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

Hi, everyone. I'm Steve Lichtman, medical devices analyst at Oppenheimer. Welcome back to the Oppenheim MedTech and Services Conference 2024. Very happy to have with us up next Tandem Diabetes. With us today President and CEO, John Sheridan, and Executive Vice President and CFO, Leigh Vosseller. We are going to do a fireside chat format. If you do have any questions, please key them into the Q&A area, and I will get them over to management. But with that, let's get started, John, and Leigh. Thanks.

Steven. Let me just say one thing. I just need to say that today's discussion is going to include forward-looking statements. And for further details regarding our forward-looking statements that can be found on our safe harbor slide in the Tandem conference materials and also on our website.

Thank you. So let's dive in. So on -- obviously, a lot of new products to focus on for you this year, the biggest of which is Mobi. So can you give us an update on where we stand on the Mobi rollout, the feedback you've gotten, lay of the land overall in terms of the Mobi ramp?

Yes, absolutely. Well, first of all, we were going to -- we knew we were going to be seeing very positive feedback on Mobi. And we've had about 150 people using it for the last 4 or 5 months. Half of them are employees, and then half of them were people from different clinics, a couple of large clinics in the U.S. And they actually included [indiscernible] as well who had type 1. So we were able to get a great deal of input and feedback from them on their experience using the product. And it was just over the top. I mean really, very positive, very excited to see the product coming out as well. And some of the things that we've heard is that the product is just liberating, you forget you have it on and controlling it with the mobile app gives you a great deal of discretion as well as the simplicity, it's just easy to use. So we've begun rolling it out about 3 weeks ago. Today, we're in [indiscernible] offices, and we're basically just helping them understand how to use it and sort of the features, et cetera. And it just keeps coming back to people can't believe how small and light it is. And typically, what people are doing, they're wearing it in an adhesive sleeve with a very short infusion set. And it gives you the flexibility to put it anywhere you like on your body. And what we're hearing is we're hearing that it's -- the wearability, it's a substantial improvement and wearability. And I think it's -- we're at the point where I think we believe that there is this tubeless argument. We think it's not tubeless. It's really wearability and the benefits of flexibility that comes along with wearability is what really people -- is what people are really looking for. And then you add to that the choice of the sensors and the best algorithm. And we think we have a really good product that we're bringing to market this year. So we actually, last week was the ATTD, it was in Florence. And most of the ATTD is dedicated to technical and clinical presentations. But there was a small area that allowed us to have a booth and our booth was just absolutely overwhelmed and overrun with people just wanting to see it and interact with it and understand it. So we're excited. We think it's going to really, I think, change the trajectory of our growth curve this year as we begin to get out in the marketplace.

And Leigh, there was obviously an impact during 2023 from patients pausing, knowing that Mobi was coming, but it wasn't yet on the market until early this year. Can you scale for us -- I mean, when you look back now, how big of an impact was that? Any sort of color you can provide as to -- at the end of the day, how much do you think the pausing really impacted your business?

Yes. So it was in July when we got approval, and that's when the noise started growing about Mobi in the market and people were hearing about it. So it was really our third and fourth quarter where we started to see the impact and I would say at a nominal level on our renewal customers because we did continue to still actually achieve and maybe a little bit exceed our renewal target for the year. And those were very consistent with the renewal capture rates we've seen in the quarters and the years past. It was really more on the new patient side where we saw the pausing dynamic as people were weighing as they got close to the end of the year, whether or not they wanted to take advantage of their lowest insurance out of pocket and use the Tandem choice to switch later or just wait for Mobi to become available on the market. And so over the course of those quarters, we were -- we had sign-up sheet for people, so we were having thousands of people interested in signing up. Some of those were people who are interested in choice, some are interested in waiting for Mobi. And now it's all come to fruition. So here we are with the product on the market, and we're actively taking orders. And so we look forward to being able to report what that looks like for us at the next earnings call.

And how does that from a reporting perspective, those patients that went on the waitlist, took advantage of the Tandem Choice? How does that sort of flow through on the P&L here as they start getting the Mobi?

Yes. So just like we've been reporting non-GAAP numbers, which excludes the impact of the revenue deferrals for Tandem Choice, as people start to exercise that right to switch, we'll also exclude that for non-GAAP purposes. And the point is what we want people to be able to see as the trajectory of the business on a regular sales basis. So it's comparable to periods in the past and in the future without that switching opportunity. So that will purely be reported in GAAP results. One thing that I think will be different maybe for people just to understand is that GAAP results in 2024 will actually be higher on a revenue basis than they were -- than non-GAAP will, which is a turnaround from what we've been seeing in the last 4 or 5 quarters as people do start to elect it and we reverse those revenue deferrals.

I want to go back, John, to a point you made on sort of tube versus tubeless. What are you seeing initially here in terms of how Mobi may be expanding your -- the sort of the purview you have to the customers you might go after? Obviously, it's on body, it's a little smaller. It is a smaller reservoir, but talk a little bit about how this may be a TAM expanding for you in terms of the type of patients that you can go after?

Yes. I mean I think if you look back over the last 18 months, we have seen competitive pressure and the pressure has been primarily MDI conversions. We really haven't seen attrition and our own renewals have done quite well. So I think that the Wearability and Choice that comes along with Mobi gives us the opportunity, I think, to regain some of the position that we had in the past on MDI conversions. We expect to see improvement in the conversions, the MDI conversions, particularly as we start off this year. As we add the Mobi Tubeless, I think we would probably take more. Now we think that our Sigi product in the future is going to be very competitive in the marketplace. But I think right now, that's what we expect to see happen. We expect to see improvement from the past 18 months in terms of our ability to convert people from MDI to pump therapy specifically to Tandem's pump therapy.

One of the things you brought up on the last call that was certainly -- got some people's attention was on the pharmacy channel. So can you talk to sort of what your expectations are for movement from payers this year, next year on the pharmacy channel, I guess, specifically relative to Mobi where it seems to be leading the way ?I guess.

Yes, yes. So we are having active conversations right now with folks all across the insurance spectrum, including PDNs and insurance payers directly. And I think a couple of important points about our initiatives. Our ultimate goal is to take the Sigi pump directly into the pharmacy channel. And we're using Mobi as our entry point into the channel today. And so it's about opening the door for access. It's about building the infrastructure, it's about honing our practices and processes so that we are ready when Sigi comes to market. And today, we are looking to get some contracts. We believe we'll have at least a contract by the end of this year. which will be a good sign of what things could look like going forward. But our goals would be to reduce the patient out-of-pocket. So really, we can increase that access for anyone who sees cost as a barrier to getting on pump therapy. And then ideally, we would have a price improvement over time with it. So we're very focused on making sure the contracts that we do get are at least as good as or better than the DME contracts we have in place today. And so stay tuned, there's a lot more information to come as we continue to drive through this process. I guess I would say, most importantly, I wouldn't anticipate that there's any material change to 2024 because of our ability to drive forward, it's more about the coming years beyond this year.

When you mentioned a contract, one of your competitors had an announcement a few months ago. Is it something along those lines? Is it something broader than that? Can you talk a little bit about what we should be expecting to hear from you when we do hear from you guys on this front?

Sure. I would say, first and foremost, I think the contracts may differ across the spectrum. So it depends on whether we start with a PDM agreement or go straight with an insurance payer, and each contract -- and the first contract might not be a sign of what's to come necessarily. There's a broad range of options here in terms of how these contracts may be structured, whether they look subscription model like or they look more DME like. And so we're going to be out there very thoughtful and methodical about which ones we choose to accept and it might not be the model to use for going forward, but it will be an indication of what's possible. So it's really more of a stay tuned since we're in these active conversations. We look forward to telling more when we have something real on paper that we can discuss more thoroughly.

And just lastly, not to push too much, but when you say more DME like is that sort of indicative of how much upfront versus ongoing? So it could look maybe not just an ongoing stream but something a little bit more weighted to the front? Or what do you mean by DME like in that respect?

Yes. Is that where -- just like today, where there's more economics, I would say, from the Tandem perspective on the pump versus the supply that all of it with an eye towards how we can improve the patient economic peace. And what pharmacy provides options for our ways to use the different levers such as the tiering and the formularies to impact patient out-of-pockets as well as co-pay assistance programs that just aren't available to us through DME. So all of that's being taken into consideration as we determine where is the best place to start and when to put that into effect.

Got it. Got it. Okay. So in terms of your other new offerings this year, I wanted to touch on Libre. And we've talked in the past about the opportunity. What is sort of -- what are you seeing in early days in terms of the reality here? What are you seeing in terms of patient interest -- and what role does Abbott play in generating some of that interest as well?

Yes. So right now, if you buy a pump from Tandem, you have the option to use G6 sensor, a G7 sensor and the Libre 2 sensor. We also indicated that in the late spring, we would have a G7 on Mobi and we're clearly working to get the Libre 3D sensor on both Mobi and t:slim with a fast follow, if you will. We've talked about the market in the U.S. as we understand it, is about 300,000 to 400,000 people who use the Libre sensor that have type 1 and very few, if any, use a pump. So it's a big number when you sort of -- when you think about that. And it's 20% or 30% of the available population for MDI conversions. We're obviously collaborating with Abbott. We're on sales calls with them. They're advertising the product as well for us, and we're collaborating on that as well. So the thing we have to do in this market is we really have to develop it. We have to help the people who are there, who are interested in pump therapy, understand the benefit that the Control-IQ provides. And that's a big part of this. And we think that it's not going to be a step function jump. It's probably going to be a continuous ramp. And that's kind of how we look at it. We'll see -- longer term, we'll see a significant opportunity here it's going to be more of a ramp in time. And the same -- I think the same factors that exist here in the states are also the same -- that's the same in the OUS countries as well. So big opportunity for us to get to the 1 million pumpers that we've defined over the next couple of years with that partnership.

G7, Mobi in the spring, and then is Libre 3 on either platform or potential by this year? Or what's sort of the latest number you break through?

We haven't been specific about the timing. And in fact, we're going to kind of like refrain from giving specific dates until we get closer to the actual commercialization just for competitive reasons.

For those not familiar with Mobi Tubeless, can you sort of briefly walk through what that's going to mean for that platform? What is different about that versus Mobi? And I guess, broadly the time line, I know you're not getting specific number in more broadly, how we should be thinking about that?

So Mobi Tubeless is actually -- it's not any -- there's no change to the pump. The pump is identical to the one that's on the market now. What it is, it's a different supply set. And so there's a new cartridge, of course, the cartridge basically is designed to interact with an infusion site or sled. That has a cannula on it, and you would insert, put adhesive onto -- you adhere the sled or the site to your arm, your abdomen where you'd like to put it, insert the cannula and then you would just slide the pump with that appropriate cartridge into that sled and you then have a tubeless option. And we've been -- have best of both worlds. We have both tubed and tubeless options for whoever is using the Mobi system at that point in time. As I said, it's simply a change to the supplies that come along with it.

And then beyond that, you've got Sigi patch. So I guess, one, talk a little bit about how you think that, that can differentiate in the patch market? And then two, -- why have both? I mean what's your vision long term for, say, Mobi Tubeless and Sigi?

Well, I think that we look at the market as being very segmented. There's people out there that just want to wear it, control it, interact with it differently. And in order to be successful, I don't think one product can meet the needs of all segments that are in type 1 and type 2 diabetes. So we're really focused on a portfolio. And we think the portfolio is -- as we've defined it, which would be the t:slim, a tube system, Mobi, small, flexible, wearable, tube, tubeless and Sigi as an entirely tubeless implementation are important. We think that there are people out there who would not come to pump therapy from MDI unless there is a tubeless option, but we also understand that there's great benefits in having the flexibility of tubed and tubeless implementations with Mobi. So we believe there's all 3 of those are necessary to really tap into that MDI market, which is large and underpenetrated here in OUS countries.

Leigh I wanted to jump to some financials. First, on the sort of recent convert, can you talk about sort of the why now and what it does to shore up your balance sheet?

Yes. So it's essentially a refinancing transaction. So we had $288 million of convertible debt on our balance sheet, which actually matures in May of 2025. And so our balance sheet is strong. We're generating actually more interest on our cash than we were paying on the convert, which was 1.5% coupon but it does become current on the balance sheet in May. And so we thought with that in mind and the incremental pressure that might bring as people, I would say, have concerns about that becoming due, as well as the convert market being very open and strong right now. We thought it was a good time to go out and address it. So the new raise was simply refinancing to pay off the old. We actually have the same coupon, so same 1.5% interest rate. And balance sheet still remains very strong.

And on the guidance, I think a lot -- you've talked a lot about this, but sort of the buildup of the guidance for this year and what gives you comfort about it. Can you talk about the inputs that are driving the at least 10%? What's in and what's not in?

Sure. So the guidance was built heavily weighted towards our predictable revenue streams. And so it starts with supplies, which in 2023 worldwide were half of our sales. And with our installed base, as we've added more people across the year, there's an annualization effect just from the people already in our installed base, and those revenue streams have been very predictable, as I said. So when you layer on next, and this is mostly a comment to the U.S., but the fact that our renewal opportunities have become so significant as a piece of the business. And by comparison, in 2024, there are 70,000 people whose warranties will be expiring versus in 2023, there were 50,000 in the U.S. So that's a more than 30% increase in number of new opportunities alone. And when you look back at our history here in the last 12 to 18 months, it's been a challenging environment for us. But what we have demonstrated is a high level of customer satisfaction through the renewal process. And in fact, we were hitting on renewal capture rate for the last 2 years, highest that we've seen in our history. So we put that in the category of a very predictable revenue stream. And then in the U.S., when you put those layers there, the last piece would be, well, what do you expect from new pumpers. And so we laid the foundation that assuming the environment now is the same as it was in 2023. So the same competitive dynamics with Omnipod 5 in the market and 780G in the market, we believe we can still attract as many new pumpers as we did in 2023. When you think about that, we've been talking about these all these fabulous products that we have in the market and how they're going to make a change in the business. For now, we're not adding any of that incremental benefit that may come from the Mobi launch, the G7 or the Abbott Libre integration. That's something that we'll be monitoring as we see those trends. And as we get to a sustainable trend level after -- as these products launch, then we'll start to think about how to inform the guidance with that type of information. So right now, those will be upside to the current guidance we've put out there.

Thanks, Leigh. Any surprises from the competitive dynamics so far this year. And you didn't mention Beta Bionics, I mean how do you factor in the iLet into your thinking on competitive pressure?

Sure. I would say no surprises this year. We went through all of those launches across 2023, and we think we got to a place where we could adequately predict what those dynamics look like in the market from both an MDI perspective and a competitive conversion perspective. So as we look ahead into 2024, we feel very confident with the expectations we've laid out, even with the new entrant into the market, because it has also been up for 3 to 6 months now.

And on that front, in terms of improvements or enhancements to your algorithm, obviously, Control-IQ is very good algorithm. But certainly, one of the pitches for iLet is the simplicity for patients. How should we think about the evolution for you guys from a software algorithm perspective. We talked a lot about hardware, but what about that pipeline for you guys?

Yes. Well, we just got approval for an enhancement to Control-IQ in December, and we're working on implementing that now. What this enhancement will enable is indications down to 2 years old. It will also allow people with much larger body mass and insulin usage to use the system. And it will be the platform for the type 2 indication also. There's a number of personalization enhancements that also come along with it. And so this will be available sometime this year where obviously, our sales force is very busy right now with the new products that just came to market. And so we're just working on planning when the best time to bring it to market is, but it will be sometime this year. The team, we've assembled a relatively large and capable team of algorithm developers, and they have been working on the next-generation system for quite a while now. And we -- ultimately, I'd say our objective is to get to a fully closed system. We think we can accomplish that with insulin. And I think that the idea would be you don't have to bolus if you don't want to, but you can if you need to or you want to. So there's flexibility, but you can actually operate the system without bolusing and still achieve strong time and range, which is where we're going. And that's all about improving the simplicity and the burden that these devices cause in someone with type 1 diabetes life. It's a lot of work to manage meals. And so I think the simplification of that process is important.

One thing you just mentioned, we haven't talked about yet is type 2. I know you don't have any real expectations or anything incremental this year versus what you've already been doing. But can you update us on that opportunity in terms of the ongoing clinical trial and what that could mean for you guys in 2025, perhaps?

Yes. So it's -- the trial is underway right now. We would anticipate that it will be complete sometime in the second half, at which time we would prepare the FDA filing, expecting approval sometime in '25. I think that when you look at the market in the U.S., it's large, there's 2.3 million people who have insulin-intensive type 2, but it's -- and it's very low. The penetration rate is only 5%, and it's even -- it's much larger OUS. And so we think it's an important market to be in. And we think that when you have insulin intensive type 2, it's very much like you have the same needs as someone who has type 1. And we think the pump, the therapy that comes along with the algorithm, all of those things will substantially improve the lives of [Technical Difficulty] also.

On that front, one of the things that has kept penetration of type 2 low, I think, for pumps has been on the reimbursement side. And we've been tracking it does seem like CMS maybe looking to do something on that front, at least relative to DME, maybe reduce some of the burden? I mean is that something that you're seeing? And you're hearing anything in terms of what timing could look like in terms of potentially a review of the NCD around pumps?

Sure. There's really nothing on timing yet that I know ever can share. There is that National Coverage Determination that is on the list for review. We don't yet know exactly where we're slotted or when they expect it to come. But I think one thing that I can say is there were some changes in the CGM space in the last 12 months or so and the same coalition that's driving this NCD review is who drove that as well. So I'm optimistic that when CMS gets to it, that will be a favorable impact for our space.

And where would you see the primary impact? Do you think on the potential for type 2? Or is that where you could see some benefit with it?

Yes. The focus really is what are the hurdles or the barriers to getting someone approved for medical necessity on the pump, and it's really more the type 2 space where those challenges exist. And so there were some key opinion leaders that help write the justification for why some of the requirements don't even make sense for whether or not someone should be on a pump or not. And that all candidates are good candidates for pump therapy. So it would really could have a big impact on our opportunity as we drive the type 2 for that -- getting that indication.

What's your outlook for international growth as you look out the next couple of years, you do have more competition strictly from Omnipod 5 now outside of the U.S. What is Tandem's response? And what sort of the -- your growth outlook internationally?

Sure. Well, we still see the markets outside the U.S., the 25 countries we operate in as being a significant growth opportunity for us. by comparison to the U.S., the type 1 population there is about 3 million people versus only 1.9 million people here. And it's even far less penetrated. So the penetration rates are below 20%. It gives us a great opportunity to continue to drive that business and our focus in the next 12 to 18 months will really be on driving the penetration in the markets that we're in. So we have enhanced our leadership outside the United States. And so we're taking a different look of the way we partner with our distributors and how we help them drive that clinical value or that clinical conversation within the market. So it's something that we look forward to as a growth opportunity for Tandem down the road.

I'd also add, Steve -- I was just going to add that we also are aggressively trying to get this new technology that we now have in the U.S. -- in these OUS countries. And I mean specifically in 2024, we intend to roll out Tandem Source to U.S. on a country-by-country basis. We intend to introduce the mobile app that has the ability to bolus from a cell phone into the OUS markets. And then we also plan to have the Libre 3 implementation done in the OUS markets as well this year. So obviously, we have to do regulatory work to get Mobi into that market. But in all cases, we're moving as quickly as possible to get these technologies over there. And I think that's the real -- that's the response to the competitive situation that we're facing there. We still think we're going to do well now but with these new products on the horizon, we look forward to strong growth.

I just wanted to shift to gross margin really quickly. Certainly, that's been an area of focus for investors as well. Can we -- when can we start seeing the benefits of Mobi? I mean if you can remind us in terms of from a cost-of-goods perspective, the difference between Mobi and t:slim? And when could that really start flowing through in the P&L?

Yes. So starting with the cost difference from pump-to-pump, the Mobi has a 10% to 15% lower manufacturing cost than the X2 does at scale. And then by comparison, the cartridge for Mobi is about a 20% lower manufacturing cost than the t:slim X2 cartridge. Right now as we're in the midst of the early phases of the launch, we are not yet building at a level of volumes or scale where we can achieve all of those benefits in gross margin. But as we exit 2024, we expect that Mobi will start making a contribution to gross margin. And you can look at it in the early years, it will be mostly coming from the pump as we sell more of those pumps, you'll see the gross margin benefit. And then as the installed base of customers using Mobi growth over time, the cartridge will also yield incremental benefits. So across the years beginning in 2025, we'll start to see that improvement. And as a reminder, we have a long-term gross margin target of 65% out there. And so Mobi should get us more than halfway to that target in the coming years. But really, it's more of a 2025 inflection for the business.

Got it. Great. As we wrap up here, I wanted just to -- is there anything else I want to -- John, as you look out over the next a couple of years that we haven't hit on it, you're particularly excited about? I mean, you've got a lot of different products in the bag now. What are the things that you're most excited about here as we look out over the next 12 to 18 months?

Yes. I mean there's a lot going on right now that all are very exciting for the business, and I think should be for the market as well. As we bring this new wave of technology, we have armed our sales force. They're very excited. The physicians we're talking with they're also very excited. We're also going to make progress -- meaningful progress this year with the pharmacy channel, something that we think can potentially help with additional reimbursement and also just -- and reduce the amount of the burden, the financial burden that people have to encounter as they go on to pump therapy. We've got the margin improvements that come along with Mobi. And then we also made some pretty big changes to our commercial leadership team here in the U.S. and OUS. And so I just think when you look at all of these things together, now it does put the company in a completely different trajectory of growth, and we expect this to be a meaningful -- there's a point in time now that this -- we're going to see change as we go forward over the next couple of years based on what we've accomplished in 2023 and early part of '24. So the whole organization is very prompt. It's really excited about all the things that are happening, and we feel that the user community is as well as the physicians that help them. So looking forward to a great '24 and beyond.

Great way to end it. Thank you, John. Thanks, Leigh, for being with us today. Thanks everyone, and hope you have a great rest of the day. Thanks so much.

Thank you, Steve.