Tandem Diabetes Care, Inc. (NASDAQ:TNDM) Q3 2023 Earnings Call Transcript

Tandem Diabetes Care, Inc. (NASDAQ:TNDM) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Thank you for standing by, and welcome to Tandem's Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to hand the call over to EVP and Chief Administrative Officer, Susan Morrison. Madam, you may begin.

Susan Morrison: Hello, everyone, and thanks for joining Tandem's 2023 Third Quarter Earnings Call. As 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 and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the Risk Factors portion and elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and in our other SEC filings.

A patient sitting in their home with the phone app open, tracking their diabetes in real-time.

We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or other factors. Today's discussion will also include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. Any non-GAAP information presented should not be considered as a substitution, independently or superior to results prepared in accordance with GAAP. Please refer to our earnings release, quarterly report on Form 10-Q and the Investor Center portion of our website for a reconciliation of these measures to their most direct comparable GAAP financial measure.

Leading today's call is John Sheridan, Tandem's President and CEO who will be joined by Leigh Vosseller, our Executive Vice President and Chief Financial Officer. Dr. Jordan Pinsker, our Medical Director, will also be joining for the Q&A portion of today's call. I'll now turn the call over to John.

John Sheridan: Thanks, Susan, and welcome, everyone, to today's call. In the third quarter and throughout 2023, Tandem has focused on bringing the benefits of our #1 rated AID system to more people living with diabetes worldwide -- along with providing customer care excellence and making operational progress throughout our business. It's been a transitional time for Tandem as we prepare for the company's next phase of growth through our portfolio of innovation. We are executing on multiple near-term product launches while implementing scalable systems and processes to support our global operations and leverage our infrastructure. Reflecting on our third quarter results, our overall performance was above our baseline expectations, primarily due to the U.S. market.

Over the past few weeks, I have had an opportunity to attend some of our regional sales meetings across the United States and was excited and encouraged by my conversations. My first takeaway is that the t:slim X2 and with Control-IQ continues to be the best AID system available. This is also reflected in third-party research and our own customer satisfaction surveys. It's evident in our low attrition and higher percentage of customers choosing to purchase a new t:slim X2 from Tandem after their warranty expires. My next takeaway is that overall competitive dynamics remain stable. Some products are newer than others, but the noise from the other AID offerings is in line with our expectations, and the diabetes community is learning more about what these products are and what they are not.

Lastly and most overwhelmingly, is the high level of enthusiasm and anticipation for our new sensor integrations and for Mobi Pump platform. Our sales team shared that some new and renewing t:slim customers are pausing as they wait for Mobi and G7 launches and are excited for their availability. These products are at various stages in the release process, and we are highly encouraged by the performance in the hands of our early users. Starting with CGM additions, I am proud of our teams to have demonstrated leadership in AID sensor integration. Developing pump and algorithm software for the compatibility with a new sensor is an extensive process, and the technical work is just part of the effort it takes to bring a newly integrated system to market.

I would like to express our thanks to our CGM partners for their collaborations as we work to launch the t:slim X2 with the DexCom G7 and Abbott's FreeStyle Libre sensors. The steps to bring the DexCom G7 integrated system to market are well underway, and we made great progress in the early release phases. We are proud to be rolling out the first AID system in the world to use DexCom's G7 sensor data and are planning for full availability of G7 across the U.S. by year's end. We've also been preparing for the launch of the t:slim X2 integration with the Abbott FreeStyle Libre 2 sensor. Based on where we are and being mindful of the upcoming holiday season, we plan to initiate the U.S. launch of t:slim with Freestyle Libre 2 later this quarter with broad availability early in the new year.

This new integrated offering is an incredible accomplishment for our teams as we bring the benefits of AID technology to Abbott's customers in the U.S. for the first time. Now turning to Mobi. In my 10 years with Tandem, I've had the privilege of being part of launching many new innovations that have reduced the burden of diabetes and improved clinical outcomes. The excitement around the launching of Mobi is among the highest I've ever seen and there is incredible interest by the health care providers, people using MDI and current pumpers to learn more and gain access to our new pump technology. The most common feedback we hear is that people are surprised and thrilled about Mobi's tiny size and the option that enables for wearability, including on-body wear via a patch accessory or clipped on to a waste band or easily tucked into a jean coin pocket.

Beyond body wear options, combined with the ability to disconnect if needed, is a new paradigm. This distinguishes Tandem Mobi from on-market patch bumps. And of course, they also appreciate the benefit and discretion of its mobile app operation. For these reasons, we believe that Tandem Mobi is positioned to expand the insulin pump market and further our mission to improve the lives of more people living with diabetes. Our release of Tandem Mobi began in October with a limited number of users and will scale through the quarter. Throughout this process, we monitor key criteria and performance metrics, not only for the pump but also for all the surrounding systems and processes across the company. We feel this rigor ultimately leads to a stronger commercial offering for customers and health care providers and delivers a positively different experience that Tandem has built its reputation upon.

We are tracking to our plan to begin offering Mobi more broadly in the U.S., beginning early in 2024. Simultaneously, with each of these new launches, we are developing plans for our new products in countries we serve internationally. Reflecting on our overall business outside the United States, our third quarter aligned with our base expectation, which contemplates the European summer holiday season as well as competitive activities. During this period, our distribution partner in 1 of the largest European countries experienced capacity constraints and disruptions to its sales activities because their focus was on rolling out a t:slim software update to their installed base. Software updatability is still a relatively new offering outside the United States, especially at such a large scale and individual health care systems sometimes have different requirements for who does the update where and how they occur.

Our commercial team has been very responsive in helping this distribution partner identify opportunities for process efficiency and to minimize constraints based on best practices from the U.S. and other geographies. We're also working through the timing of G7 integration availability in our key European markets. Much like the U.S., enthusiasm is high for this new offering and our preparations for launch are actively underway. This is impacting our distributors' fourth quarter forecast, which they are adjusting anticipation of this launch occurring just after the first of the year. It is rare and exciting to have an opportunity to like this 1 in front of us. with so many new product launches in flight worldwide, each of which individually has the opportunity to change the trajectory of our business going forward.

It's also an ideal time for us to welcome Mark Novara as our EVP and Chief Commercial Officer. Mark will succeed Brian Hanson, who we thank for his passion and leadership along with laying the foundation for Mark's long-term success at Tandem. As you saw from the press release issued this afternoon, Mark brings strategic and operational global experience in diabetes as well as medical devices. He has a successful track record of delivering above-market growth, best-in-class customer experience and scalable commercial operations. His knowledge in leading global commercial functions will be critically important as we prepare for the launch of multiple new products in the coming weeks and months, and we welcome him to our leadership team. 2023 has been a complicated year of transition, but we remain focused on executing diligently to scale our operations in preparation for this exciting next phase of growth.

I'd now like to turn the call over to Leigh to share more on the 3Q results and financial expectations. Leigh?

Leigh Vosseller: Thank you, John. As a reminder, unless otherwise noted, the financial metrics I'll be discussing today are on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as on the Investor Center portion of our website. Third quarter sales were above our baseline expectations at $194 million worldwide, primarily due to sales in the U.S. We shipped 25,000 pumps and supply sales grew 10% in line with our installed base, which is now nearly 445,000 customers. U.S. sales in the third quarter were $138 million on 17,000 pump shipments. We experienced the anticipated near-term pressure previously discussed as customer enthusiasm builds for the upcoming broad availability of our new products.

There were also a number of highlights in our performance. First, we continue to expand the U.S. insulin pump market as half of our new customers reported adopting pump therapy for the first time with the remaining half converting from competitors. Next, our consistently strong retention rate is reflected in our supply sales, which grew 10% in line with our U.S. installed base that has now reached 308,000 people. Another highlight was our continued high capture rate of renewal opportunities. In fact, renewals grew sequentially to nearly half of the pumps we shipped in the quarter. Consistent with our expectations, our renewal customers have shown the greatest interest in using our Tandem Choice program. This program offers in-warranty t:slim X2 customers the ability to take advantage of end-of-year health insurance benefits with the low switching cost for Tandem Mobi in the future.

New customers have been more inclined to defer the timing of their purchase until our new products are fully available. Forecasting the timing of customer purchases remains a challenge in the near term. Seasonal trends as deductibles are met and consistency in renewal and supplies ordering patterns provide a level of predictability, particularly as our renewal opportunity step up nearly 20% in the fourth quarter compared to the third quarter. As a result, we are reaffirming our U.S. sales baseline of $575 million for 2023. Outside the U.S., sales in the third quarter were $55 million in alignment with our base expectation, which contemplated typical commercial dynamics during the European summer holiday season as well as competitive activities.

We shipped 8,000 pumps across our OUS markets and grew our installed base year-over-year by more than 10% to 136,000. As John discussed in the back half of this year, we are working through some disruptions in Europe. For example, we were recently notified that 1 of our largest distributors materially reduced pump orders for the fourth quarter when planning for the upcoming release of t:slim G7 just after the first of the year. While we have not included G7 in a meaningful way in our 2023 forecast, we also did not include an assumption for a meaningful disruption to orders in Europe in advance of G7. In addition, we are analyzing the potential financial impact of the newly enacted reimbursement for Control-IQ in France with its related rebate structures.

With these factors in mind, we are updating our baseline expectation outside the U.S. to $190 million for the year, which assumes no meaningful new orders are placed by our distributors outside the U.S. for the remainder of the year and allows for up to $10 million for the initial impact of the change in reimbursement in France. Moving on to margins. Our gross margin of 51% of sales in the third quarter was consistent with the prior year. We have spoken to certain high-cost raw materials over the last year, which were creating margin pressure of up to 2 percentage points in any given quarter. In the third quarter, these costs fell to less than 1% of sales. We continued making meaningful progress by driving additional operational cost savings across all products through lean activities and other manufacturing efficiencies as well as improving average selling prices.

These benefits were offset by the impact of geography and product mix with pumps worldwide, representing 45% of sales in the third quarter of 2023 compared to 53% in the prior year. Our adjusted EBITDA margin remained positive this quarter at 1% of sales as we continue to benefit from cost savings initiatives across the organization and as we prioritize investments in R&D and marketing. Our operating expenses sequentially declined for a second time this year to $121 million and were flat compared to the third quarter of the prior year despite year-over-year increases in costs associated with our acquisitions. We are reaffirming both our gross margin and adjusted EBITDA expectations for the full year 2023. We ended the quarter with approximately $500 million in total cash and investments and our strong balance sheet provides us financial flexibility to strategically invest in our business.

In summary, our worldwide sales expectations for the full year 2023 are $765 million, which includes sales outside the U.S. of $190 million. Our gross margin guidance remains unchanged at 51% and adjusted EBITDA is expected to be at least breakeven. The margins include recurring noncash P&L charges of about $110 million, of which $95 million is associated with stock compensation and $15 million with depreciation and amortization. As we look to opportunities for future growth, we have strong conviction in Tandem's ability to lead in diabetes management. We believe it was important and prudent for us to set early expectations for baseline 2024 sales growth starting at 10% at our last earnings call. We will learn a great deal in the next 6 months that will better inform our thoughts on the catalyst for growth next year as we scale the launches of multiple new products, both in the United States and internationally.

We look forward to sharing these earnings with you in the upcoming quarters as we pursue the longer-term goals we've set for our business. With that, I'll turn the call back to you, John.

John Sheridan: Thanks, Leigh. As we look at Tandem's near and longer-term strategy, we are focused on meaningfully expanding the insulin pump adoption by people living with type 1 diabetes across all our markets and evolving our products and services to attract people living with type 2 diabetes who use insulin intensive therapy. Our analysis shows that in the U.S., there are more than 1 million people living with Type 1 diabetes who are currently not getting the benefits of insulin pump therapy and 3x that opportunity in the countries we serve internationally. In addition, there are well over 2 million people in the U.S. living with type 2 diabetes who are already insulin-dependent and do not use a pump today. It's an immense worldwide opportunity.

To expand pump penetration from its minority position today requires innovation as people have vastly different needs and preferences that motivate their pump purchasing decision. Our new pump platforms and CGM sensor integrations address many of these current unmet customer needs. We also believe our industry-leading algorithm, the user and payer-facing benefits of our dual device portfolio and the degree of flexibility afforded by the modularity of the Tandem system will help us to drive demand in the years ahead as we enter the next product -- to further drive our pump adoption opportunity, we've also been busy in advantage of our clinical initiatives. Results from the Control-IQ post-market study were recently published in Diabetes Technology and Therapeutics.

The data showed that approximately 3,000 people with type 1 diabetes, down to age 6 using Control-IQ for 1 year. Adverse events related to severe hypoglycemia and DKA occurred at much lower rates than historic public data for people on standard of care therapy. We are in late-stage discussions with the FDA regarding a submission under review for enhancements to our Control-IQ algorithm. These advancements represent another exciting milestone for Tandem as we will lower the age indication for our algorithm and expand its feature set with options for greater personalization. It's part of our ongoing commitment to expanding the user reach of our AID system portfolio, and bringing new features to people with diabetes across all the markets we serve.

We also made progress on enrolling participants in our clinical trial in support of expanding our label indication for our next-generation Control-IQ algorithm to include people living with type 2 diabetes. In the past few months, we've seen meaningful research on the use of GLP-1s and SGLT2s in the treatment of insulin-dependent diabetes. At Tandem, we look at both devices and therapeutics as part of a broad continuum of care for people living with diabetes. This was reflected in the clinical diabetes publication earlier this year. of a study on glycemic outcomes people with type 2 diabetes, where most participants were using GLP-1 and/or SGLT2 therapy in addition to insulin delivered by our t:slim X2 with Control-IQ technology. The results highlighted the benefits of using Control-IQ with these additional therapies, which gave the best outcomes when used together with time in the range of 76% with no hypoglycemic events.

Heading up our clinical efforts is Dr. Jordan Pinsker, who joined Tandem in 2021, and as a leading endocrinologist and prominent thought leader in artificial pancreas research. He's been a primary investigator in numerous clinical trials on automated insulin delivery systems prior to joining Tandem and brings extensive knowledge in patient care and the epidemiology of type 1 and type 2 diabetes. We've asked Dr. Pinsker to join the Q&A portion of our call today as he's been helping us to contextualize how the different drugs currently available along with those in the research stages playing our longer-term opportunity. As you can see, this is an extremely busy time at Tandem. I'd like to thank our employees for their perseverance, diligent focus on execution and continued heartfelt care for our customers.

Together, we will be working hard to close out 2023 with eye in the future and the next chapter at Tandem. I'd like to now turn the call back to the operator for questions.

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