Tandem Diabetes Care, Inc. (TNDM) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Tandem's Second Quarter 2020 Earnings 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 may be recorded. [Operator Instructions] I would now like to hand the conference over to your host, EVP and Chief Administrative Officer, Susan Morrison. Madam, please go ahead.

Great, thank you, and welcome, everyone, to Tandem's second quarter 2020 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, quarterly report on Form 10-Q 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 future 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, Executive Vice President 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 2 questions before getting back into the queue. With that, I'll now turn the call over to John.

Thanks, Susan, and good afternoon everyone and welcome to today's call. Looking back at the first half of 2020, the broader issues impacting the world continue to be at the forefront of our minds. Incredibly even in this challenging global environment, our business has excelled in its commercial, operational and strategic performance. I'd like to say a special thanks to our employees for their steadfast focus and commitment to improving the lives of people living with diabetes. It is only through their hard work and dedication that our customers are able to succeed and as a result so is our business. I am very proud of the team and all that we have accomplished. I'd also like to extend the continued thanks to the healthcare providers supporting the diabetes community and to the frontline workers, looking after all of us during these challenging times, in addition to all of our suppliers who continue to support us without disruption, thank you to everyone. Next, I'd like to take a moment to extend an extra welcome to our two new board members, Kathleen McGroddy-Goetz and Peyton Howell. Kathy has extensive experience commercializing pioneering technologies that span from microelectronics through software, advanced data analytics, artificial intelligence with an emphasis on healthcare and life science applications. Peyton is a reimbursement expert across a broad range of disease states, including diabetes and brings a broad wealth of healthcare knowledge across in hospital, pharmacy and home care settings. We are very fortunate to welcome Kathy and Peyton to our board. Their perspectives will be extremely valuable as we work to execute on our long-term strategy to lead an insulin therapy management. The addition of these two talented individuals were two of many meaningful recent announcements. Since our last call, we also further strengthened our balance sheet with a successful completion of a convertible debt offering of nearly $290 million presented compelling real world clinical outcomes of early adopters of our Control-IQ technology, earned FDA clearance, lowering the age indication for Control-IQ from an age 14 down to age 6 and above announced our acquisition of the popular Sugarmate app, finalized our agreement with Abbott to integrate their CGM technology with our pumps and completed a cross license agreement with Medtronic. As if this long list of accomplishes was not enough, we were also able to share the highly anticipated decision by United Healthcare to include Tandem’s products in their network. All the while, we also achieved record worldwide sales in the second quarter, which are even better than expected when we entered the quarter with the challenges of COVID-19. Based on the continued high demand for our t:slim X2 insulin pump, we are reinstating our original sales guidance that we set at the beginning of 2020. Domestically, the feedback for our easy to use Bluetooth enabled t:slim X2 platform continues to be outstanding. This is furthered by the growing awareness of our Control-IQ technology that's demonstrating even better real world clinical results than in our pivotal study. Our t:connect data provides us great customer insight and indicates that overall our domestic integrated Dexcom CGM use has increased from approximately 30%, just two years ago, to more than 60% today. Similarly, the data also indicates that more than 60% of our customers in the U.S. use either Basal-IQ or Control-IQ. And looking just at our 2Q new domestic customers, the percent using CGM is meaningfully higher than the 60% in the overall installed base. Of these customers who are adopting t:slim X2 therapy from multiple daily injections more than half are using CGM. This supports our belief that once a person has their CGM information, it often highlights opportunities for greater glucose control, which is where pump therapy and automated insulin delivery comes into play. Importantly, we are also continuing to see about half of our new customers report adopting pump therapy for the first time for multiple daily injection. This was consistent throughout the months of the second quarter, which was meaningful as there was a natural assumption that people may be less likely to adopt pump therapy during the pandemic. The other metric of note is that people with type 1 are making up more than 90% of our new customers. It's evident that we are continuing to make progress in our broader strategic goal to bring the benefits of pump therapy to more people with diabetes by expanding the type 1 insulin pump market from just over 30% today to 50%. It also points to there being a largely unsupported market of people with insulin dependent type 2 diabetes that have not been our primary focus in the past, but we are evaluating how our technology can help address the unmet needs of this population. Another interesting observation from the quarter is that nearly all of our new customer pump trainings were performed virtually and we are receiving extremely high remarks from customers on the training experience. In fact, customer confidence and satisfaction scores have increased. And while a small percentage of people have opted to wait for live training, many have moved forward virtually. Today, we estimate that the vast majority of our accounts are seeing some of their patients in the office, although limited access for commercial activities continues. Our sales reps and educators are using their discretion based on geography of weather that they will participate in these live visits. But our direction overall is to limit interactions and work remote as much as possible. Even with the challenges of COVID-19, we are expecting growth throughout this year. We anticipate this will continue to be driven by some level of seasonality, along with strong interest in Control-IQ and the expanded access to the United Healthcare members. United Healthcare’s recent decision is one that we celebrated with the entire diabetes community as it provides people living with diabetes greater choice in their therapy management. Access is an initial step towards improved outcomes and we look forward to bringing the benefits of the t:slim X2 insulin pump to United Healthcare members. Internationally, our new pump sales also exceeded our expectations. We assumed that there would not be many pump placements during the quarter as many people with diabetes received their care through hospital systems outside of the United States. However, our distributor restocking orders and their feedback demonstrated that there is continued demand for the t:slim X2 even in this challenging environment. The t:slim X2 pump software is now available in 12 languages, and we've been receiving the same positive feedback from international users on their experience with our easy to use t:slim X2 system. I'm also excited to share that we have commenced the international launch of our Control-IQ technology, which is at the early end of our second half of 2020 goal. Control-IQ was now available in the UK and South Africa and we plan to continue rolling it out more broadly internationally throughout the remainder of the year. As you can see, our worldwide commercial efforts are progressing extremely well, which we attribute to both our product innovation and our emphasis on customer service. Similarly, our corporate and operational functions continue to perform at a very high level. Employees, who are able to perform their job functions remotely continue to do so and we do not feel any immediate pressure to have them return to the office and potentially put them at increased risk. Our manufacturing and warehouse employees continue to operate onsite with heightened safety precautions in place as does our third party cartridge manufacturer just across the border in Mexico. These teams have excelled in the face of COVID-19 challenges and are continuing to work towards our production goals while preparing for future growth. Scalability continues to be a focus for us, particularly as we advance our new products in development. Overall, we review the R&D impact from COVID-19 to be a delay of just over a quarter. And when considering the circumstances are very happy that there was no further impact. In the next 12 months, we are focused on preparing to bring three new products and features to market in the U.S. including the launch of our t:connect mobile app, which is underway now, the future edition of the mobile bolus delivery feature through an app and the clearance of the t:sport insulin delivery system. As a reminder, our t:connect mobile app is the center of our digital health strategy moving forward, which is why we took a more metered approach to its launch over the past few weeks. Even without broad promotion, approximately 15,000 people have downloaded the app since its release for both Android and iOS devices. Most importantly, the feedback on the user experience of the app has been excellent and we are confident in its ability to serve as a foundation for future offerings. We will be ramping up his promotion now, so both customers and healthcare providers are aware of its key benefits such as the secondary display and the wireless upload of pump data. The wireless upload feature takes away a burdensome step from our customers and their healthcare providers of having to upload data through a USB cable to see tracking and trending information in t:connect. This improves the HCP office efficiency by streamlining visits and providing an important resource for the delivery of care using telehealth platforms. The ability for our users to deliver a bolus through an app is the next major feature we plan to launch and one that's already in high demand. Human factors testing has started and will take several weeks to complete at various sites across the country. Then we will compile and analyze the data, which will be used in a 510(k) submission to the FDA in the fourth quarter. There is not a commercially available app that delivers insulin from a consumer mobile device and FDA resources are being prioritized for COVID-19. So the timing for the clearance is difficult to predict, but we are preparing to launch in the first quarter of 2021. Remote bolus capability is a meaningful step towards full mobile control, which is our next major feature we plan to launch on our app for the operation of our next generation hardware platform, the t:sport pump. T:sport is meaningful to our business as it expands the family of insulin pump offerings and offers customers a choice depending on whether they prefer to program their therapy management using a touchscreen on the pump, or they prefer a pump that's about half the size and fully controlled through a mobile app. Both platforms will offer the latest automated insulin delivery algorithm. I'm happy to share that human factors testing for t:sport is now underway. As a reminder, t:sport will have a two-part regulatory strategy. The first filing is expected to include both t:sport pump hardware and a dedicated controller. And it's now planned for the fourth quarter due to the COVID-19 delays. This will be followed by a separate filing for the t:sport pump utilizing the full pump control through our mobile app. While the second filing is under review, we plan to gather expanded real world user experience with a pump and scale our manufacturing processes. However, in light of this multiple step strategy, it's also more difficult to predict the ultimate FDA clearance and broad commercial availability, but we are preparing for clearance in the summer of 2021, after which time we'll commence our commercial launch. Rounding out our digital health activities in the quarter with the acquisition of Sugarmate, a popular app with a complimentary features to t:connect. Sugarmate also integrates with consumer devices such as the Apple Watch, Alexa and CarPlay, and helps visualize therapy data in innovative ways, which is key to supporting our insulin therapy management. We estimate that more than half of the 30,000 people using Sugarmate, do not use an insulin pump today. So we expect it to help us deliver new features to Tandem pump users, as well as to a broader community of people with diabetes. It's the first acquisition for our company and a small but important step in the future development of digital health platforms that reinforce our strategy to lead an insulin therapy management. Also in support of this strategy, we continue to advance our internal development efforts on features and enhancements of our Control-IQ technology. We aren't providing a schedule yet for competitive reasons, but broadly they are centered around algorithm enhancements that are intended to further improve clinical outcomes, new features with greater personalization and refinement of the overall systems usability. We are planning the first of our Control-IQ updates in the second half of 2021. Another exciting business development activity this quarter, we were happy to finalize our agreement with Abbott to develop and commercialize an integrated system using their technology. The product development teams are kicking off the integration efforts now from which we'll be able to establish commercial timelines. We look forward to bringing the benefits of integration and automation, insulin delivery to Abbott’s customers and more people living with diabetes. As you can see, we are very busy in each of our accomplishments this quarter individually represents a tremendous amount of cross-functional work. Collectively, it's the reflection of the strength of our organization and the high level at which we are functioning to drive the near and longer-term growth of our business and further our mission to improve the lives of people living with diabetes. And now I'd like to turn the call over to Leigh for further discussion the results of the quarter as well as financial guidance.

Thank you, John, and good afternoon, everyone. It is remarkable that we achieved our highest sales quarter ever in the face of the COVID-19 pandemic. We entered the second quarter with a great deal of uncertainty regarding the pandemic impact. While we did experience negative pressure on our pump volumes, the impact was far less pronounced than originally anticipated. Thank you again to our employees, suppliers and distributors who continue to work tirelessly to support our customers. Worldwide sales in the second quarter were a record $109 million representing 17% growth over last year, which we already had anticipated to be a tough comparison due to international dynamics in 2019. Our worldwide installed base has reached nearly 170,000 customers with 18,700 pump shipped worldwide this quarter. Overall, our worldwide sales in the first half of 2020 were $207 million or a strong 30% growth year-over-year. As our international operations continue to become a more meaningful part of the business, it's important to understand the different trends in the U.S. and OUS markets. Starting with the U.S., our domestic pumps shipments grew 15% year-over-year to 14,700. We attribute this growth to the appeal of our easy to use pump with the ability to offer remote software updates and the building customer awareness of our Control-IQ technology and the improved clinical benefits it offers as well as our successful pivot to operating in a telehealth environment. Our second quarter shipments included approximately 3,000 pumps to renewal customers. This is more than we shipped to renewing customers for the entire first half of 2019. And we are happy with the steady progress we continue to make on our renewal and retention initiatives. In total, we achieved $89 million in domestic sales in the second quarter, $33 million of which were from sales of supplies. This growth in supply sales reflects more than 40% increase in our domestic install base compared to last year, which has now reached approximately 137,000 in warranty customers. On a year-to-day basis, our domestic sales were $169 million or 35% growth versus $125 million in 2019. Outside the U.S., our second quarter results are not directly comparable to last year. As a reminder, in the second quarter of 2019, our international sales benefited significantly from the last major influx of Animas patients converting to Tandem, as well as the fulfillment of a $7 million backlog from a supplier component constraint months earlier. This quarter, we shipped approximately 4,000 pumps, which is of course down from the 8,500 shipped last year, due to those one time dynamics, but meaningfully more than our expectations at the beginning of the quarter. As a result, in the second quarter of 2020, we achieved $20 million in international sales. On a year-to-date basis, our international sales were $38 million versus $34 million in the prior year, which represents 12% growth due largely to the supply contribution from our growing international installed base. We now have approximately 32,000 customers outside the U.S. in just under two years. By comparison, in the U.S., we did not reach an install base of that size for more than three years post-launch. As we look forward, we are confident in reinstating our original 2020 worldwide sales guidance that we set at the beginning of the year of $450 million to $465 million. Included in our assumptions is a balance of the headwinds and tailwinds we are experiencing, including the continued unpredictable nature of the COVID-19 pandemic. It is important to note that we continue to feel pressure from the pandemic and do not anticipate returning to full recovery in 2020. That being said, several positive factors give us confidence on the remainder of the year. These factors are the strong, positive feedback from Control-IQ so far, and it's continued scaling rollout worldwide. Our demonstrated success operating in a remote environment and the anticipated benefit from United Healthcare, including Tandem as a network provider. We anticipate achieving domestic sales of approximately $380 million to $390 million. In the U.S., we have historically seen a significant seasonal uptick across the year, particularly in the fourth quarter where our pump shipments have typically represented 35% to 40% of the full year. At this time, we are assuming that the benefits from seasonality along with Control-IQ and access to United Healthcare members will drive sequential benefit in the third and fourth quarters but that an overall pressure relating to the pandemic will remain on our business. Outside the U.S., our 2020 sales guidance it seems approximately $70 million to $75 million in sales. This expectation reflects continued pressure from COVID-19 on existing and new markets. Aside from that, we consider the likely variability in the ordering patterns of our distributors from typical European third quarter holidays, and the scaling launch of Control-IQ for the remainder of the year. As to the rest of our performance across the P&L, our gross margin was 50% compared to 54% in the prior year. The majority of the decline was from royalty and non-cash stock-based comp. Royalty expense associated with Control-IQ is a new element of gross margin in 2020, for which there was no comparable expense in 2019. We recognize royalty expense for every new pump that is sold with Control-IQ installed as well as for the free software updates in the quarter. In the second quarter, royalty expense was nearly 2% of sales. Royalty expense as a percent of sales may fluctuate in the near term, depending on the number of free software updates in any given period, but will eventually decline as a percent of sales. Additionally, non-cash stock-based compensation in cost of sales increased to 2% of sales in the second quarter of 2020 from 1% in the second quarter of 2019. Fluctuating sales and manufacturing volumes also had an impact on the gross margin this quarter. The sales benefit we saw in Q2 last year from the backlog fulfillment resulted in increased pump manufacturing volumes to meet the incremental demand. In contrast, in recent months, we have reduced our pump manufacturing builds while managing our inventory to appropriate levels during the pandemic. As a result, our pump manufacturing volumes were down more than 15% in the first half of 2020 compared to the prior year, which increased overhead cost per unit in the second quarter, and will continue into the third quarter. As an essential business during COVID, we also made certain decisions that resulted in slightly increased costs in order to de-risk against manufacturing disruption, and ensure continuity of supplies for our customers, such as carrying a larger number of direct labor employees. Other impacts on gross margin this quarter included slight benefit from pump average selling prices, pressure from product mix and higher spending levels to both increased cartridge manufacturing capacity, and support our digital health product offerings. Overall, we anticipate that our gross margin for 2020 will be in the low to mid 50% range. We continue to execute on our margin improvement initiatives and feel confident in achieving our long-term gross margin goal of at least 60%. Our adjusted EBITDA margin, which excludes the impact of non-cash stock-based compensation was 6% in the second quarter continuing our trend of reporting positive quarterly adjusted EBITDA margin since the fourth quarter of 2018. Prior to the onset of COVID-19, we made a conscious decision to fund investments in 2020 that were focused on driving our long-term sales and profitability initiative. Due to the strength in our balance sheet, we are committed to continuing these investments, even in the face of the COVID-19 pressures. As a result, our operating expenses grew to $66 million in the second quarter of 2020, including $14 million of non-cash stock comp. By comparison, our operating expenses were $52 million in the second quarter of 2019, including $11 million of stock comp. We anticipate achieving adjusted EBITDA margins in the low to mid teens as a percent of sales in 2020, as we continue to focus on prudent spending to meet the objectives and our strategic plan. Our total cash and investments at the end of the second quarter were $426 million, up from $176 million at the end of 2019. This increase includes $245 million in net proceeds from the convertible debt transaction that we completed in May 2020, as well as $31 million generated year-to-date from employee stock plans and warrant exercises. In summary, we anticipate 2020 worldwide sales to be in the range of $450 million to $465 million, which includes international sales in the range of $70 million to $75 million. We remain committed to investing in key initiatives that are expected to deliver both sales and profitability return to beyond 2020. As a result, we anticipate that gross margins in 2020 will be in the low to mid 50% range and adjusted EBITDA margins will be in the low to mid teens as a percent of sales. With that, I will turn it over to the operator for questions.

Thank you. [Operator Instructions]

While the questions are being compiled, I wanted to mention that there is a short delay in filing our 10-Q due to EDGAR issues, and we expect it to be filed as soon as the system comes back online. Thanks.

Thank you. Our first question comes from the line of Brooks O'Neil of Lake Street Capital. Your line is open.

Good afternoon, all. Congratulations on a terrific performance here and the positive outlook as well. So nice work.

Thanks, Brooks.

Thanks, Brooks.

So I was listening as carefully as I could. And I didn't hear you specifically say a lot about what the trends have been in July and what changes you've been seeing in the most recent time period. Could you give us just a little feel for what you're seeing out there recently?

Sure. Brooks. Thanks for the question. So to go back just a little bit further as well, I'll talk a little bit more about what we saw in the second quarter that led us to give confidence to reinstating our guidance for the year. And really what happened was when we were on our first quarter earnings call at the end of April, we were starting to see a little bit of softness in May, which is why we were through the annual guidance and we gave a number just for the second quarter, but what happens in the middle-to-late part of the quarter, we started to see what I guess I would refer to as a stabilization. And so rather than the normal seasonal uptick, we saw some strengths, but not as strong as we've seen in the past. As we moved into July, we're very excited because now we have the opportunity to go to – go after the United Healthcare members, now that we're in network there again. And based on the strength that we were seeing in the second quarter and the momentum we're seeing from Control-IQ, as we go forward, we're very confident in the numbers that we've given for the rest of the year, but still cautious about the impact that COVID-19 could put on us.

Brooks, I'd also say that we've been very successful operating in a telehealth environment, our sales team and training team are doing an outstanding job, and that's really helping us out in the field.

So would you say just as a quick follow up, but not really my second question, but would you say you don't anticipate any problems continuing in more of a telehealth environment going through the third quarter and into the fourth?

I mean, I think the team is operating very efficiently in the telehealth world, and I think that it's – right now I think that the healthcare providers are as well, they're getting used to it and there has been some opening up of offices as of late. It's shut down entirely in the late March, April and May timeframe, but late May, we started to see it opening up and there was even more of that in the June timeframe. But I think that telehealth is going to be something that's important going forward. And I think our team feels very comfortable doing that. We've been prepared and we've been doing this for a while now. So I don't think that's going to have an impact on us.

Great. So a second question I had was, could you just talk a little bit about – more about international? I'm really excited about the opportunity with Abbott given their enormous success internationally, but my sense is right now, you're primarily marketing Basal-IQ and tell us how that’s going and tell us any changes you've seen when you're beginning to switch over to Control-IQ and how that might be changing the dynamics internationally in the near term?

Okay. So we began introducing Basal-IQ in the second half of 2019. And we have at that point, roughly 12 countries, most of those countries now are actively using Basal-IQ. And there's the same kind of success, the same kind of excitement and positive feedback that we see in the States. We're now also seeing OUS. And as we indicated, we just now began to launch Control-IQ in the UK and in South Africa. And so that's earlier than we expected, and we have a plan to launch Control-IQ by geographies between now and the end of the year for the rest of the geographies. So we're excited about that. We believe that Control-IQ is very competitive. We think that the certain same competitive dynamics we're seeing here in the U.S. are going to exist OUS, so we're very confident with that. And we're excited about it. And I think that it's great for the OUS pump users. I will say that there has been some unpredictability in the ordering patterns, OUS and this is predominantly because most of the patient visits current hospital settings, and because of that, there's uncertainty in how we might actually see the OUS demand materialize in the second half. It's less that way in this States, but I think that's kind of a headwind that I think is basically countered by the tailwind of the Control-IQ introduction.

Yes. That's great. Thank you so much for taking my questions.

Sure. Thanks.

Thank you. Our next question comes from Travis Steed of Bank of America. Your question, please.

Hi, congratulations on a great quarter. So the full year guide...

Thanks, Travis.

Yes, the full year guide the same now as it was before. But just curious now that you're halfway through the year, if you're tracking ahead of that original plan, or if you're below that plan, and now you have UNH to kind of fill the void. Just kind of curious, [indiscernible] here, where you stand?

Sure. We're fortunate to be able to reinstate our original guidance, but it's with much different dynamics now than we had. We're thinking of, I guess I would say when we set the original guidance. So at the beginning of the year, and I guess I should start with our guidance philosophy just to remind everyone is that we factor in elements that we think are more within our control. And we're cautious about areas where we don't have as much control. So from a renewal perspective, feel very confident in where those numbers are heading. At the beginning of the year, we were very focused on how quickly or how much more the NDI market would grow compared to what we had seen last year, which showed an escalation as well as we were cautious about controlling too, because we had just launched it. And while we believe there could be an inflection some that we weren't building revenues until we began to see some trends. So here we are halfway through the year and everything's flipped on its head. It's very different now. And that COVID is applying pressure. We're seeing great momentum from Control-IQ. So we're factoring that into the back half of the year. And now we have United, which we also didn't anticipate before. So much different dynamics, but fortunately we're still going to be coming in with a very strong year with a great growth over last year.

Okay. And it looks like if you look at the new patients in the U.S. in Q2, it's only about 1,500 to 500 below trend. So, very in line with trends, just kind of trying to tease out the negative impact from COVID patients delaying versus the benefit from Control-IQ. I don't know if you have any sense for, how many patients you think delayed, and if those who come out in the second half and also in the second half, just trying to think if there could be a bolus of patients from UNH that, that come through, or you could think that'll be more steady state and thanks for taking the questions.

Sure. Thanks, Travis. It's hard to say exactly how much was pressure from COVID versus offset from Control-IQ. What I can say is that Q2 didn't come in where we had originally anticipated. But when we entered the quarter, as you recall, we were much more cautious about how Q2 would turn out. And really we attribute Control-IQ to being that driving force to giving us greater strength in the second quarter. And so when it comes to United Healthcare, what I can say right now, at least, is that there's been great excitement for people who are anxious to and actually now to switch to our pump or start pump there before the first time that weren't going to be able to before, because there wasn't access to our technology. So we expect, as we think about United Health Care, we've communicated that we expect it to be a mid-single-digit lift to the business. And so, again, another element that we are very excited about for the back half.

Thank you. Next question comes from the line of Alex Nowak of Guggenheim. Your line is open.

Great. Good afternoon, everyone. First congrats on getting back in network with United Healthcare, a big win. Obviously that announcement appears to have come with some preferential language towards the competitor, Medtronic, can you just explain how this is going to affect the reentry into that United Health population and what sort of targeted marketing actions can you take to get those that are waiting to switch to a pump to switch to Tandem?

I would just say that we really aren't in a position to talk about the sort of marketing practices that that UNH has. We were careful and we basically work closely with them to do exactly as they asked. I think that now that the word is out, we're able to discuss it. I don't think that there's any competitive advantage that Medtronic may have against us in the situation right here. They have mentioned prior offs are things that we deal with routinely. It's something the organization knows how to manage, and there's really no benefit, I think, from that against what we're dealing with today. So we're excited about it. We think the diabetes community will benefit from this. And we're happy to provide the benefits of control, like human, our pump therapy to the UNC – the UNH population.

Okay, understood. And then just staying on Medtronic, they put out data in June on their next-gen pump 780G, since you do have some really good visibility into orders on almost a week-to-week basis, did you see any change in order patterns after this product announcement and all of the blogs started to talk about the data? And then just maybe can you speak about, have you talked with endos on their thoughts on the Medtronic data compared to Control-IQ?

I would just say that we haven't seen any effect. I mean, as you saw that, half of our new sales were competitive conversions, and it's predominantly Medtronic at this point in time. So really, really nothing happened, I would say, as a result of that. I think that, the data that they presented was good data. I think that it was better than the 670G. We all know that the issues that they're dealing with, however, is really the sensor. And so I think until they get the sensor under control, they have the performance of the sensor in line with Dexcom and Abbott, I think they're going to continue to struggle. So I think we feel very good about Control-IQ competing against the 780G and we'll have to wait and see what happens when it gets to market here.

Okay, understood. Congrats.

Thank you.

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

Thank you so much. Good afternoon, guys. Thanks for the questions and congrats on a really strong quarter. Just to follow-up on a switch question in Medtronic. You mentioned, John, here in the last question, that 50% of your new starts were competitive switches. That's consistent. I think with the past few years. How sustainable do you think that is going forward? And do you see that shifting at all as the pump market continues to evolve and your competitors launch new products?

I mean, I think we have the best product on the market today. And I think we've got to continue to innovate to maintain that position. And I think the combination of the improved therapeutic outcomes as you – I think you can clearly see when you listen to people talking social media, as well as ease of use are the two things that drive adoption. And so we intend to continue to focus on that. We are excited about our mobile app with the mobile bolus capability. T:sport is going to add another very competitive product here in the future. And we're also talking about improvements to the algorithm. So I think that when you look at us competitively, we've got a great deal of innovation lined up. And I think we have the best product on the market today. So we continue to remain confident about our position in this market.

Yes. Okay, great. And then following up a component here. I mean you guys have been doing such a phenomenal job, so much credit to you and your team there. And it does feel like telehealth is here to stay in more of a way than it has been a whole dynamic, has sort of accelerated telehealth. Do you actually think that your abilities there strengthened your competitive position? Because from my perspective, it seems like that could be a competitive for you guys and sort of how far ahead of you from the competition from a telehealth perspective. Thanks so much.

Sure. I would definitely say that our ability to operate in this virtual environment was really a tailwind to the organization. Again, our sales team has been working on this for quite a while. They were ready. We didn't anticipate control COVID-19. But as soon as it happened, I think we responded extremely well to it. And we've talked a great deal about our pivot towards digital health. And I think that virtual training and virtual interaction with physicians is going to be an increasingly important part as we develop new products and services that are going to use data and make the physician's daily interaction just more efficient. And like we have with our pump products, reduce the burden to their experience in their practices.

Thank you.

Thank you. Nice talking to Danielle.

Thank you. Our next question comes from the Mathew Blackman of Stifel. Your question, please.

Good afternoon, everyone. Let me join the chorus of congratulations on a truly remarkable quarter. Just a couple of questions. Maybe John to start, I wanted to follow-up on some of follow-up on some of your CGM and type two comments in the script. Earlier this week, your CGM partner highlighted that I think roughly 20% of their current installed base is now a type two and largely intensive patients. So the question is similar to how you think about type one penetration and runway. Do you think as CGM penetration goes in type two, so we'll go pump penetration, or would that constructs on how many different with this patient cohort?

So, as I indicated in the remarks, right now about 60% of the people using our pumps use CGM. And if you look at the most recent quarter, just the second quarter, it's appreciably higher. So, I think that we believe that for people that the other important statistic, I think was the fact that approximately half of the people who were MDI come into pump therapy also use CGM. So I think when it comes to type one, people start using CGM and then they see the benefits of pump therapy with automated insulin delivery systems and just improving their glycemic control. So it's a natural move I think to come on to pump therapy, just for the benefits that they're seeing. And again, the benefits that we're seeing today in the marketplace are remarkable. I think that, clearly the type two markets under penetrated, it's something that we're interested in. We are exploring and evaluating it. I think right now we presented data on the type two market – on type two patients using Control-IQ, early adopters. The data was great. They saw significant improvement. So it’s encouraging. We intend to collect more clinical data. We believe that t:sport is a strong pump offering that provides discretion that's appealing to the type two marketplace. So we expect that, that's going to help drive adoption of the insulin-intensive type two patients. And we're evaluating what a commercial strategy might look like, the sales touch points. the channels, which we're evaluating all of these things right now to decide exactly how we move into this type two space, because there have been a number of companies that have tried to do it unsuccessfully, and we want to make sure that as we do move into what we do with well thought out plans.

I appreciate the color John. And then my follow-up question. The Medtronic patent cross licensing announcement was pretty unique. I think, is there anything we should read into that as we think about the competitive landscape over the next several years? And do you think we should expect as more competition comes over the next 12 months that there maybe a more litigious pump market backdrop?

I think that, this is good for the diabetes community. We can now – the two companies can now innovate and develop products and not have to worry about is the litigations and the impact that has on your organizations. I mean, we just don't want to have the distraction of litigations going on in the background. And so I think this is clearly its good for us. I think that we have demonstrated the ability to innovate faster than our competitors over the last seven years. And we think we can continue to do that. I would say that one thing that that I think stands out is the fact that I think the agreement really suggests that Tandem's IP portfolio was very strong. And I think this, like I said, I think this is good for the entire diabetes community.

Thank you. I appreciate it. And congrats again.

Thank you.

Thanks, Matt.

Thank you. Our next question comes from Ryan Blicker of Cowen. Your questions, please.

Hi, thanks for taking my question. Maybe a follow-up on international. Can you – on guidance, you talked about earlier the unpredictability of ordering patterns from distributors. Can you talk a little bit about the first half? Was there any meaningful stocking for distributors in your new geographies? I guess I'm just wondering, despite the unpredictability, you're launching Control-IQ in a bunch of geographies, you're launching in just some new really meaningful geographies. I'm just wondering, again, why international guidance is a little bit higher for the year.

Sure. So as John mentioned, there is a lot of variability in the ordering patterns on an international basis, and it's compounded by COVID-19 and the impact on those markets. And so as we look forward to the back half of the year, we're cautious about one factor, which is aside from COVID, which is the summer holiday season that happens in Europe, which typically [indiscernible] business there. We'll also be rolling out Control-IQ. And when we rolled out Basal-IQ last year, we saw a little bit of turbulence or disruption in the ordering patterns at that time as well. So we're just being thoughtful about the impacts of those. From our new market perspective, we're still very excited about that opportunity. One thing about Germany in particular was that we needed one last piece of reimbursement approval in order to start truly marketing and placing pumps on patients, which we received at the end of June. So we expect a full marketing push starting here in the back half of the year. So that's just another element that we're being thoughtful about how that takes off. Like I said, though, still we're still very encouraged by what we're hearing and seeing there and excited about the future and the international market.

Got it. Very helpful. And then on virtual training, do you think this is a trend that will be sustained to some degree whenever we hopefully get through this pandemic? And if so, could you talk about what that might mean for your OpEx infrastructure over time?

I'll just talk about the training itself, and I think that Leigh, you can talk about the financial elements of it. I think that it's going to stick around. I think that patients like it and physicians like it. It might not be something that occurs every visit. Because some visits require physical exams and things like that. But I think that there's a significant sort of the reduction in stress. It's just more convenient, and people really like it. And as we mentioned in the script, we're seeing really good customer service response from it. People like it. They actually are more confident, and they do very well afterwards. We track carefully our customer service statistics and make sure that we're not seeing any increase as people do more and more of this. So I think it's definitely here to stay. I think it's potentially going to reduce some cost here as we do move toward it. And it clearly makes the people who are providing the trading more efficient because there's less travel time and all of the things that go along with that. So I think it's here to stay. And Leigh, anything you want to add to that.

I will just add in brief that the training costs are actually a component of cost of goods sold, so they impact the gross margin. And virtual trainings were something that we were piloting before COVID came about as a gross margin opportunity and this just helped prove that. It can be very successful. So yes, we do expect to see benefit in the future.

Excellent. If I could speak one more. You talked about a lot of exciting pipeline initiatives. Can you confirm that you still expect to launch a new algorithm in 2021? And then longer term, you're making a lot of moves to continue to differentiate on ease of use. Do you believe over the next one to two years you will be able to able to continue to differentiate on outcomes as well? Thank you.

Yes, we do plan to launch an update to Control-IQ algorithm in the second half of next year. We haven't said what the features are going to be for competitive reasons. But we have spoken about the fact that we're focused on that on improving therapeutic outcomes, personalization and ease of use. That's really where our heads at.

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

All right, thanks afternoon. Thanks for taking the questions. Just for starters, I know, when COVID broke out, you guys had rolled out a flexible spending plan. What kind of reaction did you get from patients, especially new patients here in the second quarter? How impactful was that? Did it cost you any material revenue in Q2? And then how does that factor into your reinstating guidance for the rest of the year?

Sure. So I think you're referring to our payment plans, which actually we've always had payment plans as an option for patients. And what we've seen it's been very utilized at a very low level. In the second quarter, we didn't see much of a differential in their usage, but we're mindful that in the future, it may be used at a higher rate, but really no impact on a material basis.

Okay. That's helpful. Thank you. And then, the opportunity with Abbott obviously is significant given their presence in the space, but the label came out with 2.0, that was a little bit different than I think some people were expecting, especially on the AID side. So does the label – was the label kind of what you expected when you were thinking about developing a system with Abbott or do you need 3.0 that is a little bit more CGM like to really integrate effectively with Tandem going forward. How do we think about that relationship? Thank you.

Now, we really never spoke about these specific model that we were going to actually integrate with or the technology. So that's still – that's something that's that we're working with Abbott on right now. I would say that we have now just begun to work with them. Our teams are preparing and getting together to put together the details of a development plan and a pipeline plan. Abbott has come forward and said that the issues they're experiencing has to do with sorbic acid with vitamin C. I think that the issues that are contributing to that have nothing to do with the integration of our pump with our sensor. So we intend to continue to move down that path. And I would imagine that Abbott will do this in parallel. Well, they'll be working to address the issues that will allow that system to be used with an AID – in an AID system, which is what we ultimately would expect. So it's all good at this point in time. We have talked to Abbott, they're very confident they can address this. And we're just going to continue to work closely with them.

Okay. Good job. That's really helpful. Just to be clear though, is that t:slim plus Libre 2.0 is the plan at this point, there will be a product with those two components.

We haven't said that.

Okay. Thank you.

Yep.

Thank you. Our next question comes from the line of Jason Bedford of Raymond James. Please go ahead.

Hi. This is Matt Wizman on for Jason Bedford. Thanks for taking the questions here. So my question is on the percentage of the new MDIs coming from CGME. So I think you threw out about 50% of them are coming from CGM. One is that right? And are you seeing the rate of Dexcom user on MDI. Are you seeing an acceleration of them, are those users converting to pumps? And is Tandem executing kind of a purposeful strategy to target those Dexcom users on MDI? Thanks.

You're right. We said that of the people who are coming from MDI 50% are using CGM when they come to Tandem. So that – that's the correct statistic. And I think that if you look at the sort of the adoption of CGM over the last couple of years, two years ago, it was about 30%. And now, the average of our entire installed base is, as I said, it’s 60%. So in two years we saw a meaningful increase. And if you look at the just this quarter's data, it's even higher than that. So, clearly, I think what's happening is that people are coming to Tandem. They're using either Basal-IQ or Control-IQ. In order for those systems to work you need CGM. And so, I think that's what's driving the uptake of the CGM use as they – people are – they believe in the algorithms and they're satisfied and happy with the results they're achieving as they do use these systems.

Okay, thank you. So next, I guess, just a follow up on some of the ADA dynamics. So the real world data that you guys presented was very strong. Has that had an impact or has that improved demand at all or interest from endos and then maybe – maybe that along with the peds data? Thanks.

Yes, I would say that it's definitely – it can't hurt. I think that what's happening today as more and more endocrinologists are having experiences with Control-IQ. They're actually seeing the power of the system and the extraordinary real world data that we presented. So, I think it's definitely having a positive effect. And I think that as we saw with Basal-IQ as more and more people became familiar with the technology they began to use it and prescribe it more. And I think that I've talked about they’re being in an inflection point as a result of the introduction of Control-IQ. We clearly have had headwinds with COVID-19, but Control-IQ has really helped us to get through this. And I think you saw the results as we've just announced today. So we're very excited about it, and we think it's going to continue to drive demand going forward for the foreseeable future.

Appreciate the questions.

Yup.

Thank you. Our next question comes from Joanne Wuensch of Citi. Your line is open.

Yes. Hi. This is Matt Henriksson in for Joanne. I'll keep the streak of Matt's going in the Q&A process. Let's start with the pediatric label. That's kind of been under the radar during this call. Now that you have the label, but summer camps aren't open. How has the strategy changed with reaching out to those kids? And kind of how is that expected to be a tailwind for the remainder of the year?

I think we still intend to do that. There was a virtual conference just a few weeks ago. It was children's with diabetes. It's a very popular conference. And I think we had a great deal of visibility because of Control-IQ being receiving that the indication for [indiscernible]. So we saw a very pop – a very, very positive response there. And I think that we now are able to market this group and we are definitely adjusting our marketing materials, so that we can actually let the people know the benefits of the technology to this younger crowd. I think that endocrinologists were aware of it coming. I think that they're now more comfortable in a situation of prescribing it although in the past. And I think that there were some endocrinologists that were prescribing it off-label. So, I think that it's a positive thing. It allows us to market openly. And again, we're excited to bring the benefits of this technology to that population.

That's helpful. And then going to the mobile bolus feature on your app, you talked about going through human factor testing over the next few weeks before reaching out to the FDA. Do you expect that there would be any need for clinical data before the FDA provides any approval or an expanded label?

No, we don't. We've been working with the FDA on this for a while right now, but human factors data is the only real information from the field that we're required produce. And as I said, we are actively conducting the testing right now. When we originally had put the schedule in place at the beginning of the year, we anticipated that we'd be filing this with the FDA at the end of the summer. And so, it's just a little bit longer than a quarter’s delay because of COVID-19. And so, now we're planning to do this in the fourth quarter. I think that's the one thing we've got to be cautious about is that the FDA has indicated that they're prioritizing COVID-19 projects. And so, if there's a potential that there might be a longer review process than normal, but we're expecting approval in the first quarter and we're planning a launch of this feature at that point in time.

Great. Thanks for taking the questions.

Sure.

Thank you. Our next question comes from Chris Pasquale of Guggenheim. Your question please.

Thanks. A couple of questions, one on t:sport. Just wanted to clarify the plan there. I think before you had said that you would wait for the full mobile control before launching that commercially. Is that still the plan? And then I wasn't clear what that summer of 2021 estimated timing was. Was that the estimate for the final approval? Or was that when the second filing would just be submitted?

Good question. We – as I said, we planned – we had planned on submitting the first filing for t:sport in the summer – in the late summer also. And so we've seen a similar delay. So we're planning on making that in the fourth quarter. We expect to get the approval again in the first quarter and then we will, at that point in time file the combined device with the mobile app. So we expect to get approval in the summertime. And as a result of that, we would basically launch it shortly after that. But once we get approval for the device with the standalone controller, we're in a position where we can actually do just collect the real world data, almost have a soft launch and evaluate the device in the market again in a small – with small numbers. At the same time refine the manufacturing processes and get things ready for our full launch during the summer timeframe. That's what our plans are.

Okay. Yes, that makes sense. It’s helpful. And then just explain the commentary on manufacturing, the number of pumps shipped in the first half year was about the same as last year, but you mentioned lower volumes as a headwind for gross margin. Could you just walk through what exactly happened there?

Sure. Last year, we were experiencing something different in the market, a couple of things were going on particularly related to international. It was the last major shift of Animas patients to our pumps. And so we were producing at higher levels to fulfill that demand and add to that that we had a backlog situation, which began in the fourth quarter of 2018. And in the first half of last year, we caught up the manufacturing to fulfill that backlog. So we were – despite the volumes on the sales side, we were producing at higher levels last year in order to meet that demand.

Okay, thanks.

Thank you. Our next question comes from Steven Lichtman of Oppenheimer. Your question please.

Thank you. Hi, guys.

Hi, Steven.

I guess first among the strong drivers in the quarter was better renewables. Can you talk about the progress you're making and capturing that opportunity, how Control-IQ is bolstering it? And what your latest thoughts on the capture rate looking ahead?

Sure. Renewals, Steve, it’s really kind of a boring story. We just continue to make strong, steady progress and so not really a surprise element there. What's going on is that we have continued opportunities being added to that denominator. And so, this year, right now, we're already have about 40,000 people in grand total, who's warranties have expired and we're adding at least 8,000 more to that in the back half of this year. So we continue to make progress on renewing people, who purchased pumps one, two years ago, as well as people who are – whose warranties are freshly expiring here in the very near-term.

Thanks, Leigh. And then I was wondering if you can talk a little bit more about Sugarmate and how it adds to your capabilities with respect to your digital strategy and your mobile apps specifically and how do you expect to integrate that into your efforts?

Sure. Well, first of all, we're excited to have Sugarmate as part of the family of Tandem. They bring a very innovative ways of presenting data. And there's also some unique connectivity aspects where it connects to an Apple watch. It connects to Alexa, connects to CarPlay, a lot of different areas. And so, there's a certain expertise in DNA that that Sugarmate brings to Tandem that will allow us to utilize that going forward. They also have essentially a follow feature that is available today. So I think that going forward our plans today are really to bring Sugarmate into Tandem and stabilize it to continue to provide the excellent service that that organization has to its 30,000 members. And we're going to gradually bring the Tandem support services in place to work with that organization from a customer service and the quality system and those sorts of things. And then we’re going to begin working on developing products and integrating ideas that that Sugarmate will bring with our digital health platform. So, we see it as a very complementary exercise. I think that it's going to add a lot to our own digital health initiatives and we're excited to have them as part of our team.

Great, thanks a lot.

You're welcome.

Thank you. Our next question comes from Matt Taylor of UBS. Please go ahead.

Hi, thanks for taking the question. Just I ask two quick ones. I mean, one was, you talked about some momentum outside of the U.S. [indiscernible] any dynamics there that favor you, or put you in a disadvantage versus the U.S.? Or is it largely the same? So a few different competitors and different dynamics, so I just was curious what you're seeing.

I would say the competitive dynamic OUS is comparable to what it is here in the States. I mean, it's Tandem, Medtronic and Insulet, and I think that here it's tube versus tubeless. And we compete essentially against Medtronic. And I think that's what's going to happen when we start to bring Control-IQ to market in those countries. It's just going to happen in the back half of this year. So, I think, we're excited about. We're excited about our opportunities out there. And I think that we're going to continue to do very well.

Great. And then just another follow up, have you seen any notable changes in renewal or attrition rates, just wanted to get a quick update there.

We have not really renewal, I would say, continued growth at a strong steady pace. From a nutrition perspective, we haven't seen any change in people's purchasing patterns. We did have people accelerate some purchasing in Q1 when stay home orders were first put into place, but in the second quarter, we're still seeing the same level of customers that continue to order on the go forward. So other than some of the COVID pressures we discussed as we've been adapting and pivoting to this telehealth environment and no significant items of note.

Great. Thanks much and congrats.

Thank you.

Thanks, Matt.

Thank you. Our next question comes from Jeff Johnson of Baird. Please go ahead.

Hi, this is [indiscernible] on for Jeff. On pricing through United Health and more broadly has COVID had any impact on pricing? And generally speaking, does United Health pricing shake out similar to other payers? Or are there any requirements given the Medtronic preferred pricing to change how you think about pricing and the payer channel? Thank you.

Thanks for the question. And we really haven't seen any pricing impacts from COVID as you suggested or and we don't comment to pricing on a particular payer by payer basis. One of our major initiatives though is to continue to move our managed care business, move to more of a direct model, I guess I would say relying less on our distributors. Today, we still have about 30% of our business that's direct and our long-term goal is to move to 50:50 to gain some efficiencies in the operations from that shift.

Great. Thank you. And my last question, can you just speak a little bit to the addition of the new board members and in particular Ms. Howell’s experience on the payer front, including the PBMs. Is there any update on if there would ever be a possibility of getting Control-IQ requests from DME to pharmacy over time?

Well, I just wanted to say that we are really excited to have both Kathy and Peyton join our team. Peyton has a great deal of experience in reimbursement. It's clearly an area that we're interested in. I think we looked to her to provide guidance to the organization when it comes to – just in hospital pharmacy and just home care settings. So, we definitely think she's going to do that. And we're also very excited to have Kathy on the team as well. Kathy has got more of a technical background. I think she's going to be working with us as we pivot, as I've said, towards this digital health initiative. Leigh, do you want to talk a little bit about the pharmacies?

Sure. I'll just start by laying out our managed care strategy right now. First and foremost, as I just mentioned is that when it continued to bolster our relationships with the payers and get more direct contracts, that can you shift the business in that way. And then we will continue to evaluate on the go forward what makes sense for us as a business, whether or not pharmacy and makes sense for our product, which is more of a specialty nature. And then and understanding more about some of the potential downsides of being in pharmacy that lack of visibility, potential price erosion. So those are all the factors that we're taking into consideration. But today, first and foremost, it's really about focusing on building relationships with the payers.

Great, thank you.

Thank you. Our next question comes from Ravi Misra of Berenberg Capital Markets. Your line is open.

Hi, I appreciate the question. Leigh, John, maybe you could help me to think about the renewal cycle. It looks like there was a little bit more of a stronger step up than we would have expected over the last – compared to the last few quarters. I mean, any thoughts on what would – what was driving that, was it Control-IQ, was it people sitting at home with an expired pump, thinking right now is it time to turn it in. And then is that kind of the new, so to speak, run rate that we should be thinking about in the models going forward?

From a renewal perspective, I think a lot of what we're seeing is just the outcome of the continued investment we're making in that team. So we refer to it as our renewals and retention initiatives, making sure when the patient first buys the pump that we don't lose sight or lose touch with them over the course of the four years. So when their warranty does expire, they're familiar with the products, they're familiar with what's coming next. They’re like to be a part of the Tandem family, if you will. And so, I think, what we're seeing is that the renewals are starting to reflect that investment that we've been making and for us the opportunities continue to grow. So Control-IQ certainly helps that.

Okay. And then maybe one on the longer-term pricing strategy you’ve purchased – you made the Sugarmate purchase that's going to be layered into your product suite at some point. Should we think about these as a means to defend price in the long-term? Or as something that you'll need to – you'll be able to charge a premium for? Just curious as your thoughts, maybe as we head into election, thoughts around drug pricing and how that might affect you on the pump side. Thank you very much.

Sure, Ravi. I think that the – on the pricing side, we have clearly made Control-IQ and Basal-IQ free to the users, but we believe that there's going to be a compelling argument made to their payer organizations and to go back and show them the real world data and show them the benefits that this technology has provided them in terms of cost savings. And that makes us – puts us in a strong position to argue for additional reimbursement for our algorithms. So that's definitely one thing that we're looking at. I would say that when it comes to the digital health initiatives, I think that initially we're moving into this space, not expecting to monetize the effects of the technology that we bring, that these products and services that use data to reduce the burden to – of the healthcare providers as well as the people using the pumps. We believe that it will increase stickiness because people will really want to have the additional data, the informations and the benefits that this technology provides. So I think it provides us the opportunity to – it – basically I think as a preventative against price erosion over time, but not necessarily something that's going to create the opportunities to increase price.

Thanks. Have a good one.

Thank you.

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