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

Good morning, everyone. I'm Steve Lichtman, medical devices analyst at Oppenheimer, and welcome to the Oppenheimer 33rd Annual Healthcare Conference. Up next for us, very happy to have Tandem Diabetes. With us this morning is CEO, John Sheridan; and CFO, Leigh Vosseller. We're going to do this in a fireside format. So, if you have any questions, please just enter them into the chat box on the webcast, and I will make sure to get them over to management. With that, John and Leigh good morning, and thank you for joining us.

Hi Steve. It's nice to be here.

I thought first, we'll start on -- the latest news relative to Abbott's approval for integration with Control-IQ. Maybe if you could just update us on the timeline there? I know Abbott spoke about modifying their sensors does that change at all the 1 to 2 quarter time frame you talked about, obviously, that got Libre 3 approval as well. So how are you thinking about the overall timing of commercialization?

Yes. I mean, I think all things being equal, we probably wouldn't change our timeline. And right now, I think there's just a little uncertainty as to when the modified device is going to be on the market. So I think we need to spend some time and have our teams speak about the -- what their schedule looks like. And I think once we get that information, we'll be sure to let everyone know. I'm -- we have a call coming up in late April, our first quarter earnings call. I'm sure that we'll have information by that point in time where we can let everyone know.

There were some questions about whether to -- the warmup time for Libre would impact the integration with pumps like Tandem's. What's sort of your understanding and how that integration would work?

Yes. We've been aware of that from the very beginning. So we have been working on it with their team. Tandem has a good history with interoperable devices. We were the first ones to integrate an iCGM. We had the ACE pump and then we had the interoperable algorithm first. And so we understand how these things work at a pretty deep level. I would say that at this point, we feel very comfortable that the system will work in that warm-up period -- that Control-IQ will work effectively during that Control -- during that warm-up period?

As we think about -- also in the near-term pipeline, wanted to touch on Mobi -- your latest in terms of confidence in that second half launch that you've talked about is your dialogue with FDA here in the first half, fairly typical?

Yes. I mean I think it's just normal for this point in the process. We've been having routine conversations with them. There's nothing out there that I would say is a showstopper. There's some work to do for sure. And with -- right now, I would say it's there's back and forth, just trying to clarify questions and respond to them. So, as you know over the last 6 months to a year, there has been delays in getting the FDA approval on -- for a variety of reasons. But and -- so for us, at least, it's difficult to say, absolutely, we think the approval is going to come in this point in time. And rather than try to commit what we've said we will do is we can be ready to commercialize our product in the second half and we will need about a quarter after we get approval to have the product on the market. And that's, I think, what the organization is planning on making happen.

Once approved, what are the gating factors on the pace of launch? Because you've -- I think you've been clear that it will be sort of a rolling launch. So what does that mean? And what are the sort of the gating factors?

Yes. I mean the first thing that we have to do, there's usually labeling changes that come about from the review. So we'll have to go back and update all the manuals and those sorts of things, get them printed. The other thing that's incredibly important is just training the HCPs and their staff and so our sales organization needs to go out into the field and work with all of the endos and their staff to make sure that they're very familiar with the product. And that takes a little while to get that done. When that's all ready and we're ready to go. I think that you're right. We'll probably -- since this is our first hardware change in a while, we will roll it out slowly. We will -- want to make sure that the product is performing as we expect. Even though we test it thoroughly inside in the house, we still want to get it on several thousand people and just make sure we're seeing the results we expect. That being said, we will -- once we have that confidence, we'll move aggressively to get it out into the market.

And just to follow up, relative to FDA, again, understanding just the general sort of timing uncertainty that can happen with FDA, especially these days. But relative from your perspective and the ask was just to be clear, nothing that's unusual or burdensome?

Yes. I mean one of the early questions we received was whether or not we would have to do additional human factor studies or clinical work. Certainly, if that was the case, that would take an extended period of time. And we do not think any additional human factors or clinical work is necessary. So that's -- that was one of the big potential factors that could result in delay, but it's -- we don't need to do that. So I would say the things that -- beyond that, things I would characterize as just nothing surprising.

Okay. And then also just do you circle back to Libre. And Leigh, I know you've made clear that you haven't included any new product movie or I don't think even Libre integration into 2023 guidance. But how are you thinking about that potential contribution now either -- not putting on a spot in terms of adding to '23, but now that it is becoming more of a reality, what could this mean for you guys as an opportunity in the near to medium term?

Sure. So what Libre offers is greenfield opportunity. You -- what we understand is that they have roughly 300,000 people living with type 1 diabetes in the U.S. alone who don't have access to integrated technology or algorithms. And so that means there's a great opportunity to co-market with Abbott directly to those patients and introduce to them the benefits of pump therapy. So we look forward to that being an opportunity when we're able to launch it. But to your point, no benefit from that, nor Mobi not even at -- nor G7 are included in our guidance for this year. So as any of these roll out, they are all upside opportunities to 2023. I think the right way for you to think about it, though, these are actually more of a 2024 contribution just based on the timing of how things are flowing in the year.

In terms of the other near-term changes that you've made, you -- late last year, you talked about expanding your monthly payment model. Can you talk -- sort of update us on that. Is a -- what is the model looking like these days? Is it sort of an 18-month opportunity still for patients to pay over and what has been the uptake as you've been more proactive in promoting that opportunity for patients?

Sure. So we launched that program officially at the very end of September in 2022. So it's still fairly new. I will say it's been a great marketing tool from the perspective of the field because when they're faced with the conversation, with patients or even physicians that talk about the differences in how you pay for a tube pump versus something through the pharmacy that there is a upfront commitment. And so it helps them have that conversation that we can now level the playing field and what we offer is actually very flexible. So we will spread the payment plan as long as the 4-year warranty cycle for as low as $50 a month. So pretty much equalized it in terms of, I would say, financial outlay from a patient and once we launched that program, we were in the fourth quarter, which is where most people have met their deductibles. And so they're really at their lowest point in terms of what their out-of-pocket is. So we didn't see a significant change at all really in the actual usage of it also as we go into the beginning of this year that may change as more and more people's deductibles have reset and they might have a higher out-of-pocket here at the beginning of the year, and they could access the program at this time. The one thing that we did notice in terms of usage, though, is that where we did see more interest would be from patients that were new to Tandem as supposed to our own renewal patients. And I think that continues to go back to say a lot about once people are on the pump once people are accustomed to Control-IQ, some of these other external factors aren't influencing when they make their purchasing decisions.

I guess maybe just since you mentioned it on renewals. Obviously, Insulet has done quite well over the last few quarters as they have launched Omnipod 5 but it seems like your current patients are very happy and staying on. I mean in just in terms of the numbers. So can you talk a little bit about that sort of what you've seen and maybe put some numbers behind it from the renewal opportunity and your -- how you're capturing that opportunity even in the face of some new product launches?

Sure, happy to. So you're right, from a renewal perspective, when we look at our own internal metrics, we actually improved our renewal rate in 2022 versus 2021, and it was steadily improving across the year. And what does that mean? It's not necessarily about measuring the sheer volume of renewals compared to the year before because the opportunities did grow as well. So you would expect that to go up. It's really looking at the traction of how many people are renewing within those cohorts and how quickly they're renewing. And we look closely at -- I have particularly been watching the 90-day renewal rate just to monitor, especially in the more challenging environment, that the nearest term that you could view to see if you see any changes in behaviors and we didn't. The numbers that I've shared has been when we exited 2021, where we had about 17,000 new renewal opportunities, we have renewed just under 50% of them when we close that year. In 2022, the opportunities grew to about 30,000. And by the time we exited the year, we had renewed a little more than 50%. So like I said, that even in the face of the challenging environment that we were seeing, which includes competition as well as the economic environment, we're continuing to see our own patients renew at a faster clip than we have seen before. And I think then that's really important as we go into 2023, and we think about the number of renewal opportunities stepping up once more growing to over 50,000 people. So it's great that we've been able to get this traction in this environment. And -- I think, again, it's a testament to how committed people are to Control-IQ.

And the 90 day, can you define that a little bit more? So that's 90 days post when the warranty is up or?

Exactly. I mean you can imagine, we look at every metric possible internally. So we look at how many people renew within 30 days of their warranty expiration within 90 days of their warranty expiration and across the year, that continued to improve all the way through the end. So fourth quarter was our best renewal rate of all time in that fourth quarter.

Okay. Because -- there actually 90 days -- is -- patients can wait even longer, of course, right? So that's 50% at 90 days is actually pretty good.

To be clear, Steve, the 50% is not at 90 days, but it is a high percentage within the 90-day time frame. So 50% is a measure of exiting 2022, how many for that year that cohort renewed by the time we exited that year.

Got it. Just on the share side, just a question that came in just relative to the market share of new patients. As you look back in 2022, if for -- if MDI moving to pumps, how did that share dynamic changes as Omnipod 5 rolled out? What was the -- what kind of loss share did you experience in terms of the new patients? And what are you assuming in 2023?

Sure. So when we look at the overall opportunity first, I'll say the number of people that came to market from the MDI population, we estimate with somewhere between $75,000 and $80,000 in total. And that is a step-up from the prior year, which we estimated was about $70,000. So first of all, I just want to highlight that the market continues to grow. And before, I would say the launch of Omnipod 5, we were effectively, I would say, splitting that market with Insulet in terms of new pumpers coming in. So roughly 50% attracted to Tandem, 50% attracted to Insulet. As we look at the end of the year after their full commercial launch and as things continue to evolve, and there's always interesting dynamics when a product is first launched into the market. It appears that they took a little bit more of the edge there and maybe pushed upwards to 55% or 60% of that share. But that's not unexpected when you think about a product that's attracting a different segment of the market than the segment that we're trying to attract. So as we go into 2023, we took this into consideration as we look at how many people we estimate could be coming to market. We looked at various scenarios of what our capture rate could be. And actually, we look forward to the opportunity when we have Mobi coming to market, when we'll be attracting a different segment of the market than either KSM would have attracted B4 or Omnipod 5. And so I would say as new products come to market, you would expect these sorts of inflections. You might be a little shifting around in the balance of share attraction. But we think that we have the right products in hand to continue to drive us to get our own fair share of new pumpers coming to market.

Do you think -- as we look at the -- in the back half of the year, the year-over-year decline in new patient adds, obviously, you added patients but less than the prior year. Was that the bigger impact in terms of percent of new MDIs or was it them capturing more Medtronic share than previous? Or is it a combination -- pretty equal combination of both?

I would say a combination. We still maintain the ratio that we've seen pretty consistently, which is of new pumpers to Tandem, about half were coming from competitive conversions and about half were coming from MDI.

So we talked about some of the near-term opportunities relative to Libre integration of Mobi with the hopeful start launch in the back half of this year. As we think a little bit beyond that, I think Mobi Tubeless is slotted later in your pipeline in the next-gen t:slim. Why is that? Is that because of required development milestones? And relative to Mobi Tubeless, what are the next steps that we might hear on that project?

Yes. I think that's -- that's correct. It is slotted after t:slim X3. And I'll say that we've been working on both programs now for a while. The importance of t:slim X3 is that there are -- I mean if we don't take care of it almost immediately or in the next year or so as we've said, there's the potential to have supply chain problems with a lot of the integrated circuits that are used in the inside t:slim X2. So that's really the -- the priority is to address the supply chain issues because we do believe that t:slim is a product that's going to be on the market for quite a while. And as you know, it's been about 10 years since the product was designed. And while we have made improvements to it over the years, there's still this potential that's out there in time. So it's really to address that.

Okay. And then just relative to Mobi Tubeless, I mean, what are sort of the -- will we see any sort of milestones from investor side over the next 12 months or what are you thinking about?

Yes, we're planning a Investor Tech day at the ADA this year in June. And I think what we'll do is likely show it to you and give you sort of like the look and feel. So you'll get to see how it's -- how it will work, how we'll implement it. And we'll talk more about timelines in that meeting.

Thinking about type 2, I guess a couple of questions I have. What is type 2 mix for Tandem today? And from your guys' perspective, what percent of the intensive type 2 patient population is on pump? And what's holding it back from being higher in your view?

Yes, it's a good questions. We have -- when you look at the type 2 market in the U.S., there's about 2.3 million people with insulin-intensive type 2 and of those, approximately 100,000 people use a pump. So it's less than 5%. It's a small number. I would say that in Tandem, we have almost -- we have almost 300,000 people in the U.S. using our pump and about 20,000 are using -- or excuse me, have a type 2. So it's a good number. And I think that it's something that we think it's an important market to focus on. We certainly need the indication for Control-IQ and that's really where the focus is right now. As we -- we've just -- we finished a feasibility study last year. The results look great. We're probably any week now. We're going to start this type 2 study. We're very close to starting it. And it will probably take us into the latter part of this year to get the data submitted, and I would anticipate that we'd have the indication next year. When you look at Type 2, it's it's very different than type 1. I mean, people obviously with type 1 need insulin every day to live. I think that as people progress through type 2, when you get to the point where you're using insulin every day and you need it, it's almost -- the people feel as if they've lost, they've lost a battle. And so there's a different mental state that you have to deal with. And I think people still are incredibly sensitive to just the fact that they have type 2. They don't want people to know discretions hugely important. So I think that we've been looking carefully at the market at the people who are potential candidates for pump therapy. And there's -- I would say, it kind of breaks into 2 groups. There's one group of people who want nothing to do with technology, nothing at all. They would just continue to use pens and needles as needed. But then there's a group who are I'd call near-term pumpers. And these are people who are I would say they're tech-savvy. They probably have good insurance. They are personally interested in improving their situation, and they have a family or a network of supporters who are also working to help them. We think this is a group that we can target and we can move into pump therapy. Certainly, we don't see it going the same -- at a same penetration as the Type 1, which we anticipate in the next 4 or 5 years, we'll get to 65%. But we think going from 5% to 10% to 15% in that same time frame would be very successful -- would be a very positive movement for that group. But first, it's really -- let's get the -- let's get Mobi on the market with a type 2 indication. And I think we also believe that in time, we need to simplify the user interface the product today is really -- it's really developed for someone with type 2 and -- excuse me, type 1. And we need to have a simpler interface that someone with type 2 would be more likely to use. So there's a lot of work going on there.

So a few follow-ups then. One, do you see Mobi as being sort of your lead type 2? Or will the reservoir size be of hindrance there?

It's a good point. I would say that just based on what we're seeing with some of our competitors, the reservoir side -- size doesn't seem to be as important as the discretion that comes along with the size of the product. So obviously, both products will be available to the community. But we believe that Mobi will be appealing because it's controlled by a mobile app and you can interact with the device on the mobile app when you're out and about in public and deliver boluses and things like that, which I think is -- it's not only convenient, but it's a very discrete way of managing diabetes.

And then second, I think from a reimbursement perspective, I think there had been some hope that CMS may look to reduce some of the hurdles for patients, particularly in the DME channel, I think that would impact type 2. What are you hearing on that front? And is this something that could happen, do you think in 2023? Or anything you've heard from the field?

Sure. It's always really hard to put a time frame on anything through CMS. I would say what's encouraging has been that there's been traction on the CGM side in the last 6 months or so. So the simple fact that they're actually looking at reviewing the guidelines and making proactive changes, I think, is very important. And so there has been a submission with a proposal to CMS to look at some of the guidelines for getting approval for someone with type 2 diabetes to have access to pump therapy. It's got a lot of backing from the health care community. So I'm hopeful that there will be a change. I would be reluctant to put a date on it, though, and say it could come as early as 2023. But we -- obviously, the whole industry continues to lobby for this.

Got it. Before we continue on the pipeline, I wanted to ask a little bit also about some near-term things on the P&L, maybe be. Can you -- tell sort of why you decided to open a new distribution center in Europe and what the benefits will be on that? And then sort of secondarily, just walk through the mechanics of how it's impacting 1Q sales and gross margin as you guys have guided to?

Sure. So the decision to open these operations in the Netherlands was really, first of all, for streamlining. And so it's much more efficient, particularly for the distributors that we work with in order to have a hub outside the U.S. Up to now, what's been happening is when distributors place orders, they have to secure a freight forwarder and pick it up in San Diego and have it delivered. And that's challenging in its own way when you don't have the additional impacts from the COVID environment on top of it. And what we've seen is that distributors have had significant challenge in getting that inventory delivered timely and having any sort of ability to predict when it will show up for predictability to when it arrives. And so we've had examples where some distributors have ordered inventory and it didn't show up for 5 or 6 months because it was on overseas and on the boat, and it was -- just took a long time to get there. And what that has done, it has created an environment where distributors have to carry higher safety stock levels of inventory. And so in some cases, they're -- were carrying more than 3 months of inventory on their own shelves because they were trying to navigate this environment. So with opening this, this will help them be able to take away that impediment. So what's happening right now is that the distributors -- and this is the European markets only. So it's about 70% to 75% of our OUS business, are starting to destock their inventory down to normal stocking levels, which I would put in the 2- to 4-week type of category. So they're weaning them down so while they order from the Netherlands, it will be a much simpler process. Most of that impact is coming here in the first quarter. We have about $6 million of revenue headwinds because of it in the fourth quarter and we're expecting about $25 million more in total, as I said, mostly in the first quarter. And so that challenges what our year-over-year revenue growth rates look like. It puts a little bit of pressure on gross margin, but I think even more so it puts pressure on our adjusted EBITDA. Keeping in mind that in our OUS operations, we don't have a lot of operating expense associated with it. So when we talked about adjusted EBITDA being negative in the first half of 2023, this transition is a big piece of that. In fact, in the first quarter alone, it will be negative to the tune of low double digits, so low teens for adjusted EBITDA perspective. So once we work through this, we'll be back on track and our revenue that we report, we'll start to more closely align with the real demand behind the scenes that the distributors are experiencing. And that's probably something I should have highlighted from the very beginning when you look at what we reported in 2022, our pump shipments to our OUS markets were actually flat year-over-year, but the underlying demand showed that there was a 20% increase in pumps -- would have been pump sales had we been reporting it along the demand line. So this will be very beneficial after we get through this transition.

And then just quickly, gross margin at scale for Mobi versus t:slim is would be what approximately?

Yes. It's one of the single biggest contributors to our gross margin expansion in the next 3 to 4 years. The pump itself, when you compare it to t:slim has about a 10% to 15% lower manufacturing costs. And so after we get to about, I would say, a year from launch, you'll really start to see that and show its benefit in our gross margin. But then beyond that, our cartridges as well have a more than 20% reduction in costs compared to t:slim. So as more and more people are part of the installed base and that grows, our supply margins will start to improve as well. Like I said, it's one of the single biggest contributors to that expansion.

All right. John, I wanted to go back to something you mentioned earlier. I think you said type 1 pump penetration potential up ease there to 65%, which is higher than the number I think you talked about before, kind of think about let's get to that 50% mark and then go from there. So I know that's a little longer term, but what gives you the confidence that the market can get there? And what would be the major drivers?

Yes. When we outlined our long-term plans in December of 2021, we indicated that we by '27, we would have 1 million people using our pumps and our technology. We'd have a gross margin of 65%, and we would have an operating margin of 25%. So I think in order for us to get that, there's several things that have to happen, certainly, we have to get the penetration rate up and we believe that it can go from 35% to 40% where it is today, up to 25% -- excuse me, up to 65% in that time frame. The things that drive it really are new technologies that reduce the burden that reduce the hurdle that people have to overcome to wear a device 24/7. And we think that Tandem, our competitors and our partners are all innovating at a very rapid rate right now. And even with the newest entrant to the AID space this past year, there are people who probably would never have considered pump therapy if that device wasn't on the market. And certainly, they're bringing people from MDI into pump therapy. So I think that when you look at our pipeline, we have a very exciting pipeline. We have a lot of innovation. We're going to be providing choice. We're going to have a portfolio of products. We think that, that design along with the innovation that comes with our CGM partners is going to lower that burden, and we believe that will drive the adoption. The other things that we have to do is we have to work with organizations that affect how and when people can get on to AID systems. Right now, there are selection biases out there. And there's a sense, at least with some physicians that you have to be in control before we can put you on an AID system. And the reality is that the people who see the best results and the most significant improvement are the ones that have the worst control. So I think that we're working with a variety of different organizations. We're generating clinical data all with the intent of developing the market as well as innovating in this space.

Only less than 2 minutes, so I have to choose from a few questions here. I guess thinking about the Sigi Patch Pump long term, what are the next steps in development? I know you've talked about not taking the revenue out until 2027. So what needs to happen over the next couple of 3 years. What are the key milestones that investors can be on the look out for?

Yes. So we acquired AMF Medical and the Sigi Patch Pump because we felt that it was highly differentiated and we actually did quite a bit of market testing with our own product, with the competitive products and with a lot of the start-up products that are kind of in the early development phases. And Sigi just stood out. It was actually the most -- it had the most interest, the most preference share increase compared to anything that -- of the group I just described. So I think that we felt like it was such highly -- highly differentiated product. It would it would basically help us achieve our objectives with a patch device faster and better. And so we basically we shelved our internal development effort, and we acquired Sigi Now. That's what we're working on. I would say that the product today, it's a very well-thought-out product. I think it's got a -- I would call it an advanced prototype so there's still a lot of hardening that needs to go on with the manufacturability, the reliability and the safety. And those are things that we're working with the team on. Obviously, it's early. We just started the real acquisition ended in January. So our teams are now working together. I'd say -- but that's a major element of that. The other is just the integration of the Bluetooth technology, the CGM integration and the AID systems. So I would say it's a combination of those 2 things right now. And then I think as time progresses, we'll be looking to automate the manufacturing process and develop the automation of the manufacturing capabilities to build it in high volume. So those are kind of the 3 steps, really, it's hard into the design, let's integrate AID and then let's get the manufacturing process to the point where it's highly automated and really drive the cost out of the system so we can continue to see gross margin benefits as it comes to market.

Okay. Got it. That makes sense. Well, I think we're out of time. John and Leigh, thank you so much for joining us. Thanks, everyone, for joining us as well, and I hope everyone has a great week.

Thanks, Steve. It's great talking to you.

Thanks, Steve.