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

Well, good morning, everybody. Thank you so much for joining us. My name is Matt O'Brien. I cover med tech here at Piper Sandler. Welcome to the 36th Annual Piper Sandler Healthcare Conference. Really excited to kick things off with the management team here at Tandem. We've got John, who's the President and CEO; and then Katie, who's the VP of Investor Relations up here with us.

Maybe, John, just for starters, just talk a little bit like kind of state of Tandem as we sit here today.

First thing I want to say is just I want to encourage everybody to look at our website for the safe harbor statement. Just get that out of the way. I think that we had a solid quarter in the third quarter. It was our highest revenue quarter ever. We had substantial growth from the previous year. In fact, we also -- it was the first year that we saw meaningful year-over-year growth in new patient starts. And new patient starts are a combination of MDI conversions and competitive conversions. In this particular quarter, we actually saw more -- I mean, greater than 50% of our new starts were MDI conversions, people choosing pump therapy from pens and needles, which is really something that's important to us. It's something that we anticipated Mobi would enable us to get to that point, and it has. And so if you look at Mobi's performance over the last 3 quarters, we've seen consecutive growth in the number of Mobi shipments, certainly driving the demand. And I think that when you look at the year, I mean, we basically have -- we've gotten back to the point where we beat and raised every quarter so far. And again, we're very happy with the performance. There are some structural things that we've dealt with. I think Mobi in particular, the team has, first of all, done an excellent job in executing. We've introduced multiple new products in the last couple of quarters. And these quarters are now having a substantial positive effect on our top line. But the good news about Mobi is Mobi also drives substantial improvement in gross margin, and we'll talk about that in a few minutes. But we -- now that, that's in place, we expect to see gradual improvement in gross margin as the volume of Mobi increases and the percentage of the product mix becomes more Mobi oriented. We've also got the -- a meaningful contract with the pharmacy channel. And the pharmacy channel also helps us with the top line growth as we expect to see better ASP performance there. It also improves access and most importantly, it reduces out of pocket for the people who are actually choosing pump therapy, which is incredibly important for us. And so those are too structural. I mean the gross margin pharmacy contract really do help us structurally. And then I think the final thing I'll say is that we just also completed our type 2 study, and we'll be presenting the results here in the next couple of months. Results from what I've seen look very good. And I think that also enables us to expand the market. And we do think that type 2 is going to have meaningful opportunity for us in the years to come.

Got it. Any sense for timing on the type 2 side of things?

Yes. We are going to submit the data to the FDA this quarter, and we would expect a relatively quick review. One of our competitors got the review completed in just over 2 months. No reason why we wouldn't expect to see the same thing. The FDA has seen the data from Control-IQ 4 times now. And so they're very intimately involved in the planning of this study. And as I said, we are pleased with the results.

Got it. Okay. And then I guess for starters on the financial side of things, why didn't you raise the guide by more than the beat that you saw in Q3, if there is such good momentum with Mobi and everything else? I think that was one sticking point for investors coming out of the...

Actually, we did. And if you consider the fact that in the -- we had $5 million of OUS orders in the fourth quarter that we pulled into the third quarter, and we still raised by the beat. And so that's essentially raising.

Got it. Okay. That makes sense. And then maybe, Katie, a question for you. I was trying to understand exactly what Leigh was saying, with the '25 outlook for the business is, should we basically just start with kind of 10% top line growth for next year? And then what would be some of the potential upside drivers to that 10% number?

Absolutely. So yes, during the Q3 call, we wanted to make sure that we set out the way to look at our business. Our business model has evolved. We have over 450,000 pumps out worldwide in the market. And so with that comes predictable revenue streams related to renewals and supplies. And so those really are the building blocks of our business. So we wanted to make sure we kind of level set that. There's healthy growth in both of those areas. And then we plan to layer on. So we have tremendous opportunities going into 2025 and beyond. And as we get more clarity on certainty of timing, magnitude, we'll continue to have those conversations and give more color. And we certainly want to see our Q4 results and then share more.

Okay. Got it. But -- so potential upside areas could be type 2, could be Abbott integration, et cetera. Is that right?

Yes, there's a number of things happening next year that will drive top line growth. But it's just one of those things that it's not predictable exactly how fast it's going to occur. So I think we've typically just taken more of a conservative approach when we've done that. I mean, Leigh has been very clear about the approach it takes. There's reoccurring revenue that we can count on and then we build upon that as these other things happen.

Okay. So John, when you say that you're taking some pump patients, are those primarily folks that used to use Tandem and then came back to you after trying O5 for a little while? Or is there any way to kind of parse out that? I don't know if that data is available for you guys.

I mean it's hard to say specifically. I'll just say that we presented data at the ADA last year -- this year, excuse me, in the summertime. And it was data that we accumulated over several months in the end of 2023. And that data was presented by Barba Davis Center physicians. It was a combination of people who had -- they all used Mobi for about a quarter. It was people who are MDI conversions, people who were using patch, Tandem and Medtronic. And the response was extremely positive, and it continues to be. You can just look out on the blogs today, but we get very, very positive and high scores for Mobi today. But when you looked at the patch users, what we found is that the people were coming to Tandem because we've eliminated the size issue. Mobi is essentially the same size as the patch, but the algorithm, it just performs better. And so we're seeing better control, and that's what people are talking about. So we think that's an important aspect. Again, size does matter to people. So now we've addressed that. And certainly, the algorithm performs very well.

Okay. And to that point with Mobi, the folks that you're seeing because the algo works so well, is it adult patients? Is it kids? Which of the 2 are you seeing switch back -- switch over to Mobi from maybe using O5? And is there kind of a finite number of patients you can really attack in terms of patch pump patients? Or no, it's broader than we think?

No I think that I don't -- first of all, what we're seeing with Mobi in general is we're seeing it sort of -- it does favor younger people using it. It's not -- I think that's just early indications which suggest more people that are younger are using the product. It's active. It makes sense to me that that's the case. I think that when it comes to competitive conversions, I think that as we continue to evolve the product, as we continue to bring newer products to market, we're going to see sort of growth in competitive conversions from areas that we haven't seen historically. That's the intent. And I think that when we come out with tubeless Mobi, which is not far away, I think it become more competitive with the patch device. And then we have our own, and I think it's a different game.

Okay. I wanted to ask some questions on the new products. I'm not sure what you're willing to share, which I completely understand. But just back to one of the companies you used to disrupt a lot, that was Medtronic. Right? When t:slim came out, you guys started just taking a ton of share away from those guys. With Mobi, is it an area where you can start to -- I know they don't have as big an installed base as they used to, but is that an area where you can start to see meaningful new patient additions back from Medtronic again like you saw maybe a couple of years ago?

I mean I would think so. When you see the size of Mobi, again, it's small, when people wear it, they actually tell you they forget they have it on. And that's like the ultimate complement really because it's the burden of having a device on your body 24/7. If you forget you have it on, that's a real positive. And that's what people are saying. And so I think that when you compare the 2 of them and you just look at the 2 devices sitting in front of you, it would surprise me that someone would choose something that's that big. And then they would the smaller patch like device.

Okay. Got it. So you think between Insulet and Medtronic, there's opportunities to continue to take some share away from those guys maybe next year or so. Do you think there's that much momentum in Mobi?

I think that it's going to gradually happen. I think about Mobi that's different than former new product introductions. In the past, we've introduced new software. And when we've done that, we've seen 40,000 or 50,000 people convert their pumps to the new software in a relatively short period of time in a matter of a quarter or 2. So with Mobi, it's a new platform. And so there's a process you've got to get to. You've got to basically let the physician see, feel it, touch it. It's a very tactical sell. And that's something that just takes time. And so we have over 10,000 people who prescribe our products today. And we just haven't gotten to them all yet. So there's a process for us to continue to work. And the other thing about Mobi as well is today, it uses G7 and it's iOS only. So there's limited opportunity because of that. But we're adding FreeStyle Libre 3. We're adding Android. We're bringing to get OUS. So there's a number of things that are going to happen to Mobi over time that increase the opportunity. But I think it's important to understand it's not going to happen overnight. It takes time, and it will gradually grow as we're in front of more...

Okay. Got it. And then, Katie, I'm not good at math. That's well known by everybody in the room and listening to the webcast. But there was something quantitative in the call I didn't fully understand. You said that Mobi is going better than you expected and -- but that weighed on gross margins in the quarter. I thought Mobi, as it scales, is going to start to help the gross margin line. So we're 3 quarters in, I just -- why didn't we see more evidence of that improvement in Q3? And is there going to be kind of an aha quarter. I don't know if it's Q2 of next year, which is seasonally stronger or something like that. Why was that the case here in Q3?

Sure. I think your math is sound. I think your Mobi math facts are sound, but I'll add a little bit more color. You are correct, Mobi increased from Q1 to Q2 to Q3. And you're also accurate that when you look at t:slim compared to Mobi, Mobi is going to have a 10% to 15% manufacturing cost improvement on the actual pump. And then when we increase our Mobi mix, we're also going to get margin accretion as we increase our supply sales because we have an over 20% improvement in cost on the supplies. That will take a little bit of time. So Mobi is a very important part of our profitability plan. But this quarter and this year, we really have been ramping the product. So we were anticipating that we were going to have a bit of a headwind until we exit Q4. So we think that we're on a good track. We had record Q3 revenue. We've had profitability for profitable EBITDA in Q3, positive cash flow, and we expect to continue that trend.

Got it. And to that point, you've talked historically about gross margins eventually getting to 60% plus. Can we see a meaningful step-up in the gross margin line next year as Mobi continues to ramp?

So we feel good about our prospects, and we're definitely committed to that 65%. And we'll provide more color as we finish out Q4 and give further guidance for '25.

Got it. Okay.

I would say one of the things that's going to happen is the -- as Katie said, when we get into '25, we're going to see the benefits of the pump. But it's going to take us probably another year to see the benefits of the cartridge to really get the volume up. So more like 2026 to start to see -- we're going to see gradual improvement over time, but I think that the meaningful impact is going to be on the cartridges, is we're beyond the overhead absorption issues on the cartridge.

Okay. If we start getting new products, John, from tubeless and then Sigi, hopefully, '26, '27, something in that time frame, are we going to run into another lull in terms of the gross margins and profitability?

I don't think it's going to be as meaningful as just the pump by itself since the pump is so much more -- it's just a much more expensive element than the cartridge. But I think that any time you introduce a new device, there is a period of time where you've got to take care of the overhead. You just got to increase utilization to address the overhead.

Got it. Okay. Appreciate that. So you talked about type 2 timing. Hopefully, sometime Q1, Q2 of next year, you've got the approval. Are you ready to go as soon as you get that approval and start to market to type 2 patients?

Yes. I mean right now, we're -- the team is working on the sort of the commercial strategy, which is the go-to-market plan, it's the clinical plan, it's the market access plan. All these things are elements of that, and we do intend to move aggressively once we've got the product in the market.

All right. So there's a lot of patients out there that do not use pumps today. They're type 2s. Why is that? And then how can Mobi compete there? I'm assuming Mobi is the one that's going to get the approval first.

It's both will. It's all the products will. It's the algorithm that's being approved.

Okay. Got it. So why is that going to be the one that really wins with type 2, especially given how easy it is just to start on 05, not to keep bringing up Insulet. But it's just so easy to start with that versus a little bit more challenging with Mobi.

Well, I would say that the type 2 community has -- there's a negative social stigma associated with that, and people want to be discrete. And so Mobi certainly is a much more discrete pump. You don't have to take it out at all. You can interact with your cell phone, and that's how you control it. And that's -- so that's a big improvement in discretion, I think. So certainly, that's going to be a big part of it. I think that the -- we have a number of people using our products today that have type 2. We have roughly 30,000 people who have type 2 who are using t:slim off-label. And we see roughly 2% to 5% quarterly come to Tandem from MDI who are type 2 users. I think that the thing is that we haven't -- we aren't able to market. And that's the thing that's important. We're not able to market to the patients, and that's something that's important and also to the physicians. And I think that the clinical data that we're generating here is going to be a very important element of the strategy, to help the physicians understand the benefits because the benefits are substantial. The other thing I'll say is that the -- as we get more and more physicians comfortable with the product, we would definitely expect to see greater uptake. We've done quite a bit of market research in the last couple of years. And more recently, I think as people are becoming more familiar with the benefits of AID therapy, there's been more -- I would say our research suggests that there is going to be higher penetration rates into the type 2 community than we originally anticipated. In the past, I think we would have said -- today, it's about -- there's about 2.3 million people in the U.S. that have insulin-intensive type 2, and it's about 5% penetrated. So roughly 100,000 or so are using pump therapy. We would have said maybe in 3 to 4 years, 3 to 5 years, we get to maybe 5% -- about 15%, but I think now we think we can get in excess of 25% just based on the research that we've been doing. So the market appears to be responding to AID systems, the benefit, the fact that these devices are much easier to use now, they're not as cumbersome. And so I think that it does represent a big opportunity for all the pump players now that we're all in the process of getting approval for the algorithms.

Got it. What data are you looking at? Or what kind of feedback are you getting that gets you to that 25% number? Because that's a number that always gets thrown around, but what kind of concrete data would you...

We actually insist surveys. We're doing surveys with physicians and people with diabetes.

Okay. And the benefits are known to be as strong with the type 2 patients.

Yes. I mean it's -- in fact, I think the benefits are probably even better when we look at the time and range improvements.

Okay. What about utilization? I know you only have about 30,000 patients versus 420,000 type 1s. But do type 2 patients stay on therapy as long? Do they use the pump as often? Any kind of metrics around that you can think about?

Yes. I mean I think what we see is we see -- I mean, people that have insulin-intensive type 2 is essentially the same condition as with type 1, where you need bolus insulin, you need basal insulin. And so we find that people who are using the system are very compliant, and they use it every day. Yes. So it's -- once they're on it, they see the benefits, they appreciate that, and they continue to use it. And I think that the group of people that we -- they're concerned about their health. They want to improve. They understand the longer-term comorbidities of type 2. And so they're on the therapy to prevent that from happening. And that's one of the -- that's when we analyze the patient populations that are potential candidates for type 2, that's one of the things that's important. They care about their health, and they're willing to take the steps to try to make improvements.

Got it. Okay. So I'm just going to use 2 million for easy math because as I said before, I'm not good at math. 2 million type 2s that are intensively managed, 5% are on today, 100,000 roughly, going to 25. So that's another 400,000 patients. What percentage do you think you can get of that 400,000? I know it's going to be over a multiyear period, but...

Yes, it's kind of hard to say off the top of my head. I think that we'll have to wait until we actually start to get the product to market, start to actually see the response. But I think that, again, there's a significant number of people out there who have type 2 who are interested and willing to consider pump therapy, the near-term pumpers. And so I think that there's no reason why we can't get a meaningful share of that.

Got it. Okay. I mean something that mirrors your type 1 share?

I mean I would say that absolutely, yes. I'm confident that we're going to do well in that market.

Okay. Okay. Great. On the pharmacy side, congrats on getting the first pharmacy contract. I'm assuming that's a smaller one, probably more of like a kind of a learning experience here in '25 and then maybe a couple more contracts. So '26 will be a little bit more of a contributor on the top line from the pharmacy?

We haven't said the size of it, but I would say we wouldn't have announced it if it wasn't a meaningful agreement. So it is meaningful. And I think that the other thing we've said about it is the economics are basically as good as, if not better, than what we're getting today through DME. So we have a number of other discussions in the works, and I expect that we're going to have more contracts in place here in a relatively short time frame. So we will be starting off in January. And I think that we'll see gradual growth in the percentage of customers who use pharmacy channel at a time. Certainly, it's going to help us with type 2 as we get that. But we think that -- yes, we expect to see meaningful growth in that area.

Got it. How do we think about economics there? I mean you're getting $4,000 a pump now roughly. Is this -- you're not going to get that through the pharmacy. Is it fair to think that you can recoup that cost of the $4,000 of the revenue in a couple of years or even less than that?

We haven't said specifically what the economics are other than they're as good as, if not better. The only other thing we have said is it's a DME-like agreement. So it replicates essentially more for the pump, less for the supplies. and the supplies -- it's a onetime payment for the pump and the supplies are reimbursed over the 4-year period. So it's not like other agreements that you've heard about where it's they just get reimbursed for the supplies at a higher rate over that period of time. It's more like a DME agreement.

Okay. I think I understood that. Any risk of disrupting the DME channel as you start to move into the pharmacy channel? I know one of your CGM partners struggle with that.

We have -- I think the way we're organized, we have 2 teams that are really focused on, one on DME, one on pharmacy. So I think we've got our hand on the pulse of what's going on there. The other thing I'll say, though, is that t:slim has been in the DME for 10-plus years now, and I don't think there's any plans to change t:slim. So that's going to still be a meaningful part of the business. And I think that's what we'll do is we'll keep that in the DME channel.

Got it. Okay. Katie, just again, something that comes up a lot is profitability. Durable pump companies never make money. You can look at Animas, you look at MiniMed. You guys have made money in the past. When can we start to expect a little bit more evidence of -- I know Q3 was good from a cash flow perspective. But just durably, annually the company being -- getting much better on the profitability side of things?

Yes. I think this year was a really good year for us. We laid out our commitments at the beginning of the year, and we have been executing to it every quarter. And that's what we intend to do. We are very focused on profitable growth, not just growth, but balancing what do we need to do? What investments do we need to make to grow the top line, but we're very focused on cost initiatives within the company. We talked about Mobi. We have steady set, which is going to also help with our margin pull-through and the access into the pharmacy channel. So we have a lot of exciting opportunities. And I would just say a very heightened focus within the company for cost initiatives. So I'd say we just want to continue our track record and to continue to demonstrate increase leverage and profitability.

Can we get steady set out next year? Or is that more of a '26 event?

We haven't shared specifics, but it's in development, and we're really excited about it. One, just for the users' experience; and two, the margin benefit that it's going to bring.

Got it. Okay. Just a couple more here in the last few minutes that we have. Just on the R&D spend that you have, you've got a competitor that's got a weight-only system. Is that something from an algorithm perspective that you guys can introduce? Do you need to do that? What else on the algo side, should we expect at Tandem?

Well, right now, we've got an enhanced version of Control-IQ that we're working on getting to the marketplace here in the near future. It's the version that's going to enable children down to 2 years plus to use the technology as well as type 2. But there's also a number of improvements in personalization and simplification. So that's not too far off. I would say that the most significant aspect of our algorithm development really is focused on a fully closed-loop system. And we're investing in that. We think that's the solution and being able to set it, forget it and not have to interact with the system at all if you don't want to, is a very important aspect, I think, of the ease of use that's required to get the majority of the MDI people who are left on to pump therapy. So fully closed loop is a big area of investment for us, and we're making good progress there.

John, can you help me understand exactly what that means fully closed loop. You're not going bihormonal, are you?

No. It means that we'll have a device that will not require you to interact with it and you'll still get good time and range.

Okay. So similar kind of weight only just...

You don't have -- you haven't got a bolus for meals if you don't want to. If you want to, you can and you can improve your control by doing that, but you still get very good performance without bolusing for meals. And so that's the one thing today that I think it's the extra burden, I think, having to interact with the system. So you can give yourself a meal bolus. But not doing that, we think, is the next big step.

Okay. Yes, that sounds pretty amazing. Last minute here. What about -- you guys did an Investor Day -- it wasn't sorry, it was an R&D Day a couple of years ago, talked about Mobi, which is now out, but you also talked about tubeless and you also talked about Sigi as well. And you gave some pretty hard time frames when those would be out. I think you've kind of pulled those a little bit.

We haven't changed anything. The only thing we've done is we've stopped talking about dates, and that's primarily because every time we talk about dates, we're giving more information to our competitors, and that's just -- nobody else does either. So I think that -- nothing has changed since we've made those commitments. We're certainly very focused on Mobi's tubeless version. We think that's going to be a game changer for us. It's going to really drive Mobi volume when it does come to market, and we're still focused on getting a full patch system on the market as well.

Okay. But the developmental outlook is good. There's no delays. There's no changes.

If anything, I mean, we're doing everything we can to speed both up.

Okay. Got it. All right. Well, I'm looking at the time here. I think we're just about out. So we'll go ah and wrap it up there. John, Katie, thank you so much for time. I really appreciate it.

Thank you. Good to talk to you. Thanks, everybody.