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

Good afternoon, everybody. Next up, we have Tandem Diabetes. I'm Travis Steed, the medical device analyst at BofA. We have John Sheridan, CEO; and Leigh Vosseller, CFO. So welcome, and I think John, you wanted to...

Sure. I just want to kind of give you guys a sense of the state. Thank you for having us Travis. It's always great to be here. We prefer to be on the West Coast and in at least the same time zone that we kind of are from, it's a lot easier getting up in the morning and having those early meetings. So I guess I wanted to start off by saying that we've been pretty clear over the last quarter, couple of quarters that there's been a good deal of pressure on the business from the macroeconomic factors and from the competitive issues as well. And I would say that as we enter this year, we have seen some stabilization, which has been good. The stabilization doesn't mean we're not experiencing pressure. We're still experiencing a good deal of pressure. But I would say it's no better or no worse, as we enter the year. So that's something we view as a positive. I would say that we anticipate that this pressure is probably going to exist for the next couple of quarters until we start to see this next wave of innovation that we have come to market in the second half of this year. So I think that when you talk to HCPs today, they still think we have the best product in the market. I think we are the #1 rated product in the market today by a number of different third parties. And over the last couple of quarters, what we've been able to do is, we've been able to go out to the market. We've been able to talk to HCPs, talk to people who are using some of these competitive products and really begin to understand how to position ourselves against them. And so that's something we didn't have immediately as soon as the product hit the market, but now we do. And so we really equipped our sales organization to do a much better job of working with HCP, so they understand the benefits of our technology and can position it competitively against the products that are on the market. So we're excited about that, and we think that's going to have an effect on our business as we go forward into this year. The other thing I'll say is that we -- the 780G just was approved a week ago or so. And I think there's also some concern about how that might impact the quarter and impact the year, in fact. So I'll say, first of all, it's a better product, no question about it, but it still has weaknesses. And I think that the benefit we have with the 780G is that we've been competing against it now for many quarters outside the United States. And we understand how to position ourselves competitively against it. And so as it starts to come to market immediately now, we're in a much better position to compete against this product. And I will say that while it's a better product, there's still -- I think that the U.S. endo community has lost some confidence in Medtronic's ability, and I think that it's just -- initially, they're going to have to deal with in addition to the fact that the product still requires finger sticks, which I think is problematic. So we feel comfortable competing against that device. And so I think that, as I said, this year, we have our next wave of innovation coming to market. Our team is excited. We're bringing 4 new products which I think is unprecedented in diabetes to the market in the next several months. And I think that we are very committed and convicted to -- commitment to the goals we set for the company. And I think we feel confident we can achieve them this year. So thanks for letting me say that.

Yes, of course, great opening remarks. Maybe we'll start with Q1 just reported last week. When you think through Q1 and kind of your initial expectations versus where the quarter shook up. Like how do you think new starts, renewals, international, kind of all the pieces played out over the course of Q1 versus kind of your initial expectations?

Sure. So we came in pretty much in line with our expectations. I'll start with the OUS market. It's a bit different there right now what's happening. We're going through an operational transition where we are moving distribution from a U.S. location to a center in the Netherlands, which is very beneficial to our OUS distributor partners because it will alleviate the headaches they've had with the supply chain challenges. And so we knew that we were going to see about $25 million of sales headwinds in the first half of the year. And in fact, most of that landed in the first quarter. And so we're excited to get that behind us, so we can move on to a point where report sales outside the U.S., it will look more like true patient demand. So we don't have to have these conversations about fluctuations in ordering patterns, and we can talk about really what's happening in the market. Demand is still strong there, and so we're excited about the outlook for that part of the business. In the U.S., what we're seeing, as John said, is still an environment very similar to what we saw in the fourth quarter with some pressure to it, but we did see shipments come in strong. One thing that I would highlight is that we're seeing a little bit of lengthening of time between -- timing of starting an order to actually fulfilling the order with the customers. In some cases, some of the economic questions are coming up, which is lengthening that to some extent, but it's not changing the dynamics of the number of people interested in the technology, also occurring a little bit with the sales -- supply sales side of it. And so otherwise, we look forward to the rest of the year. We feel like we have a number that's very achievable. And based on the trends we've seen so far, I have a lot of conviction in being able to deliver that.

Right. And kind of the 3 things you've highlighted. You highlighted kind of the staffing and into offices, you highlighted the economic impacts, and then kind of competitive pressures from competitive launches. Like how are those 3 buckets kind of playing out? Is the payment plan helping the economic side of the stuff? Is the staffing getting better in the competitive launch? Like how has that kind of trended over the last few months?

I think that when it comes to competitive launch, I think that I think there was a great deal of pent-up demand for the product when it first came to the market, which was in the late summer. I think that there's a number of early adopters that have tried the product. We know at least from Tandem. In Tandem, we have roughly 15% of our employees have type 1, and so a good deal of them tried the product. And I think that they tried it, some of them tried it for longer than others. But I'd say most, if not all, have come back, and they just -- they don't -- the algorithm is not as aggressive as the Control-IQ system, and they really prefer that. And I think that we're hearing the same sort of thing from many of the physicians in the marketplace where people have tried it. Most people are coming back to Tandem. I think that what's happening today is that it's definitely a different form factor. And the form factor is appealing to people. And so we've talked about trying to get the pump penetration rate in the U.S. from 35% to 40% today to 65% in the next couple of years. And in order for that to happen, the companies like Tandem and Insulet, Medtronic, Dexcom, Abbott, all have to innovate and provide solutions to diabetes that reduce the body burden and the mental burden of living with that condition. And so I think that there's people out there who otherwise would not have come to pump therapy if they didn't have a tubeless option. And so certainly, what's going on today, I think, is that we're seeing the competition really for MDI's, people are going from pens and needles into pump therapy. That's where the competition is. We have people today who are using our product, we have renewals, and we see very little attrition. The people who are renewing right now, we're actually seeing improvement in our renewal rates. So I think that it's -- I think the situation, again, there was early excitement and interest. There still is. I think that as we bring this next wave of products to market. we're going to see that situation changed dramatically, and we'll get back to the growth curves that we've seen in the past.

And the payment plan? Is it helping?

Yes. It certainly is helping with the conversations. One thing that we frequently see is there's a misunderstanding at the cost of pump therapy, particularly on the durable side, people presume because there's an upfront that it means it's more expensive overall. So what we're doing is trying to change that perception. And we've shared with people recently that about 30% of our customers today don't even have an out-of-pocket. So it really varies widely based on their insurance spends, and we want people to call in to make sure they understand what their responsibility will be. And then we couple that with the payment plan conversation so that we can equalize it because even those patients that have an upfront, if you take that with the out-of-pocket cost for the supplies averaged over the 4-year time frame, more than half of the people have less than $50 per month out of pocket. So it actually can be very affordable and the payment plan can help us in terms of that messaging.

Right. On Q2, we talked about on the earnings call, you highlighted some of these pressures continuing as well as the Mobi delays. Just maybe kind of comment on what you're seeing early April to kind of give that color into Q2 at this point?

Sure. And so I wouldn't characterize it as a Mobi delay by any means. What we are seeing is that or what we're expecting maybe is more -- the better way to say it, it is going to be a noisy quarter. So there's never been a time in the diabetes space when a new product was launched where it didn't create some sort of disruption around it as people are trying to understand what the product offers and many times, physicians and patients need to experience it to really understand that. . And so with the imminent launches of G7, the Abbott Libre with the conversations around Mobi as we continue to talk about getting closer and closer to clearance and preparing for launch and then with the 780G coming to market, we expect -- fully expect it's going to be a very noisy quarter, not unlike we've seen at other times, and we just want to be prepared for that. So that's why we're -- when we talked about what to expect for Q2, there is a wide range of variability at what the sequential step-up has been in the past. And we caution people, let's think of it on the low end of what we've seen in the past, which is a low double-digit step-up in pump shipments in the U.S., just accounting for that noise in the market.

And is that something you said you're not seeing it now, but you're just kind of baking in the noisy market?

Exactly. We're anticipating that it will occur. So we just want to be cautious about what we might see, and I think the other important point is it's not a loss of opportunity, it's a shift of timing, because what we found in the past, so for example, our Control-IQ launch, as we neared FDA approval, Control-IQ is going to be offered with a simple software update, but you find as you get nearer and nearer to the launch that sometimes people say, I'd rather just wait, buy the pump with the software on it, than to go through the software update process myself. And so that's why we think that there could be some timing elements associated with when people make their purchasing decision.

Right. When I put some of those comments into my model, we came out with like Q2 revenue for like $195 million, Street lows like $190 million, but The Street average is, I think, $206 million. So I don't have the updated models now, but I was just kind of curious if my number is right, The Street number, just kind of curious color on Q2 revenue, where we should be.

Sure. I think the way I would frame it is, I'm not sure everyone completely understood the message of going into Q2 and being on the softer side of expectations. So I would encourage people to think about it as making that adjustment in their model so they can reflect that. I think the other element even on the OUS side, I'm not sure it was fully captured the headwinds we expect to see in the second quarter, which is about $7 million, where we saw $18 million in the first quarter. So I don't know that everyone fully got the message on some of those dynamics.

Do you feel like we got the message?

I'm comfortable.

Okay. Great. And on Mobi, I think in the past, we talked about like some sort of like upgraded plan, like if somebody gets a T2 today, they can get an automatic upgrade. Is that something you're thinking about as you get ahead of Mobi?

Absolutely. That's the Tandem Choice program that we rolled out at the end of the third quarter last year, and the idea behind it is, so today, people know if they're in warranty, they always get free software updates. But the question is what happens when a new form factor comes to market. And so we wanted to assure people that even if you're in warranty, you're not precluded from having the latest and greatest technology, there is a cost to it, because you can't give away pumps for free necessarily. But at least it reassures people that if they buy, they're not stuck in a lock-in period, and they can still access it. And so that's the conversation when people do bring up Mobi today, but we reassure them that we have this plan in place. And as we get near and near the launch, we'll continue to think about the ways to mitigate any pausing that it could be around.

And how should we think about the launch, I guess it's with the FDA right now. Just kind of curious any back and forth you could share, timing, expectations there?

Well, we have an ongoing constructive dialogue with the FDA right now. We're -- there's -- I mean, some people have been concerned that we're going to have to do additional human factor studies or other studies that require interactions with people. And that's not the case. We're working on things that I would characterize as bench testing, we have to do additional bench testing that they've asked us to do, which we feel comfortable getting done. So that's going to be done here in the relatively near future. I would say that while there's been quite a few approvals in the last quarter, which I think has been good to see, it's still difficult to predict when these things are going to happen. So rather than try to , we're basically just going to be prepared to implement or to commercialize the product in the second half. And so as soon as we get approval, we're going to be ready to have the device on the market in 2 to 3 months, after that. And most of the work is really involving training our physicians. We really want to make sure that the HCPs and their practices really understand the device and feel comfortable with it, so they feel comfortable prescribing it. And we want to minimize any problems that they might experience by training, we also have to upgrade all the manuals. I mean typically, you get feedback at the very last minute that has to do with labeling. And so we'll have to update manuals and get those reprinted. So those are the things that take time. But right now, our manufacturing teams, our commercial teams are really gearing up, expecting that we're going to get clearance here in the relatively near future.

How do you expect the launch to go once you get the clearance?

It's going to be a phased launch where we scale -- I mean, we -- it's a brand-new pump for us, and I think we want to be cautious at first. We'll have thousands of people trying to use it at first, and we will make sure that it's working the way we expect it to. And I think once we have that experience, then we'll move more aggressively to get more people on it. But I think it's taking a cautious approach when you've got a device like this, a brand-new technology is the right one.

Are you going to prioritize your existing patients for renewals or MDI's.

Those are all good questions. But haven't been really specific about our commercialization plans other than it's going to be a scaled launch. And I think that once we get approval, we'll talk more specifically about that. .

Just like thinking overall, which patients do you think is going to be the big opportunity for renewals or MDIs just like bigger picture.

I think all of the above. I mean I think we think it's going to drive MDI conversions. So I think this is a new form factor controlled entirely by a mobile phone, a great deal of convenience and discretion that comes along with it. So I think all of the above is going to benefit from this. .

And you've not included this in guidance, right, for '23. When we look at the full year, both like revenue side, the EBITDA side, it's a pretty steep ramp with the Q2 commentary, it got a little steeper. So how are you giving investors comfort with the kind of the big step up in Q3 and Q4, excluding even the new product launch?

Sure. Well, first of all, a couple of factors there. I'll start with if you just look at our history, in pretty much every year, the split between first half and back half has been about 40-60 in the U.S. And so it's something that's very repeatable, we've demonstrated many times. The conviction we have in this year, in particular, if you think about some of the building blocks, the amount of sales that are coming from what I would call recurring sources is an even greater piece than we've had before. So you have the supply sales on our very large installed base. You have the renewal opportunities, which are stepping up very substantially. 4 years ago, we shipped about 50,000 pumps. So you can attribute that to what would be renewal opportunities this year, which is up from about 30,000 last year. And in the face of everything that we've been seeing in the market, we have been capturing renewal patients, actually improved our rates last year, and capturing them consistently with what we saw in 2022, even in this first quarter. And so then you add to it the new pumpers. And really, it just becomes seasonal scale. It's something that we see all the time just because people face high deductibles in the first quarter, and I would say in the insurance world, more and more people have high deductible plans, which I think pushes even more people out of that first part of the year. And so it's not too unlike what we've seen before, and we feel very confident that we can achieve it, even in absence of benefit from new products.

Renewal, they're also back-end loaded. So I mean most of the renewals will occur, opportunity becomes available in the back half.

And the EBITDA is just a function of the revenue or...

Yes. So a couple -- I can give a couple of points there to as well. So the first half of the year is pressured particularly by this OUS dynamic that we have with the transition to the new distribution center. The OUS markets, there's very little variable expense. And so when sales are up or when sales are down, it has a meaningful impact on EBITDA margin. So that's sort of a onetime anomaly that's not going to repeat itself. When you take that out of the way and you think about how pump scale with the highest gross margin contribution, that's a driver of EBITDA, we're going to see a little bit of relief on gross margin from some higher inventory costs we've been seeing over the last 3 or 4 quarters. We'll have consumed most of that inventory by middle of this year, and we've been reporting about 1 to 2 points of gross margin pressure because of that. And then the last element really is on the spending side. And I think this is the part maybe that people are struggling to understand because typically they see our spending dollars accelerate across the year in line with sales. This year, in particular, we've had a heavy focus on cost optimization. I mean we've made a number of efficiency improvements in the teams that support our growing installed base. And so you can think about operating expenses being almost flattish across the year, which also will contribute to that improved or very improved EBITDA margin by the back of the half -- by the back half.

Okay. And then kind of longer-term OpEx, like before it was like 30% OpEx growth, this year I think it's closer to 15% or mid-teens. Like how should we think about OpEx growth longer term here?

Yes. So we'll continue to drive towards our long-term targets, which is a 25% operating margin in 2027. A lot of that comes from gross profit contribution. But from the spending side, we will continue to prioritize investments in R&D. We need to make sure we drive those initiatives that are going to continue to expand the market and drive top line and then focusing on these leverage opportunities. And so what you're going to see this year in terms of efficiency contribution on this SG&A side will continue as we go forward because we'll continue to optimize those processes.

And on the gross margin side, I guess, the impact of Mobi at the 7-day infusion set, how do you think about those rolling in versus other things on the gross margin line?

Yes. So our gross margin target in 2027 is 65%. And Mobi will get us more than halfway to that target. The pump itself costs about 10% to 15% less to manufacture than the t:slim and the cartridge also has significant cost improvement, more than 20% cost reduction. So as that builds up as a bigger part of our installed base, you'll see an initial -- first, any new product, you have a little bit of a headwind until you get to scale. The pump will start to give immediate contribution and then the supply side will grow over time as the installed base increases. The next biggest contributor comes from extended wear infusion set technology. We own the technology, so that we have more opportunity to reduce costs there ourselves. And just the way the structure of the reimbursement model works, we expect to see gross margin optimization there. And then beyond that, it is your natural gross margin improvement opportunities, it's price improvement, it's general cost reduction, lean savings.

Do you think the consumable piece is the lower gross margin in your business? So anything else to kind of outside of the 7-day infusion set to get that recurring revenue up to a higher margin?

Yes. What strength Mobi can provide or what percent it ends up being of the installed base will be a significant contributor. We did also just complete the full transition of our cartridge manufacturing to a third party in Mexico, something we've been undergoing for a couple of years, and that's been demonstrating some modest gross margin improvement, and that will continue here. And so now that's complete and will be to the optimal state.

I'd also say there's an opportunity on ASP improvement. In fact, today, when you look at people who use control like, hey, there's a substantial reduction in adverse events, which means less hospitalizations and ER visits. And so this is where the majority of the expenses come for payer organizations. And so I think that we're in the process now because we have such a large installed base, we're talking to the right people in these organizations. We have dashboards that are set to share exactly how their patient populations are doing. We're working with them to get their data so we can put this together and show them that there's a substantial benefit to their organizations by using Control-IQ. And in having that, we would expect to share that benefit. So I think that's an opportunity. It's not going to be immediate, but something that will happen over time.

And those conversations started at all?