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

Good afternoon. I'm Josh Jennings from TD Cowen [indiscernible]. And we are excited to [indiscernible] track on the first day of this 44th Annual TD Health Care Conference with the executive team from Tandem Diabetes. We've got President and CEO, John Sheridan; [indiscernible] and Chief Financial Officer, Leigh Vosseller; and Chief Administrative Officer, Susan Morrison. I'm going to hand it over to you to just read a quick blurb.

I want to give everyone the legal disclaimer that today's discussion will include forward looking statements. These statements reflect management's expectations about future events, product development time lines and financial performance and operating plans and speak only as of today's date. These statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause the actual results to differ materially from those expressed or implied in our forward-looking statements. Further details related to our forward-looking statements can be found in the safe harbor slide included in Tandem's conference materials. Back to you.

Thank you guys for coming out at least. This 2024 guidance was issued recently. I think it was consistent with what some of the high-level commentary you guys have provided to the investment community throughout the back half of last year. But 10% growth for the 2023 revenue base, U.S. growth about 8%, international, high teens. And I think investors are really interested about the evolving competitive landscape within the pump market, both in the U.S. and OUS. And maybe you can help just reiterate some of the drivers of those assumptions and then also what you baked in for -- I guess, for the competition.

You want to do that, Leigh?

So when we put together the guidance, we -- a number of factors obviously come into play. We've focused it more on what I would call our predictable revenue streams, more so than what we think we can grow the business with the new product opportunities. So that starts with the supply sales, which are pretty easy to model based on our installed base. We have 450,000 people worldwide, people using our product and enjoying the benefits of Control-IQ. And then on top of that, we added the renewal opportunity. And that's been pretty remarkable for us because in the last few years, even through what's been a challenging period for us, our renewal stream has remained steady and strong in terms of capture rate. And as we look ahead into 2024, the number of new opportunities coming from customers who use our pump today, whose warranties will be expiring, is growing more than 30%. And so embedded in the guidance is the fact that we believe we can continue to capture people at the same rates as we have in the last 2 years. And then on top of that, mostly from a U.S. perspective, focus on where the -- what's going to happen with new pumpers? That's the big question for everyone. And what we factored in that right now, we can bring at least as many new pumpers to Tandem in 2024 as we did in 2023. And the important footnote to that is that does not imply that there's going to be any change in the business or the trajectory of the business because of our new product offering. So it's a complete contrast to our excitement over the new products and what they -- we think they can deliver for the business. But for now, we're going to set the expectations at this level until we get started and as we gain more information and trends on those products, then we will start to talk about how we would layer them in to the guidance.

And just thinking about the renewable opportunity, I think your historic rate of the last year is about 50% capture. And within that 50% of that, other 50% is uncaptured, they're just not renewing yet, but majority of those is our assumption. But can you just talk about that at 50%? And then as those warranties expire, how long is the average for your population to renew or [indiscernible] on t:slim?

Yes. So a couple of data points here. Our goal is a 70% renewal rate, and we have been consistently reaching that about 18 months from when people's warranties expire. And that's been, again, consistent over the last few years, and those are our peak rates of capture that we've ever seen before in our history. The data point about what we captured within the calendar year, that's the blending of the people whose warranties expired in Q1, who are further along in that renewal cycle, and the blending of people whose warranties expired in Q4, which is usually the biggest quarter of the year. And so we've been able to capture about 50% of people whose warranties expire within the same calendar year. We did that in '22, we did it in '23. And as we look at the '24, we're going to 70,000 new warranty expirations, and so we would assume that we could capture at least half of those within the calendar year. An important point I would make, though, as I said, majority usually fall in the back half. About 35% of those opportunities don't come to market until the fourth quarter. So when you look at the cadence of sales across the year, it will definitely push the opportunities and the sales into the back half of the year.

I'll just add to that. If you think about the competitive environment in the last 6 quarters, we definitely have built quite a bit of pressure. And the one thing that's been surprising to me, well, it's not surprising. I think it's great, that more people are renewing faster in this competitive market. And you would think that there was ever a chance for someone to switch, they would do it when their warranties are up, they're not. The majority of those people are staying with Tandem and I think it's because we have the best algorithm and we have fantastic customer service and people really appreciate that.

Yes. And you guys have not baked anything in for the Mobi launch or some of the sensor integration, but we'll get into that in a second. But before we do, I just wanted to talk about the international guidance as well. I mean you have new products there with CGM integrations coming, you've got Tandem Source. Just any underlying assumptions within that high teens guidance for the international business?

Right. So we still view the OUS market has a tremendous opportunity for the business. There are more type 1s in the countries we serve. Outside the U.S., there are 3 million than in the U.S., where it's only 1.9 million. And the penetration rates are very low. By comparison outside the U.S., we see them in the 10% to 15% range, where in the U.S., we're already at 35% to 40% pump penetration. And so what we're doing is we're thinking about the guidance for 2024 is we're anticipating it will be a noisy environment because of the competitive dynamics there. And so we factored that in to make sure that we're considered of that in our guidance as we're setting expectations for 2024.

Got you. And then moving to Mobi, congratulations on all the progress there and then moving into a full launch mode soon here. But you did have the pilot program and love to just -- you mentioned about some of the favorable feedback that you received from those initial, I think, 150-plus patients over a couple of month period. Maybe just review what that feedback was. And then there's any other feedback that could drive some just minor enhancements of the system?

Sure. So as I said, we had about 150 people using the product for the last 4 months -- 4, 5 months. And there are people that were Tandem employees, and there were also people who are from external clinics, and there are also people who were MDI, people who are insulated people who are Medtronic users. So a really good cross-section. And I would say that one of the most common things that people say is when they first see it, they can't believe how small it is. They're really stunned by that. And I think that it is small. I mean it's about half the size of the t:slim and it doesn't have a controller. The control mechanism is entirely through a mobile app. And so what people say is that it's very light. We actually sell it with an adhesive patch and a very small infusion set. And so you can pretty much put it anywhere in your body. And people say they have forgotten they've got it on. The fact that you control it by a mobile app, it basically does not require you to interact with the system at all. And so I mean what we're seeing, I think, is that -- it's really -- I think in the past, there was this 2 tubeless argument. And I think what we think now is really the important part is wearability and choice. And I think wearability -- really, the ability to put it pretty much anywhere you'd like, the ability to detach with the choice of multiple sensors and also the best algorithm really is driving a great deal of excitement. And so in that group of 150, there were several people who were actually [ endos ] who have type 1, and they were really excited and they were really talking about the application of this to their patient population. And so we rolled it out on February 13. We really started the first formal sales on the product. It's only been 2 weeks now. But we've been attending a lot of practices with our sales organization and helping train and make people aware of it. And it's been kind of surprising how much -- how many people come to these meetings. I mean, the entire practices are showing up. We're seeing 10, 20 people show up to just understand the product. And I think the sales force is excited. We can definitely tell that the endo community is excited, and we think this is going to be a real meaningful product for us going forward.

And I know there's a lot to learn in the launch. But with Mobi on board now, as you move into full launch mode, I believe, in the coming weeks/months, it seems as on the renewable opportunity, but we could add a boost on patients -- MDI patients [indiscernible] the pump patients, Mobi is an attractive option. So I guess the question really is just as you said this year's guidance, 2024 guidance, I mean, it's more conservative approach than in past years? Or how would you classify it?

Yes. I think I would say it's more weighted to the risks than the opportunities. And so trying to take into consideration -- in the past couple of years, there were some surprises that came maybe underestimated the competitive dynamics to some extent. And we had our own challenges outside the U.S. with some of our markets, and so we wanted to think about how to factor those types of risks into the business model as we set the guidance and leaving room for the upside opportunities that could come from these products, which we think will make a significant difference in how the business scales and grows.

Great. When you say there's no manufacturing capacity constraints, at least built into your internal Mobi launch plans and reliability, at least in the pilot program, there are no issues, but I think [indiscernible] schedule launch a new system.

We have capacity today to build what we anticipate the demand will be for the year, and so adding capacity is really not that significant of a challenge for us. So that's definitely where we are. I think that when you look at the performance of the system over the last 4 months, it's been fantastic. It really did perform extremely well. What we spent quite a bit of time doing was making sure that the training processes that we use to make sure that physicians and their staff are comfortable and familiar with the system, doesn't introduce any more problems. The same thing for the training for the person using the pump, a lot of focus on that. But we also have a large customer service organization that takes calls 24/7. We want to make sure that they were ready. The last thing we wanted to do and the reason we took so long was we wanted to make sure that when the product is on the market, it's not driving problems or negative issues in the marketplace. We wanted to make sure that it would be a very positive introduction. And so we feel like we're in that place today. And so again, we're very happy with the way the system is performing, and we're also happy with how prepared we are in terms of our internal organizations and systems.

If we think about the timing of G7 and Libre integration to Mobi, I mean those are just software upgrades [indiscernible] G6 compatibility already is our understanding. But there really shouldn't be any kind of waiting period for patients looking to have access to G7 or Libre. They can adopt Mobi on G6, just have the software update convert over once that integration is fully on the market.

We have intentionally introduced it with G6 because we have so much experience with a G6 sensor. And since it is a brand-new pump platform, we wanted to make sure -- we just let's eliminate a variable. I mean we didn't want to put a new sensor on a new pump at the same time. So we've done that now, and we've seen great results, and we're certainly working to get G7 on the system here in the next -- late spring, we'll definitely rolling that out. And as you said, all of the software, all of these updates that we're making to the pump to provide new functionality as well as sensor integrations are software updates that are made available to people who are in warranty for free of charge. And so that's one of the reasons that people do come back is because they know they've got access to this new technology and they get a free of charge as long as they're in warranty.

I wanted to ask about the t:slim and Mobi, kind of 2 offerings in the market now and that coexistence of 2 platforms. I mean, it makes sense. Going to be moving -- we talked a little bit more about the pharmacy channel, but [indiscernible] access in the pharmacy channel t:slim and DME, but it makes sense to us also that the patients with swift t:slim, great experience [indiscernible] range, they'd want to just continue with that platform. But how do you see the type of patient selecting t:slim versus Mobi going forward may not be clear right now because they didn't have commercial experience, but just help us understand that coexistence and how you see the patient selection process between the 2 pumps stands off.

So when you -- when we look at the market, we view diabetes as being very segmented. There's people who have different desires on how they interact with the system, how they wear it, how they control it. And there might even be very subtle reasons they prefer one over the other. And we feel that to be successful in this marketplace, we need a portfolio of products. And so we think that having t:slim, Mobi with a tube and tubeless option and Sigi really address the complex needs of that community. I think specifically when it comes to Mobi, as I said, it is fully controlled by a mobile app. And so I think that it's small, it's discrete. You would think that maybe somebody who is more mobile, somebody who's more computer-savvy, more comfortable with technology would probably use Mobi. When it comes to t:slim, we definitely think that there's still going to be a meaningful percentage of our new starts that will come and want the t:slim system. Some people just want to have that pump in their hands. They want the control mechanism to be on the pump. There's a certain level of comfort they get from that. And so I think that all of our products will have Control-IQ on them. So it really comes down to the personal preferences. And we think that by having this portfolio, and in the next couple of years, we'll have all of these products on the market. Certainly, today, we have half of the number of products that are available commercially. And so we're excited to be in that position.

Excellent. And you've talked, John, and we were talking about this a year ago at this health care conference in 2023, just about the integration with Libre, Libre is such a big population of MDI patients, and just potentially driving the integration with Libre, not just with Tandem's pumps, but some of your competitor pumps could drive. So as MDI patients to increase the technology, kind of portfolio that they have for their personal diabetes management, how do you tap into that? How does Tandem tap into that opportunity directly? I mean is there -- is it just now that Libre is integrated, all these Libre patients will kind of get this understanding that pump technology is now available to -- that's compatible with their CGM or does Tandem do anything special in terms of marketing to that channel to try and capture as much share as possible?

Yes. I mean I think there's -- it's a great question. And today, when you look at the -- the choice is very important for us. And so we think it's really important to have access to the leading sensors on the market. And now both the Dexcom G7 and the Libre are both integrated with our product. And again, choice is usually important. I think when you -- when you look at the current installed base, we have 450,000 people who are essentially all using the G6 or G7. And so that's -- it's a great product, and we -- it's a product that's got a much better form factor. It actually starts up faster. There's a lot of big benefits to that. So we expect that, that's going to continue to drive incremental new starts for Tandem and as Dexcom continues to innovate, we'll benefit from that. But the thing about Abbott is, Abbott has 300,000 to 400,000 people today that are type 1 in the U.S. market that use our sensors that don't use a pump. And so that becomes almost a whole new market for us. And if you look at the total number of MDIs that are on the market today, obviously not using a pump, it's about 20%. So it's a very big number. And I think that we've talked to the people who are using the Abbott sensor, there's definitely a lot of interest in having access to pump therapy. The therapeutic benefits are substantial. I mean there's an immediate improvement in the quality of life on a daily basis, but there's also the reduction of longer-term comorbidities that come along with type 1. So this is a group of people that we intend to market to specifically, to collaborate with Abbott and work with the Abbott sales organization to get access to that population. Thing is it's a large portion of the people in the U.S. that have type 1. It's also a large portion of OUS and the type 2 opportunity is even larger. So I think the partnership is a good one. It's an important one, and we see it driving longer-term growth for the business.

The Control-IQ, we've heard over the years just from collections about the algorithm and how sophisticated is the time and range results, and that drove a significant amount of share gains when you guys first launched that algorithm with t:slim X2. Any updates just on how that algorithm can evolve and [indiscernible] for one? And then two, you guys have confidence in the Control-IQ algorithm as well. I mean, is there ever a period or are there -- where Tandem decides to run a head-to-head trial against some of the competitors or are there any centers that are running head-to-head trials to kind of drive further differentiation for Control-IQ versus other algorithms?

Yes. I mean I would say that we believe that the Control-IQ algorithm is the best algorithm on the market. If you look at -- we have 3 clinical studies that were all published in the New England Journal Medicine, the results are fantastic. I think the benefit really is as you get immediate and sustained improvement in terms of your time and range. The other algorithms that are on the market, they have a learning period. It takes a time for you to actually get into control and into range. And I think that with ours, it's immediate and sustained. And if you manage your diabetes carefully, we have people who talk to us all the time that say they have high 80s, low 90s, even 100% time in range for a relatively extended periods of time. So it's a fantastic algorithm. We actually just got approval from the FDA for an enhancement to the algorithm in December, and we're working on the implementation of that now. We haven't said specifically when it's going to be on the market. But one of the benefits of that is it will actually give us an indication for age down to type 2. It will also enable us to work with people that have much larger body mass and larger insulin usage, and it will be the algorithm that's used for the type 2 study that we have underway right now. So it's a more inclusive algorithm. It will allow more people that have type 1 and type 2 diabetes to use our system. It also has a number of personalized benefits in terms of features that we've added that provide a level of personalization that people will really appreciate. But the algorithm is incredibly important to us, and we are -- we have established an internal organization of developers that are all experienced in algorithm sort of engineering and development. And we also have a number of partners in the marketplace that have expertise. And so together, we're definitely working to continue to advance it. I would say that certainly, a fully closed loop system is a goal of ours as an organization. We expect to get there. We think we can do it with the technology that we have today and still provide excellent benefits to people living with diabetes. So I think that's -- the algorithm development is incredibly important to the company, and we are investing a significant amount of our R&D resources. And I think that you'll see, we'll continue to add features and capability and time to the installed base so that people can anticipate that they'll see those benefits when they're available.

Understood. Talk about type 2. Your team has had a pivotal trial for the type 2 indication, and I believe that the study may have been complete enrollment at least according to clinical trials...

Not yet. [indiscernible]

Okay. But you may have data and file later this year, your team has discussed. And nice indication expansion. Maybe to start on this topic, just the percentage of type 2 pumpers within your patient base. Have you guys disclosed that -- you have?

We have about 20,000 people who are using the Control-IQ system that have type 2 off-label. Now right now, none of the larger pump manufacturers have an indication for type 2 yet. All 3 of us are involved in clinical studies to enable that. We have the study, it's underway. We would anticipate it will be done probably in the back half of this year. We would see ourselves presenting data at some of the conferences that occur in the late fall. And then we would go through an FDA submission, anticipate having the product in the market in the 2025 time frame. And if you look at the market today in the U.S., there's about 2.3 million people that have insulin intensive type 2. And it's only penetrated -- there's only about 100,000 use a pump. So it's only 5% penetrated. So it represents a large opportunity in the U.S. And we have -- we definitely talk to people who are -- who have type 2, there is definitely interest in pump therapy out there because the benefits are essentially the same as they are for somebody who has type 1. And then if you go OUS, it's even -- it's a much larger market than it is in the U.S. So again, it's an area of investment, which we think is going to continue to bring the benefits of our technology to a much broader group, but at the same time, help us grow the business and get to the point where our goals internally are to have 1 million people using our technology to get to a 65% gross margin and 25% operating margin. And we think that by providing this technology that group is going to enable us to achieve that.

Great. And just we were just on our team, whether that approval is tied to the algorithm, Control-IQ or the device t:slim just thinking about Mobi and we had to run a clinical trial, would that approval kind of carry over and over the type 2 indication for Mobi as well? Maybe down the line...

The FDA is -- and they've developed the class of products that they call interoperable. And the algorithm -- Control-IQ algorithm is called IAGC. And it's an interoperable automated glycemic controller. That's right. And so that's what we're getting approval for. We're getting these indications for Control-IQ. Once you have approval, you can load it on any interoperable comp. And today, both the t:slim and the Mobi pump are interoperable. So as soon as that indication is available, we will have it on the pumps, we will make it available to people in the marketplace to update it if they'd like to. But we will begin selling the existing pumps with the new software.

Another advanced [indiscernible] this is opening up the pharmacy channel and access through that route. And if you guys have talked about any one contract under your belt by the end of this year. And I guess the question is just thinking about the progression there, just to start and then there could be a domino effect of other [indiscernible]. Will that take significant amount of time to lock in? Any help just thinking about the cadence of [indiscernible] after this initial one?

Sure. So the pharmacy is a big initiative for us, and we've made a lot of inroads, I would say, in the last 6 to 12 months. The first one is, I think we've answered the question of whether or not a durable pump would be accepted in the pharmacy channel. And so where all systems go on that front. We're having many active conversations with PBMs and insurance payers on our entry point in there, with Mobi as the first product. Our #1 goal, I'll start with this, is to make sure that the economics for the patient are better than what we get through the DME channel. So it's really focusing on the patient out-of-pocket cost and getting the lowest possible amount. So that won't be a barrier for people or perception that durable pumps are more costly. Secondly, we want to at least get is equal to or a premium to what we're seeing in the DME channel from a revenue perspective. So with those 2 thoughts in mind, we're going to be very methodical about the contracts that we sign. And it's not about getting a contract or any contract at any cost, it's about getting a contract that's really good for Tandem. Our DME channel, we have some really good contracts there. We have some, for example, where a patient doesn't even have an out-of-pocket cost on the pump. So we're being thoughtful of who we're targeting and that sort of thing. And so getting the first one or 2 is going to be the biggest lift. And then I think what we'll do is we'll have a template that we can somewhat replicate as we look into other agreements. These are somewhat gated by the payers themselves, because many of them have time points where they allow new products to come on formulary. So it's not like we could turn this on overnight by any means. It's probably a multiyear initiative. But the long-term goal for us is we pave the way with Mobi, we get some level of access that makes sense for our business and that we really want to take Sigi straight into the pharmacy channel down the road. And so it's about what we can learn and how we can build it here in the near term.

Great. And then the different, I guess, revenue generating models for Tandem, I mean I think you got a couple [indiscernible] and then it's kind of a monthly or subscription model and the other. I guess the question is on the subscription model piece, is the reimbursement, if it goes through that channel just equivalent to kind of like over a 4-year period supplies plus pump getting paid on a per monthly basis. Is that one potential kind of belief that kind of how it works for the current AID system as it's access for the pharmacy channel Insulet's Omnipod 5?

Yes, you're right. That is one of the scenarios that you could envision. There's a lot to be learned this year as we're negotiating these contracts and having these initial conversations. It's highly likely that the contracts will look different payer by payer. So if and when there is any sort of change to the business model because of it, we'll be sure to telegraph that well in advance so people can understand if there's any impact. But for now, we're open to it, and we're excited about exploring this opportunity because we think it can really broaden our access and really help the customers who see cost as a barrier to getting on pump therapy today.

Great. And just in terms of the pharmacy channel access, the open [indiscernible] competitor and Tandem. I mean how big of that has been for the business? I mean the DME channel seems to be pretty accessible or in a phase a little bit more administrative work on the provider side, potentially, maybe a little bit more work for the patient side. But there may be some less patient costs in the pharmacy access channel. But any thoughts on just the puts and takes between DME and pharmacy on those metrics? And then how big of a headwind it's been for Tandem?

Sure. I mean, I think you framed it well, there is a bigger, if you want to call it, paperwork burden or administrative burden for the physicians and sometimes the patients. That's something we've been streamlining on our own through the DME side. So we've been working to optimize that channel. When we can remove prior authorization requirements, we use our Control-IQ algorithm outcomes data as a way to remove that kind of barrier. So we are optimizing that. And we used to have an average of 30 days to get a patient on a pump. We have some plans today where a patient can get their pump within 4 to 5 days. And so it varies across the spectrum there. Pharmacy does have a little bit lighter burden, I would say, in that regard, which is another reason that we're interested. But what we haven't seen, I would say, is a physician making the decision based on what your insurance requirement is or the insurance channel. We believe that they still offer all of the products, and they're working to find the solution that's going to work best for the patient, because making that decision based on a channel might not be a best solution that the patient will want to stick with in the long term, and the most important part is improving their therapy.

Great. So maybe time for one last question on the pipeline. On the hardware side, t:slim X2, Mobi, you're working on Mobi tubeless X3 and Sigi. And then ultimately, I mean, could you have 5 pumps in the market? Or could the success of Mobi kind of optimize that pipeline or condense it? Or how should investors and maybe even clinicians think about the portfolio 3 to 5 years out that's commercialized and all the offerings through Tandem?

Yes. I mean I think that with Mobi -- first of all, it's going to be Mobi tubed and Mobi tubeless. It's the exact same pump. It's the supplies that are different. So that's a -- it's a new cartridge and a new infusion site. So really, our intent is to have 3 products. I think that the X3 is a technology upgrade on the X2, because the X2 has been around for a while. We want to make sure we take advantage of new technology and don't run into any supply chain issues. And of course, we've got Sigi coming after that. I would say that we're -- there's a substantial financial benefit, a margin benefit for having Mobi in the market. We expect to see that in the back half of this year and beyond. But if everybody decided to choose Mobi, that would be great for us as we'd see an immediate benefit in gross margin. We just believe that it's a segmented market. We think there's still going to be a meaningful demand for all 3.

Excellent. That's a good place to wrap it up, seeing the red light blinking over there. So thank you guys so much for the time here and for putting up with all our questions. Thank you.