Good afternoon. I'm Joshua Jennings from the Cowen Medical Devices team, we're gonna kick off the afternoon medical devices channel. A great way to kick it off is to have the executive team from Tandem joining us today. We've got John Sheridan, President and CEO; and Leigh Vosseller, Executive Vice President and CFO.
It's good to be here, Josh.
Great to have you guys. Thank you so much.
It's a big day. Big day.
Participating in the Cowen Health Care Conference.
Yeah, absolutely.
Maybe, I think you said, you know, big day for a reason, and there's some news out here this morning.
That's right. It looks like Abbott got the FDA approval for both FreeStyle Libre 2 and FreeStyle Libre 3 in an AID system, which is something that I'd say we're very happy for them. It's a big accomplishment. I know a number of people were skeptical that this would even happen, so it's big news as far as we're concerned. When you consider the size of the market that Abbott has today with their sensors in the U.S., there's roughly 300,000 people in the U.S. with Type 1, and a much larger group OUS, and there's about 1 million people in the market in the U.S. with Type 2, and again, larger.
This is, a new opportunity for Tandem because none of these people use an integrated AID system, and we're currently working with Abbott to integrate our system with them. It's great for us. Again, it eliminates a lot of uncertainty. We were going down a parallel path where Abbott was working to fix the AID indication with the vitamin C issue. Now that they've got that taken care of, it's really just an engineering challenge for us to integrate the two systems, and it's something we've done many times. We'll get that done with them as well.
Excellent. Anything you can share just in terms of the development work that's already kind of behind you in terms of integration?
Yeah. Sure. We've been working with them now for quite a while. It's a very strong team, very capable. It's interesting. When you look at the product that's on the market today, it's been developed to be an independent sensor. Because of the interoperable conditions that the FDA defined, we're able to work with Abbott to develop the code to allow our pump to talk to their sensor. That's really what we've been doing with them. We're developing the code that allows us to communicate and control the system in a safe and secure manner. It's relatively complicated. There's a lot of work that goes on in doing that. Like I say, we've been working with them now for just over a year, maybe a year and a half.
You know, we expect to bring that to market this year.
Excellent. Anything more detailed than this year? I mean, do you think
Well, you know, it's interesting because one of the things that they indicated in the press release was that they have to modify the sensor in order for it to be used in an AID system. That modified system is not gonna be available, I think, till second half. We really need to understand their timing on commercialization. I think that we will in the near future. Again, we've known about this for 24 hours now and really haven't had a chance to talk to them in depth about it. You know, we would expect that we're still gonna be aggressively moving to bring this product to market. It's important for us. We'll talk more about it on our earnings call in April.
Excellent. Just some of the excitement with you leading off the thing, it's a big day. Just primarily just the potential to accelerate MDI converters that are using Libre today.
That's right.
Yeah.
I mean, I think when you look at our growth over the next four years, we said we were gonna get to 1 million people using Tandem's technology by 2027. This is an important element of that. I mean, there's both U.S. and OUS, the Abbott integration is an important element of that.
Were you surprised that Libre 3 got the?
That was a surprise to me. I mean, I'm not surprised that Libre 2 got approved. I am surprised. I think it's great that the FDA did that. It does present some decisions. We've got to make some decisions now about that, but I think it's great that they got both of them taken care of.
Is there any reason for investors to think that the Tandem with the Control-IQ algorithm plus FreeStyle Libre 3 in the modified form, does Tandem have a advantage with that collaboration over, say, any competitor or primarily Insulet where it's probably hard to know in terms of what?
Yeah.
How they compare in terms of?
I don't know where we stand, honestly, relative to the competitors. Clearly, there's a device on the market, OUS, that's using it. You know, we're working as fast as we can to get it to market. It's important for us, and we're working as fast as we can to do it. So we'll just have to wait and see.
Excellent. Well, that is an exciting event for the whole diabetes space.
Yeah. It's great.
This morning. Great to see. Maybe to talk about some more exciting Tandem specific or even more specific to Tandem action. Maybe we'll start with Mobi and wanted to just check in on the, I think you relayed that the FDA gave some questions on the 510(k) filing and you're responding to it. Any way you can characterize the nature of the questions and do you think is this likely to be the final amendment or round or I mean, it's probably maybe hard to say.
I mean, typically for competitive reasons, we wouldn't wanna say anything about specifics of the questions other than to say we filed it, we filed it last year. We got the questions in late December. We've been interacting with the FDA now for the last several months. I would say the interaction is normal. It's what you'd expect to have happen at this point in a review cycle. Some questions I have received over the last couple of months are whether or not these questions would require us to do any additional human factors or clinical studies, and our belief is that it's not. We will not have to do any additional clinical work or human factors work, which we think is a positive. As we look at it today, I don't think that there's any showstoppers out there.
You know, it's just there's work for us to do, though. We are, we're all about making sure that we're prepared for commercialization. It's difficult for us to predict exactly when we could anticipate approval just based on some of the, you know, the changes that have occurred within the FDA and resources now coming back, but still maybe not as familiar with our products as they have been in the past. We can't really predict when it's gonna happen, but we're gonna be ready for approval in the second half. I would say that we would be in a situation to have product in the market roughly a quarter after we get the approval from the FDA.
Yeah. Okay, great. Just on the manufacturer side for Mobi and just the readiness of Tandem to launch. I mean, just any issues with component supply or capacity ramp as you see it on to get that approval and quarter later launch it?
Yeah, I mean, we've been working on it now in manufacturing for quite a while. We've purchased all the automation equipment or a great deal of the automation equipment that's required. I think our manufacturing processes are developed. We're just, and we are building some inventory. We're still in the preparation phases, but I think that we feel good about it, that we don't see any or foresee any supply chain issues. Our supply chain team has been working overtime for the last two years just to make sure that that's the case. At this point, we don't see any issues.
Great. Wanted to touch on just the revenue guidance you put forward for 2023. You know, I think it, appropriately conservative. You have, assumes that the client indication starts and also no contribution from new products like Mobi. I guess having recognized that that's pretty straightforward. Just in terms of U.S. Mobi launches, is there and I would guess, what's the bull case in terms of, I guess, for 2023? I know part of it would be dependent the earlier the approval and launch, the better. Second half approval, quarter later launch, you know, would probably be a little bit of a stub in 2023, potentially. Maybe thinking about the early part of 2024.
You know, what patient segments do you think will be most interested in Mobi, versus, you know, T2?
As I said, it's difficult for us to predict exactly when we're gonna get approval, so we're gonna be ready for commercialization. We'll be ready in the second half so that once it does happen, we can respond quickly to it. You know, that's really what our priority is. I think that when it comes to the segments, I mean, we believe we need a portfolio of products because diabetes has many different segments in it. People want to use the products. They wanna wear it differently. They wanna interact with it differently. They wanna control it differently. Mobi is half the size of the t:slim. It doesn't have a touch screen interface on it. The interface is entirely controlled by a mobile app.
You know, there's a great deal of discretion that comes along with that, and there's a great deal of convenience. I mean, people can interact with the pump using the mobile app, and basically no one will know you have diabetes, which is very important to people who live with diabetes. When it comes to trying to define the characteristics, we have done a great deal of market research on Mobi over the last couple of years. We've done competitive assessments where we've looked at the existing competitive AID products on the market, and we put t:slim in there first as it's currently defined. t:slim did quite well in these competitive situations.
We put Mobi by itself in the same competitive assessment with the other products that were on the market, and it did quite well. When we put them both in there, we actually got 50% of the preference share. I mean, there's definitely a group of people out there that are interested in each, and we plan to have a portfolio with both. At the end of this year, we'll have two of the four products that are going to be on the market, you know, in diabetes pump technology. I think that when you look at it's going to be tech-savvy people who want to be mobile, people who maybe they have more active lifestyles. There are definitely people out there though that like the idea of having the controller on the pump.
I mean, there's possibly a fear of losing your phone or something like that that might drive people towards that feeling. The beauty of the Mobi system is, though, it's all of the algorithms are on the pump, and the sensor talks to the pump as well. If you were to lose your phone, it has a bolus button on it, so the algorithm is continuing to control and deliver your insulin, but you can bolus from the pump at the same time with a pre-programmed amount. You know, we've considered that as an option, but like I said, there are people out there that just may not be comfortable with it.
Excellent. Just thinking about headwinds and tailwinds in 2023 versus 2022, you did have some COVID restriction and staffing headwinds that you faced in 2022. How should investors think about those rolling over into 2023 or have they eased? It seems like they've eased a little bit at least. Just, I mean, could you see a nice kind of comp set up on those two headwinds easing?
I think we've dealt with COVID now for over a year, and so we've recognized it's gonna be part of, you know, the market we have to deal with. I mean, in addition to COVID, there's obviously been the competitive challenges as well as just the macroeconomic factors. I think all three of those have kind of blended together in the last, you know, couple of quarters to impact the business. I would say that what we have seen in the most recent, say, four months, is we have seen some stabilization where the market for us hasn't gotten any worse, and it hasn't gotten any better, but it has stabilized. We think that's a positive.
I think that, you know, when it comes to 2023, our guidance really assumes that these three factors remain unchanged for the entire year. That's the way we're moving into the year with that, again, a conservative assumption that they remain unchanged. I think that when it comes to tailwinds, certainly we have new products that are planning to come to market. We're planning to bring to market this year, but they're not figured into the guidance at this point at all. Any one of them that do, and when they do, we will definitely see the benefits of that happening.
Excellent. If we just think about a headwind, I mean, you called out this European distribution center startup about $25 million in 2023. After you're just thinking about that level, I mean, are there any other distributor moves that could come into play in 2023 and/or could that number move higher? Is that pretty just a solid number that investors think it's not really going to move much?
Yeah. You know, it's, we feel like it's a really strong estimate based on our interactions with our distributors, the level of inventory that they're carrying today, the level of inventory that they're targeting. I guess just a little bit of background, if you're unfamiliar, is that, our distributors outside the U.S. were sourcing their inventory from us in San Diego. It created a lot of complications in getting inventory from point A to point B and caused them to drive up their inventory levels to something higher than they would ordinarily carry, in some cases, 3+ months of inventory. Now we're at the point where we've established an operation in the Netherlands. Our distributors in Europe will be able to source their inventory from that location, which means they will bring their inventory levels down to something more in the two to four week range.
We have a little bit of headwind from that, in 2022, about $6 million. $25 million is about what we expect to have left, mostly in the first quarter. It should be pretty much behind us by middle of the year. I think one important point to note is what this does for us in the future, where it's been difficult to measure our progress outside the U.S. because of these ordering patterns that have been somewhat variable from our distributors. You'll start to see closer alignment with what they're ordering, with what true demand looks like. This does represent or covers about 70% of our OUS operations. I think it will be a good positive difference for us once we get past this transition.
Excellent. Back to the Mobi launch and just thinking about pricing and the potential to see that Mobi has achieve a secure price premium for Mobi. Is that how investors should be thinking about the launch of Mobi in the United States? Could it be priced at a premium to t:slim X2?
I would start with expectations that it'll be priced equally. We will continue to pursue any opportunity that we can to get price increases. It could mean it's for both products. It could mean it's for Mobi. Our starting point right now, as we're preparing for the commercial launch, is to get Mobi on every one of our DME contracts so that we can be ready to go when the launch occurs. Simultaneously, we're pursuing the pharmacy channel for Mobi in particular. That's something that we are looking into as a potential avenue to broaden access for all of our customers. We'll have to see where we get with Mobi itself. If nothing else, we want to build the pathway for Sigi down the road and other products in the future.
Understood, understood. Just on the pharmacy channel and just to think through that, I mean, so these discussions you're having prior to the Mobi C approval and launch, I mean, could those be definitive discussions or kind of learnings that you could share with the investment community? Or do you think you need to have a product that's approved and launched before you kind of have anything formal from payers where they open up this pharmacy channel for, I guess, a non-disposable system?
Sure. You know, you can't execute a contract with the payers if they don't want to, until you have clearance. It doesn't mean we can't have the conversations now. I think that it's something we will be talking more about down the road, because the other element of this is pharmacy. This is something that's going to take a while to build that capability. It's not something that can turn on overnight.
Sure.
When we have something material to discuss in terms of the direction we're headed or the opportunity that's there, we'll be happy to discuss it at a future date.
Should we be thinking about, I guess, that the evolution of your team's thought process on whether pharmacy channel can open up, that is a probably more detailed understanding in 2024. Is that kind of the message? Yeah.
I think that's fair. It's, it's not gonna be a complete on/off switch. We're gonna probably have many different variations of what we're capable of achieving with it. Stay tuned, you know, we'll be happy to share that. Like you said, I would say not really to expect anything before 2024 in terms of conversation.
Great. Maybe just one last question on the pharmacy channel. Just reviews, any of the positive signals, I mean, what's given you optimism then that without a fully disposable platform, that the pharmacy channel could open up for Tandem and their products or their next generation products?
Yeah. I think the world of reimbursement is evolving to some extent. If you had asked me a year or two ago, I would have said you have two sides of the house. One's DME, one's pharmacy, and they don't really talk to each other. I think as the insurance plans are continuing to evolve, you're seeing them come together more, and so you're seeing them under the same umbrella of leadership. For us, it's about talking to people at the innovation level within the insurance plans and helping determine what the right path is. We've seen openness in some of those introductory conversations, so we're encouraged that it's possible. Again, will Mobi be the one that gets us in there initially? It at least gets us the relationship.
It gets the conversation.
That's right.
Further down the road. I mean, my understanding of some of the largest DMEs in the United States, they have a DME business, and they also have a pharmacy business that they're distributing product out of as well. Is there anything there to just think about, I mean, you know, that channel could open up because you have that channel side by side at some of these DME, biggest DME companies out there?
Yeah, that's a true statement. I would say in some cases that capability exists within the DMEs, that they might have a pharmacy access. We're exploring that with our current partners as well, to see what capabilities they have, because those relationships obviously have been very valuable to us over the years. When you think about the fact that even on the DME side today, they still represent more than 60% of our business. Without the distributors in place we've had, we wouldn't have the broad coverage that we do. When it comes to market access, our primary goal isn't necessarily a channel. It's about getting the best access for the patient, the simplest access for the physician, and the best price point for the patient.
That's where our focus is, and where that takes us will probably continue to evolve over time.
Wonderful. Just to follow up on access, you know, the patient assistance program that was initiated, how should we be thinking about that in 2023? I know the goal is to bring just the monthly average cost down for a patient in that $50 range. How is that program taking off relative to internal expectations? Could that, I mean, I know the guidance is, we assume it. We believe. Sorry, I shouldn't assume, but we believe is relatively conservative about a decline in new patient starts. How should we be thinking about the patient assistance program supporting new patient start levels, if not growth?
Sure. You know, it's been a helpful tool. We just launched it late in the third quarter. The fourth quarter, you don't tend to see the same level of interest in programs like that, considering many people have met their deductible. It's more valuable in the early part of the year, which we're into right now. The feedback has been this. The, the field sales reps, when faced with a conversation about economics, about payment offerings or reimbursement levels, it's been something they haven't been able really to engage in because they weren't empowered with this tool. What it's doing today is it's helping them bring, take away one objection point. When a customer's response is, or a physician says, "But your reimbursement is typically structured this way with a high upfront," they can respond to, "Don't let that deter you".
You need to call in because we have programs that can help spread that out." It takes one objection off the table, because many times people wouldn't even make that first phone call to find out what their out-of-pocket actually looks like.
Right.
It's helping from that perspective.
Okay. Thanks. I mean, should we think of it as a potential tailwind in 2023 on the new patient start side or even on the retention side?
I think it's one of many useful tools. I don't think it by itself is going to be a direction changer for us.
Okay, great. Great. Thanks for that. Maybe also we could talk about the Tandem Choice program and just, thinking about the participation rate in front of Mobi's U.S. launch. Are you expecting more significant numbers in the kind of GAAP to non-GAAP spread in the first and second quarter as we're getting closer to the Mobi launch? Yeah, maybe start there.
Sure. Yeah, this program has created some confusion around what our sales numbers look like and what they represent. It's actually a program today that's used for another objection. If people start to ask about Mobi and start to discuss the thought of, "Maybe I shouldn't buy your t:slim today because I heard Mobi is coming," what it does is it lets them know that we will have a pathway program. The program exists today. People don't sign up for it. They don't elect it. We don't really have any idea today, based on current conversations of how many people will. We have history from a former program that says how many people typically take advantage of a program like this.
Right.
What we're sharing today in terms of our results, the GAAP results have some very complex accounting associated with this program. The non-GAAP results is where I want to try to direct everyone's attention because it's framed in the way that our normal sales would be framed. It's the same, for example, the economics are already the same. We still ship a t:slim today. We collect at the same time and get reimbursed by insurance the same. We're reflecting the accounting, the revenue just so you can compare it to historical periods. We're trying to take away this noise you're going to continue to see with this program that you'll see deferrals each quarter until approval.
When we start asking people to make the election, that's when you'll start to see revenue get recognized, which can be very sporadic and unpredictable. It's back to if you use the non-GAAP sales, you'll be able to better compare to historical periods.
Great. If we think about that delta, I mean, is that giving you a signal of future Mobi demand? I mean, how do you think about just the progression in front of the Mobi launch? Do you think that the more patients that are participating in Tandem Choice that are current users of the technology or patients of the technology? Do you expect kind of just the pent-up demand to build and then once launched, and patients will access it that way? Maybe hard to answer, but what are you guys expecting?
Yeah, it's a good question. I think the way we get signals from this program, since people don't elect in advance, it's a matter of if and when they choose to down the road. The signal will be how many people are asking about it. How many times you're having to talk about the program, and that we do have this pathway offering for them. That's when we'll start to determine if there's noise around pausing that may come from people who are looking ahead to Mobi. At this point, we haven't really had to talk about the program much. We're not hearing noise in the market, nothing that would indicate that people are waiting for Mobi to come in order to purchase. We do anticipate that noise could come. Usually, it comes around clearance timing.
That's why, to John's earlier points, we're gonna be working very hard to commercially launch as quickly as possible after clearance to make sure we minimize the timeframe where there could be that noise and disruption.
Many people don't know about Mobi now. It's I think investors do, of course. A few physicians do. but I'd say it's widely not known. I think that as soon as we do get clearance, we'll ramp up the advertising and marketing around it. At that point in time, we'll probably start to see people express interest in it.
No, that's an important point to make. Thank you. Maybe on top of Mobi, thinking about some of the other initiatives in your R&D pipeline. You know, you've discussed the expectation for a commercial patch pump in 2027, if not earlier. Just thinking about t:slim X3, Mobi Tubeless, Sigi Patch, it's kind of like an almost an annual or every 18 months.
Right.
Another hardware launch. Is that the right cadence to think about the three products?
Yeah. I mean, I think that if you look prior to COVID, we were launching a brand-new product, a meaningful new product every 12- 18 months, and we anticipate getting back into that same, that same cadence. Interesting this year, we actually have two CGM integrations, both G7 and the Libre sensors will be integrated. We also have Mobi launch, but we also have a brand-new data management platform that'll upgrade t:connect. It's called Tandem Source. It's also, we're very excited to release that, and it'll be globally released, which is another big thing. I think then you look beyond that, and we've got three significant introductions, you know, staged roughly in a year to 18 months beyond that.
I mean, I think we have the most exciting pipeline in diabetes. Unfortunately, I don't think we get any credit for it.
I know. That is true, on the credit side and the portfolio that you guys are developing. I'll question on the patch technology and the development work there. You acquired AMF Medical. You got Sigi under your roof now. You had an internal program that was moving on. How do we think about what would be incorporated from the internal work? Is there anything there that you can use and leverage in the development pathway for Sigi?
Yeah, that's a great question?
Or technology algorithm, anything along those lines?
We announced our intent to commercialize the patch back in December 2020. We laid out a roadmap at that point. That included X3, Mobi Tubeless and the patch pump. We've had a patch pump program under development for a while now. Our internal priorities were to miniaturize the patch and to use a concentrated insulin. By doing that, we could have a smaller reservoir. This past year in 2022, we did extensive market research from the very beginning of the year throughout the end of the year. We were looking at our device as well as the competitive product, as well as multiple startups that are underway today.
You know, what we found is that the Sigi Patch Pump really resonated with people, and it was, and highly differentiated, and we saw the greatest, you know, preference scores with that device. We looked at it and well, initially, we were considering an investment, and we said: Well, let's just buy this company because, you know, it does have differentiated features, which are it's rechargeable. It has a pre-filled insulin cartridge, which makes it just very simple to use. It's got a great ergonomic profile. The team in Switzerland that developed it are very capable. They're excellent engineers that are focused on, in addition to the technology development, also manufacturability.
We really believe that when we bring the product to market, it'll be highly automated, it will be very reliable, and I think that it's gonna be very appealing to the community. It was really a matter of just comparing the sort of the differentiation of our own system that we were working on to the Sigi Patch. I think we felt the Sigi Patch would be more meaningful in terms of market growth.
Great. I should have asked this question up front at the beginning when you were talking about the Libre 2 and 3 approvals for integration in AID systems, but on G7, you mentioned G7.
Yeah.
A minute before. Just any sort of timelines you can share where you are in the development, pathway to integrate G7 into?
Yeah, of course. We said with G7 that it'd be a quarter to two after it was commercially available. It was approved in the, I think, mid-December timeframe. Our plan today is in the latter half of the second quarter, we plan to bring it to market. We're excited about that. We're kind of in the final stages of development. We're, you know, working on labeling and things like that. We have a great relationship with Dexcom. They have great product, a great team. We're really excited to bring this pump, this product to market here in the first half of the year.
Excellent. Wanted to maybe just use the last couple minutes, maybe didn't leave enough time, but just thinking about the 2027 goals you put out at your investor event and innovation day, I think at the end of 2021.
Yeah. No, end of 2020.
End of 2020. Excuse me. Sorry.
Oh, 2021? Oh, sorry.
It was 2021.
Sorry. 2021. Yeah.
just some of the goals are 65%, you know, gross margin expanding to 65% and operating margin expanding to getting to the 25% level.
Yep.
Just like I guess the cadence. One, maybe just the, those targets are still in play. I know there's been choppiness all through. 2022 was a unique year for the whole medical device industry. Are those targets for the investors saying that those are still in play and those are still, kind of, milestones you guys have.
Yeah, absolutely. We don't intend to back off those. I think that when we put the plan in place, we recognized that there were going to be periods. It's not gonna be linear growth.
Sure.
There will be periods of moderation, which certainly 2022 is one of those years. I think as we get these new products to market this year and beyond, we would expect to return to a growth gauge that we're accustomed to, and with that, achieve the numbers that we set forward.
When we think about margin expansion, specifically operating margin expansion, is that kind of 2025 and beyond? I know you guys are making a lot of investments and pipeline opportunities that'll fuel the growth in internationally and in the United States. Is that kind of the right timeframe to think about a stronger operating margin expansion in that period before in 2025-2027?
The first piece. I would say, yes, that's fair. The first piece that really drives that is the dropdown from gross margin. Mobi is the single biggest driver of our gross margin expansion goals. It will get us more than halfway to our 65% target. The pump itself has a 10%-15% lower manufacturing cost. You start getting benefit, I don't wanna say right away. We need to get to a level of scale before you'll actually see it in a meaningful way. Followed by, as it becomes, those customers become a bigger piece of our installed base, the cartridge has a cost reduction of more than 20% compared. These are both compared to t:slim.
Exactly.
As those build up in the installed base over time, we'll really start to see margin benefit. The next single biggest contributor would be extended wear infusion set. Beyond what comes from gross margin, the operating leverage, the best opportunity we really have is how we support our customers today. Today we have hundreds of people that support customers from the beginning to the very end of the process. When they first inquire about the pump, all the way through to when they have, buy the pump, have technical support needs, coming back through the renewal process. We're very focused on optimizing that so that it's not human-centric every time someone needs to have an interaction or wants to have an interaction.
It will be more like a retail experience that you have in any shopping experience, out there online. That's why we're really focused on developing automation to help make those processes more efficient and we don't have to hire as many people in the future to support the base as it grows.
Excellent. Maybe last question, just on these margin targets, thinking about the contribution from sales growth versus on the cost reductions or new product introductions with lower COGS. I mean, how dependent on those margin targets is getting back into that maybe high teens or 20% revenue growth trajectory?
The sales growth is important to hitting those margin targets, but I would say we can drive a long way with just the operating efficiencies that we have in mind, in order to get there. I would say probably both almost of equal importance.
Excellent. Well, thank you for putting up with some rapid fire questions. Thanks for all the answers.
Yeah. Great talking to you, Josh. Thank you very much.
Great to talk to you guys both. I appreciate you joining the Cowen Health Care Conference this year. John and Leigh, thank you so much.
Thanks, Josh.