Tandem Diabetes Care, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Tandem's Fourth Quarter and Year End 2020 Earnings Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host, EVP and Chief Administrative Officer, Susan Morrison. Madam, you may begin.

[Susan Morrison:]

Thank you. Good afternoon, everyone, and thanks for joining Tandem's fourth quarter and year end 2020 earnings call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, product development timelines, 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, and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or other factors. In addition, today's discussion will include references to adjusted EBITDA, which is a non-GAAP financial measure. Adjusted EBITDA is a key measure used by us to evaluate operating performance, generate operating plans, and make strategic decisions for the allocation of capital. Please refer to our press release issued earlier today for further information. John Sheridan, President and CEO; and Leigh Vosseller, EVP and Chief Financial Officer will be participating on today's call. Following our prepared remarks, we'll open up the call for questions. Thanks for limiting yourself to asking one question before getting back into the queue. With that, I'll now turn the call over to John.

[John Sheridan:]

Thanks Susan, and welcome everyone to today's call. Before we jump into our fantastic 2020 results, I'd be remiss not to take time upfront to acknowledge the incredible team of employees at Tandem. It's a group with a demonstrated history appointed together during difficult times, and in the face of 2020s challenges, we persevered and stayed focused on our mission to improve the lives of people living with diabetes. Our heartfelt thank you to all our employees for your efforts, passion, and dedication that made the year a success even under challenging circumstances. Looking back over the past year, we achieved approximately $500 million in sales, surpassed the milestone of having more than 200,000 customers in our worldwide installed base, launched our best-in-class Control-IQ technology, and made meaningful internal product development and operational progress all under the constraints of the global pandemic.

[Leigh Vosseller:]

Thank you, John, and good afternoon, everyone. Once again, the entire organization executed remarkably well with Control-IQ continuing to drive strong demand and outstanding sales results. We were able to accomplish this by entering the fourth quarter with a heightened concern regarding COVID-19 and its potential impact on the markets in which we operate, particularly those geographies outside the U.S. We closed 2020 achieving record worldwide sales of approximately $500 million. This 38% year-over-year sales growth, both domestically and internationally, was particularly impressive as 2019 largely benefited from the worldwide Animas opportunity in addition to having no pandemic-related headwind. We shipped more than 90,000 pumps worldwide for the full year of 2020, of which more than a third were shipped in the fourth quarter. Fourth quarter sales were $168 million, a growth rate of 55%. This momentum gives us high confidence as we enter the New Year. To add some additional color on our domestic business, 2020 sales were $416 million and we now have more than 170,000 domestic customers in our installed base. We shipped 25,000 pumps domestically in the fourth quarter resulting in sales at $139 million or 42% growth over 2019. As John mentioned, we continue to be successful across multiple growth drivers, including our own renewal where we saw an increase in the fourth quarter. Our internal data shows that we are renewing customers at a higher rate and are shortening our average time to renewal. As a result, we have increased our cumulative renewal rates at 55%, which is up 5 percentage points from the end of 2019 reinforcing the ability to reach our longer term goal of a 70% renewal rate. In 2021, our taximo opportunities will scale from 50,000 to more than 65,000 while we expect to see continued positive trends, particularly now that we have access to all UnitedHealthcare subscribers. Even more exciting is looking ahead to 2022 and beyond, where the number of opportunities sails dramatically in line with our 2018 to 2020 growth trends during which period we demonstrated a pump shipment CAGR of greater than 60%. Outside the U.S., our full year sales grew to $83 million, of which $29 million were in the fourth quarter alone. Awareness of our technology and demand are building outside the U.S. even amidst the challenges of COVID-19. This was reflected in greater than anticipated pump shipments late in the fourth quarter typical to demand and right size inventory levels, particularly in Germany, which represented approximately half of our 8,000 international pump shipments. We are proud of our international progress and that nearly 45,000 people with diabetes outside the United States are using Tandem's insulin therapy management technology. Globally, we estimate that our in-warranty installed base is going to more than 250,000 people, trading a 61% increase in supply sales for the full year of 2020. Of total worldwide sales, pumps represented 63%, followed by infusion set at 26% and cartridges at 11%. For all of these reasons our enthusiasm for 2021 is high as we continue to build on the same drivers that made recent years so successful. We expect our 2021 worldwide sales to be in the range of $600 million to $615 million, a growth rate of 20% to 23%. We continue to build our recurring stream of supply sales from our large installed base and pump renewal sales. In combination we expect these to contribute nearly half of our 2021 sales. As a reminder, Q1 is typically the smallest sales quarter of the year due to seasonality. For example, in 2020 it represented approximately 20% of our worldwide sales. Our sales guidance includes the range of $495 million to $505 million in the U.S. Similar to our historic seasonal trends, pump shipments are expected to sail increasingly across the year based on the timing of insurance deductible resets, and the resulting impact on customer ordering patterns. Our international sales are expected to be in the range of $105 million to $110 million, growing 26% to 32% as we continue to penetrate our existing markets, drive further awareness in those countries where COVID-19 impacted our 2020 commercial launches and enter new markets. We anticipate continued variability in the quarterly ordering patterns of our distributors in the near-term where the level of COVID restrictions continues to fluctuate, and as we continue to get familiarity with the ordering dynamics in the individual market. For example, the fourth quarter of 2020 benefited from large size demand in Germany, which is not anticipated to recur at those levels in the near term. As we enter 2021, we anticipate that Control-IQ will be available in all of the countries in which operate today, and will begin to drive increased momentum similar to what we've experienced in the U.S. Overall, the outlook remains in line with our historical guidance philosophy. We based our projections on the factors where we have a better line of sight or control, and have had caution for unknown such as the impact of COVID-19 and new product launches whether our own or those of our competitors. Turning to margins. We being improved sequentially to 54% in the fourth quarter and ended the full year with the gross margin at 52%. There has been a number of factors that contributed despite pressure on 2020 compared to 2019, but most notable is a royalty obligation associated with our Control-IQ technology at just over 1% of sales this year for which there was no comparable expense in 2019. Excluding the cost of the royalty, both our pump and supplies gross margin improved versus 2019. We also made investments in 2020 to double our cartridge manufacturing capacity and incorporate an experienced third-party manufacturer into our processes, both of which are necessary at best to support our growing installed base and to reach our 2024 gross margin goal in excess of 60%. Other factors that have and will continue to influence our gross margin results include average selling prices and changes in both geographical and product mix. In 2021 with an increase in volumes, anticipated production and pressure from COVID and continued cost deposits from these initiatives, we expect to achieve annual gross margins of approximately 55%. For the third year in a row we achieved a positive operating margin in the fourth quarter and recognized an operating margin loss of only 2% of sales for all of 2020. We also sustained our trend of reporting positive adjusted EBITDA margins for the ninth quarter in a row reaching 21% of fourth quarter sales and 12% on a full-year basis. As anticipated, our adjusted EBITDA was relatively flat to 2019 based on current investments in manufacturing, R&D and simply organizational scale setting the foundation for achievement of our long-term operating margin goal of 25% or better. In 2021, we expect to pass the breakeven point for operating margin on a full year basis and achieve an adjusted EBITDA margin in the range of 14% to 15% through gross margin improvement and continued execution on our operating initiatives, while we continue to make prudent investments to meet our long-term objective. Our total cash and investments were $485 million at the end of 2020. We generated $25 million of cash from operations this year and $314 million from financing activities, including our convertible debt transaction in May. We also reinvested $32 million in the business through capital purchases for manufacturing and general facilities expansion as well as executed against our mobile strategy through the Sugarmate acquisition. Our balance sheet is strong and continues to kind provide us security and flexibility in pursuit of our strategic plan. To summarize our 2021 outlook. Worldwide sales are estimated to be in the range of $600 million to $615 million, including international sales of $105 million to $110 million. We estimate gross margin for the year to average 55% and adjusted EBITDA to be in the range of 14% to 15% of sales. Our non-cash charges for stock compensation, depreciation and amortization are expected to be approximately $80 million included both component of cost of sales and operating expense. With that, I will turn it over to the operator for questions.

[Operator:]

Our first question comes from the line of Steven Lichtman of Oppenheimer. Your question, please.

[Steven Lichtman:]

I guess, sorry, I have one question John, you mentioned you guys have submitted for - I believe you mentioned submitting for an algorithm enhancement. When - is this the one you've been targeting for 2021 overall? When should we expect to see that, and could you talk a little bit more about what it's going to do for customers? Thanks.

[John Sheridan:]

Sure yes, thanks for the question. I would say that the - this enhancement to the algorithm really is about improving access to the technology. We're expanding body weight and correction factors just to enable a broader range of the pediatric population to use a system and also people that have larger insulin needs. There is some mobile bolus - or there is some bolus in the experience improvements and I've mentioned analog you know I think that this is. These are changes that we don't believe require clinical studies. And as I said, we submitted them this past year. So we're waiting for the FDA right now to get onto this and to begin to actually look at the review process. There's a little bit of uncertainty as when we expect to see this happening. I would say that we have a lot more meaningful improvements planned that do require clinical studies, and we'll be conducting those this year.

[Operator:]

Our next question comes from the line Larry Biegelsen of Wells Fargo. Your line is open.

[Larry Biegelsen:]

Good afternoon, and thanks for taking the question and congratulations on a nice quarter. John, maybe a little bit more color on what led to the delay in t

[John Sheridan:]

Yes, sure. Well, I think that we didn't anticipate - or we do experience the delays due to COVID when COVID first hit. We probably lost an entire quarter, and I would say that it was just difficult to actually do the human factors testing. When the market did open back up, we had virtual human factors, we had face-to-face, but we had a hard time getting the correct number of patients in various groups to do the appropriate types of testing. But as I said, what happened is that we began to look at the data thoroughly in the December timeframe. And as we did, we just saw issues that we weren't satisfied with. And I think the most important takeaway here is that we want to get this product right, and we're willing to sacrifice a few months to do that because we understand the long-term benefits of this technology, and we know what's going to drive demand from the MDI segment. So we're - we think that we have a reputation that's built upon ease of use, intuitive and simple-to-use devices, and we've got to continue to do that. I would say that none of the changes that we're making are significant. It just requires us to go back and correct the issues, test them again, and then just move forward. So, as we mentioned, we're going to be doing this now. Our submission's planned for the fourth quarter. There is still some uncertainty that we are entering into additional human factors testing now and it's still a COVID environment. And as I mentioned the FDA is - they're pretty backed up right now. And it's uncertain as to when they are going to get back to their normal cadence of review, but we are - this is still our number one priority as an organization. We have a lot of confidence in the device and how it's going to impact the market. And so, we're moving forward aggressively to get it - to market.

[Operator:]

Our next question comes from Alex Nowak of Craig-Hallum Capital. Your line is open.

[Trenton McCarthy:]

Good afternoon, everyone. This is Trent McCarthy on for Alex. One question Control-IQ, can you speak to the competitive environment and how that will morph over 2021? Medtronic is being more vocal with their pump this year. There are new patch pumps coming as well as some new players? So how do you expect growth to modulate this year and next with competition, and what actions are you taking to defend that?

[John Sheridan:]

Well, I guess I'll start off by saying that we have a great deal of confidence in Control-IQ even without t

[Operator:]

Our next question comes from Chris Pasquale of Guggenheim Partners. Your question, please.

[Chris Pasquale:]

Thanks, and congrats on a great quarter, guys. Curious, do you have an estimate for the percentage of U.S. new patient starts that came from United this quarter?

[Leigh Vosseller:]

Yes. So the way United settled in for us getting full access again starting July 1, it ended up being about 10% of our domestic shipment. And as we look forward into 2021, that's a good baseline for a starting point. In the longer term, we anticipate that, that will grow to be closer to their overall market share, which is estimated at about 15%. But that will take time as we - to gain access to people who are coming up for their warranty renewal.

[Chris Pasquale:]

That's helpful, thanks. And then, John, the comments around Type 2 and the opportunity there was very interesting. When you think about a dedicated platform for those patients and what they really need, do you see t

[John Sheridan:]

Yes, I mean I think our intent really is to start with t

[Operator:]

Our next question comes from Brooks O'Neil of Lake Street Capital. Please go ahead.

[Brooks O'Neil:]

I'm hoping you could just characterize kind of, what you're seeing in general from the FDA in terms of responsiveness. And just want to be sure that the t

[John Sheridan:]

Hi, Brooks. I mean we - right now, we are talking to the FDA frequently, and I think that there's definitely been a significant reduction of their resources that they've been reassigned to other COVID-related tasks. And so the predictability I think right now is a bit uncertain. A few months ago, they indicated they thought it would be about nine months before the sort of road jam or the road block would break, and it's been about that amount of time right now. So I think that as you know, we're still in the midst of this pandemic and I'm not exactly sure when the resources are going to come back. But we do have confidence that we're going to have approval for our mobile bolus feature in the first half and I think that as we move to the latter half of 2021, we're hoping that these three apps, so that there really is no impact on t

[Operator:]

Our next question comes from Chris Lin of Cowen. Your question, please.

[Chris Lin:]

Hi, thanks for taking my question. I just want to follow up on a previous question here. Could you update us on pump share gains trends exiting 2020, and as it relates to 2021, what do you have factored into guidance? And I guess do you put in a bit more conservatism just relative to the past with the pending launch of 780G? Thank you.

[Leigh Vosseller:]

Sure. So as we exited 2020, the source of our new pump came really - considering with what we've seen in our history, which is about half from the MDI population and about half from competitor conversion. So as we move forward into 2021, I guess what you pointed out is that MDI population continues to become further penetrated in the pump space. And where years ago, you would see only about 25,000 to 30,000 new pumpers come to market each year. What we've been experiencing in the last two years is that is an acceleration and our best estimate, it was somewhere close to 60,000 people who purchased a pump in the market this year for the first time. So when we think about 2021, we're anticipating that, that will continue to grow but at the same time, just consistent with our conservative guidance philosophy, we're anticipating right now will be at least as good as what we saw in 2020 and we'll continue to take a very large share of that.

[Operator:]

Our next question comes from Matthew O'Brien of Piper Sandler. Your line is open.

[Matthew O'Brien:]

Thanks for taking my question. I guess, Leigh, just on the renewal side, I wasn't quite following the commentary as far as what you're seeing on the renewals side, what you're seeing in terms of an acceleration there and what we should be expecting. To me, it sounds like things are starting to get much better on the renewal side and that could be a meaningful tailwind for the company over the next several years, is that what you were trying to say? And then John just to kind of finish off a finer point that you were making earlier on the Type 2 side on the discrete side, is there going to be a renewal component - not a renewal, excuse me, an annuity component with the technologies you're thinking about there? Thank you.

[Leigh Vosseller:]

Thank you for the question. Starting with renewals, so just to frame up how - where things are looking today is up through the end of December. We have had about 50,000 people in total whose warranties have expired. And of that, we have renewed about 55% of them. And when you compare that to where we were a year ago at the end of 2019, we have renewed about 50% of all of the opportunities that were available. So that 50% to 55% demonstrates really great progress on the renewals front. And I agree with you, renewals are becoming such an important part of our business as we look forward because if you think about the acceleration, the kind of the business in the last three years, all of those folks will start coming to the table as well. And so it's been a lot of investment in that stream and it's also just building up a better patient experience, which we think that's what's driving this improvement in the renewal cumulative rate.

[John Sheridan:]

I would just say that relative to the annuity aspect. I mean, we're continuing to invest in our pump technology and we believe that miniaturizing is really the direction to go. So as I mentioned, we're looking at concentrated insulins as well, so - but we really haven't spoken about whether or not the next point after is going to be disposable or not.

[Operator:]

Our next question comes from Mathew Blackman of Stifel. Your line is open.

[Mathew Blackman:]

Good afternoon, everyone. Thanks for taking the question. And I've got a few international questions that I'll just sort of throw out there in one swoop and maybe the first couple for Leigh. You called out Germany stocking. Is there any way you could quantify that for us and then Leigh for you as well, can you just give us a sense of what the mix of patients are that you're on-boarding, that are coming from existing pumpers versus MDI in some of these European countries? And then a couple for John, sort of same line of questioning. You sort of alluded to it in your commentary about international but any efforts to expand the number of MDI patients in some of these regions outside the U.S. whether it's you or your partners, and it doesn't look like or sound like it but any changes in the competitive backdrop in Europe with some of these recent launches? Thanks.

[Leigh Vosseller:]

Thanks, Matt for the questions. I'll start with Germany. What really is happening with Germany is, it's not exactly as we had anticipated when we came into the year. We were planning the commercial launch for the third quarter but with COVID and everything going on in the world, that was somewhat muted. I would say the reception to launching t

[John Sheridan:]

Yes. I would just underscore the fact that we said we have approximately this 4 million people with Type 1 and 400,000 are using pumps. So I think that the MDI population is right to be looked at. And I think that when you look at our success here, half of our sales are coming from MDI in United States, and we're really - I mean, you look at t

[Operator:]

As a reminder, please limit yourself to one question. Our next question comes from the line of Matt Taylor of UBS. Your question, please.

[Matt Taylor:]

Hi, thanks for taking the question. So I wanted to ask you about your comments on phone bolus. It seems a little different on this call. You seem very excited about it in terms of it being, calling it a tipping point or kind of awareness generator that you saw with Basal and Control-IQ. Those are high bars. So maybe talk about why you think that? Have you done additional market testing or are you getting feedback that really shows that could be a catalyst?

[John Sheridan:]

Yes, I think that mobile bolus is going to be very important, but I wouldn't put it in the same category as Control-IQ or Basal-IQ. I would say that we believe that t

[Operator:]

Our next question comes from Jayson Bedford of Raymond James. Please go ahead.

[Jayson Bedford:]

So just, I guess one from me. All three of the domestic pump manufacturers reported much better fourth quarter, December quarter results here. Of course you guys grew the strongest so I'll give you credit there. But I'm just wondering, do you think this is a function of COVID-related pent-up demand or is it something else either from and awareness or an access standpoint? I just would - love your thoughts there on just kind of general market acceleration?

[John Sheridan:]

We're seeing some sort of relief, I think in the COVID environment, but it's a bit spotty. It's geography - jump by geography. It seems like the Southeast have opened up and office visits are common there, but there are other locations where it's still pretty tight. So, I think it's difficult for us to sort of put our finger on COVID as - and sort of bring up COVID as the reason that's driving it. I think that we just believe it’s a continued interest in the technology and I said that we're building momentum with these healthcare providers. There's so many of them now are so familiar with the results. They see them. They have got many, many patients on the system. They have a great confidence with this. At least from our point of view, we think that's what's driving this. It's - the healthcare providers, trust and confidence and it's also the people using the system. They talk about it. It is available on social media. We have marketing programs that are just using people's own words to describe their experience of Control-IQ, and I think all of that really I think, is just making awareness better. So I think it's probably more of an awareness situation than its COVID.

[Operator:]

Our next question comes from Joanne Wuensch of Citibank. Your question, please.

[Joanne Wuensch:]

I'm curious about your comments of getting into the Type 2 diabetes patients, and it sounds like the mobile bolus app might be moving in that direction. But I wanted to make sure that, that's the right read and then I'm curious what else you might need or want to have to penetrate it, and going along with that? Do you have plans to launch a patch pump?

[John Sheridan:]

All right well - let me just start with the mobile bolus. The mobile bolus feature is going to be developed - made available to our entire U.S. patient population here, like I said, hopefully in the first half. And that's something that's going to drive discretion, which we know is important to the Type 2 community. We probably believe that the t

[Operator:]

Our next question comes from Jeff Johnson of Baird. Your question, please.

[Jeff Johnson:]

So hopefully this doesn't count as my question, but Leigh, I'm not sure if I caught the renewal number in the quarter, if you could just repeat that for me? But for my question, John I was thinking on, you made some comments on FreeStyle Libre, and you made a comment in passing about, you're not sure which sensor you might go with, with them. Is there an opportunity on Libre to work that into a Control-IQ? My understanding was maybe the battery or some other limitations there wouldn't allow for full kind of continuous streaming to a pump to control it. So, I just want to understand if Libre 3 is delayed for any reason or if it doesn't meet your timeline requirements, would you say and you could go back to Libre 2 or is there something else in that comment? Thanks.

[John Sheridan:]

I'm going to let Leigh first and I'll answer your question after that, Jeff.

[Jeff Johnson:]

Yes.

[Leigh Vosseller:]

I'll take second I think the way I think that renewals is more about trying to cater to something you can measure or compare against our long-term goal of achieving a 70% renewal rate. So the way I think that is - that we have now improved to about 55% of all opportunities, which were roughly 50,000 at the end of the year. I can give a specific number this quarter, but it's fair to assume that it was up again compared to last year and even the third quarter in line with seasonal trends so, moving in a really great direction.

[John Sheridan:]

And Jeff, I would just say that we haven't been specific about which technology we intend to incorporate into the relationship with Abbott, the CGM integration, but I do know that the Libre 2 is capable of operating in the IT system. But first, Abbott obviously has to address the vibrancy issue, which I know that they're working on.

[Operator:]

Our next question comes from Ravi Misra of Berenberg Capital Management. Your line is open.

[Ravi Misra:]

So I wanted to probe a little bit more on the Type 2 access commentary that you talked about earlier, John. One of your peers yesterday on their call basically said that they feel that having pharma access is something that kind of sets them up really nicely into Type 2? Maybe if you could comment on that and your kind of potential ability to get there these days. I know that's been something you've been trying for a while or is there another kind of channel or venue that we should be thinking of that we're not that would kind of engender that?

[John Sheridan:]

Yes, I mean, I'll tell you what I'll do. I'll start off and I'm going to let Leigh kind of wrap up as well, because she has thoughts on the pharmacy channel. I would say that when we interact with physicians today. They do not make decisions on whether or not the system's going into a pharmacy channel or whether it's going into the DME. So, I think that that's - we believe that we can make the system and the interaction with our products just as accessible and easy as the pharmacy channel using some of our digital health initiatives. I think the reason will be - when you look at some of our competitors, the reason that's important, we sell a pump once a year. And so when you consider the touch points that we've got, once every four years, the touch points, it's very is reduced. I think that if we can even improve that when you - I think that you go a long way to improving access. There is no way we can't - there's no way we really can't we can't automate the supply sales. We can automate that we can make that happen automatically. And I think that's something that simplifies our part of the process. But I think when you look at the competitive patch pumps, I mean they're selling pumps and they're using it every three days. And they're probably buying it monthly or quarterly. So there's a lot more interaction I think that access and frequency of interaction make the pharmacy channel important for them. You want to take that Leigh.

[Leigh Vosseller:]

I would say - John framed that very well. I think first and foremost, it's about having the right product because that's what physicians will recommend. And as the channel simplify things, we'll continue to look for rates to optimize or create efficiencies within our own channel, and then what it comes down to for us, we are focused on getting stronger relationships with the payers through more direct contracts. And in those conversations then we can have a deeper discussion about what's the right channel, what makes sense for us, with the type of product that we have. Would it be much more specialized than a disposable type product?

[Ravi Misra:]

Great thanks. And if I could just ask one more, is there an FX component to the U.S. revenue? Thank you.

[Leigh Vosseller:]

It's very immaterial.

[Operator:]

Our next question comes from Danielle Antalffy of SVB Leerink. Your line is open.

[Danielle Antalffy:]

Good afternoon, guys. Thanks so much for taking the question. Just wanted to ask one question on replacement given the competitive environment, hardly 50% of your replacement -- I'm sorry, of your that comes from replacement. How sustainable do you think that is given the fact the primary driver of those replacements of the replacement group is Medtronic and they're launching the 780G, which might be more competitive?

[John Sheridan:]

Danielle, I think we feel very confident in our competitive positioning next year and we would anticipate that we would continue to see a strong part of our total sales coming from better conversion.

[Operator:]

Thank you. Ladies and gentlemen that does conclude the Q&A portion of our call today and our call. Thank you so much for participating. You may now disconnect. Have a great day.