Diabetes-sector disruptor Tandem Diabetes (NASDAQ:TNDM) is revolutionizing diabetes treatment with its first-gen automated insulin delivery system, the T:Slim X2 with basal IQ. Meanwhile, telehealth titan Teladoc (NYSE:TDOC) is disrupting how patients get primary and specialty care via its virtual-health business model. Both companies reported rapid top-line growth last quarter, but were the results at one better than the other?

In this earnings brawl episode of the Motley Fool's Industry Focus: Healthcare, analyst Shannon Jones is joined by healthcare investor Todd Campbell to explain why these companies are game changers and, when push comes to shove, which company delivered the best quarterly results to its investors.


This video was recorded on May 1, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, the 1st of May, and I'm your host, Shannon Jones, and I am joined via Skype by healthcare guru Todd Campbell. Todd, how are you today?

Todd Campbell: Shannon, I'm doing great! Before I forget, I wanted to give you a shout-out. Thank you, if you will, for turning me on to probably one of the best Twitter handles that I've seen in years!

Jones: [laughs] Of course, you can be speaking none other than @JustSaysInMice. For our listeners out there, if you have not found it on Twitter just yet, please make sure to follow @JustSaysInMice. This is a scientist who literally created an account simply to track studies that are done in mice where they try to extrapolate those studies to human studies. It's hilarious, it's sad at the same time, I guess, Todd? I don't know how else to put it. [laughs]

Campbell: [laughs] It's a very good reality check to the clickbait that is scientific discovery, when they say something crazy like, "Wine will extend your life by 30 years!" Yeah, it just says in mice.

Jones: Yeah, just in mice. [laughs] Yes, thank you for bringing that up, Todd! We've got a show for our listeners today. I'm excited because we've got earnings season. We've got two companies to talk about on the show today that reported earnings fresh off the bell yesterday, the first of which being Teladoc and then the other is Tandem Diabetes Care. I'm excited to dive in because at the end of the day, Todd, I want to know which of these stocks had the better quarter.

Without further ado, let's start off with the first one. Let's look at Teladoc, ticker TDOC. Teladoc, leading telehealth provider out there. Shares have been pretty volatile, especially when you look back over the last six months or so, especially that last quarter of 2018. Despite some signs of recovery earlier this year, the stock is still down about 30%. Coming off of earnings yesterday, the stock has been hovering around 1.5% up on earnings news. Todd, what are some of the headline figures here?

Campbell: Talk about disruptive companies. I just love disruptive stock! Certainly, Teladoc is one of them. I think that investors should probably know before we get into the numbers why this stock has been pretty volatile and actually trended down over the course of the last three to five months. We had a few different things. We had some concerns about some of the marketing that they were doing on YouTube and whether or not that was OK. We had a short-seller who took aim at it for some of its EBITDA reporting. Then we also had a departure of their CFO. So I think there were a lot of people who were coming into this report short the stock. I want to say, Shannon, that about 28% of the float was held short in this stock coming into the report, which is pretty remarkable and probably one of the reasons why shares rallied relatively sharply after they reported their numbers.

As you said, leading provider of telehealth. What we're talking about is, "I don't feel good. I don't want to go to the doctor's office. I'm going to go online and speak with a doctor using my smartphone or my tablet," or, like you and I, use PCs.

They put up pretty good numbers, Shannon. They had top-line revenue totaled $129 million. That was up 43% year over year. Even if you back out the acquisition that they made last year to get international exposure, even if you back that out, they still grew their revenue by 23%. What I think is really interesting about that, Shannon, is that they were able to grow that revenue even though the flu season, which is a big driver of visits for telehealth, was pretty tame. They saw a big drop-off year over year in visits due to the flu, yet they were still able to deliver this kind of revenue growth. I think that's pretty remarkable, and suggests the company's obviously gaining traction. It's disruptive, not to have to go to the doctor's office if you feel horrible.

Jones: Yes. And really, this quarter marked a huge milestone for Teladoc. They crossed the 1 million visit mark, which is pretty huge. Breaking down revenue even further here, subscription access fees were $106 million. Those were up 46%. When you look at visit fee revenue, that was $23 million, up 26%. Across all channels, you saw total visits up 75% year over year, which is pretty impressive. Another interesting data point, really driving home the just massive opportunity for telehealth, is in the behavioral health segment. They do have a mental health segment, and that really is one of the ripest areas, I think, for these virtual telehealth services. If you think about it, many people typically, because of a stigma, or just whatever, tend to not go to see a provider to talk about mental health issues. This was a really strong channel for them. Teladoc saw total behavioral health visit volume increase by over 100% in Q1. They're expecting behavioral health total revenue growth to exceed 50% for the full year.

Also, another interesting metric, one of the metrics that a lot of investors tend to focus on is utilization rate. This really is a measure of just how predictable are these visits on an ongoing basis. It's really defined as total general medical visits divided by paid U.S. memberships. In Q1, they had a utilization rate of 11%, just slightly ahead of where they were last year. Two, Teladoc actually tends to report the utilization rate a little bit more conservatively than their competitors, so it could even be slightly higher depending on how you define it. But really, what that tells us is that the platform is catching on with more members. At the end of the day, higher utilization rates boost these high-margin patient visits, which in turn, of course, drives revenue and really sets Teladoc up to exceed expectations long term.

Campbell: You mentioned the mental health side of things. I thought it was interesting when I was going through their 10-K report filing with the SEC. They say that there are about 100 million people who live in mental health deserts, basically live in these rural areas where it's very hard to get to someone. You talk about the stigma. Well, yeah, there's the stigma, and the fact that I'm going to have to drive an hour, an hour and a half, or whatever. So telehealth is a nice, natural fit for that population, and it's a relatively large population.

To back up a second, make sure that people understand how this company makes its money. It gets the bulk of its revenue by selling access, subscriber access fees. It has 12,000 clients. Those clients are health insurers, hospital systems, self-insured companies. What happens is, these payers, recognizing that it's a heck of a lot cheaper to provide someone with a telehealth visit than it is an in-office visit, are promoting the use of telehealth and making telehealth from Teladoc available to their members. And that's really what's driving a lot of this growth. It's not just organic, you and I talking about it with our friends and family and people saying, "Oh, that might be interesting the next time I have a flu." It's also payers saying, "I can save a lot of money and improve my margins, and maybe even reduce premiums at some point, if I can drive most of my members to telehealth." That's a really huge, disruptive long-term trend, especially when you consider that the CDC says there are 990 million office visits per year. That's a crazy number, especially when you think about, they did 1 million visits in the quarter. 990 million opportunities for growth!

Jones: Massive opportunities for growth. Really, the telemedicine field in general is just completely revolutionizing how healthcare is delivered. It's one of the few innovations in healthcare where it's not just about cost. It's also about access, to your point. They have the partnership with CVS/Aetna to also expand access through the CVS app, as well. And that's also about being able to reach patients where they're at. If they have the app, they are more than likely to use the Teladoc platform. Granted, rollout for that has been a bit slow, a little bit slower than I think Teladoc would like. But that's a part of its plans. But yeah, it's the access. It's the lower cost.

The interesting thing, though, and one of the areas that I'll be watching is that, of course, Teladoc isn't the only telehealth provider in town. Just last month, it's a private competitor, but Doctor On Demand said that they're going to be launching a service that's called On Hand, which is basically a virtual-first and really, for some patients, maybe even a virtual-only healthcare plan that's really designed to give patients access, again, to physicians. With this plan also comes, again, the lower cost, but premiums could literally be cut in half with this type of plan. Listening to the conference call yesterday with Teladoc, that was one of the questions that came up from the analysts -- how are you responding to this? Are you thinking about a separate plan specific just to virtual health visits? Of course the company says, "Yes, it's on our minds. It's something we're thinking about." But that, I think, is a huge threat, but also a huge opportunity for Teladoc here as well.

Campbell: On the conference call, they also asked the question, talking about the competitive landscape, they were wondering, it seems like a few of these health insurers have actually taken equity stakes in venture capital rounds of some of their competitors. It seems like we're carving out these specific channels where, yes, Teladoc works with these people and the competitor works with these people, and there's not really much overlap. On the conference call, management did try to say, "Listen, we're agnostic. We think we can win business away. We think that we continue to expand in our existing relationships." And one of those relationships, UnitedHealth, is the biggest insurer in America with some 100 million insured lives. And they're only scratching the surface of members that they currently serve through UnitedHealth. They did hint that an expanded relationship with them could be coming. But they said they're not going to make that announcement; that's UnitedHealth's announcement to make.

They have 26.7 million U.S. paid subscribers that are covered by those payers, they're buying the subscriber access fees. 26.7 million. Shannon, one of the things that blew me away when I was looking through those filings, they say that their existing clients alone, they think that there's an addressable market of 50 million untapped. 50 million people. So just with their existing clients, they could go from 26.7 million and add 50 million more to that. That would be, obviously, remarkable.

Jones: That's so interesting! I was actually reading a stat just before the show that said, of people who are employed that have access to telehealth, 80% haven't even utilized the service yet. That is a huge opportunity for them. Probably a lot more education. Of course, that does mean they have to rely on employers and insurance providers to really drive that service. But that's a huge opportunity!

Let's also talk about the other massive opportunity, Todd, and that is the Medicare Advantage plans that are out there. 22 million people potentially on tap for Teladoc. Listening to the call yesterday, of course that came up. It sounds like we may not hear more about it until the latter half of this year. But Teladoc is very much in talks with many of these plans to get this up and running.

Campbell: Right. Remember that number we just talked about, 26 million is where they are right now. Now you're talking about a potential to reach another 22 million just through Medicare Advantage. Eventually, if Medicare Advantage is allowed, traditional Medicare probably will follow. So you're talking about tens of millions more there as well.

You're right. They were cagey about pricing. No idea how that's going to translate. It's not baked into the guidance. But it's coming. Telehealth is coming to Medicare. I think that's the takeaway. And I think it probably won't start contributing revenue until late 2020, maybe 2021. But it's coming. So, I think you're right, that's a huge potential catalyst.

We should also not forget that this is now a global company. Because of acquisitions, now they can provide telehealth services in Europe, for example, which opens up, what, 500 million more people theoretically, as far as the target market. Again, they have single-payer systems over there, you don't know how the reimbursement is going to go. But because telehealth saves money, there's a lot of opportunity there for traction and future growth.

They said on the conference call, 20% to 30% organic growth expected this year. And when pressed they said, "Yeah, we think that that will continue through 2020." So, a 20% to 30% grower is pretty good. But, Shannon, they still lose money.

Jones: They are still losing money. More of the same, and not unexpected at this point, but something to certainly keep an eye on.

All right, let's turn the page. Let's talk about the second stock that reported earnings after the bell. And this is really the turnaround story that I don't think gets enough press or enough coverage, and that is none other than insulin pump manufacturer Tandem Diabetes Care, ticker TNDM. This has been such an interesting stock to watch. I think what's more astounding to me, Todd, is that this was a stock that at one point, I believe in 2017, when the company was really at its ultimate lows, had blow after blow coming after it, was trading for like $2 a share. I think it opened up 2018 at maybe $3 a share. Looking at it today, this is a stock that's trading around $60 a share. I have to admit, I was one of those people that had pretty much written this company off, Todd.

Campbell: 1,500% return in 2018. [laughs] 1,500%! That's crazy! You have a very competitive marketplace. Up until last year, a lot of people looked at Tandem and said, they're an also-ran. You had Insulet that had this tubeless insulin pump, and a lot of people were really big fans of that. And they were like, why would people want a tubed pump like Tandem's offering? What ended up happening over the course of the last year is, you had J&J's Animas exit the business. That put a whole bunch of new customers up for grabs. And they won FDA approval of the use of some software that creates their first-generation automated insulin device. Essentially what this first-generation one does is, it knows enough to temporarily suspend insulin dosing from the pump if you are at risk of a dangerous blood sugar low, which is very, very important. Sales have been gangbusters since then. The pump shipments are through the roof. They won this approval last August. That quarter, the third quarter of last year, they shipped 8,400 pumps, which was pretty remarkable. That was up 118%. Guess what? In Q1, they shipped 14,732 pumps. 75% more, Shannon, than they had shipped in that first quarter that this system became available. And honestly, so much more room to run. The size of the addressable market is massive. They think they only have about 100,000 people who are using their pumps today.

Jones: Yeah, and only about 27% of patients that have type 1 diabetes are using pumps. To your point, Todd, this is a massive opportunity. Tandem thinks that in America, it can actually increase those that are using insulin pumps from 550,000 to 900,000 total. Outside of the U.S., there's another three million people with type 1 diabetes they can also go after. So yeah, the opportunity here is massive. I love that Tandem is partnering with probably one of the, if not the most, innovative diabetes manufacturers out there, which is Dexcom right now, with their G6 system I believe it is. 2018, looking back, the diabetes space was probably one of the top performers in terms of subsectors within the industry. No surprise there because they have been innovating in so many different ways. And really, I think they're just getting started, Todd.

Campbell: Right. You have the Dexcom sensors. Those are the ones that are evaluating your glucose levels consistently. And then you have them feeding information to the pump. And that's how the pump's making its decisions. The shipments that we talked about translated into 142% year over year revenue growth for the company. $66 million. Again, to put that in perspective, in the third quarter of last year when this device first got approved, sales were $46 million. So $66 million in the first quarter, up 142%. And the reason that really amazes me is that durable equipment like this has significant seasonality. People typically try to avoid spending on purchases that are expensive like this until they've met their deductible for the year. So usually, sales are tilted toward the back end of a plan year, so the fourth quarter. First quarter is usually incredibly weak because few people have made their deductibles. Yet even with that headwind, you were still able to deliver this kind of growth. I think that obviously shows that people who suffer from diabetes, who need multiple daily injections -- type 1, obviously, especially, 1.25 million type 1 diabetics here in the U.S. Like you said, only about 30% of them on pumps right now. This would seem to be a slam dunk. So, yeah, I think this was a very strong showing for this company, especially given that seasonal headwind.

Jones: And not only that, Todd, but when you think about the competition in this space, you've got a massive player like Medtronic who they've been able to capture market share from. When I see numbers like this, that tells me that they are very quickly encroaching on Medtronic's space. And it's not just Medtronic. It's also with Insulet, another major player in the space. Tandem has about 12% of the market right now. It would not surprise me to see those numbers go up significantly, especially as we move toward the end of the year.

But it's interesting, when we talk about the competitive dynamics. It was back in 2016, 2017, that UnitedHealth dropped Tandem and actually picked up Medtronic in terms of coverage and reimbursement. That was really, I think, a reason a lot of analysts went ahead and wrote this company off, because that was just such a huge rug to pull from under this company. Our colleague, Brian Feroldi, who's worked in the space for about a decade, he even said, "I didn't think they'd recover from this." So, to not only see this company recover from something like that -- and granted, we've had other smaller competitors start to fall away -- but to then start posting revenue numbers like this, it's just so impressive, Todd.

Campbell: It really is. I mean, these companies aren't going to roll over and give this market to Tandem. Medtronic was actually the first to have one of these automated systems launch. Theirs, though, is so bulky, it's not nearly as sophisticated as Tandem's. Medtronic isn't going to give up. They're going to come back with their own revised offering, using their own sensors and their own pumps. Insulet is working with Dexcom on their own device. That's expected to hit in 2020. So there's a competitive threat there. Eli Lilly is working on one. A privately held company called Bigfoot Biomedical is working on one. So there's a lot of competition in this space. But I think one of the things that investors should recognize is that Tandem has a head start, and people don't usually switch until their warranty is up on these devices. Landing as many accounts early on like this could help them when it comes to maintaining market share, even when these others launch.

The other thing, too, is that they have an update to the system that got approved last year. Supposedly, if the FDA cooperates, that's going to hit this year. It's called Control-IQ. Control-IQ will actually automatically adjust up and down insulin, depending on those readings from those sensors. So you're not only just preventing the lows, you're preventing highs, you're preventing lows, you're keeping the patient within their desired range for a longer period of time in the day. That's huge to delaying disease progression, and hopefully extending lives for people with diabetes.

So yes, competitive threats exist. But we shouldn't ignore the fact that they do have an innovation advantage, and the leadership advantage.

Jones: Todd, at the end of the day, you've got Teladoc on one hand, you've got Tandem Diabetes Care on the other. Which of these companies do you think is the winner in terms of earnings at the end of the day? Who won this battle?

Campbell: I'm going to say Tandem. I'm going to say Tandem and here's why. Teladoc has this great -- and I'm a shareholder -- awesome addressable market opportunity. But their losses widened last quarter, and their guidance for the full year, although there's 95% visibility, according to management, into Teladoc's numbers forecast for the year, their guidance was unchanged. Flip that now and look at Tandem. Tandem not only saw huge, huge improvements in gross margin and operating margin -- they also still lose money, but their operating margin went from negative 57% to negative 17%, which is remarkable improvement, showing the leverage that they have. They took their full-year guidance up to at least $300 million from $255 million, what, 2.5 months ago? Three months ago? So they just increased the bottom end of their guidance by $45 million! [laughs] Over the course of the span of 2.5 months! So, for me, I think Tandem, push comes to shove, is the one that had the better quarter.

Jones: All right. For all our listeners out there, Tandem is the winner of this round, but we will be sure to keep you up to date on all the latest earnings battles going on out there.

That'll do it for this week's Industry Focus: Healthcare show! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Shannon Jones. Thanks for listening, and Fool on!