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

All right. Well, good morning, everyone. Thank you for joining us for the last day of the UBS Healthcare Conference. I'm Danielle Antalffy. I am the U.S. MedTech analyst here at UBS. And lucky to have with us here the Tandem team. We've got an all-girl squad on stage, just want to point that out. But we have CFO, Leigh Vosseller, CAO, Susan Morrison, and Investor Relations, Katie Nicoletti. So thank you, ladies for joining us. I've known Tandem for a very long time and always love spending time with you guys. So maybe I'll toss it to Katie first for disclosures.

Absolutely. Thank you. So just a reminder, 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, speak only as of today's date and these statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause 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 on the safe harbor slide at our Tandem Investor Center.

All right. Thanks, Katie. So why don't we kick it off. You guys just reported earnings last week, I actually thought it was a good quarter. So maybe talk about state of affairs in tandem today and where we are.

Great. we actually thought it was a really good quarter as well. There were a number of things that we're very proud of that we accomplished. In fact, we set out a large number of goals this year, and it's all coming together. But it started with, first of all, it was a record sales quarter. And so not just worldwide, but U.S. was a record in our OUS markets, it was a record for us. Secondly, we had said that in the back half of this year, we would start to see new patient growth, and we did see that in a big way. New patients in the third quarter grew more than 20% over last year. And it's interesting because Q3 in the U.S. in particular, is typically a seasonal quarter where you see shipments flat to down, and we grew through that seasonality with Mobi continuing to grow quarter-over-quarter, like we've seen in the first half of the year. So very exciting for us there. From a margin perspective, we turned the corner on profitability. So we were 2% of sales, positive adjusted EBITDA. So many things I keep lining up here. On cash basis, we had $22 million of free cash flow positive, which is the first time we've generated cash in a few quarters. So we were happy to demonstrate that again. And then last of all, I think one very important milestone was the achievement of getting our first pharmacy agreement. So look forward to talking about all those in more detail with you.

Yes, that's great. And it does feel like I think -- I don't know if you would characterize it this way, but it does feel like maybe we've turned a corner now after about 4 quarters of like pretty heavy competitive headwind. So maybe talk a little bit about what you're seeing from a competitive perspective? I know you mentioned on the call more competitive switches from the patch pump. So maybe talk a little bit more about that.

Sure. What we're very excited about is that we're seeing the growth from MDI, right? That's where the focus is. This is such a large and underpenetrated market. It's a tremendous opportunity. It's also just a very competitive environment. But we've got the new products to compete. And I think that's what's so exciting about this year between Mobi and our Control-IQ technology, we're very much out there and bringing more people over because of the compelling offerings that we have. And so it is competitive, but it's an environment, again, that we're very comfortable in.

Yes. And I think the new patient growth number sort of signals where we are there. Yes. So maybe let's talk a little bit about -- well, actually, before we go into that 2025, I do have to address that because I feel like there was some confusion coming off the call sort of what you guys were trying to message. So maybe, Leigh, you can clarify that for folks.

Sure. Happy to talk about it. And so first of all, everyone is always hungry for more information for what next year is going to look like. And we still have a lot to demonstrate for this year going into the biggest seasonal quarter in the U.S. So what we wanted to do is to make sure we have so many new players that are looking at us and talking about us that people understood what our typical philosophy is and how we approach guidance. And so for example, when we started this year, we set expectations at 10% growth year-over-year. And that contemplated really the basis was our recurring and predictable revenue streams. And we had 4 product launches this year. So what we wanted to do was, as we had more information on those as we develop sustainable trends from the data to share how to think about building those into the guidance. And so here we are now at the end of the third quarter, and we set expectations to have 17% to 18% growth year-over-year. So as we look to 2025, we have so many more new products to launch and so many ways to think about the year that we want to calibrate folks to think about how to start off again, we'll be thinking very much so about our predictable revenue streams, and starting with that, supply sales will grow just with the annualization of people we've added this year. Secondly, renewal, another great year for renewal growth opportunity. In 2024, there were 70,000 new warranty expirations coming to market, which was substantial growth over '23. As we look into '25 in the U.S., there will be more than 80,000 people with warranties expiring. So we still have a huge base from this year that we can continue to work on renewing and then we'll have another new base that's even larger than before. And then we think about what the upside drivers are, and that would come from things like the Type 2 indication, the launch of FreeStyle Libre 3 pharmacy access. And so we want to -- as we have the information with more certainty, we want to give the certainty on timing and how to think about adding those in before folks start putting them into expectations. And then last of all, we always take a risk-based approach. And so we think about the dynamics in the market, particularly it is a noisy market. It's a competitive market, and we want to factor in caution around what that might look like in the future. So we tend to take that more risk-based view as we set initial expectations, and we just want to calibrate everyone.

Yes. No, that's really helpful. And so just to be clear, you were not implying 10% guidance for next year. We don't know what guidance is for next year.

That is correct. There has been no guidance set. It's not affirming, denying anything. It's just how to think about the building.

Right. And just on that point, so what -- do you assume then if you're talking about really just focusing on the predictable revenue stream, do you always assume no new patient adds? Or do you assume no new patient growth? Or how do you think about new patients there?

Yes. We don't -- this year, we particularly said, new patients will be flat to slightly down. That was in advance of Mobi and what traction we might see with it. We're going to have more information about just how Mobi's scaling as we enter 2025. So it's not necessarily saying we won't factor in growth there. But we'll stay tuned and we'll talk about the trends we've seen throughout this year and how that should influence next year.

Okay. But just to be clear, so when you're contemplating guidance, you do assume something for new patients. It's not just the recurring revenue.

It will be the knowns, right? So what we feel comfortable based on the recent trends.

Okay. Got it. So curious too about you are growing new patients off an easier comp in Q3. But just the momentum you have seen how it's been building as we've moved through 2024. And curious about even if you can give this color, how it moved through Q3, month-to-month?

Absolutely. Well, Mobi built from Q1 to Q2 and then grew again Q2 to Q3. And so the progress we've seen throughout the year has been tremendous. We're not giving expectations for how this looks on the go forward, but we're really excited with what we're seeing, and we expect that Mobi is going to continue to scale. If you think about the timing, first, we started doing our direct shipments in February. And we were integrated with the G6 system at the time. Then broad availability of G7 integration really became available in the June time frame. But it's an interesting sale because when you have it in your hand and you have a chance to experience it and understand the wearability and the options there, and you couple that with the power of Control-IQ, that's when you really start to gain momentum. And that's why it's been great because we see more new prescribers in Q3 compared to Q2, who had never prescribed a Tandem pump before. And so I think this is where you start to see that build and that excitement behind it. And then you add on integration with FreeStyle Libre 3 that's to come, our Android operations. And so if you look at Mobi, it has a lot of longevity to it, and we're still in the early innings.

Okay. And I actually wanted to ask about that. I mean where are you with Mobi in the launch? I don't know if it's -- think about it as a percent of new patients, excuse me, going on Mobi versus t:slim or what you can say there [indiscernible].

It's been great to see demand for both pumps and that's always what we expected. We rely very heavily on market research. And what we hear is it's a highly segmented market, the way that people want to wear their pump, the way that they operate their pump, it's a very personal decision. And so what we see is that we are able to help the most people by offering both platforms, and we see strength from both.

Okay. And what about patients coming from competitive switches versus MDI? And how that shift -- I mean, it shifted quite a bit from a few years ago and over the last few years and shifting again in Q3.

It's been in alignment with our expectations. We always expected that multiple daily injection would start to become the larger piece of our customer, our new customer base, and that's what we're seeing. And so I think that's actually very important for our longer-term objectives. And it goes back to how do we continue to expand pump adoption in the large and underpenetrated market for people using multiple daily injection today.

And can we talk about the market a little bit here because I've always been in the camp that this market is actually growing faster than people think. Now we do have -- we have a big competitor reporting next week. But we have a few data points now. What do you guys think is happening in the market?

Sure. I mean from our results, we're really excited to see growth in MDI. And as we look at the overall market, underpenetrated, lots of opportunity. And as other players see growth, we see that great for market adoption. Innovation is going to drive adoption. And I agree with you, I think there's great opportunity.

And where do you think we are today from a penetration perspective? And you guys have put out there, and I think one of your competitors as well, 65% penetration in type 1, is sort of the goal. Why not further? I mean, why wouldn't pump penetration reach. I know 100% is not reasonable, but 85%, 90%.

I think we put that target out there as a milestone, which we absolutely believe is achievable over time. And we don't necessarily think that that's a ceiling. But I think as we continue to bring technology, innovation, continue to try and focus on lowering the out of cost for our patients and our customers, I think we're going to continue to see additional adoption.

Okay. Got it. And type 2, if we could talk about that for a little bit and how to think about that. So I appreciate when you do give guidance for '25, it sounds like you probably would leave that as a source of upside. But just conceptually, how do you guys look at the type 2 market? And why is Mobi or your t:slim technology, the right technology to really go after that market?

Absolutely. So the more people -- I should say we've seen increasing interest in our market research from people who are insulin-dependent living with type 2 today wanting to adopt technology. And I think that's where it goes back to we've got multiple platforms that allows them options and how they want to wear it. Control-IQ and the outcomes that people get is incredible. And we see that with the 30,000 people living with Type 2 who use Control-IQ today. And so it's a very powerful offering. So we'll submit by the end of this year that indication. And so we're excited. The agency recently reviewed that algorithm, and so it's very familiar to them. And as we think about the market and market opportunity, it's even more people in the United States living with Type 2, here insulin-dependent compared to type 1, where penetration sits. And so it's an incredible opportunity. And the fact that, that coupled with the interest and the increasing interest levels that we see, I think it really gives us another long-term growth driver for the company.

Yes. Where do you think penetration in type 2 can go? I don't know if you've given that number or if you want to give it today.

A couple of years ago, I would have said it would go from less than 5% to 15% based on our more market research more recently. I'd say that 25% is very realistic and that can continue to build as we're able to make these systems easier and easier to use, it will drive greater adoption.

Yes. If I could -- every diabetes survey I've ever done for the last 5 years, actually, it's like 1/3 of patients. And this is between primary care and endocrinologists. So I do -- I agree with that assessment. Speaking of type 2, though too, if we can say on that talk track for a second, Primary care is a big -- that's where most of these type 2 patients are and actually a lot of type 1 patients are. So can you guys maybe talk about how your commercial strategy is different between endocrinology and primary care because they do have different needs from a service and support perspective.

Sure. We're very focused on the high prescribers of insulin, and these are people who are helping the customers that can best benefit from our technology. So we're working through that go-to-market strategy. Our commercial team has been very focused on it in anticipation of this clearance. It's nothing we provided too much detail on it yet, but I agree with you. The way you approach this market, the training provided, we have to think about it a little bit differently, and we're taking a very strategic and data-driven approach.

Is it going to be a situation where you build a primary care sales force? Or is that still not decided?

We're looking at optimization of our sales force, what should the territories look like? But again, we're very focused on the high prescribers of insulin.

Got it. Okay. Let's talk about the pharmacy access. So I'm not sure what you can say about the contract you signed. But I think one of the other questions is as we think about this shift to the pharmacy, what it looks like from a top line and bottom line perspective because the finances are different and the way you recognize revenue will be different. So maybe help us with that?

Yes, absolutely. Obviously, I can't share the details of our specific contract, but maybe I'll start with reminding what our goals were for pharmacy. So we were focused on reducing the patient out-of-pocket improving speed to therapy for patients as well as looking for opportunities to optimize our margin profile just looking at what we see reimbursement is for other folks in the space. And so we have been very strategic about what contracts we're willing to accept and we're using Mobi as almost a pilot, if you will, for stepping into pharmacy. And our long-term goal is to put Sigi straight into pharmacy. So this year, we made it. We set out a goal. We said we would have a contract by the end of the year. And so we get another box we can check that we've accomplished that objective. And now our focus is really on the pull-through from that. And so what does that look like in 2025? What I can share is this, it's -- there's a variety of structures this could look like in the pharmacy channel. So it's not a foregone conclusion that it will be a subscription model. And this contract in particular won't be disruptive to our current business model. And back to the being selective, we also had said, we only will accept contracts that are at least as good as or better than our current DME contracts. And all I can say is this one met the criteria. So we're very focused on driving volume through this in 2025. The thing that pharmacy really offers to us is we can improve the access. We already have broad coverage with DME, but the out-of-pocket, the affordability is a big reason why people don't move forward with pump therapy at all. In fact, why it could be a little bit of a ceiling on where penetration can go, as Katie mentioned. And so with the co-pay assistance and buy-down programs they have in the pharmacy channel, that can allow us to help the patients with that out-of-pocket piece of it and hopefully can then not only drive better margins, but also drive more volume.

Got it. Okay. And on the margin side of things, outside of pharmacy, just in general. You guys had provided a long-term margin target there. I think it was 25% for adjusted EBITDA margin. Obviously, we're far from that right now. So maybe talk about the path to get back to there and how we should think about ultimately when you can get there?

Yes, absolutely. So improving that margin target really starts with gross margin. And a big piece of that would be new product launches. And so Mobi is the first and foremost the most important in terms of driving that expansion. And the good news is it's here and now. We've already launched it. By the time we exit this year, we'll start to see the benefit from the Mobi pump. And the benefit, the way we've quantified it is when you compare it to today, ultimately, we'll have a 10% to 15% lower manufacturing cost. Today, we're not building out enough volumes to absorb all of the overhead. So as we get into '25 and continue to build up the volumes, you'll start to see the accretion. The cartridge on the other hand, also has a lower manufacturing cost, but that benefit likely won't come through until end of '25 or moving into '26. And that's mostly just volume because you think about when you're blending in a base in the U.S. versus the 480,000 people worldwide, it's going to take time before it's material enough to make a difference. And so moving the needle on gross margin is important. We have our extended wear infusion set technology. We have the opportunity to improve margins with pharmacy access. So all of those pieces are step one. then to get to the bottom line, the next big piece is how we run our business. And so it's -- the area we're focused on the most is how we serve our customer base. So today, there are -- there's hundreds of people in our organization just to support customers when they place their initial order when they call in for a reorder for supplies when they have a technical question or just an educational question. So we're looking for ways to optimize that patient engagement in a way that will keep really high satisfaction scores but can reduce the need for the number of people to support the base as it grows. And so that's an area where we're focusing on driving leverage to help fund investments but also to show that margin expansion over time.

Got you. Okay. All right. Let's talk a little bit about the renewal opportunity. So you already did -- you front-ran me on my question, you already gave the number. So it's 80,000 this year after 70,000 -- or sorry, in 2025, 80,000, 70,000 this year. What are you guys seeing from a renewal perspective? Are you hitting that, I think, industry standard is kind of 70%, 75% of renewal capture? Maybe talk about the capture rate and where that can go.

Sure. So we had set a goal, and we are consistently achieving the goal of a 70% capture rate. It doesn't mean it's the ceiling, but what we consistently see is that we get to 70% of within about 18 months of when warranties expire. And I think that's important when you think about the 70,000 in market this year. Over the next 18 months, the biggest quarter is the fourth, you'll still see benefit coming from just those people whose warranties are expiring now. And so that 80,000 next year will also give us benefit for the year after. So it's been a growing base that has been a very good growth driver and become very predictable for us. And that is just framing up the U.S. And so that's where we usually point to. That's the biggest -- has been the biggest opportunity. We are now expecting to see meaningful contribution from renewals outside the U.S. So we originally launched in 2018. It was very small volumes in that first year or 2. And also, there was time differences for when pumps get shipped there versus when they go on patients. So we're starting to see some benefit this year, but 2025 will become more meaningful. I would not anticipate we'll be getting to that same 70% rate within 18 months right off the bat. There's a learning curve. It took us a few years to build up that capability. We're working with our distributor partners. We're teaching them our best practices. They have to understand how that dynamics work in their own markets. But we're very confident that we will have the same stickiness that we have with customers in the U. S.

Okay. And actually, let's go to international because that is a growth driver of the business as well. It's a much more fragmented market than the U.S. Maybe talk about the dynamics you're seeing internationally from both patient growth and MDI switches and also the competitive dynamics?

Yes. So it -- I mean, obviously, it varies market to market. But what I can say overall is our growth has been all coming from new patients. And so very much like the U.S., it's a mix of new pumpers and competitive switchers, but the market is so much more underpenetrated there. So there are a few markets where the penetration rate is more like the U.S., but some vastly underpenetrated in the 10% to 15% range. So that's the real opportunity that we're focused on driving is getting that depth in the markets that we exist in today. We've added new leadership outside the U.S. We're driving our distributors in different ways than we have been in the past. And so we're just very focused on continuing to grow there. But you can see this year, that's another area where we've outperformed consistently 3 quarters in a row. And it is a noisy competitive market there as well, but we're continuing to hold our own. And we feel confident just like here, there's an opportunity for all of us to grow.

Does something need to change internationally from a regulatory or coverage perspective to eventually get to the levels of penetration in the U.S. I know, again, it varies market to market. But if you're kind of like how is it set up internationally, how well covered are these.

Yes, I would say coverage is pretty broad. There where the -- some of the unique traits are coming when you have tenders that you have to apply for. And in some of the markets, it's really about the market access, building up the evidence to show the cost benefit of paying for these products. And so there is coverage in every market we're in. We're working to enhance that coverage. And so in the U.K., for example, last year, not just us, but they approved extended reimbursement for a larger population than they had in the past. And in the last quarter, we had a few really nice tender wins, which we look forward to talking about the growth that can provide in 2025. And so that's where we're focusing our efforts. It's really demonstrating the cost benefit there.

Okay. And as far as -- it's more about going deep and unlocking existing markets versus entering new markets, at least in the near term.

That's correct.

Okay. Okay. Got it. Maybe let's shift gears a little bit to the pipeline. And you do have FreeStyle Libre 3, integration coming and a lot of people are trying to figure out how that could accelerate growth or new patient adds because they do have an existing installed base in type 1 patients and in type 2. So maybe talk about how we should be thinking about that. I think their installed base is somewhere around $300,000 for type 1, so....

Which is an exciting and incredible opportunity because the majority of those people are not using an insulin pump today. And so that's where we've got a huge marketing opportunity to be able to focus our efforts to bringing the benefits of Control-IQ technology to those individuals. So we are now a global organization. So we're thinking about products and how do we bring them to the global markets that we serve more quickly. And so for FreeStyle Libre 3, it's a great example that we're planning to bring that both in the U.S. and outside the United States next year. followed by Mobi. And so we're really looking at this as a broad opportunity, and we want to provide optionality for people who choose that sensor and which pump platform that we can offer them.

Okay. So I mean it feels like low-hanging fruit though, that $300,000.

Is an exciting catalyst opportunity.

Okay. I tried. No, I'm kidding. Okay. And then beyond that, so I know you guys aren't really giving time lines for Sigi. But maybe walk us through like the cadence of new products. You started to do this already with Libre 3 integration, Android, et cetera. But for new pump platforms. So I think after Mobi, we're going to have Tobi. Are we still calling it Tobi? Tubeless Mobi?

Which is -- it started as an internal nickname and a development name because it's the same Mobi pump. And so what we refer to kindly is Tobi is really just a different or an alternative to the cartridge portion. And so that the cartridge can be used without an infusion set for an option and wearability if someone chooses. So what we see is that this actually drives preference for people who choose the Mobi pump, who day to day, if they -- within every 3-day period or every few day period, they want to wear it in a different fashion that they have that optionality. So we see that as a very exciting opportunity for the company. We did pull back on giving time lines at the beginning of this year, to your point, but it's a large internal focus for us, that as well as Sigi.

Do you think you need a patch pump to compete here?

Not to compete in the broad market within that segment of the market, when someone chooses to wear their device in a certain way, it's a personal decision. So for people who don't want to use an infusion set in order for us to have the broadest opportunity to be able to address the needs of the most people living with diabetes. We do see it as an important segment that we don't serve today. but that these products allow us to be competitive in.

Yes, that's fair. And the competitive environment is going to continue to evolve. So one of your big competitors did open up their integration to Libre. And just curious about how you guys think about the competitive market dynamics and not today, but in the future, as Medtronic presumably launches a Libre integration and has potentially a more competitive footprint, a bigger competitive footprint.

Well, for that one specifically, when they have a Libre integration, then it comes down to pump versus pump and algorithm versus algorithm. And those are the areas where Tandem stands out. So we feel very comfortable with our competitive position and our ability to compete and what differentiates us today, even from a pump platform perspective as well as an algorithm perspective.

Okay. Okay. I'm running out of questions. We still have 7.5 minutes left. Well, you talk too fast. Maybe we'll say -- like let's just talk high level, I mean, what -- as you do look ahead to 2025, like what are you most excited about, but conversely, because I feel like we always talk about what's going well. I mean, where do you see areas of potential improvement for Tandem? And as CFO, where are you focused on that.

Yes, it's a good question. It kind of goes back to how I started, there are so many exciting things for us to grow. Our pipeline is the richest, I would say, in the industry. We have so much to offer and especially thinking about how are we meeting the needs of customers. So people whose needs have not been met before. And so that's where our focus is. Where I'm focused is our #1 priority is driving top line growth, and we want to invest appropriately to get there, but we are very focused as well. And I would say, secondarily, but almost the same on profitability. It's important for us to demonstrate that we can be a profitable business, we can be self-sustaining. And so we are balancing those 2 objectives and look forward to demonstrating margin expansion in the future. And like I said, products are a big piece of it, but there are other ways we can drive cost efficiencies with the organization, and that's where our focus and attention is right now.

Okay. Got it. Anything we missed? I don't think so.

I hope you heard our excitement.

I did. I did.

I think that's the most important thing.

And I think we can just wrap early.

Right. Sounds good. Thanks for having us.

Thanks everyone.

Yes, thank you.