Tandem Diabetes Care, Inc.
Q4 2022 Earnings Call Transcript

Published: 22 Feb 2023

[Operator:]

Good day, and welcome to the Tandem Diabetes Care Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Executive Vice President and Chief Administrative Officer, Susan Morrison. Susan Morrison?

[Susan Morrison:]

Hello, everyone. Thank you for joining Tandem's 2022 fourth quarter and year-end earnings call. 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 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 includes 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. For additional information about our use of non-GAAP financial measures, please refer to our press release issued earlier today. Today's call will be led by John Sheridan, our President and CEO; and Leigh Vosseller, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we'll open up the call for questions. Thank you in advance for limiting yourself to one question before getting back into the queue. I'll now turn the call over to John.

[John Sheridan:]

Thanks, Susan, and welcome, everyone to today's call. In 2022, Tandem continued to expand its record high installed base to new levels with now more than 420,000 customers worldwide using the t

[Leigh Vosseller:]

Thank you, John. Our full year 2022 sales exceeded $800 million setting quarterly records throughout the year. With this achievement, we have more than doubled our sales in three years. Pumps made up 54% of our sales as we continue to expand the insulin pump market, capture competitive share and drive success in our renewal efforts. Fourth quarter sales were $221 million on a GAAP basis and $223 million non-GAAP on 36,000 pump shipments worldwide. Our GAAP sales reflect an accounting deferral related to the recent introduction of our Tandem Choice program in the U.S., which provides a pathway for our customers to access our newest pumps. Our non-GAAP sale computed to reflect pump sales consistent with historical periods in order to better aid and measuring progress of the business. It's important to note this program does not change the economics of when or how much we are reimbursed for each t

[John Sheridan:]

Thanks, Leigh. Before we begin Q&A, I'd like to acknowledge the separate press release we issued today announcing that Kim Blickenstaff will be handing over the duties of Chair of our Board of Directors to our fellow Board member, Becky Robertson. Kim has been an instrumental leader for Tandem since joining the company in 2007, serving first as CEO and then his chair for several years. His strategic vision and mission driven focus on our company culture has helped build and shape Tandem from VC back to start-up to a worldwide leader in diabetes care. While serving as Chair, a focus for Kim and that of our other directors has been on evolving our Board, bringing on a number of new talented individuals with diverse perspectives and skills and expertise in consumer technology, connected health, managed care and a global expansion. Beckie Robertson joined Tandem's board in early 2019 with an impressive track record of helping medical device companies scale in her roles as an engineer and entrepreneur, a corporate executive and Board member. She's added tremendous value to our Board, bringing patient centric and strategic vision, along with experience with a range of technologies and business models. It's a natural choice for the expanded leadership position. Thank you again to Kim and Becky, and we appreciate your continued contributions to the Board of our company. And with that, I'll turn the call back over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Matt Miksic with Barclays.

[John Sheridan:]

Hi, Matt.

[Matthew Miksic:]

Hi. Thanks so much for taking the time. I just wanted to make sure we understand the questions around that we're getting around sort of margin direction. The investments that you're making in this coming year. I appreciate the conservatism on the top line. But could you kind of walk us through, again, maybe just the puts and takes that get you to that sort of 5% to 6% EBITDA number you mentioned?

[Leigh Vosseller:]

Sure. Thanks for the question, Matt. I'll start with gross margin. Obviously, that makes a big difference in what we can achieve on the bottom line. And with the moderated sales that we have projected for this year. We didn't really anticipate much gross margin expansion. We do anticipate that we will have pricing improvements as well as cost efficiencies that will offset any product mix pressures that we may see. But the real benefit is to come in the future from new product launches, which I can talk to you in a bit. But then when you think about the puts and takes in the operating expense area, we took a lot of time to be very deliberate in thinking about which projects and programs will provide the biggest benefit or impact to the organization going forward. And so we prioritize a number of the R&D investments. We're taking measures such as consolidation of facilities as we rethink how we work in this hybrid environment and other programs along those lines. And then we're continuing to look for ways to optimize the business model. A lot of that comes from how we support our customer base and with the launch of Tandem source that will greatly improve our abilities to digitize and automate some of those customer-facing activities that we have today that require a heavy headcount burden. So when you put all those factors together and you think about where we ended 2022 at about a 7% adjusted EBITDA margin with the onset of the new acquisitions this year does put a little pressure on the bottom line, but we still felt very confident to expand those margins in the longer term.

[Operator:]

Thank you. And our next question comes from the line of Brooks O'Neil with Lake Street Capital Markets.

[Brooks O'Neil:]

Thank you for taking my question. I'm just curious, John, and Leigh, as you think about Q4 and maybe what you're beginning to see in Q1, could you just parse out what do you think are the impacts of the softening economy and the macro factors as well as give us your sense for the impact of competition and whether perhaps you're seeing anything different than you expected on the competitive side of the equation? Thanks a lot.

[John Sheridan:]

Hi, Brooks. Yeah. I mean I would say that if you look back to the third quarter call in November, we've seen things remain fairly consistent. And by that, I would mean it's been no better. It's been no worse. And that being said, I think that we anticipate that this is the way it's going to be throughout this year in the entire year. And so I think as we said in the prepared remarks, our intent really is to increase the awareness and benefits of Control-IQ and really focus on execution of these new product activities that we've got planned for the year because they are really going to drive the change in the growth curve of the company and get us back to a growth rate that we're used to in the past. But I would say that there's really been not much change, it's no better, no worse.

[Brooks O'Neil:]

In competition, John?

[John Sheridan:]

Yeah. I mean, I would say the same thing with competition as well.

[Brooks O'Neil:]

Okay.

[Operator:]

Thank you. And our next question comes from the line of Chris Pasqual with Nephron Research.

[Chris Pasquale:]

Thanks for taking the questions. Just want to dig in on the U.S. guidance. As we run the math on the renewal opportunity, it seems like guidance is probably baking in new patient starts being down low-double digits this year. So first, I'd just be curious if that's right or your math gets you to a different place.

[Leigh Vosseller:]

I think that's in the ballpark, Chris. One of the biggest drivers this year, especially one that we've seen some tremendous growth in that we can really count on is the renewal opportunity. And we expect that with the environment being so much to what we were seeing in the fourth quarter as we go into this year. That we will continue to see some level of pressure on new pumpers, although, we still will be adding new pumpers to the organization. It's just part of it is also the comp we had to last year, which the first half was a much healthier environment.

[Chris Pasquale:]

Right. Okay. And are you assuming any benefit from OUS renewals? You've been on the international market for a little over four years now. So it seems like that might start to flow through.

[Leigh Vosseller:]

You're right. We're just at the beginning of that in 2023 and 2019 was our first full year of operations, and we shipped 20,000 pumps in that year. But keeping in mind that there is a longer lag from when you ship those pumps to when they get placed on patients. It's more of a back half phenomenon for us and really moving into 2024 is where we'll begin to see noticeable benefit.

[Chris Pasquale:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Steve Litchman with Oppenheimer.

[Steve Lichtman:]

Thank you. Hi, guys. Wondering if you could just touch a little bit more on internal. I think the implied guidance is low-double digits, I guess, even including that headwind you talked about in terms of the transition. So can you talk a little bit about sort of the underlying dynamics on how things are trending outside of the U.S.? And any new regions we should be focused on for you guys in terms of Control-IQ here in 2023?

[Leigh Vosseller:]

Sure. I could start with saying that you can still think of the opportunity for us outside the U.S. is still about 4 million customers living with type 1 diabetes in the approximate 25 countries in which we're operating. So that would be the opportunity. And we've seen really great growth there. In fact, although hard to see on the top line because of some of the shipping dynamics, we've seen 20% growth in patient payments placements in 2022. So I think it's a great place for us to continue to push on penetration. So we're expanding the market as well as attracting competitive conversion there.

[John Sheridan:]

I'd also say, Steve, that this is an important week OUS as the ATD is starting today, I believe, and that we've got a symposium on Friday and which will have a number of papers that are presented. One of which is going to be the results of the Control-IQ NICE study, which is in the UK. And UK is looking at creative means to use AID technology to help people with diabetes in that country, and it's a big opportunity for us this year.

[Steve Lichtman:]

Thanks, John and Leigh. I’ll jump back in queue.

[John Sheridan:]

Thank care.

[Leigh Vosseller:]

Thanks, Steve.

[Operator:]

Thank you. And our next question comes from the line of Alex Nowak with Craig Hallum.

[Alex Nowak:]

[indiscernible] everyone. I know you're not including this in the guidance, but just curious, how are we thinking about the specular eventual content on the [indiscernible] CDM launches, [indiscernible] and then also [indiscernible] Mobi. Just remind us what happened back, when G6 come online and also in base control Q4 to roll out?

[John Sheridan:]

Alex, we had a really hard time understanding you.

[Susan Morrison:]

I think the question was what type of sales catalyst is the launch of our CGM partners, new sensors. And if you could maybe compare that to what we saw in the past with Control-IQ launch and the Basal-IQ Launch?

[John Sheridan:]

Yeah, certainly. I think that the interesting is, if you look back with Basal-IQ and with the Control-IQ is the G6 sensor had a meaningful impact and improving the overall patient experience in both products. But at the same time, we are introducing new algorithms but also had an important impact. I would say that clearly, with Basal-IQ is really the first device that reduced the burden of diabetes that people in the market had an opportunity to experience and then with Control-IQ, the first really effective AID system in addition to the great sensor. And obviously, the sensor and the finger sticks were important. I think if you look forward to this year, -- and in the case of DexCom and the G7 integration, it's a much better product. It's clearly got a painless insertion. It's got faster warm-up times and a much more ergonomic form factor, all of which are going to drive share growth for us. We think it's going to definitely be a favorable effect on sales, and we're going to see strength in our sales from that product. And as I said in the call, we anticipate that we would have the product in the scaling launch of the second half, excuse me, the second half of the -- the second quarter -- at the end of the second quarter.

[Alex Nowak:]

Okay. Thanks for the update.

[Operator:]

Thank you. And our next question comes from the line of Matt Taylor with Jefferies.

[Matt Taylor:]

Hi. Thanks for taking the questions. Good afternoon. And so I wanted to ask you more about the assumptions around the U.S. the new pump tax renewals, and I know you're expecting some pressure this year. I guess, I was hoping to understand better in the second half of the year, when you get maybe some new product help and lap the competitive launch, these conditions improve, do you think that you can grow new starts, externals in the U.S. in the second half of '23 and maybe extend that thinking to if you can?

[Leigh Vosseller:]

Sure. It's a great question. So I guess the first point I'll make is just a reminder that our guidance expectations for this year do not have those new product introductions in there. And so even with that, we still expect that we can expand the market with new pumpers just slightly pressured and part of that is just the baseline that we're comparing to. But with those new product launches, we do anticipate inflections in the business that we'll continue to attract more and more people from shots than what we're seeing today, just reaching a different segment, whether it's with the CGM integration or with our own Mobi product.

[Matt Taylor:]

Okay. All right. I’ll leave it there. Thanks, Leigh.

[Operator:]

Thank you. And our next question comes from the line of Matthew O'Brien with Piper Sandler.

[Matthew O'Brien:]

Thanks for taking the question. Hey, John, and Leigh. Thanks for taking the question. I guess, over the last year or so, there's been kind of a downward trajectory to revenue guidance. And now to your point where I think we're in good shape. But as I look at the EBITDA outlook for the company this year is -- and maybe I misheard Leigh, but I think you said negative in the first half of the year adjusted and then positive in the back, that would assume a massive ramp in the back half, if I'm hearing that right. And I mean, how do you get there? I just don't want to be in another situation where you've got to cut that outlook on the EBITDA line as we put the year as some of these expenses come through. So can you just are there programs that are going to fall off or something else there to really call out that gets you up to that full year adjusted EBITDA number? Thanks.

[Leigh Vosseller:]

Sure. A great deal of it is not so much tied to the spending levels themselves and as we expect that to stay moderated across the year, it’s really a function of the sales levels. So if you think about how sales are scaling, in the U.S., we have the typical seasonal curve where pump shipments start lower at the beginning of the year. In fact, coming off of Q4 pump shipments could -- our history would suggest that they could come down 30% in the first quarter. And so you have that on current spending levels. And then when you think about the OUS dynamics with that headwind that we're expecting to see in the first half and really most heavily loaded into the first quarter, it makes for a challenging sales number, which really puts pressure on that adjusted EBITDA at the beginning of the year. So the ramp through the end of the year is as much about the sales going up across the year scaling as it is about spending levels. But we are implementing programs today that I do expect to see -- start to see benefit from that on the spending side. And a lot of it would be initiatives in our customer care organization to -- for new productivities that will help drive down the cost to support the installed base as it continues to expand.

[Matthew O'Brien:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Joanne Wuensch with Citi.

[Joanne Wuensch:]

Thank you for taking the question. I just want to check a couple of things. If I put all the pieces into my model, it looks like new pumpers were down high-teens in the quarter. Is that the right math?

[Leigh Vosseller:]

Let me say that's in the ballpark. You're talking about Q4. It did have the most pressure of the year in terms of new pumpers when you're looking year-over-year, I would like to highlight, though, Joanne, that going from Q3 to Q4, we did see a modest increase in new pumpers as well as renewal customers.

[Joanne Wuensch:]

Okay. And then just as a follow-up, I'm just a little thoughtful on how we're going to get from essentially 3% more or less revenue growth in the first quarter to ramp to get to your full year guide. Other than easy comps since you're not including new products in there, are you assuming maybe even trialing or something else that is helping you figure out that ramp? Thank you.

[Leigh Vosseller:]

Yeah. So really the ramp about separating -- it's important to separate the U.S. from the OUS markets. But the ramp across the year would follow what I would call a typical seasonal curve. The challenge is that when we're comparing year-over-year, we had a much healthier environment in the first quarter of last year and even the second quarter compared to the back half. So part of the year-over-year conversation is just about comps in the baseline and not so much about something you have -- that's beyond belief in the 2023 expectations. So if you think about renewals continuing to drive growth this year, as you think about continuing to have new pumpers come to Tandem. And then in the OUS markets, particularly with a $25 million headwind in the first half, again, mostly in the first quarter. That's really a pressure on that top line growth rate. And so -- it's as much about those elements and the comp year-over-year as it is about anything else.

[Joanne Wuensch:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Travis Steed with Bank of America.

[Travis Steed:]

Hey. Thank you for taking the question. I heard your comments on things no better than worse. But curious the guidance did change, the low end went down a little bit. I just want to make sure I understood the reason for the guidance change on the revenue. And then a quick clarification, it looks like U.S. supply revenue per patient was down about 5% year-over-year. So just want to understand the math on the U.S. supply revenue. Thank you.

[Leigh Vosseller:]

Sure. So starting with the guidance question. I would characterize that Travis as just -- now that we're giving guidance top to bottom on the P&L and giving it in a whole dollar number rather than a growth rate, we're starting with that typical $15 million range that we usually start the year with. And important point is that the midpoint of that range is right in line with the business, so obviously very comfortable with where consensus is sitting today from that regard. And then when looking at the supplies on a per patient basis, nothing in our data suggests that there was anything out of the norm or unusual in terms of a per person usage of supplies. And so, I don't know [indiscernible] can really just speak to from a supplies perspective. I guess, I would clarify, if you're looking at it on a worldwide basis, we did see some headwinds on supplies outside the U.S. because of the transition to the distribution center that began in the quarter. But when you look at the U.S. independently, it was really very much in line with our expectations.

[Travis Steed:]

Okay. Great. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Larry Biegelsen with Wells Fargo.

[Nathan Treybeck:]

Hi. This is Nathan Treybeck on for Larry. Just a question in terms of the Mobi launch. Are you expecting any delay in new starts or renewals because patients will wait for the launch?

[Leigh Vosseller:]

So that's something that does typically occur in advance of a new launch. But I would say it's much closer to the launch time itself and not really that far in advance. In fact, it usually doesn't begin until you get to a clearance point. So between then and when you start your commercial launches when you see sometimes some level of cost. But we're continuing to -- we have a program today to help mitigate the process (ph) as much as possible, and we'll continue to evaluate the effectiveness of that. At this point, I can say that we're not hearing anything from a field perspective that says there's even much knowledge of Mobi coming from a customer perspective. And so today, we're not seeing any profit related to it.

[Nathan Treybeck:]

Thanks. And just as a follow-up, so we've seen most diabetes devices delayed at the FDA in recent years. Do you expect a few rounds of questions with Mobi? And I guess, what's a reasonable base case for launch timing?

[John Sheridan:]

Yeah. I mean, we are in the process of responding to the questions right now. I would say that the communications that we're having and the interaction is normal for the stage of the process. And you're right, it's -- I mean, clearance timing is difficult to predict. And the way we're dealing with that is that we're planning on a scaled launch in the second half of the year. And roughly, we would expect that to start a quarter after clearance. And I think that's just the way we're looking at it. I mean, I think that we can't control it, but we can be prepared and that's what we're planning to underpin.

[Nathan Treybeck:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Jeff Johnson with RW Baird.

[Jeff Johnson:]

Thank you. Good evening. Hey, John. How are you? First off, I guess, first, can you just pass along, I'm sure for all of us, well, wish us to Kim. And just letting the personnel continue his generosity with Pure, Illinois is near and dear to my heart in my hometown. So if you could pass that message, John. I would appreciate it.

[John Sheridan:]

Absolutely.

[Jeff Johnson:]

Yeah. And then just two follow-up questions here. Just some things that have been asked. One, on the 30% normalized sequential declines for 4Q to 1Q, we do have some macro uncertainty in this environment and obviously, competitive headwinds or at least competitive uncertainties. Are you comfortable that like a normalized sequential pattern is something that can happen this year? We don't have to build in a bigger cushion there? And then just to Joanne's question, she would asked about upper teens decline in new patient starts. I just want to confirm, that's on a global basis, right? We have you down, I think, closer to 25% on a U.S. basis. I just want to make sure my math is not off on that use number. Thank you.

[Leigh Vosseller:]

Sure. So starting with the sequential decline question, I would say that, that history that we've seen, I feel comfortable is going to hold true in the first quarter. And part of that is back to John's commentary that since the last earnings call, we've seen the environment maintain consistency, no better, no worse than what we've seen. And so we're comfortable that thinking about it from along the lines of those same historical seasonality trends would make sense at this point. And then in terms of new patient declines, the conversation that we've been having at least when I've been talking to patients, I've been very focused on the U.S. market. And so that's what, I would agree with the percentages that people have been commenting to and suggesting that they've come up within their models, are pretty much in line with what we have been seeing and what we're anticipating.

[Jeff Johnson:]

So sorry, just to clarify, you're down high-teens for U.S., that was a U.S. comment? Because again, I get you down 25%, and we can talk about the math offline, but I just want you're saying closer to down high-teens for U.S. new starts in the 4Q?

[Leigh Vosseller:]

I would say it's in the ballpark, Jeff. And we're talking about 4Q and then as we look ahead, someone had asked the question about next year as well and I agree with their indication.

[Jeff Johnson:]

Fair enough. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Matthew Blackman with Stifel.

[Mathew Blackman:]

Good afternoon, everybody. Thanks for taking my question. Leigh, I appreciate the specific call out on the EBITDA headwind from AMF and Capillary in 2023. If I can get greedy, though, for AMF specifically, conceptually, does spend accelerate from ‘23 into '24 and '25 likely move into more intense clinical and regulatory work or should we think about it being a fairly consistent annual investment rate through commercialization? Thanks.

[Leigh Vosseller:]

Sure. The way to think about it, Matt, is this -- is that even in our own, let's say, pre-AMF in our own plans, we had expected that we would be accelerating spending on our own patch pump program. And so by acquiring AMF standing down our own internal program, it's going to follow suit with what we anticipated. And so that falls in line with our original R&D expectations across the five years and meeting our operating margin targets.

[Mathew Blackman:]

Yeah. Okay. Appreciate that. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Joshua Jennings with Cowen.

[Joshua Jennings:]

All right. Good evening. Thanks for taking the question. I wanted to ask about the tech access program and just how sales have attracted the first internal expectations and maybe what's a fair amount to assume for '23 to account for the difference between GAAP sales in the non-GAAP guidance?

[Leigh Vosseller:]

Sure, Josh. Thanks for the question. And so just a little bit more information on the Tandem Choice program is that today, I guess I would highlight that it doesn't change the economics of a transaction when we sell t

[Joshua Jennings:]

Great. Thank you for that. And then just on the pipeline, I just wanted to ask about piece of the next three and just any updates on development or regulatory progress for that platform? Thanks.

[John Sheridan:]

Well, we're -- sure. We're definitely in the middle of developing the product right now. I mean I think it's the -- we said that t

[Joshua Jennings:]

Great. Thanks.

[Operator:]

Thank you. And this concludes today's conference call. Thank you for participating, and you may now disconnect.