, it comes around clearance timing. So that's why, to John's earlier points, we're going to be working very hard to commercially launch as quickly as possible after clearance to make sure we minimize the timeframe where there could be that noise and disruption.

Many people don't know about Mobi now. It's only -- I think investors do, of course, a few physicians do. But I'd say it's widely not known. And so I think that as soon as we do get clearance, we'll ramp up the advertising and marketing around it. And at that point in time, we'll probably start to see people express interest in it.

No, that's an important point to make. Maybe on top of Mobi, thinking about some of the other initiatives in your R&D pipeline, you discussed the expectation for commercial patch pump in 2027, not earlier. And just thinking about t:slim X3, Mobi:Tubeless, Sigi Patch, it's kind of like almost an annual or every 18 months and other hardware launches. Is that the right cadence to think about through?

Yes. I mean I think that if you look prior to, we were launching a brand-new product, a meaningful new product every 12 to 18 months. And we anticipate getting back into that same cadence. Interesting this year, we actually have 2 CGM integrations, both G7 and the Libre sensors will be integrated. We also have Mobi launch, but we also have a -- it's a brand-new data management platform that will upgrade t:connect, it's called Tandem Source. And it's also -- we're very excited to release that, and it will be globally released, which is another big thing. So I think then you look beyond that, and we've got 3 significant introductions stage roughly a year to 18 months beyond that. I mean I think we have the most exciting pipeline in diabetes. And unfortunately, I don't think we get any credit for it.

No. That is true on the credit side and the portfolio that you guys are developing. Follow-up question on the patch technology and the development work there. You acquired AMF Medical. You got Sigi under your roof now and an internal program that was moving on. How do we think about what would be incorporated from the internal work? Is it -- is there anything there that you can use and leverage in the development where its Sigi or technology algorithm and anything along those lines?

We announced our intent to commercialize the patch back in December 2020. And we laid out a roadmap at that point. That included X3, Mobi:Tubeless, and the Patch Pump. And we've had a Patch Pump program under development for a while now. Our internal priorities, which is to miniaturize the patch and to use in concentrated insulin. And by doing that, we could have a smaller reservoir. This past year, in 2022, we did extensive market research from the very beginning of the year throughout the end of the year. And we were looking at our device as well as the competitive product as well as multiple start-ups that are underway today. And what we found is we found that the Sigi Patch, it really resonated with people, and it was highly differentiated, and we saw the greatest preference scores with that device. So we looked at it and we said, well, initially, we were considering an investment. And we said, well, let's just buy this company because it does have differentiated features, which are, it's rechargeable. It has a prefilled insulin cartridge, which makes it is very simple to use. And it's got a great ergonomic profile. The team in Switzerland have developed, they are very capable. They're excellent engineers that are focused on, in addition to the technology development, also manufacturability. And so we really believe that when we bring the product to market, it will be highly automated. It will be very reliable. And I think that it's going to be very appealing to the community. So it was really a matter of just comparing the sort of the differentiation of our own system that we are working on to the Sigi Patch. And I think we felt the Sigi Patch would be more meaningful in terms of market growth.

I should have asked this question upfront at the beginning, we were talking about the Libre 2 and 3 approvals for integration and AID systems. But on G7, you mentioned G7 a minute before. Just any sort of timelines you can share where you are in the development pathway to integrate G7 into…

Yes. Of course, we said with G7, it'd be a quarter to 2 after it was commercially available. And it was approved in the, I think, mid-December timeframe. So our plan today is in the latter half of the second quarter, we plan to bring it to market. So we're excited about that. We're kind of in the final stages of development. We're working on labeling and things like that. But we have a great relationship with Dexcom. They have a great product, a great team. And so we're really excited to bring this product to market here in the first half of the year.

I wanted to maybe just use the last couple of minutes, maybe to leave enough time. But just thinking about the 2027 goals you put out at your investor event and innovation day, I think at the end of '21.

Yes. No, end of '20.

End of '20, excuse me, sorry.

'21, sorry.

So just in terms of the goals or 65% gross margin, expanding to 65% and operating margin expanding and getting to the 25% level. And just like, I guess, the cadence or one maybe just those targets are still in play. I know there's been choppiness all through 2022 is a unique year for the whole medical device industry. But are those targets for the investor thing that those are still in play, and there's still kind of milestones that you guys can…

Yes, absolutely. We don't intend to back off those. I think that when we put the plan in place, we recognize that there are going to be periods. It's not going to be linear growth. So there will be periods of moderation, which certainly, 2022 is one of those years. But I think as we get these new products to market this year and beyond, we would expect to return to a growth cadence that we're accustomed to and with that, achieve the numbers that we set forward.

And if we just think about margin expansion, specific operating margin expansion, is that kind of 2025 and beyond? I know you guys are making a lot of investments and pipeline opportunities kind of fuel the growth internationally and in the United States. But is that kind of the right time frame to think about stronger operating margin expansion in that period before '25 to '27?

The first piece, I would say, yes, that's fair. The first piece that really drives that is the drop down from gross margin. Mobi is the single biggest driver of our gross margin expansion goals. It will get us more than halfway to our 65% target. The pump itself has a 10% to 15% lower manufacturing cost. So you start getting benefit. And I don't want to say right away, we need to get to a level of scale before you'll actually see it in a meaningful way, followed by as it becomes -- those customers become a bigger piece of our installed base, the cartridge has a cost reduction of more than 20% compared -- and these are both compared to t:slim. So as those build up in the installed base over time, we'll really start to see margin benefit. The next single biggest contributor will be extended wear infusion site. Beyond what comes from gross margin, the operating leverage, the best opportunity we really have is how we support our customers today. And so today, we have hundreds of people that support customers from the beginning to the very end of the process. So when they first inquire about the pump all the way through to when they buy the pump, have technical support needs coming back through the renewal process. And so we're very focused on optimizing that so that it's not human-centric every time someone needs to have an interaction or wants to have an interaction. It will be more like a retail experience that you have in any shopping experience out there online. And so that's where we're really focused on developing automation to help make those processes more efficient and we don't have to hire as many people in the future to support the base as it grows.

Maybe last question, just on these margin targets, thinking about the contribution from sales growth versus some of the cost reductions or new product introductions with lower COGS. I mean, how dependent on those margin targets is getting back into that maybe high-teens or 20% revenue growth trajectory?

The sales growth is important to hitting those margin targets, but I would say we can drive a long way with just the operating efficiencies that we have in mind, in order to get there. So I would say probably both almost of equal importance.

Well, thank you for putting up some rapid-fire questions. Thanks for all the answers. Great to see you guys both.

Yes, great talking to you. Thank you for inviting.

Appreciate you joining the Cowen Healthcare conference here. John and Leigh, thank you so much.

Thanks, Josh.