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

All right. Why don't we kick this off? So it's Patrick on the U.S. Medtech team. I got the exciting disclaimers for you guys. So for the disclosures, please go to Morgan Stanley research disclosures website at morganstanley.com/researchdisclosures. I'm sure all will be going there. If you have any questions, feel free to reach out to your sales rep. So I'll say there bye-bye. So massive thank you to Tandem. We've got John Sheridan, obviously, and Leigh Vosseller here, agreed to join us as CEO and CFO. An open fireside chat should be a lot of fun. So thank you for joining us.

Nice to be here, Patrick.

Thank you. Maybe as an opener, just to sort of set the scene, what do you feel gives Tandem its competitive edge in the pump market overall? And how do you feel like what's the DNA of the company that really gives the edge to Tandem?

Yes. I mean I think that over the last several years, we've just demonstrated the ability to innovate faster than our competitors. And we've been producing products on the gate of roughly every 12 to 18 months. We've been introducing a new device. And that's much faster than our competition. This year, in particular, we introduced 4 new products in a single year, which is almost unprecedented. And so I think that certainly, the organization is just focused on developing products that really do improve the lives of people living with diabetes. That's what the entire organization is just driven to do that, whether it's providing service and support for the customers we have or just developing products to innovative that are going to reduce the burden of diabetes in their lives.

Makes sense. And maybe to jump in on the product side. You've got quite a lot of integration with CGMs coming up, G7, Libre, that sort of things. How should we think about the impact on your business from successfully closing that loop and connecting up from a growth perspective?

Yes. We've been now -- we've been working with Dexcom for about 10 years, and we've integrated 4 generations of their technology on to the pump. And they're a great partner, and I think we have definitely drafted off their success. Today, Dexcom is the only company really that has CGM integration with AID systems. And I think that they are -- they provide -- this is a fantastic product. Again, we draft off their product. And I think largely, our success has been because of the sensor and the excellent performance of that. But at the same time, there's a new product in the market, and we want to provide choice. And so I think that we've been working with Abbott now for a year or 2 as well, and we intend to bring the Abbott integration to market this coming quarter. We're excited about that. I think that Abbott is a large company. It has a large presence of people with type 1 in the U.S. who use their sensors who don't use pump therapy. So it's a big opportunity for us to look to grow our business with that integration.

I mean, Abbott's big installed base of CGMs not had a lot of connectivity, frankly, on the pump side, and therefore, there's quite a lot of green space to go after. Is there any idea for you like where to start or how aggressive it is? Like how does like a sort of consumer outreach work in this way to sort of build up the education side? Is that the PCP? Is it the endos? Or is it more DTC? How do you build that network quickly?

First, we're going to go after people that are living with type 1. I mean, we don't have the indication for type 2 we're working on it, but it's a year or so away. So we'll be working with Abbott, collaborating with Abbott will be co-marketing, will basically help people who have Abbott sensors that don't use pump therapy, understand the benefits. And we've already started that. I mean we've been talking to thousands of people who have Abbott sensors who don't use pumps. There's been some concern that maybe since they don't have pumps today, they don't want them. Well, that's not true. We find that there is a great deal of interest. I think it's just more of a personal preference and it's also the human condition where if you're using something, it's difficult to change. But we do anticipate that there'll be good uptake. I mean, right now, in the U.S., there's 1.8 million people who have type 1 who use pump and of them, about 35% use pumps. And in my mind, there's no reason why at a minimum, 35% of this Abbott population also wouldn't consider pump. And I think it's just one of those things that we, as a company, need to do is to continue to sell the benefits, continue to provide excellent products and move that number from 35% to 65%.

I mean in a way, the pump market has been an amazing success. But also in another way, it's surprising that penetration isn't higher even in type 1s than where it was. What do you think has been holding people back? Is it that CGM integration? Is it just ingrained behavior it just takes time no matter what you do to sort of convert over? What's the thing we need to let over to get from the 35% to the 60%, 70%?

Yes. I mean, it's a great question. But I think if you look back over time, Medtronic was the first to bring pump therapy to people with type 1 and that's been 20 or 30 years, I believe, when they started it. I would say the real -- and so -- and that pump was just a pump. It didn't have CGM integration. It didn't have an algorithm on it. It wasn't really until we brought Control IQ to market in 2020 that we really -- it was really the first successful automated insulin delivery therapy that was on the market. And it substantially improved people's lives. I mean, it brought time and range up significantly. It improved the daily experience, people felt good. So I really think that's the first time people have actually had an opportunity to understand what is it like to have a system controlling your insulin doses and reducing the burden. And so my sense is now we've got Insulet obviously has a device in the market with AID. And Medtronic has a new device in the market with AID. There's others coming. And so my sense is the reason that pump penetration hasn't really accelerated is because the innovation just hasn't been there. And I think that AID and the steps that have been taken now in AID will substantially change that as well as innovation that's coming in the future with form factors, control mechanisms and different algorithms.

Interesting. You mentioned Control IQ. I mean is there a difference between how the system works from a patient standpoint, whether you're using, say, like a Dexcom system or Libre on the CGM side, like how the software connects? Is there any difference there? Or is it...

No. It's essentially the algorithm is on the pump. It takes the CGM data. It uses the data to predict forward and then make decisions on whether to suspend or increase the amount of insulin you get. So it will happen essentially the identical way just using a different source of the CGM information.

And that would be inevitable GLP-1 question. [indiscernible] to say anything else like -- just like I guess it's very early days in many ways. Obviously, essentially, it's not really a type 1 topic. But as you think about it for type 2 eventually, any thoughts on your mind like about how you think about that market evolves? Is there any impact on patients? Just any ideas you have about it?

Yes. I mean I think there's a progression of people who have type 2, you progress from medications to basal-only insulin to insulin intensive therapy. And certainly, diet and exercise play an important role in that. And I think that a lot of weight makes it more challenging, I think, and you need more insulin to basically help this address digesting and things like that. So the way we look at it today is that the GLP-1s are likely to slow the process down where people may not move us quickly from medications to insulin intensive therapy. But they're still -- I mean we believe they're still going to get there. So it's a large market as it is today. There's 2.3 million people in the U.S. today that have insulin-intensive type 2. And it's going to continue to grow. It may not grow at the same rate, but it's going to continue to grow as we see. So big market already. We are definitely committed to developing products to help people with type 2. And I think that it's a meaningful portion of our development organizations priorities at this point in time.

And then on the product side, t:slim, Mobi, that side of things, how do you think about the different patient profile who would be interested in what? And how are you thinking about targeting the products respectively?

Yes, that's a great question. We believe that diabetes is very segmented. There are people out there that have different needs, different use habits, different preferences in how they wear, how they interact with the system. And in that case, it's not a one-size-fits-all solution. A single pump is not going to address the needs of the entirety of the diabetes community. And so we believe in a portfolio of products. And as you said, t:slim has been on the market for about 10 years. It's a device that has a touch screen that's on it. It's fairly -- I wouldn't say fairly large. It's convenient and -- but the next device we bring into market right now is Mobi. And Mobi is about half the size of the t:slim, it's controlled entirely by a mobile app. It gives you a great deal of flexibility in terms of how you wear it and where you locate it. But the fact that it's controlled by a mobile app gives you convenience and discretion. So we think that's important. And then we also have a device that we're bringing to market here in the not-too-distant future, that's a full patch. It's a patch that's actually rechargeable, which we think is an important element. There's a great deal of sensitivity to environmental issues here and in the U.S. countries. So a rechargeable device that has a prefilled insulin cartridges, we think is very differentiated. And we think when it does get to market, it will be quite successful. So we've looked at these segments, and we feel that these products here will do a much better job of providing the needs that people have for how they manage and control their situation.

Is there a pricing differential that we should think about in terms of the product range?

At this point in time, I don't think -- we intend to at least introduce Mobi at the same price point. And I would imagine that, that figure would be the same way.

And then the channel, obviously, you've got the DME side and you got the pharmacy side. How are you thinking about the relative differentials between the 2 and pushing to the pharmacy channel?

I'll let Leigh answer that.

Yes. So as you probably know, durable pumps are well rooted in the DME channel. It's something that we've actually very successfully developed with our products. We have broad coverage there. But there are some limitations. There's a lot of extra effort, I would say, from the physician side of the house in terms of getting approval. So right now, because we have such a good established network there, we are pushing to put Mobi on market in the DME channel where we are today and continue to try to optimize that. So reducing prior authorization requirements, so getting the product to patients faster and then helping in any way we can to help patients from the cost perspective. So for example, we offer payment plans for people so they don't have to deal with the upfront cost, that's typically known with a durable pump. Having said that, pharmacy provides some interesting opportunities for us. And so we have been thinking, looking, researching whether it is possible for the last few years. And I would say we're at the point now where we feel very confident that we can put a durable pump like Mobi into the pharmacy channel. And so we're going to be pursuing that simultaneous with getting it on the DME contracts. Although, keep in mind, it does take time. So it's not an overnight sensation to build up the pharmacy channel. It usually takes many years to get there to get broad coverage. We're using Mobi as the entry point, and we're actually changing the dynamics of the conversation. So it's not about it being a durable pump made about these components the cartridge and the infusion set, but it's really about the system, the technology, the clinical outcomes and the benefits it can bring. And so it's talking about it in a different innovative way that I think is more appreciated on the pharmacy side. And so with that, we look to also increase reimbursement over time to -- with data as the value proposition there. So it's something that we're very focused on. It's a high priority for the organization. But I think most importantly, as John mentioned Sigi earlier, we want to build that capability, build that muscle so that when Sigi comes to market, we can go straight to the pharmacy channel with it.

On the pharmacy side is a little more consolidated from a distribution standpoint than DME. So does that make it easier for you, working in partnership you can get the product physically out there a little faster when you decide to sign a larger agreement? Or is that overall different?

I would say pharmacy has its own set of complexity. It's very different from DME and more and how the organization administration, everything is structured. And so what we hope is that the burden is on Tandem and not on the patients and the physicians. So we hope to remove some of those upfront requirements for the physicians and give faster access for the patients and also improve the cost to them.

Between products is another sort of form factor debate in the market, which is tubed and tubeless. How do you feel that debate is evolving and the patient profiles, preferences between the 2?

Well, I think that there definitely is a group of people out there that prefer a tubeless option, and we're aware of that. And certainly, that's why we're developing a tubeless pump ourselves. But we think that's not the only option that people care about. I mean, today or in the past year, one of our competitors has brought a new AID version of a tubeless system to market, and it's been very well received. And I would say that it's definitely -- there are people who otherwise probably would not have considered pump therapy if this system did not exist with an AID system. So they have taken more of the MDI conversions than we had prior to it coming to market. We think that Mobi with its form factor, the fact that it's roughly the same size mobile control, the convenience and discretion that comes along with that, we think it's going to -- as well as the sensor integration center also come to market here in the not-too-distant future, are going to get us to the point where we see a return to the growth that we've seen in the past, specifically with the MDI conversions.

And in terms of peers, I mean, there's quite a lot of movement in the market from product launches across kind of everybody simultaneously. How has the competitive dynamic evolved recently? What are you seeing in terms of attrition or new customer wins? Just any color around that would be helpful.

Yes. I would just -- I tell you what I can do. I can talk about the products, and you can talk about what you're seeing in terms of attrition. But certainly, the Insulet device came to market about a year ago. And I think as we entered this year, we would say that there's been quite a bit of pressure, but it's stabilized. And we haven't seen it deteriorate any further, it stabilized, which we think is fine. Certainly, there's the Medtronic has a new device in the market, which is coming to market as we speak. And then Beta Bionics, they just received approval in the not-too-distant future. I think just in the recent future -- recent past, excuse me. They -- I think when you look at the 780G, it's the same form factor. It's essentially that requires finger sticks. And you put that up against Mobi, which is a brand-new small pump, mobile control, using excellent sensors. We feel like we're in a great position to compete against it. But I can tell you that every single time a new product does come to market, there's always a pausing dynamic. And certainly, even with a device like Medtronic, there's going to be pausing, there's excitement and interest to understand how does it perform, what's going on in the marketplace. And there of course an effective marketing machine as well. So -- but we think that as the dust settles, that our products will continue to be very competitive, and we'll continue to take share from them. On the Beta Bionics side, they're a small, young company just getting started. They've just raised funding. I think they've got a high-risk sales force. They've got to develop the commercial enterprise to support a product over a 4-year lifespan. So there's a lot of work then for them to do still. But they're a company that we keep an eye on. It's just -- we really haven't seen much of them in the marketplace at this point in time. And Leigh, you want to talk a bit about attrition a little more?

Sure. So I would say, when you look at a Tandem customer, they are very sticky. We have seen that here on renewal dynamics that once they make the choice to move to Control IQ, they stay with it in the long term. And what I mean is when we think about when people's warranties are expiring and the percent of people that we capture for a new pump purchase in the last 6 quarters. So in through this challenging environment, we've been seeing, we've seen our highest renewal rate ever. And so I think that's pretty important. It says -- what it says about attrition or retention, I should say. And when we look -- there's been conversations, I think people have been asking why are more people moving away from Tandem to other companies than you have seen in the past. And when we look at all of our signals of whether or not people are staying or leaving, we're not seeing any changes in what I would call active behavior of our customers. And keep in mind, we have a lot of touch points with customers so we can see these levels of activity. For example, our t:connect system. So vast majority of patients upload their data, you can see not only in upload, but it backfills with the activity. We have people that we sell direct supplies. We have people that call into customer technical support. So there a number of ways where we can measure the level of engagement, and it's remained very consistent in the last year.

Should we expect that for going forward with the proportion of growth coming from MDI and competitive conversions, it should be somewhat similar like keeping that ratio roughly the same?

Well, I'll start with looking back. What we've seen in our history is that our new pumpers have been about 50-50 mix between MDI and competitive conversions. It's been very stable even up through this second quarter, most recent quarter. As we look forward, we've always expected that MDIs will start to outpace competitive conversions. We've captured so many in the past. Many of those have become our own renewal customers now. And with our new products that we're introducing, as John described, they will be attracting people from different segments of the market than we have been reaching before. So MDI should continue to grow at a faster rate than I would say, competitive conversions in the future.

And on the topic of renewals, how some of that is coming up, OUS, which is a market that doesn't get talked about a lot despite being most of the world? How should we think about the impact there? And also just sequentially block that on just the OUS opportunity in general because, again, we have a lot of good data from the U.S., OUS was tricky?

Sure. I'll just start with the size of the markets that we're in. There are about 4 million people living with type 1 diabetes in the 25 countries that we operate outside the U.S. And it's vastly underpenetrated there. So in the range of 10% to 15% of people use pumps. And so with all the innovation that we expect to bring to market, we expect to move the needle there. In terms of that stickiness factor, we're just lapping the first people who are coming up for their 4-year warranty renewal. And I would think about it much like we saw in the U.S. where we have a goal, and we have consistently achieved in the U.S., 70% of our customers renew within about 12 to 18 months of their warranty expiration. It took more than 12 to 18 months in those first years. It was more like a 2-, 3-, 4-year cycle to get to that 70% rate. And we have a lot of learnings that we can help train our distributors on outside the U.S. So I don't think it will take that long, but it will still be probably a slower uptake initially than what we're seeing in the U.S. today. Having said that, I also caveat the fact that when you think about a 4-year warranty expiration in the U.S., pretty much, you can look at shipments 4 years ago because pumps even go through distribution and get on a patient pretty quickly. Outside the U.S., those pumps have tended to sit on distributor shelves on both on the ocean, whatever it may be for 3-plus months. So I would say even though looking back to 2019, we shipped about 19,000 pumps. We will just begin to see the beginnings of renewal opportunities, probably late '24. So next year is our first real opportunity is probably more back half of the year to start to really drive that renewal stream of business that we've seen has become pretty predictable here in the U.S.

As we also do quite a bit to incent people to renew, one of the most important things we do is we continue to develop software during the 4-year period that people have their pumps. And if we come out with a new version of software, we make it available for people who are in warranty for free of charge. And these are meaningful software changes. I mean, for instance, Control IQ was -- it's a game-changer in terms of just living with IV. Well, we need that free -- made that available free to everybody in warranty. And we also really do, I think, an amazing job as a company just providing customer service and support, which is hugely important to people with diabetes. We have people that are available 24/7 to address any questions and issues that people may experience. And I think that -- the combination of those 2 things there are really important, I think, in maintaining and retaining the installed base.

Have you noticed any difference in patient profile OUS versus U.S.? Like do you have any observations about how patients differ whether, like preference or products or things like that to choose those patch like that split? Or is it a very similar sort of profile between the different regions?

I think that we would probably expect it to be similar. I think that there's -- at least right now, the patch device with the AID system is just coming to market. We'll see how it does there. I think they have some -- they don't have some of the structural advantages that they have here with pharmacy channel there. So we'll have to wait and see how that goes. But I think that there's definitely still going to be a preference for it. But I think the bottom line is that people in the OUS countries want the same advantage that this technology is bringing. And I think that innovating as we have as our competitors have and as our partners have will continue to drive adoption upon therapy.

I mean, historically, you've had CGMs that have sort of started the patient journey of engaging with technology to manage that condition and then pumps have been part of that as well. Is there any -- do you think the introduction of CGM is more into the basal population within type 2 could help prime the patient's thought process such that when they do drop into intensive, they're just more ready to engage with a pump in a more realistic way or am I just overinterpreting?

No, I would say that I'm not sure whether that applies to basal in the transition from basal to insulin intensive type 2. But certainly, it's the case when it comes to type 1 because I think typically, when you present with type 1 or you decide you want to try CGM therapy, you get support. You get to see the benefits of the technology you're wearing 24/7. And we think people are more inclined to consider pump therapy at that point in time. So as I said, we have drafted off the great products that Dexcom has provided over the last 5 or 6 years. And I think that we intend to continue to let that happen now with 2 partners.

You recently sort of changed your time lines so we do like gross and EBIT margin sort of long-term targets and sort of made them a bit more sort of lack of an exact year associated with them. I guess, either what would you need to see to make you more comfortable that a time line on it? Or how should we think about the interplay for you between low penetration investing to grow? I mean it's a dynamic you have to balance, right, because you want to grow as quickly as you can because of low penetration but then there's margins on the other side. So how are you thinking about the interplay with the margins in the long-term, let's say, targets? And what would you need to see to get you to sort of put a time line back on them?

Do you want to start with that one?

Sure. So I'll start -- let's talk first about why we removed the time stamp on it. Based on the environment that we're in, where we have less visibility right now in the next few quarters. And it really comes about because of the timing of the Mobi launch with it being known in wider audiences now since we got approval with the actual launch to happen October 1, 2024. So that's going to be very disruptive in the next few quarters, which caused us to reset our guidance to a baseline level. And having done that, we thought it was important to reset 2024 as well so that people would have a baseline off of which to think what that could look like where 2023 sits now. What's important to note is that 2024 does not have the upside opportunities that come from these new product launches. It's more about what Tandem can achieve, people seeing a pathway to it. And so then if people continue to draw that line to the 2027 goals we had out there, it would be difficult for them to see how we could get such a steep ramp and achieve those. I'll say that our goal and objective is still to reach that million customers in 2027, but we needed to set it in a place where people could see achievability. And so what we need to do really is evaluate the uptick of Mobi and really Abbott, Libre integration next year and see what kind of momentum that drives for us to give confidence to put that time stamp back out there. The margin targets were set with that million customers in mind, but we still have ways to achieve those and we have initiatives in place to achieve those. We could achieve those faster than the million customers, but one of the most important drivers of that would be the Mobi product. It's a much lower cost to manufacture than the t:slim product. And it drives us more than halfway to that 65% margin target that we had set. So it all comes back to the uptake of Mobi, the percentage of business that it drives that will really help us give the confidence to put a date back out there. So you can look to that in the future after we start to put some of these products in the market.

On the manufacturing side and the capacity, let's say, Libre integration, Mobi on that side, the volume end of the equation is coming faster and more aggressively than you would expect. What's your capacity to meet that demand? And what does that mean for margins?

Well, it's a problem we'd like to have. I think that the -- when we look at 2024, we've certainly modeled upside potential for pump sales because of Mobi. And we're certainly in a position now to meet that. We're building the product today. It's salable and we have -- we really have strong conviction that we'll be able to meet whatever we're presented with. And again, the more the merrier.

Outside of GLP-1, probably that for a little bit. You do a lot of these meetings, you have a lot of these calls. For you, is there anything you're surprised that you don't get asked about more or like where the external focus on something is more than the internal or vice versa? Like is there like a split in the sort of attention to what you're spending?

I think that recently, a lot of questions on the guidance change that we had. So that's been one thing that people have been very interested in learning. There's also a lot of interest in the time lines for the new products, when will they be available? When will they sort of begin to contribute to revenues. So those have been really the 2 things. I mean, I think the thing that -- again, I think we have the most innovative pipeline in diabetes, and we're executing on it. It's just around the corner. We're very excited about it. But I think we don't get any credit for that either. And I think it's really -- it won't occur until the point in time when people actually start to see the MDI conversions move back into a growth rate where we've seen in the past. We'll start to see it at that point in time. But that's the thing. I also want -- I mean, it's a large and growing market. I mean I think that again, there's 1.8 million people, only 35% use pumps. We think innovation is going to drive that. So as the market continues to grow both in the U.S. and in the OUS countries we're in today, we think there's an opportunity for all of the companies that are currently working to help people with diabetes, that we can all be successful.

Everyone likes to talk about the algorithm side of things, only some people like to sound small by saying algorithm. But could you give us a sort of sense on how competitive that market is in terms of hiring the right people, remaining ahead of the pack. It's obviously an area people spend a lot of efforts. And also, is that something that you think that we always sit on the pump? Do you ever worry that the CGM providers might try and like mitigate it and pull it over there and then end up being essentially transmitted with the data? Or how do you think about that as well?

Yes, really good questions. I would say that we partnered with UVA and TypeZero back in 2016 because at that point in time, we didn't have a team developing an algorithm. And so it's really -- we felt it was the best algorithm in the market at that point in time. And we implemented it as it was as, as quickly as possible. Since that point, we have hired our own teams, and we continue to develop a very capable group of people who understand how to develop and optimize algorithms. And we have been working on that for quite a while. We believe today that we have the best algorithm on the market. I think if you talk to any physician, they'll agree with that and tell you that's the case. I will say that from a competitive point of view, it takes a long time to make changes. And I think that the FDA is very careful about these changes. They want to make sure that they're thoroughly evaluated before they actually even go into clinical studies. So that's the thing that -- I mean, we all want to move as quickly as we can, but there's limitations in terms of clinical studies, and you have to run several studies, I think, before you get to the point we actually even can give them data on how these things perform and what changes you'd like to make. So I think that we're all facing that same challenge really is the time to make changes to the algorithms. But I think it's something that's certainly very important. When it comes to where it resides, we think from a safety point of view, it's best to have it on the pump. I think that the CGM needs to talk to the pump and the algorithm needs to be on a pump. If it was on a cell phone or someplace else, you lost that, then obviously, your system is no longer in closed loop. You're not getting the benefits. And so I think that as a company, we'll always have the algorithm on the pump, and we'll always have the sensor talking to the pump as well. So it's an important safety factor that we think is necessary.

The CGM side of the market, obviously, your partners in business have been -- it's essentially been a duopoly in essence for a while. But there's a few new entrants trying to think about pushing in some of the smaller ones, but obviously companies like Roche. Is there tension for how you'll interplay with these other companies where they're trying to pressure you to being integration first or to exclude others? Like do you get caught in the middle of it?

I think that when you look at Abbott and Dexcom, they invest billions in R&D. And I think that when you look at these small companies that are out there today, for them to be successful, the only way they're going to make it is to be acquired by 1 of the 2 big ones. So I think they have to have novel technology that Dexcom or Abbott is interested in because the capital required to support that business is enormous. So I think that we wouldn't even consider an alternative until somebody had meaningful market share. I mean we are only -- we're working with Abbott because they do have meaningful market share, and we want to provide choice to our patient population. So those are the kind of factors that we consider to make those decisions. But it's going to be difficult for anybody that's out there today unless they just join somebody else.

Amazing. John, Leigh, thank you so much. Really appreciate that.

Nice talking to you. Thanks very much.

Thank you.