Memorandum

Tandem 1Q20 – Worldwide sales of $98 million, rising 48% YOY; 17,378 pump shipments (+18% YOY) globally; “more than 30,000” have updated to Control-IQ; t:sport delayed – April 30, 2020

Executive Highlights

  • Tandem reported quarterly revenue of $98 million in 1Q20, rising 48% YOY on a very challenging comparison to 142% YOY growth in 1Q19 and down 9% sequentially. Much of the growth was attributed to the excitement around Control-IQ, which launched in late January. Tandem’s US business led the way, reporting revenue of $80 million (+46% YOY). International sales of $18 million rose 62% YOY. Notably, initial shipments of pumps and supplies to Germany and France were made at the end of 1Q20, in preparation for the launch of t:slim X2 in those countries. Exact launch timings will depend on the state of the COVID-19 pandemic in those countries.

  • Tandem shipped a total of 17,378 pumps worldwide in the quarter, rising 18% YOY on a tough comparison to 232% growth in 1Q19 – sequentially, pumps shipped fell 11% from just under 20,000 in 4Q19. In the US, 13,158 pumps were shipped (+36% YoY and down just under 25% sequentially); outside the US, 4,220 pumps were shipped (-17% YoY but nearly double sequentially). Tandem’s in-warranty global user base is now at ~155,000, up from “nearly 100,000” one year ago. In line with previous rates, “approximately half” of new patients in the quarter came from MDI. Of note, this rate has been “consistent” through April, an encouraging sign that pump-naïve patients are not less likely to start pump therapy in the current environment with COVID-19 though to characterize that trend, we’d like to have more than six weeks of data. We do think COVID-19 should actually prompt more pump starts in theory, due to better outcomes associated with automated insulin delivery. A new “outcome” for many people with diabetes is now “staying out of the hospital” – AID certainly enables this.

  • Just over two months since officially launching, “more than 30,000” people have now updated to the hybrid closed loop algorithm Control-IQ. This also represents an additional ~18,000 people from the “more than 12,000” that had updated as of Tandem’s 4Q19 call at the end of February. CEO John Sheridan hinted at upcoming releases of real-world data from Control-IQ and also hinted that the real-world Time in Range for Control-IQ may be higher than that of the pivotal trial, where Control-IQ users ended with a mean Time in Range of 71%, up from a starting point of 59%, or an additional three hours time in range per day.

  • The FDA submission for a pediatric indication for Control-IQ has been submitted to lower the indication to 6+ years. Tandem is expecting a “longer than usual” review time, given the situation with COVID-19 and also probably the head of the division Dr. Alain Silk departing FDA a bit summarily (or at least unexpectedly from what we understand). The t:slim X2 smartphone app was beta launched in 1Q20 and will be “rolled out more broadly in the upcoming weeks.” The app will bring wireless uploading of t:slim X2 insulin dosing data along with CGM data into t:connect, removing the burden of cabled data transfer for both patients and providers. Elsewhere in the pipeline, we learned that submission and launch timelines for smartphone pump control and t:sport pump have been pushed back with no clear timelines.

  • With the uncertainty around COVID-19, Tandem has chosen to suspend its full year 2020 guidance and instead provide guidance for 2Q20. The company is expecting revenue of “at least $85 million” in 2Q20, including ~$10 million in international sales – the international sales down $8 million as estimated may well be conservative. CFO Leigh Vosseller noted that the main uncertainty with the 2Q20 guidance is around June as Tandem “already knows what April looks like and [has] orders in the system that will dictate pretty much how May will come in.” Tandem is expecting to see a bigger impact from COVID-19 impact in its international markets, where “patients tend to be treated more commonly in the hospital setting.”

  • Q&A was really illuminating – management clearly did a great job and it was terrific to hear so many obviously authentic characterizations from patients. “The Time in Range people are experiencing now is in the high 80s and 90s...”

Tandem reported 1Q20 financial results today in a call led by CEO John Sheridan, CFO Leigh Vosseller, and Chief Commercial Officer Brian Hansen. Check out our top highlights below.

Financial Highlights

1. Worldwide revenue of $98 million, rising 48% YOY; US sales of $80 million (+46% YOY), OUS sales of $18 million (+63% YOY)


Tandem reported quarterly revenue of $98 million in 1Q20, rising 48% YOY on a very challenging comparison to 142% YOY growth in 1Q19. The $98 million in revenue represents the company’s second-highest quarterly revenue, falling short of the record $108 million in 4Q19. The 10% sequential decline is a slight improvement from the 13% sequential decline from 4Q18 to 1Q19 and considerably better than the ~30% fourth quarter-to-first quarter sequential declines in the two years prior. Much of the growth was attributed to the excitement around Control-IQ, which launched in late January. Chief Commercial Officer Brian Hansen noted that pump “sales” typically begin ~30 days before the sale is recorded; thus, in the US (where impact from COVID-19 really began ramping up in March) the impact of the virus on Tandem’s March sales is limited. However, through the first month of 2Q20 (April), Mr. Hansen noted that demand has remained strong. Pump sales made up 61% of sales in the quarter, followed by infusion sets (27%) and cartridges (12%). The 61% of sales made by pumps in the quarter is lower than the 68%-70% we saw throughout 2019. Part of this would be explained by users “stocking up” on infusion set and cartridge supplies (due to COVID-19); CFO Leigh Vosseller estimated about $3 million of additional sales around infusion sets and cartridges due to this “stocking up” effect (that sounded on the higher side to us but then again anything is possible, of course).

  • Tandem’s US business led the way, reporting revenue of $80 million (+46% YOY). The strong growth, driven by Control-IQ, comes on a tough comparison to 100% YOY growth in 1Q19. Sequentially, sales were down 19% from the record set in 4Q19. Domestic sales drove 77% of overall company revenue growth in the quarter, slightly higher than the levels seen through most of 2019. Pump sales delivered $50 million of sales in the quarter with the remainder coming from infusion sets and cartridges.

  • International sales rose 62% YOY in 1Q20 to $18 million. Sequentially, sales rose a striking 80% from 4Q19. As a reminder, Tandem’s OUS business saw a weaker 2H19 compared to 1H19 due to the disappearing Animas opportunity and fulfillment of backlogs that were present at the beginning of 2019. Notably, initial shipments of pumps and supplies to Germany and France were made at the end of 1Q20, in preparation for the launch of t:slim X2 in those countries. Those exact launch timings will depend on the state of the COVID-19 pandemic in those countries. We didn’t hear any updates on timing today, but the launch of Control-IQ internationally (expected in “back half” of 2020 as of 4Q19) will help drive further growth and adoption.

2. Pump shipments of 17,378 (+18% YOY); worldwide in-warranty user base of ~155,000; no slowdown in MDI conversions in April

Tandem shipped a total of 17,378 pumps worldwide in the quarter, rising 18% YOY on a tough comparison to 232% growth in 1Q19. In the US, 13,158 pumps were shipped (+36%); outside the US, 4,220 pumps were shipped (-17%). Similar to revenue, the ~11% sequential decline in pump shipments from 4Q19 to 1Q20 was on par with the 9% sequential decline from 4Q18 to 1Q19 and significantly better than the ~35% fourth quarter-to-first quarter sequential declines seen in the two years prior. Notably, international shipments nearly doubled sequentially (+96%).

  • Tandem’s in-warranty global user base is now at ~155,000, up from “nearly 100,000” one year ago – this is a fantastic performance and what a difference two years makes! Sequentially, the user base grew by ~13,000 from 4Q19. About 9,000 of the user base adds came from the US, as Ms. Vosseller estimated the US user base at “approximately 127,000” and the OUS user base at ~28,000. We’d note that these estimates are likely conservative, as they only count purchases from the last four years; in reality, Tandem is probably renewing pumps that expired over four years ago. We salute Tandem for enabling so much through data – they could easily report fewer growth metrics; the transparency enables much better track of AID than would otherwise be possible.

  • In 1Q20, renewal pump shipments totaled “approximately 2,200,” representing a near doubling from ~1,200 in 1Q19. Wow! There was no update on the percentage of potential renewals Tandem is capturing; throughout 2019, this ranged from “about half” in 1Q19 to “more than half” in 4Q19. Of course, as Tandem’s user base continues to expand, capturing renewals will become an increasingly important revenue contributor and part of the business. We can’t imagine any patients are arguing for any pumps other than Tandem’s right now – eventually when there is something available from other manufacturers outside Medtronic, there may be more interest.  On today’s call, Ms. Vosseller did note that Tandem has “increased [its] internal resources focused on this effort” and that she was “pleased” with progress on this front. Tandem’s at-home software updates (e.g., Basal-IQ, Control-IQ) are a compelling pull for customers to stay on Tandem’s pumps, especially when those updates are free and so easy.

  • In line with previous rates, “approximately half” of new patients in the quarter came from MDI. (The other half come from patients switching from competitors’ pumps.) Of note, this rate has been “consistent” through April, an encouraging sign that pump-naïve patients are not less likely to start pump therapy in the current environment where in-person pump training is difficult or impossible. We are not sure what is happening to pump therapy for those just diagnosed – we imagine that it may be lower in general. As a sidenote, we were slightly surprised to hear that some trainings were “going remote” but not necessarily all – as well, management referenced Skype as one of the two platforms being frequently used. For comparison, Insulet saw “over 80%” of its new users in 4Q19 come from MDI, where its no-upfront cost and no-risk model with Omnipod Dash may be more appealing. Regardless, both companies continue to expand the pump market as a whole and with growing awareness of AID systems, Tandem is well-positioned to take advantage, particularly when there is no real closed loop competition – those who would be open to the 670G are probably already on it (by choice or through pressure).

  • While Tandem’s pump inventory and manufacturing capacity is at or above target levels, the company ended 1Q20 with cartridge and infusion set inventory “below [its] targeted levels.” As noted above, there was some impact from patients stocking up on their pump supplies, especially towards the end of the quarter, but CEO John Sheridan reassuringly referred to these as “temporary challenges.”

    • “We observed customers purchasing cartridges and infusion sets at a higher rate than anticipated at the end of the first quarter and as a result our inventory for finished cartridges and infusion sets is below our targeted levels. Our third-party cartridge manufacturer recently commenced commercial scale manufacturing to supplement our existing cartridge manufacturing capacity and we will be steadily scaling volumes across this year. In addition, our primary infusion set manufacturer is currently working through an inventory constraint and so we are carefully managing our pump supplies inventory while we work to overcome these temporary challenges.” – Mr. Sheridan

3. Full year 2020 guidance suspended; 2Q20 guidance for revenue of “at least” $85 million (-9% YOY); greater COVID-19 impact expected OUS

With the uncertainty around COVID-19, Tandem has chosen to suspend its full year 2020 guidance and instead provide guidance for 2Q20. The company is expecting revenue of “at least $85 million” in 2Q20, including ~$10 million in international sales. This low-end guidance of $85 million would represent a 9% YOY decline from 2Q19. In our estimate, this guidance is fairly conservative and during Q&A, Ms. Vosseller stated she was “very confident” that revenue in 2Q20 would be at least $85 million. Ms. Vosseller also noted that the main uncertainty with the 2Q20 guidance is around June as Tandem “already knows what April looks like and [has] orders in the system that will dictate pretty much how May will come in.” Typically, Tandem has seen sales increase from month-to-month, and indeed March had the highest revenue in 1Q20, she said, which was striking to us given the intensity with which the COVID-19 “shelter in place” took hold in mid-March. Unsurprisingly, Tandem is not guiding for the same seasonality pattern in 2020 given the pandemic; Mr. Sheridan noted during prepared remarks that “strong demand has continued” through April, though Ms. Vosseller later stated “that April and May are seeing pressure compared to what we would ordinarily see.” That was interesting to hear since May Day is tomorrow – it sounds like the company has a good idea May will be lower, sequentially, even though April was “stable.”

  • Tandem is expecting to see a bigger impact from COVID-19 impact in its international markets, where “patients tend to be treated more commonly in the hospital setting.” The $10 million in international sales guided for in 2Q20 are primarily driven by sales of supplies to existing users.

  • As a reminder, Tandem was guiding for $450-$465 million in revenue in FY20, representing 24%-28% YOY growth. Despite the suspension of this guidance, Ms. Vosseller noted during prepared remarks that “[Tandem has] not completely dismissed the possibility of a scenario that could result in achieving our original guidance range as more and more people experience the benefits of Control-IQ.”

4. Gross margin of 51%; $160 million in cash; adjusted EBITDA of $4.1 million (4% of sales)

Tandem reported a gross margin of 51% in 1Q20, in line with that of 1Q19, though a decline from 56% in 4Q19. Ms. Vosseller noted that product margins were higher in 1Q20 than in 1Q19, but this was offset by a decreased percentage coming from pump sales, which have higher margins (61% in 1Q20 vs. 70% in 1Q19). Royalties for Control-IQ (presumably related to Dexcom’s ownership of TypeZero’s inControl algorithm) cost about 1% of sales in the quarter. Gross margin is expected to be “relatively flat” with this quarter in 2Q20, though Ms. Vosseller maintained confidence that gross margins would reach 60+% long-term.

  • Tandem finished the quarter with $160 million in cash and cash equivalents, down from $177 million at the end of the 2019. That makes 1Q20 Tandem’s first quarter with negative cash flow since 1Q19; this was expected given the seasonally weaker revenue in first quarters. 

  • Operating expenses in the quarter totaled $64 million, rising from $44 million in 1Q19 (+44% YOY). This was roughly 65% of sales in 1Q20 versus 66% in 1Q19 – some improvement to be sure but we wish it were easier to come by and easier for greater operating leverage to emerge.  For comparison, revenue grew by 48% YOY in 1Q20.  

  • Adjusted EBITDA in 1Q20 came in at $4 million, or 4% of sales. That represents a strong improvement from $0.3 million in adjusted EBITDA in 1Q19 (1% of sales). Sequentially, adjusted EBITDA was down from $23 million in 4Q19, or 21% of sales. 

Control-IQ and Pipeline Highlights

1. “More than 30,000 people have updated” to Control-IQ; CEO John Sheridan: customers have called Control-IQ “life-changing,” Time in Range in “high 80s and 90s”

Just over two months since officially launching, “more than 30,000” people have now updated to the hybrid closed loop algorithm Control-IQ. This also represents an additional ~18,000 people from the “more than 12,000” that had updated as of Tandem’s 4Q19 call at the end of February. This would represent about one-third of Tandem’s updateable pump user base in the US, which was in “excess of 90,000” in February (no updated figure was provided today.) For some context, one year ago, the pivotal study for Control-IQ had just completed and was set for read-out at ADA 2019. Today, that algorithm is installed on at least 30,000 pumps across the US. (It’s unclear how many pumps have shipped with Control-IQ already installed.)

  • One analyst asked what “overwhelmingly positive customer feedback” means, asking management to share anecdotes on what feedback they were seeing from Control-IQ users:

    • “The first thing I'll say is that it's our customers who are calling Control-IQ life-changing. It's not us - they are doing that. If you look at the blogs, if you look at the emails that we receive you know the customers, the Time in Range people are experiencing now is in the high 80s and 90s. It's just absolutely incredible. People love the fact that they can go to sleep and they haven't got to worry about their diabetes while they're sleeping … Everything that we're seeing right now is strong. It's great. It's easy to use. It integrates with Dexcom's G6, so it doesn't require finger sticks and it's also got minimal alarms. It’s all been very, very positive.” – Mr. Sheridan

  • Later during Q&A, Mr. Sheridan hinted at upcoming releases of real-world data from Control-IQ. It was also hinted that the real-world Time in Range for Control-IQ may be higher than that of the pivotal trial, where Control-IQ users ended with a mean Time in Range of 71%, compared to 59% Time in Range going in.

    • When we look at the trial, the trial was very representative of the state of diabetes in the United States. There were people who had very good control and then there were people who just didn't really try to control their diabetes at all. In many cases, there was there was no bolus done during the trial in a significant percentage of people that had high A1cs. They typically brought the Time in Range down for the overall population of that group, but it was representative. I think now if you look at the people who are using the pump, they are serious about managing their diabetes. They do care about it. I think when you look at that population we have seen many, many reports of people who have had great experiences and they're seeing very high Time in Range. It's great to see and it's something we anticipated. Of course, we're working on looking at post-market data right now. We are planning to collect it and we're looking to present it as we have the opportunity at shows and conferences here in the near future.” – Mr. Sheridan

2. Pediatric indication (6+ years) for Control-IQ submitted to FDA; t:slim X2 smartphone app to roll out in “coming weeks”

The FDA submission for a pediatric indication for Control-IQ has been submitted to lower the indication to 6+ years. As a reminder, Control-IQ is currently indicated for use by patients 14 years and older. While we previously speculated that Control-IQ in pediatrics could launch before the summer, the FDA announced in mid-March that the Agency is prioritizing COVID-19 related devices. Given that FDA reviewers are also working from home, Mr. Sheridan also noted that Tandem is expecting a “longer than usual” review time. Still, the pediatric pivotal (n=101 participants ages 6-13), which read out at ATTD 2020 showed convincing results: Time in Range in the Control-IQ group increased from 53% at baseline to 67%, compared to those in the SAP group, who increased Time in Range from 51% to 55% (p<0.001). Like the adult trial, the vast majority of Time in Range improvement came at night, with the closed loop group reaching an astounding 80% Time in Range compared to 54% in the SAP group.

  • The t:slim X2 smartphone app was beta launched in 1Q20 and will be “rolled out more broadly in the upcoming weeks.” The app will bring wireless uploading of t:slim X2 insulin dosing data along with CGM data into t:connect, removing the burden of cabled data transfer for both patients and providers. This feature is especially valuable right now, where telemedicine visits are more common. To our knowledge, the app will also make t:slim X2 the first pump with truly no-cable uploads (we believe Omnipod Dash must be plugged into a Mac/PC to upload to Glooko). The app will also be able to automatically upload Dexcom CGM into t:connect.

    • The t:connect app also offers secondary display (mirror) of pump information, including Dexcom CGM trend, insulin on board, recent boluses, and basal information. The user interface looks friendly and very useful! It will be interesting to see how Tandem displays the automated basal and bolus dosing with Control-IQ – the below screenshot is from AADE 2019. For context, the Tandem app has a tighter integration with Dexcom, showing CGM and insulin delivery data within the same app; Insulet’s Dash Display app only shows the pod’s insulin information, requiring the Dexcom app to be running separately.

3. Human factor testing for smartphone bolusing delayed; pivotal study for next-generation Control-IQ algorithm in “2021 timeframe”

Tandem first revealed in February that they plan to bring smartphone pump control to its t:slim X2 pump. According to Mr. Sheridan, this feature will not require additional clinical studies, but will require human factors testing. These human factors tests were planned for 2Q20, but due to COVID-19, the tests have been pushed back with no clear timeline. Mr. Sheridan shared that these tests would take place when traveling is safe again and “government restrictions are lifted.” Fortunately, during Q&A, Mr. Sheridan also explained that human factors testing only takes “a day or two,” followed by the time needed to analyze results and generate reports – much quicker than a clinical trial. Being able to dose insulin from a personal smartphone (or even smartwatch) is one of the most requested features of pump users and Insulet has intended to launch its Omnipod Horizon hybrid closed system with smartphone control for over a year. Importantly, Tandem did share in February that they planned to bring this feature to both Android and iOS users and that the feature would be free.

  • Also revealed in February, Tandem plans to bring a “fully closed loop system capable of complete bolus and basal insulin automation” with its next AID update in “2021.” With the disclaimer that most timelines are unclear until COVID-19 subsides, Mr. Sheridan stated plans for a pivotal study in the “2021 timeframe.” For now, the company is focusing improvements to the parts of the algorithm that won’t require a “great deal of clinical work.” As we wrote back in February, this timeline seems aggressive, but would be an awesome win for patients. Medtronic’s “Personalized Closed Loop” is the only other system looking to have meal handling and phone control by the end of 2021 - see our AID competitive landscape.

4. Submission timing for t:sport pushed back; previously expected “this summer” with launch in “first half of 2021”

In the only mention of Tandem’s t:sport pump, it was confirmed that the FDA submission for the pump has been pushed back with no clear timelines. Like the human factors testing for phone pump control (see above), Mr. Sheridan suggested that submission for t:sport would come in when traveling is safe again and “government restrictions are lifted.” We expect this also has something to do with Dr. Alain Silk’s departure from FDA. Previously, Tandem expected to submit t:sport as an ACE pump in “summer” 2020 with launch in the “first half of 2021.” The pump was also expected to launch with smartphone control – given the delay in both timelines, we’d imagine this plan has not changed.

  • As a reminder, t:sport is a screenless, wirelessly controlled tubed pump (short infusion set), which will include the Control-IQ algorithm and iCGM integration (no new clinical data will be needed). t:sport is half the size of the current t:slim; will switch to a syringe-driven pumping mechanism (a big manufacturing change for Tandem); and will add wireless charging, water resistance, an on-device bolus button, and an easier fill process. Closed loop will still run on the pump if the phone is out of range, keeping Tandem more competitive with the on-body system design of Insulet’s Omnipod Horizon.

Slide taken from Tandem’s 2018 Analyst Meeting (note that the launch timing expectation is no longer up to date).

5. Not mentioned: international Control-IQ launches, Abbott partnership

There were no updates around any launch timings for Control-IQ in Europe. As of 4Q19, this was expected in the second half of this year. As a reminder, the Tandem Device Updater finished rolling out outside the US at the end of 3Q19, which is when Basal-IQ began rolling out. Getting Control-IQ in Europe should help drive its international sales and serve as a very compelling AID competitor to Medtronic’s MiniMed 670G.

  •  There were also no updates around Tandem’s partnership with Abbott, announced in October 2019. As of 4Q19, the details of the agreement were still being worked on.

Analyst Q&A

Q: Could you give us just a little bit more color on the assumptions behind the $85 million number for 2Q[20 revenue]. What are you assuming in terms of the pressure on new patient starts and have you thought about how that progresses relative to what you saw in April?

A (Leigh Vosseller, CFO): The Q2 guidance is really based on what we've already seen until right now. So, as you can imagine we already know what April looks like and we have orders in the system that will dictate pretty much how May will come in. The biggest question mark right now is what happens in June and as we progress forward. At this point, we haven't anticipated a typical seasonal scale which would mean that June would normally be the highest month of the quarter. We’re just going to keep monitoring that. At this point based on what we already know today and about our international orders that we have in hand, we're very confident that we can hit at least $85 million. Interestingly, our metrics that we typically monitor the number of people that are coming from MDI versus competitor conversions those of all stayed intact now through April even though we're seeing some pressure on orders overall.

Q: Thank you for the impact of the supply stocking. Was there actually a revenue contribution from the new European territories this quarter, was there stocking that went into the OUS number here in 1Q?

Ms. Vosseller: Yes. We haven't quantified that but we did have our initial stocking orders for Germany and France in particular which contributed to the international sales [in 1Q19].

Q: On the $85 million in Q2, how much below your original plan is that and can you think through what needs to have happen in the back half in order to get your original expectations?

Ms. Vosseller: Sure, as you think about how to look at the entire year, we obviously don't give any of our detailed modeling assumptions, but it really comes down to what sort of recovery curve one might anticipate. You hear a lot of conversation about the V-shape the U-shape even the W-shape. I mean at this point our only visibility is what we have in front of us right here for the upcoming month or so. We’re not even thinking about Q3 with any sort of seasonal uptick that we would ordinarily see.

Q: Are you still reiterating the five-year plan for 500,000 patients? know you built-in some conservatism originally for competitive launches, but you got fortunate and had your product approved and your competitors haven't yet. It seems like there's a chance that those get delayed. We're trying to think through what kind of incremental opportunity that can be on the margin from concerned launches getting delayed?

A (John Sheridan CEO): I would just say that we have not [reiterated], but we still intend to get the numbers we've put in place for our five-year plan. I think that you know we have to wait and see what happens with the competitors obviously on their own specific clinical studies and plans. But, at this point in time you know I think it just gives us runway. We had anticipated about six months to a year of runway to build momentum on Control-IQ. We think that's still the case.

Q: How are you guys positioning the sales force to sell in post-COVID world? Do you know where it might be harder for reps to access these medical clinics?

Mr. Sheridan: Well, I'll just say that our team did a great job transitioning to virtual interactions with our physicians. We have excellent relationships with our physicians. We're in touch with them frequently, both our sales organization and our trainers. So, the trend to the transition was smooth. They did a great job. I'll let Brian add a little color to that.

A (Brian Hansen, CCO): Yeah, John, I think we're going to take their lead we're going to see what how they would like us to interface with them. Thankfully, we had many of these tools in place both for the virtual training and then also clearly everyone has tools in place for emails and calls and video conferencing now with the physicians. We’ve even done some real unique sales calls via you know a virtual setting now and we'll see how that all plays out. I think it's going to vary account by account and will kind of follow their lead and they'll take it a day at a time. But, so far we've been in direct conversations and communication with all our accounts and their adjusting to the new norm as well.

Q: Stepping into the patient's shoes a little bit, what is the end user diabetic saying about COVID and their willingness to switch devices during a time when it might be tough for them to access the doctor or hospital? Is this turning patients off from upgrading at all and you know what would that do to the end user demand through the end of the year?

Mr. Sheridan: Yeah, I think we can only speak through Q1 and in April what we've seen so far in the calls to our team. Our communications with our field team has been very robust, so we might actually look at this a little bit. If they have time at home, they're doing the research, they are communicating still through telehealth with their physician and they're reaching out to us with that time to have the conversations with our inside and external sales team. We've actually found them to be very accessible right now and very open to those conversations. Unlike the face to face visits we may have had before, some of the walks or galas that we may participate in before, our virtual sales calls have gone very well. We're actually finding a very captive audience right now, so again, we're adjusting to the new norm. We only know what we know four months into the year, but so far it's going very well and patients have been very open as you can tell from our MDI numbers to switching therapies and coming on to a pump so far.

Mr. Hansen: I'll also add that the stress levels that come along with just dealing in an environment with COVID-19 affects people's blood sugar control, as well as COVID-19 itself has been shown to actually cause significant issues with hyperglycemia and blood sugar control. So we're hearing that people are actually out there are appreciating the benefit of Control-IQ because it does have such improvements in their overall control. We expect that to continue to drive demand to the device.

Q: Do you see any indication of building backlog? Do you see any indication that the patients have delayed purchasing pump?

Ms. Vosseller: I would say that without COVID-19 we would have done better in the first quarter and as Brian indicated we anticipated weakness in March and April as people converted to virtual visits and virtual training. We were surprised obviously to see the strength in those two months and it's largely driven by Control-IQ. It's interesting because right now it's approximately three months from the time we started to actually shift Control-IQ back in January. When we look at that and what happened with Basal-IQ, after the first three months, people started to talk to their physicians. They began to actually see the benefit of Basal-IQ. The same thing is happening now with Control-IQ. Brian mentioned the growing momentum; we expect to see continued growing momentum for Control-IQ and as people expressed the great results they're seeing to their physicians. That's only going to underscore the value of the product. I think that you know we do anticipate that there will be a bump when we get through this. We're well-prepared to deal with that.

Q: I understand in general what overwhelmingly positive customer feedback means. Can you give us just a little color on some of the sort of anecdotal things on what is really resonating with your patients?

Mr. Sheridan: The first thing I'll say is that it's our customers who are calling Control-IQ has life changing. It's not us. They are doing that. If you look at the blogs, if you look at the emails that we receive, the Time in Range people are experiencing now is in the high 80s and 90s. It's just absolutely incredible. You know people love the fact that they can go to sleep and they haven't got to worry about their diabetes while they're sleeping. They just have amazing experiences at night and just they're able to sleep through the night which is just really positive. It’s everything that we're seeing right now. It's strong, it's great. It's easy to use. It integrates with the Dexcom G6, it doesn't require finger sticks and it’s also with minimal alarms. It's all been very, very positive.

Q: For the mobile bolus feature, can you remind me what are the clinical work was required besides human factor testing prior to submitting? For the next generation algorithm, you were planning to launch in 2021 with some really attractive features. Could you give us an update on what type of clinical trial work you think might be required to launch that product and should we expect that to launch a little bit later given what's happening in the world?

Mr. Sheridan: Yeah, for the mobile bolus feature there is no additional clinical study required. It's all about human factors. Human factors is very different than a clinical trial in that there's definitely work - there is a lot of work that goes into planning it. The actual human factors testing takes a day or two and then there's time that's required to just analyze the results and get the reports. I'm not trying to understate the challenge of the complexity of doing all of that, but it's really much more contained and it happens in a much shorter period of time in a clinical study. We think there's almost a one-for-one impact of the delays between the time we had planned on doing the human factor studies and the time it will actually get it done to the submission. We are currently still working aggressively on Control-IQ, the next generations. We are actually looking at it in a risk-based manner. The first improvements we're looking at in Control-IQ really are not going to require a great deal of clinical work, so that's what we're prioritizing now. There is obviously going to be clinical work that's required and we're going to be likely starting that work later this year. I think that you know it's difficult to say if COVID-19 is going to impact that at all right now. It’ll start off with a series of small studies just to confirm the safety and just confirm the impact of those of those changes with a pivotal study sometime in the 2021 timeframe.

Q: Has COVID-19 stalled any progress you may have been making with UnitedHealthcare?

Mr. Sheridan: Well, we don't comment specifically on any of our payer interactions and activities. You know as we've talked about in the past, our priorities really are to get as many agreements in place as possible and then work with our payers to get additional reimbursement for some of our complex features that are definitely benefiting our patient population. Also, we’re looking to streamline the process of onboarding our patients. There’s a lot of activity going on in that direction. The Control-IQ pivotal data and the initial market impact has been very positively received. We're working with all the payer organizations right now and we are – we're seeing great progress. But, it takes time to do this and you know I think that we'll see these things happen over time.

Q: I'm curious about what you're seeing in April. I don't expect that you'll tell us the magnitude of the headwind, but can we say that those headwinds have stabilized or bottomed?

Ms. Vosseller: I don't think I could predict whether they stabilized or bottomed at this point. All I can say is that April and May are seeing pressure compared to what we would ordinarily see, which is why the guide is sequentially down at this point. Really, in our minds, as we said June is the big question mark of how it proceeds from there. That’s where we are at this moment.

Q: Help us think through what metrics you guys are looking at to try to project the potential recovery trajectory. Obviously, you have order numbers, but how are you thinking about the importance and impact of more macro indicators like consumer confidence or unemployment?

Ms. Vosseller: Beyond Q2, anyone's guess is as good as mine about what happens, but you're right, it's really the macro factors that we would have to consider more that would be driving impact to the business. For instance, as they come out of this, how do they phase that out, when are social distancing requirements relaxed, when are stay at home rules relieved, and how quickly those things turn to return to what is more of a normalized environment. We believe that will happen in stages or phases over time -  it won't be a quick turnaround.

Q: Thinking about your comment, I know you're not reiterating full year guidance, but you're saying it's not off the table either. Given what you've done in Q1 and your expectations for Q2, the back-half ramp would be pretty significant to get there so clearly as you're rolling out Control-IQ like you're seeing extremely really strong demand for that technology. Can you just talk a little bit about what you are seeing to give the confidence you even say something that you potentially could hit to that guidance given the big ramp in the back half of the year?

Ms. Vosseller: I'm not even actually saying their got upside or downside to that. It's just that it's a possibility if you look at a variety of scenarios that occur you have the macro factors which we can't control, but what we are very enthusiastic about is that the role of Control-IQ in this. We couldn't have gotten it launched at a better time. With the experience people are having and the success we're having with this transition to a telehealth environment, we feel like that will help us through this. Again, anyone's guess is as good as mine about how this plays out in the overall market.

Q: Why wasn't the gross margin a little bit better? Those payment plans you guys keep talking about that you have available. How are you factoring that in to, to the business maybe later this year as they come out of the recovery?

Ms. Vosseller: Sure, from a gross margin perspective, we were flat when you look at this year versus last year. There are a couple of factors that really play into the gross margin. One is product mix itself, so the percent of pump sales we saw in Q1 this year versus Q1 of last year was lower for pump, which is the biggest driver of our gross margin. Also, add to that the first time we have a royalty component associated with Control-IQ, which was about 1 margin point. There are a number of factors playing into that. We did see improvement across all product margins though this quarter versus last year, so we're still very excited about the progress that we've made and where we expect margins to go. It’s believing that we will be 60% or better in our, in our long-term model. When it comes to payment plans that's something that it's hard to say, we've had payment plans out there pretty much since the beginning of our business our distributors offer them as well. We've really seen a very small percentage of people that take advantage of them, but we'll continue to evaluate them and see if there are ways we can enhance them particularly in this environment where maybe we can help people who might be struggling and need some more financial assistance. At this point I wouldn't anticipate any trajectory change because of payment plans, but we do always look to hear the customer voice there and see what we can do to help.

Q: You know you mentioned that you're seeing reports of people achieving very high Time in Range, but maybe talk about why you think it's playing out so well in the real world?

Mr. Sheridan: Sure. I think as we've talk about in the past, when we look at the trial, the trial was very representative of the state of diabetes in the United States. There were people who had very good control and then there were people who just didn't really try to control their diabetes at all. In many cases, there was no bolus done during the trial in a significant percentage of people that had high A1cs. They typically brought the sort of the Time in Range down for the overall population of that group, but it was representative. I think now if you look at the people who are using the pump, they are serious about managing their diabetes. They do care about it. I think when you look at that population we have seen just many, many reports of people who have had great experiences and they're seeing very high Time in Range. It’s really great to see and it's something we anticipated and of course we're working on looking at post-market data right now. We are planning to collect it and we're looking to present it as we have the opportunity at shows and conferences here in the near future.

Q: I wanted to talk a little bit more about how the remote screening works. Is this something where you've trained the officers on how to do that remote training and they take it from there and do all your customer officers have that capability? And, and then Brian you talked about alternatives for those where virtual training does not working. Can you expand on what some of those are?

Mr. Hansen: Yes, some of our accounts have been utilizing remote training as well. They have been trained by us and we're using Microsoft Teams or Skype or something to be able to do that. They are training their patients remotely and their educators are doing that sometimes with our help, but many on their own accord which is great for us because we’ve got our team out there scheduled multiple trainings a day. There is some work: a virtual training is typically done through Microsoft Teams for us. There was Zoom as many of our kids are using for school today so we’re getting pretty used to this virtual world we're living in and then after that training is done there’s a follow up, there's typically a call and a video or two. We've got a lot of resources now. Things we've been working on throughout the last year and those resources really helped us during this time and allowed us to pivot quickly. I said earlier the feedback has been very positive. If a patient can't or doesn't qualify for remote trainers, a variety of reasons for that, whether it's technology or just simply comfort or they're new to pump technology. They really like to have some type of face to face we've done remote trainings with a patient in a physician's office and they've been able to help in that way. We’re still socially distanced from that perspective but we made it by calling into the physician office and there is healthcare provider that is working with them there. That has worked out extremely well in those cases where we've had challenges doing it. We’re getting good as we're doing it in the thousands now; it's working incredibly well. I think it's going to be fun going forward as we've done thousands of remote trainings just in the first quarter and we expect to see that number grow through the year.

 

--by Albert Cai and Kelly Close