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

Good morning. I think we'll get started here. I'm Jayson Bedford, I cover the medtech sector here at Raymond James. Thank you for enduring a few days here, and last day of the 45th Annual Raymond James Institutional Investors Conference. We're very pleased to have with us the senior management team from Tandem Diabetes. We have the company's CEO, John Sheridan; the company's CFO, Leigh Vosseller. And we really appreciate the time they're giving us. I think we'll go through a quick presentation, and then I'll have some questions.

Okay. Well, welcome, everybody. Thanks, Jayson. I'm going to start off with just -- I am going to be having forward-looking -- making forward-looking statements. And so would you please go to our website and look at the Investors section in terms of how to deal with that. Sorry about that. So Tandem has been around for about 15 years now. We've been selling products for about 12. From the very beginning, Tandem has been really focused on, what we call, user-centric design. We have a very strong behavioral science team and a human factors team, and they work together with the patient to really understand how they interact with the system. It's a hugely important part because we want the experience to be simple, intuitive and easy-to-use, very much like you have today with your conventional and consumer electronics. And we feel that ease-of-use through technology drives adoption. And right now, there's a very large underpenetrated market out there that technology could help expand. And that's where we see most of our growth coming from. We have a mission to improve the lives of people with diabetes through relentless innovation and extraordinary customer service. And we think both are equally important. Over the last 12 years, we've evolved our product. The first product we brought to market was simply a pump. It had no algorithms on it. It didn't interact with a sensor. So subsequently, we've basically integrated with multiple sensors. We've had multiple algorithms. And more recently, we've really moved into, what I would call, cloud web mobile, where we have an ecosystem around the pump that provides data-driven products and services that can really increase the stickiness of the product in the consumer -- with the consumer as well as with the health care provider. We have also an idea that we need a portfolio of products. Today, there's many people with diabetes and it's a very segmented marketplace. People have different needs in terms of how they wear, how they interact with, how they control the system. And we think having a single pump only allows you access to a portion of the market. So we're working on delivering 3 different insulin pumps to the market to -- basically, it's untapped, to tap into that large segment of the business. Today, we have the #1-rated automated insulin delivery system. And I'm not saying that because I'm a member of the company. I think if you were to ask any endocrinologist in the market today, they would confirm that for you. We've been very successful over the last 5 or 6 years, and seen significant growth in the business. Today, we have about 450,000 people using our technology globally. And one of the interesting aspects of the business is that the pump lasts for 4 years. And at the end of the 4-year period, we want to retain those people and have them buy another pump. So we have this large scaling renewal opportunity, which is an increasingly important part of our revenue stream as we go forward. One of the other aspects is we want to provide choice. And so not only do we provide choice in the pump, but also in the sensors. We're integrated with Dexcom's G6 and G7 today. We also have the Libre 2 sensor that's integrated with our system, and we're working to get Libre 3. We have multiple options for infusion sets to provide just a choice for people. And we think choice is very important. Choice and optionality are very important. We have been investing significantly in R&D, but we are working to leverage that. And we expect to see profitability at the end of this year, and we're working to drive gross margin improvement and operating margin improvement over the next several years. We're in San Diego, and we have about 2,500 employees. The market is very large and underpenetrated, as I said. There are -- in the United States alone, there's about 1.9 million people that have type 1 diabetes. And most of them use pens and needles today. We call that MDI, multiple daily injections. And so when you look at the number of people actually using pumps today, there's about 700,000. So it's roughly 35% to 45% penetrated. As I said, we think by using technology to improve the therapy and improve the ease-of-use, we can increase the penetration from 35% to 40% in the U.S. to 65% plus. Outside the United States, the market is even larger in the countries that we're in. It's roughly 3 million people, and it's about 15% penetrated. So it's very important for the business to get the products into the U.S. markets. But just as important really to get OUS, and really have been investing in the OUS opportunities over the last several years. We're also working today on a type 2 indication. We don't have one yet. It's probably going to be something that happens next year. We're in the midst of a large clinical study. But when you look at the opportunity there, it's even larger. It's a more complex condition. And as a result, it's probably going to be a slower uptake into that marketplace. But today, there's about 2.3 million people in the U.S. with type 2. It's about 5% penetrated. About 100,000 people use pumps today. And that when you look at OUS, it's even a larger market. It's about twice the size of the U.S. market. And again, very few people are using pumps. Most people are using pens and needles when it comes to therapy. And the benefits of the therapy are that you get substantial improvement in time and range, which also results in lowering your A1c. If your A1cs are above 6 or 7, there's a significant probability of having longer-term comorbidities that go along with diabetes, retinopathy, neuropathy, cardiovascular disease. And these things are significant threats to all of the people with diabetes. When you're at 6 or below, you substantially reduce that. So I think that the therapy that we're providing is equally applicable to people who have type 1 and type 2, and the benefits are also the same. Our flagship product is the t:slim X2. It's a pump that's -- it's about 38% smaller than the current product on the -- Medtronic system for instance. And there were many firsts that we achieved with t:slim. It was the first product to use a touchscreen. It was the first product to be rechargeable. It's the first product that actually allows you to update the software on the system. And that's very important because we continue to innovate and provide new features and capabilities to the pump over time, and we make them available to all in-warranty customers free of charge. And not only is that a great benefit to the customers, but it's also a great incentive for them to continue to have in-warranty pumps, which again gets back to the scaling business opportunity that we talked about. We're also the first product to have 3 sensor integrations, and we work closely with the FDA to really develop and lead in this area of interoperability that allows various technologies in diabetes to integrate into each other without doing significant regulatory work or clinical trials. Our next product that we've just brought to market now is Mobi. Mobi is the smallest, durable insulin pump in the market. It's about half the size of the t:slim. It's controlled entirely by a mobile app. We sell it with an adhesive sleeve, and you can locate it any place you'd like on your body. And we've had about 150 people using this product now for the last 4 months, and we've just gone into full market release about 2 or 3 weeks ago. And the feedback that we've gotten has been incredibly positive. We knew it was going to be good, but it's been extraordinary. And I think the one thing that people say -- first of all, they're very surprised by just how small it is. It's small and very, very light. And one of the common things we hear is that when you use this patch and you put it on your body, people forget they've actually got it on, which they describe as liberating. When you also control it from a mobile app, there's no need to interact with the pump. It just stays there or wherever you've got it. And all of the interaction with the pump comes through your mobile app, which is very convenient, but it's also very discrete. And I think people who have diabetes don't want you to know that they've got it. And I think the discretion that comes and the convenience that comes with the mobile app is quite important. We have had significant competitive pressure over the last 18 months. And I think that the premise has been that tubed pumps are going to be obsolete and everyone is going to go to a tubeless pump. It's very clear to us at least that there's going to continue to be a tubed market. But the benefit of Mobi in particular is it's wearable. And it's very, very convenient. And wearability, we think, actually is the most important aspect of the decision to choose a pump, wearability and the therapy benefits. So it's no longer, in our mind, tubeless. It's really wearability plus choice with the best algorithm. And we think that we have that now with Mobi. Mobi is the second product in our portfolio. I'll talk about the third one in just a moment. But Mobi's currently integrated with the Dexcom G6. We are in the midst of integrating with G7, that will be available here in the late spring. And we're also working hard to get the product into the OUS markets as well. We're very excited about Mobi. We think it's going to really change the trajectory of our growth in 2024. As I said, Control-IQ is the #1-rated AID system in the market. The thing that makes it meaningfully different is that it's the only system in the market today that actually has an automated correction bolus. So if your blood sugar is going high, the current systems or the competitive systems in the market today gradually increase the amount of basal insulin they give you. We do that as well. But if we see that your blood sugar is going high at a rapid rate, we give you a bolus and it brings it down. And as a result, what we see is we see immediate and sustained improvement in the diabetes management, and we see substantial improvement in time and range. In our clinical studies, we had 3 clinical studies published in The New England Journal of Medicine, which is, I think, by itself quite an accomplishment because they typically don't publish things unless they're very meaningful. We've seen, in those studies, that our time and range improved from about 60 to the mid-70s, which is -- and that's a big, big improvement. But if you carefully manage the system, what we see is we see people actually have time and range in the high 80s and low 90s. We even have people that report to us, so they've had time and range at 100% for the last week or so because they're just excited that they were able to achieve that with the product. We have the most exciting pipeline in diabetes. We have our next-generation pump, which is under development today. It's a result of an acquisition that we've made in the last year. It's the Sigi pump. It's a full patch pump. It has a -- it's rechargeable though. So this is not a disposable patch pump, it's rechargeable. Which is very important because we're not throwing away batteries, integrated circuits and PCBs every 3 days. And I think increasingly, people were more concerned about the environment. And I think having an environmentally sensitive rechargeable pump is a compelling offering. It also uses a prefilled insulin cartridge. And as a result of that, you can actually change the cartridge very quickly. We think that with t:slim, Mobi and Sigi on the market, that those 3 products really do a much better job of addressing the needs of the different segments in diabetes. We're also working on a couple of enhancements. A year ago or so, we also acquired Capillary Biomedical. It's a company that's making an extended-wear infusion set. It's a -- currently on the market today, infusion sets are indicated for 3-day use. This device here will be a 7-day use. It's definitely going to be a meaningful improvement to the people -- for the people who are going to use the system, but it's also going to be a gross margin benefit because we're compensated on a daily basis. So this will be compensation for 7 days and the sensor -- or excuse me, the system costs roughly the same amount. We're working on a tubeless version of Mobi. Mobi's pump will be identical. It's really the supplies that will be enabling the tubeless capability. And so the pump today has a reservoir, which we change every 3 days. And then this will have an infusion site, which basically will replicate the infusion set and people will insert the site -- insert the cannula and the pump will fit right into it and deliver insulin in a tubeless manner. So ultimate flexibility that comes from the Mobi pump with both tubed and tubeless options. And we're also working on clinical advancements right now. We have -- underway, we have a type 2 study, which we expect will be completed in the second half of this year. We believe we'll get the indication sometime in 2025. We just got the indication from the FDA for 2-year-olds and above, which is exciting and a big opportunity for us. Then we have a large group of engineers working to advance the capabilities of our algorithm. And we do not -- we do plan to get to a point where we'll have a fully closed loop system. There's -- and that's our objective longer term, and we have engineers that are working along those lines. And finally, I'll just wrap up saying that, as I said, we really believe that technology drives adoption. And in this curve here, what you can see is that this is the new product cadence over the last 10 years or so. And you can see that the new product cadence drives uptake in business. We are innovating faster than our competitors. As I have said, we just introduced 4 new products to the marketplace in the last 2 quarters. We have this exciting pipeline, and we think we have a very exciting future. I'll end by saying that 2024 is going to be a transitional year for us. We have 4 new products in the market. We have the most exciting pipeline. These new products drive margin improvement and so we expect to see significant gross margin improvement as a result of having these in the marketplaces. We are entering the pharmacy channel, which gives us another business model for us, potentially giving us additional reimbursement. And we've also made some -- we brought on some new leadership in our commercial team, a new CCO and also a new executive to run our OUS operations, both of which have experience in multibillion-dollar medtech companies. Growth and innovation have been big parts of both those companies. And so we think that, again, this is a transitional year for us and that we expect to see the growth trajectory of the business change from what we have actually seen in the past. That's it.

Great, John. A lot going on in the business. A lot of places we can go. Maybe just start with something a little bit more recent, kind of the boring stuff. But you did a convert. I guess the question is why? Why now? And what does it do for the business?

Sure. So the convertible debt offering was essentially a refinancing transaction. We have existing $288 million of convertible notes that mature in May of 2025. So we're coming up here closely on the point when it would be reflected as a current liability on the balance sheet. So as we evaluated the market and all of our opportunities, we felt like now was the right time. And fortunately, we did the raise price last night. We're getting the same coupon that we got 4 years ago at 1.5%. And again, it's really just a refinancing transaction. So what it does for us is it allows us to not have to worry about that, and we can go ahead and keep executing on the business.

And John mentioned profitability in the fourth quarter. Just remind us, rough burn, cash burn?

So looking ahead, we did have -- we did generate cash in the back half of 2023. At the beginning of 2024, we're going to be burning cash in as we are effectively investing in sales and marketing to launch these new products. Also, there's a little bit of pressure in the first half of the year because Mobi is being built at volumes that are very low. So it's going to be dilutive to gross margins initially. But as we get to the back half of the year and turn into 2025, we'll be cash flow positive again.

Very helpful. And so let's get to the good stuff and just the business. John, type 1 penetration for pumps, roughly 40% in the U.S. CGM penetration is?

70-plus.

Okay, 70-plus. So there's a lag there. You did mention that technology kind of fills that gap. Is that simply what it is? Or what's the pushback? I feel like we've been saying 35% to 40% type 1 penetration for the last 5 years. Why isn't it higher? And what needs to happen for it to be higher?

It's actually grown quite a bit. And I would say that it's grown with the availability of the AID systems that are on the market today. If you actually -- if you look back maybe to 2017 to 2018, there was about 25,000 people who came to pump therapy every year and it had been like that for quite a while. Now it's -- I think the last -- in 2022, we estimate it was probably 80,000 to 85,000. So a substantial growth in those 4 or 5 years. And what has happened in that time frame is that the -- first of all, Control-IQ came to market with really the first product that actually had a functioning and successful AID experience. It improved the therapy, and we saw a significant uptake. But we were the only company in the space really that had one. We now saw Insulet come to market 18 months ago with a successful product, and Medtronic has improved theirs. And so I think in those last couple of years, we've seen more entrants and more successful-performing AID systems. And so I think that number is going to continue to grow. I think it has grown quite a bit. We believe that it can get to 65%. And I think in order for it to get to that number, we need to see well over 100,000 people coming to pump therapy. And I think that it was -- it's ease-of-use. It's wearability and it's therapy and the benefit of the therapy. And I think that all of those things have to continue to evolve to get to that number, but we think our pipeline really helps us do that.

I hate to put you on the spot, but the 65%, what's the rough time frame? And then the other question is, do you expect an acceleration in market growth here in '24 versus '23, just given all this innovation?

Yes, I would say that we're probably 4 or 5 years out from that number. And I would say absolutely. I think that as you can see here, as we've introduced new technology, we've seen bumps in revenue. We expect -- I mean, I think the problem that we've had over the last 18 months really has been that one of our competitors is taking more of the MDI starts that we have. In the past, it was basically split evenly between the 2 companies. And I think when they brought their technology to market, they probably went from 50% to 70%. We think that with Mobi on the market, with the choice of the sensors that we've got, with the new technology that we're bringing, we can bring that number back closer to 50%. And that's really what our goal is. Basically our goal is to continue to take advantage of the large and underpenetrated market. And we think that with 3 major players in the market, we can all be successful in doing that. But we've got to have the technology to appeal to people so they're willing to wear their pump that long.

And the business model, for those who may be newer, you've got renewals and then you've got new starts.

Yes.

Just remind us in '24, what's the expectation for new starts? And if I can go just a bit layer deeper, how much -- of that number, how much is from MDI or how much is from competition?

Sure. We set our guidance expectations at 10% growth, which factors in that the primary drivers of growth in 2024, I'm going to say to start, are really the recurring streams of business. So the supply has been generated from the 450,000 customers in our installed base from the renewal opportunity, so people who are lapping their 4-year warranty cycle. The number of people coming to market with warranties expiring in '24 is 70,000. That's up more than 30% from last year of about 50,000. So those 2 pieces between supplies and renewals alone present a great growth opportunity. In our expectations right now, we've said that our new pumpers will be flat to slightly down in the U.S. from 2023. Now that's a contrast to what we think the new products can do to drive the business, but we're setting these starting expectations. And as these products are introduced and we start to see and develop the trends that are sustainable trends. So initially, we might see some pent-up demand from people who have been waiting for Mobi, for example. Then we'll start to give -- inform that into the guidance expectations going forward. So right now, we're setting the bar at assume the competitive environment is the same, assume the products don't make a difference in the trajectory of the business, we can get at least as many new pumpers. I'll take it one more step to your question about the mix. So we have been, very consistently, splitting new pumpers that have been coming about half from the MDI population and about half from competitive conversions. This is the year where we expect to start to see the MDI piece outpace from a growth perspective what's coming from competitive conversions for a number of reasons. Number one, just the new products will really drive, that's where our focus is. Driving more conversions from the MDI opportunity, which is rather large, 1 million people today not using pump therapy. The competitive conversion opportunity is smaller and has been declined. So while we still expect that we will attract customers from the competition, there's just not as many available to us as there has been in the past.

And that seems to foot with John's comment earlier of your competitor taking 70% of the MDIs, now you expect that to revert or get closer back to the historical 50-50?

Exactly.

Okay. John, on Mobi, I feel like -- maybe the quick question is, relative to the beginning of the year, you seem more enthusiastic. Is that a fair assessment? And what are you seeing from the user base today that gets you that much more enthusiastic?

Yes. It's the truth. I mean I am more enthusiastic. I think that we always expect it to be a very positive experience and, therefore, drive additional revenue for us. But over the last 4 or 5 months, we've had about 150 people using the product. Half of them were employees and then half from several clinics in the United States. And many of the people who are actually using it outside of the clinics were physicians. They were people who had -- doctors who had type 1. So the feedback we've received from them has just been incredibly positive. And I think that -- it's really that, and I think that our sales force is seeing it as well, as they actually now are out training physicians and their staff, huge interest in the product. So I think -- it's just been an overwhelmingly positive response to the device. And when people talk about it as liberating and just, again, they forget they have it on and things like that, we just think -- we just know it's going to change the dimension of growth for us.

When we look back -- this time next year, we look back on the Mobi users, are there going to be more Mobi users coming from your renewal base or coming from MDI, do you think?

I mean there's going to be some cannibalization where they will probably come -- there'll be some that would absolutely come from our renewal base. But we also think that it's definitely going to turn the tide on MDIs also.

Just on the renewals. I often get the question, you've kind of mapped out the math behind it as you'll renew half of them in year 1, another 20% in the next 6 months. What happens to the remaining 30% of the folks that don't renew after 4.5 years?

There's a variety of things that can occur. So some people just leave pump therapy. People might take breaks. They're tired of the body burden of wearing technology and devices. That's changed a bit with Control-IQ because I think once people get accustomed to it, they actually want to keep the product. You always have the situations where we have many people who just use their pump outside of their warranty cycle. So there's no reason that they have to renew. We remind them of the benefits of being in-warranty. Number one, if new innovations come to market through a software update, you get free access to those software updates. Number two, if you were to have a failure of some sort, it could thrust you into the renewal cycle, maybe at a point when you're not ready for it. So we prepare people to get ready for it and move through as quickly as possible. And you can -- we can lose people to the competition. I would say in the last 5 years or so, our experience has been mostly that people use their pump out of warranty, and we continue to bring innovation to the market to encourage them to make a purchase.

G7 integration, you certainly highlighted that as a potential growth driver.

Yes.

Are most of the new Tandem users on G7 today?

I think that we have 450,000 people out there now have access to G7, and the software is remotely updatable. So we have seen a significant portion of those people update their pumps so they can actually have G7. And when you -- the software we're providing today, even on new and the software that you can update to as the option for G6, G7 and FreeStyle will upgrade too. So those are all available to people for -- in the system today. I think that we're excited about G7. It's a good product. It's got a great form factor. It's about the size of the quarter. It warms up faster. And we've seen people in the marketplace very excited about it. In fact, we introduced it in the November time frame. And prior to that, we were hearing from our sales force that people were actually waiting for it. There was pausing in people coming from MDI to Tandem because they are waiting for the G7 to get out there. And now there's been a great deal of interest in it. So it's definitely going to -- I mean, we draft off the CGM companies. And certainly, with Dexcom, they've been a big part of our success over the last 5 or 6 years.

And there's no constraints or anything in the G7 integration in terms of supply or anything like that?

There was a change that they made, but I think we're completely by that now. That was sometime back in the in the fall time frame, that's behind us. I think everything that's happening today is the revised version of the sensor and -- or the revised version of the communication mechanisms on the sensor. And now we're not seeing any issues at all in terms of supply.

It appears to us that you may be a little ahead of your competition in terms of integrating with G7. Do you view it as a competitive advantage? I know it's not necessarily sustainable, but do you view it as a near-term competitive advantage?

Yes, I think so. I mean we are ahead, and I think we'll continue to remain ahead. They're going to catch up at some point in time, but we're going to continue to innovate and add technology to the systems. It certainly is a competitive advantage in the short-term. I think they even mentioned it in their call, they've seen some pausing because they don't have it yet on their system.

All right. We're bumping up against the bottom of the hour here. So this is great. Is there anything else you -- in the minute left, any other messages you want to get across?

I do. When I ended the discussion earlier, that's really what I want to say. I think we're really positioned for a great 2024 and beyond. I think that the things that we've made have been structural changes to the business that are really going to put us on a different growth trajectory, and we're very excited about where we're standing on. Thank you very much.

Okay. Leigh, John. Thank you so much.

Yes. Thank you.