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

Okay. We're ready to get started here with our next session. I'm really pleased to be joined by the management team from Tandem. And I'm Matt Taylor, the U.S. medical supplies and devices analyst here at Jefferies. I just want to introduce the team. John Sheridan is the President and CEO; and Leigh Vosseller is the CFO. So we're meant to have about a 25-minute Q&A session that I'll drive via a fireside chat, and then maybe we'll have a couple of minutes at the end if the audience has any questions.

So I'll give you my first question here from the podium and then joining there in the green room. But I always like to start high level. So maybe stepping back, talking about the insulin pump market. It's been growing nicely in the past few years and really driven by a lot of advances in the technology, not only of the pumps, but of the enabling tech, whether it's CGMs or software. But I'd love for you to talk a little bit about that evolution and how you've been a big part of it. Maybe we can start there.

Right. Okay. It is on. I guess I'd start off by saying if you look 5 or 6 years ago, it was prior to any of the hybrid closed-loop AID systems on the market. We believe that there is about 25,000 people annually converting from MDI therapy to pump therapy. And it had been that way for quite a while. In the 2016 timeframe, Medtronic introduced the 670G, which was really the first hybrid closed loop system, and we came to market in 2018 with Basal-IQ, which was a predictive low glucose suspend followed by Control-IQ in 2000. I would say that really, when BaseIQ and Control-IQ came to market, we began to see a step-up in that conversion rate from MDI. We started to see the numbers jump from 30 to 40, and last year, we anticipate -- we expect -- we believe that there was approximately 75,000 to 80,000 people that had come from MDI therapy to pump therapy in the U.S. So when you think about it, it's a relatively short period of time, and that has been a relatively large jump in the number. We would say that today, there's about 1.8 million people with type 1 in the U.S. And it's about 35% or 40% penetrated. And we believe that number to get to 65% over the next 4 to 5 years. And I think I've said this quite a bit, but I believe that technology really does improve the ease of use, the experience that people have and by simplifying that experience by reducing the cognitive burden of diabetes. We think we can get to that number, 65%. I think as you said, Matt, I really do believe that the CGM companies have done the same thing. They provided better technology, it's easier to use, it's less obstructive, smaller form factors. Those are all helpful. And I think when you look at our competitors and our partners, we're all doing the exact same thing, and we're improving the overall experience for people with diabetes. So we do have confidence that we can get to 65% penetration in the next couple of years.

Great. Do you guys hear me out clear from here?

Okay.

So maybe we can take that one step further and talk a little bit about the pathway that you have in terms of new products and in terms of device integration because until you're going to integrate with Abbott, most of their patients are not on pump at all. That seems like a big opportunity. Talk about Mobi first maybe, and then Abbott and device integration.

Yes. I mean I think when you look at the factors that are affecting this increase in penetration, I think pipeline really has a lot to do with that. And certainly, when you look at the U.S., the U.S. has penetrated at 35%. When you look at OUS, the market is twice as large, and it's less penetrated, maybe 10% or 15% with significant opportunities exist in both of these areas and as I said, technology is definitely driving it. Our belief is that we have to simplify the experience and improve discretion along at the same time. So the algorithms that we've implemented on to our technology and they reduce -- they make decisions for you. They decide when you're going to get insulin and how much you're going to get. And that substantially reduces the number of decisions that people living with diabetes have to make, which, again, it reduces a cognitive burden. But discretion is hugely important. And when our next device we're going to bring to market is it's called Mobi. And it's basically half the size of the current device and is controlled entirely by a mobile app. And so when you think about it, when you're out with friends, you're about ready to have lunch or something like that, it's time to bolus for a meal as opposed to taking out your device, when someone know that you've got diabetes and you're interacting with a medical device, you can just take out your cell phone and you can deliver self bolus on the cellphone. So the discretion is hugely important. It's also a very, very convenient to use that device. You only have to carry one device now as opposed to several. So Mobi is a product that we expect to drive increased penetration because of this, again, continued ease of use. It also is a product that we're going to integrate into a tubeless option. Today, when we first introduced the device into the market here in the near future, it will have a tubed implementation. But we're working on a tubeless implementation in that way, with one device, you can have tube or tubeless on the same product. It's the exact same pump, it's just the cartridge and the way the cartridge interacts with the patch will allow you to wear a tube or tubeless device. And we think that's very important. And then finally, we have another product coming to market here a little bit longer term, but it's a fully integrated patch. And that device is -- we just acquired AMF Medical earlier in this year, and we think that's very important. Another aspect, as Matt mentioned, though, is the CGM integration. We think providing choice is very important to people living with diabetes. We are currently working to implement the Dexcom G7, which is about the size of a quarter and has a much lower profile, a very appealing product. People really like it. And then we're also working with Abbott to implement the FreeStyle Libre 2 and Libre 3. And as Matt mentioned, when you look at the market today, Abbott indicated about a year ago that they have about 300,000 people in the U.S. who are using their Libre technology. They don't use pumps. So that's a substantial opportunity for Tandem. And we are working hard to get the sensors integrated. We expect that, that will drive growth for us now quite for the next several years as we take advantage of the population in the OUS and it's even larger OUS. At this group, they don't use pumps today. But we believe after doing market research with them, that they are interested in it, and they want to understand the benefits. And the benefits in our mind are so substantial as we've talked about, that we expect that a reasonably significant portion of these people will adopt pump therapy in time.

Great. Well, you gave me a lot to delve into there. But maybe I'll start with vicious goals that you laid out for the organization talking about doubling penetration like growth CAGR kind of in the high teens. Could you talk about how much of that growth is dependent on market growth versus new products? What went into thinking about?

Yes, it's a good question. So just to be specific about the goals, it was 2020 -- it was a year ago, maybe 1.5 years ago that we indicated that our 2027 goals would be by end '27, we would have 1 million people using our product. Today, we have about 430,000 using the technology today. We also indicated that we've got a gross margin up to 65% from mid-50s today and operating margin at about 25%. So those are aggressive goals. And I'll say that we've modeled this carefully. We've really studied the market, and we feel that we can get there without heroics. I'd also say that we recognize though that it's not going to be a linear growth curve. We don't expect to see us just continue to grow double digits without any bumps in the road. And certainly, I think in the most recent couple of quarters, we've seen the competitive pressures and some of the macro pressures have slowed our growth. But we have -- as I've mentioned, we've got a new wave of innovation that we plan to bring to market in the second half of this year. And then we've basically demonstrated over the last 10 years that we could introduce new technologies to market significantly new technologies to the market on a roughly 12- to 18-month time frame. And so after we have 3 or 4 products coming to market this year, and then beyond that, we have several other important new products that we think are going to drive the growth. Pipeline is very important to that. But we also have an increasing renewal rate. We've been doing much better over time. We've seen increasing interest, people are renewing at a higher rate and they're renewing faster. And this is a number that's important because if you look back 4 years, there was about 30,000 people who chose Tandem pumps. They are now candidates for renewal and we anticipate getting approximately 7% of -- 70% of those. In 2020 and 2019, I think that number was closer to 50,000. So in 2023, there's 50,000 candidates out there, and that number grows over time. So renewals is increasingly important to us. The other aspect is it's just OUS growth. I mean, right now, as I mentioned, U.S. is about 1.8 million. The markets that we're in OUS is over 4 million. So there is a large market outside the United States. They are technology starved. It's very similar to what we're experiencing here in the U.S. and we think that the work that we -- the technology that we're bringing to market here will be equally compelling in these OUS markets, and we expect to see the penetration rates grow there as well.

Let me double-click on a few of those same kind of through time. So one thing that you've talked about is having a little bit of a slower growth period now, and some of that is competitive pressure. You've also talked about economic impacts. So maybe just give us an update on kind of each of those pressures and how much you expect them to impact your term [indiscernible].

Yes. I mean, I think when you look at COVID, we've been dealing with COVID now for several years. I think that the -- I think it's moderated to a certain extent. And so I think that the biggest problem we're seeing really is COVID is staffing shortages in the endo offices. That's an issue. That still continues. It's not widespread, but it still continues. I would say that the uncertainty about the environment, macro environment, certainly, people are pausing. They're taking longer to make decisions about purchasing pumps, which is something that we're trying to address through payment plans and a number of actions to just reduce the upfront burden of purchasing the pump. So that's certainly an issue that we would anticipate that will be around. And then the market is getting more competitive, if anything. I mean, Omnipod 5 has been in the market for several quarters now. Medtronic is just bringing a new device market as well and so is Beta Bionics. I think that we're in a much better position to compete against Medtronic and Beta Bionics than we were with Omnipod. I think the form factor of Omnipod is certainly compelling for people and it definitely has slowed our growth on, particularly our U.S. MDI conversions. I don't think that the other 2 products will have the same effect that Omnipod has.

And we all know that in terms of your new patient starts, did that happen in Medtronic for your games mostly from Medtronic over time?

That's right.

Can you talk about how long you expect that to continue? And this is -- any thoughts that you have on Medtronic's recent purchase of EOFlow.

Do you want to get the first part, Leigh?

Sure. So we've always assumed that the opportunity for customers from a competitive conversion will go down over time. So it's something we factored into our models. And when we talk about the 5-year plan, it's more predicated on new pumpers coming to market from the MDI population and they capture our own renewals. And so with our new product in market, that will help them achieve their goals to renew their own patients. We think we'll still get our fair share, but it's something that we assume we'll start to dissipate.

And then as far as EOFlow goes, One of the things that we've done carefully is we've really evaluated all of the private companies that are out there that are developing patch devices as well as we've got our own -- we have our own internal effort. And I think that we've talked to the guys at EOFlow ourselves and we had a relationship for a long time. They're a capable organization. They're -- I think they're in the Korean market. I think they're in maybe Italy as well. There's still challenges in the product, and that has to be -- it has to have sensor integration and it is an algorithm. So there's still work to be done for that device, I think, to be competitive in this particular market, not unlike what we find ourselves with SIgi. I mean we think SIgi was the best option for us for a variety of reasons. We think it's a very differentiated product. Whereas I look -- when we look at EOFlow, we say it's more like the existing products that are in the market. And we think the differentiation that came along with SIgi was really one of the recent we went in that direction.

And I know that a lot of the decisions you're taking about the pipeline are by market research that you've done and said publicly with Mobi that you think that that's going to drive some preference towards that device. That you gained some share. I was wondering, are there certain aspects that market research that points to the features that are most important? Is it for form factor? Is it flexibility? Or is it just all of things?

Yes. I think that -- so the data that we've done, and we continue to collect information on Mobi. And when you look at Mobi compared to t:slim as well as all the other competitive devices that are on the market. And what we found is that when you have t:slim on the market as it is today, competing against the existing products, it does well. And then when you put t:slim -- did I say Mobi or t:slim? t:slim on the market does well, when you put Mobi on the market by itself, it also does quite well. But when you put both drugs in the market at the same time with the existing competitive devices, that the combination actually, we almost doubled the preference share. So there's certainly a lot of interest in both devices and I think that they both appeal to a certain segment of the market. I would say that as we just talked about, it's definitely the size, it's wirelessly charged. It will be wirelessly updated. It's going to be waterproof. It's also mobile control which we think is hugely important. So there's a number of features that I think that are appeal to a search segment. And I think by having 2 of these products, we'll really have -- we'll have 2 of the 4 products that will be available on the market, and we think this will continue to drive the growth that we've seen in the past.

Maybe we can do one for the margins. So as part of the 2027 goal, you talked about driving to 65% gross margins, 2% this year. So maybe talk about some of the key levers to getting to 65%? And what kind of progress should we expect in the market?

Sure. So the single biggest driver of margin expansion will be the Mobi product. And it's actually our thesis for every new product under development that it needs to have a better cost profile than any products we have on the market today. The Mobi pump itself has a 10% to 15% lower cost to manufacture than the t:slim. So once we get to a level of scale, and you can think about that as roughly 12 months from launch. We expect to start seeing contribution on the pump side from Mobi. The cartridge then also has a 20% lower manufacturing cost. And so as it grows as a bigger part of our installed base, over the years, you'll see continued tailwinds on the supply side from that. And the Mobi product alone will get us at least halfway to that 65% margin target. The next product in line that will drive contribution will be our extended [indiscernible] technology. And that's something just partially based on the cost profile with us owning the technology ourselves as well as the reimbursement structure for infusion sets. We expect to see significant gross margin contribution. And I would say those are the 2 primary areas of focus to drive that. We'll also get continued benefit from reimbursement improvement over time as we continue to shift more and more direct. And as we work with payers to negotiate price increases using the value of the clinical data that we have amassed. And then the last piece is your normal manufacturing efficiencies and cost reductions that you find over time. And so that will put us in the mid-60s, which is in line with where the industry sits today and provides great contribution to the bottom-line margins.

Leigh, on the longer wear set. I wonder if you could talk about the Tandem patients who [indiscernible]? And when you think about the margin benefit to Tandem, more of that come from the longer wear or actually just bringing the manufacturing into...

I would say it's more about the longer wear. And I'm not putting a quantification on it at this point, but it's really one of the top things we hear from customers in terms of infusion sets is the ability to have the extended wear. So we think it will be a very popular option for people. But our nature is to let people have choice, and so we'll still offer the same options that we have today. There are reasons why people don't want to wear them just as long. Sometimes people don't like something stuck on for that length of time. But we think it will be a very appealing option for people in a material margin improvement.

And then it was still a little bit below the gross margin line to talk about operating [indiscernible], a lot of that will come from GMs, but what are some of the other things that you can do to leverage SG&A?

Sure. Our biggest area of focus on SG&A right now is really the support system for our customers. So when we have today over 400,000 customers we're supporting, it takes a large number of human beings and our employee base to help support. And that's because we're very human and centric in terms of how we support patients today. But with the launch of our Tandem source product, the continued innovation and digitization of some of our processes, we won't have to add as many people in the future. So in recent years, you've probably seen as our installed base has grown, that our SG&A has grown almost ratably with that. Going forward and starting actually in the back half of this year with some of the automation of current processes, we're going to stop adding as many people. So that's our single biggest point of our leverage opportunity for the next 4 years. With that, we can not only find cost savings to drive margin expansion, but it will -- we can use those dollars to fund further innovation on the R&D side.

Can we go back to, John? Can you talk more about your decision to go with a durable patch versus a disposable?

Yes. It's a good question. I mean I think that as an organization today, the t:slim is rechargeable. And I think when you look at the competitive products that are out there, every 3 days, they throw away several batteries. Sometimes on these disposable products, there are circuit boards plus batteries that are thrown away. And these are -- of course, there's millions of these things are being made annually. And so I think when you look at the environmental impact is substantial. And I think certainly, when you look in this day and age, the environmental issues are becoming important, particularly in Europe. When you talk to people in Europe, they are highly sensitized to the environmental factors as well as, I'd say, younger populations within the states. And so we just feel compelled as an organization to have a product that is environmentally sensitive. And so I think when you look at all of our products, whether it's t:slim, Mobi or the SIgi device, they all will be rechargeable. We think that's a huge differentiator. Again, when you look at the product, now you're going to be making a decision. And I think the environmental sensitivity is big as well as, I mean, SIgi has a prefilled insulin cartridge, which improve simplicity, you can change the cartridge within seconds. So there's ease-of-use aspect that comes along with that. But certainly, I think rechargeable is something as an organization we're sensitive to, and we think it's a very important selling factor for the products.

And I just want to -- the durability can be related to pharmacy access [indiscernible] that you've been working on getting pharmacy access. Maybe talk about some of your efforts there and we should look out for your ability to get some access through pharmacy.

Sure. I would say, first and foremost, for market access perspective, our objective is to get patients to the products faster and at the lowest cost possible. Clearly, we're in DME, we're very successful there today. There are some structural limitations with DME, and we're working to improve those along the way but at the same time, we think adding pharmacy as a channel of option could be good for us as a business, particularly as we think ahead to SIgi, we definitely want that product in the pharmacy channel. So in the interim, what we're doing is we're using Mobi as a new product as the introductory point with the payer community to talk about the pharmacy opportunities that may exist. So its partially introduced them to Tandem, its introduced them to our products. Its explained the differences between durable and disposable, but more so pump what compare has become because they're used to what it was in the years past. And now it's much more of a technology solution with clinical benefits. And there's -- we have tons of data that we can use to support the kind of benefit that we provide and the cost savings they can get in their systems. And I think that will resonate well with that community. And so it's something we earnest today. And I think over time, you'll probably hear us talk about some opportunities with Mobi here and there to get some access. I don't think we'll ever be fully 100% with Mobi in the pharmacy channel, but it takes years to build that capability and Mobi's a good starting point for us to do that, so we can prepare for SIgi.

We only have a couple of minutes left, does anybody in the audience want to like to ask a question?

[indiscernible].

Yes, connectivity was certainly a very important area of focus development of both the new Dexcom and the Abbott sensor, and it's something that I think we do a very good job of today with the G6. So it's a very top of the list. And I would say that the walkabout testing has actually gone quite well. We are very confident in the performance of the system. And as I've said before, we will see meaningful people have access to it as we come into the third quarter. So it's going to be a great device that we believe will drive renewals, in particular, and then Abbott will probably more likely be available in the latter part of the third quarter, and we'll begin to scale the launch from that point in time.

Do you have any sense for how far ahead you may be device integration versus your competitor?

I'd say -- I don't know -- the only thing I know is I'll just repeat something that Kevin Sayer, who's the CEO of Dexcom said. He said this past -- a year ago in the summer, he said, we're -- he believes we're about 6 months ahead on the G7. I can't say whether we -- how far on Abbott, I just don't have that same visibility. But I think we probably are going to come to market first in both cases.

Any other questions from the audience? Maybe we can wrap up on 2 things. One is, when you think about your stock and the valuation today, what do you think -- the street is missing? What are the things you want to communicate to say, stock should go higher, or we deserve a different valuation?

Well, I think it's definitely a very short-term focus, honestly. And I think the fact that we have seen a downturn in the growth rate U.S. in particular, I think that's really affected. That's affected the performance of the stock. And I think the -- sort of the additional products that have been available been approved here recently is also impacting us. I would say that I don't think we get a lot of credit for the fact that we are about ready to introduce 2 new sensor integrations and Mobi in the second half of this year. I think all of those are going to get us to the point where we start to see a return to the growth rates we've seen in the past. And I also say, I think we have the most exciting pipeline in diabetes. I think we have demonstrated the ability to introduce products on a consistent cadence. And so I think that's going to continue to happen as well. I think people also underestimate the benefit of our renewals. Our renewal performance has been very, very strong, and it's been improving. And as I said earlier on, it's -- the market is growing. We're seeing more and more people come to pump therapy because of the benefits it provides. And therefore, it's not a zero-sum game. I mean, it's a growing market and all of the companies that are out there can benefit from it. And I think that we would anticipate that that's going to continue.

I don't think it's a great place to end. But thanks so much for your time. Thanks for your interest.

Yes. Thanks, everybody.