Good morning, everyone. I'm Steve Lichtman, medical devices analyst at Oppenheimer. Welcome to the Oppenheimer 33rd Annual Healthcare Conference. Up next for us, very happy to have Tandem Diabetes Care. With us this morning is CEO John Sheridan and CFO Leigh Vosseller. We're gonna do this in a fireside format, so if you have any questions, please just enter them into the chat box on the webcast, and I will make sure to get them over to management. With that, John and Leigh, good morning, and thank you for joining us.
Hi, Steve. It's nice to be here.
I thought first, we'll start on excuse me, the latest news, relative to Abbott's approval for integration with Control-IQ. Maybe if you could just update us on the timeline there. I know, Abbott spoke about modifying their sensors. Does that change at all the one to two-quarter timeframe you talked about? Obviously, they've got Libre 3 approval as well. How are you thinking about the overall timing, of commercialization?
Yeah. I mean, I think all things being equal, we probably wouldn't change our timeline. Right now, I think there's just a little uncertainty as to when the modified device is going to be on the market. I think we need to spend some time and have our team speak about the, you know, what their schedule looks like. I think once we get that information, we'll be sure to let everyone know. We have a call coming up in late April, our first quarter earnings call. I'm sure that we'll have information by that point in time where we can let everyone know.
Okay. There were some questions about whether, you know, the warm-up time for Libre would impact the integration with pumps, like Tandem's. What's, sort of, your understanding and how that integration would work?
Yeah. We've been aware of that from the very beginning, so, you know, we have been working on it with their team. Tandem has a good history with interoperable devices. We were the first ones to inter-integrate an ICGM. We had the ACE pump, and then we had the interoperable algorithm first. We understand how these things work at a pretty deep level. I would say that, you know, at this point, we feel very comfortable that the system will work in that warm-up period, that Control-IQ will work effectively during that warm-up period.
As we think about, you know, the also in the near term pipeline, wanted to touch on Mobi. Your latest, you know, in terms of confidence in that second half launch that you talked about, is the, you know, dialogue with FDA here in the first half fairly typical?
Yeah. I mean, I think it's just normal for this point in the process. We've been having routine conversations with them. There's nothing out there that I would say is a showstopper. There's some work to do for sure. And with right now, I would say there's back and forth, just trying to clarify questions and respond to them. As you know, over the last, you know, six months to a year, there has been delays in getting the FDA approval and, you know, for a variety of reasons. For us at least, it's difficult to say absolutely we think the approval is going to come in this point in time.
Rather than try to commit, what we said we will do is we can be ready to commercialize the product in the second half, and we will need about a quarter after we get approval to have the product on the market. That's, I think, what the organization is planning on making happen.
Once approved, what are the gating factors on the pace of launch? You've been clear that, you know, it will be sort of a rolling launch. What does that mean, and what are the sort of the gating factors?
Yeah, I mean, the first thing that we have to do, there's usually labeling changes that come about from the review. We'll have to go back and update all the manuals and those sorts of things, get them printed. The other thing that's incredibly important is just training the HCPs and their staff. Our sales organization needs to go out into the field and work with, you know, all of the endos and their staff to make sure that they're very familiar with the product, and that takes a little while to get that done. When that's all ready and we're ready to go, I think that you're right. We'll probably, since this is our first hardware change in a while, we will roll it out slowly.
We will want to make sure that the product is performing as we expect. Even though we test it thoroughly inside in the house, we still wanna get it on several thousand people and just make sure we're seeing the results we expect. That being said, we will, once we have that confidence, we'll move aggressively to get it out into the market.
Just to follow up with relative to FDA, again, understanding, you know, just the general sort of timing, uncertainty that can happen with FDA, especially these days. Relative from your perspective and the asks was just to be clear, nothing that's unusual or burdensome?
Yeah, I mean, one of the early questions we received was whether or not we would have to do additional human factor studies or clinical work. Certainly, if that was the case, that would take an extended period of time, and we do not think any additional human factors or clinical work is necessary. That was one of the big potential factors that could result in delay. We don't need to do that. I would say the things that beyond that, things I would characterize as just, they're nothing surprising.
Okay. And then also just to circle back to Libre, and then Leigh, I know you've made clear that you haven't included any new product, Mobi or I don't think even Libre integration into 2023 guidance. How are you thinking about that potential contribution now? Even though, you know, not putting you on the spot in terms of adding to 2023, but now that it is becoming more reality, you know, what could this mean for you guys as an opportunity in the near to medium term?
Sure. What Libre offers is greenfield opportunity. What we understand is that they have roughly 300,000 people living with Type 1 diabetes in the U.S. alone who don't have access to integrated technology or algorithms. That means there's a great opportunity to co-market with Abbott directly to those patients and introduce to them the benefits of pump therapy. We look forward to that being an opportunity when we're able to launch it. But to your point, no benefit from that, nor Mobi, and I'll even add nor G7, are included in our guidance for this year. As any of these roll out, they're all upside opportunities to 2023.
I think the right way for you to think about it, though, it's these are actually more of a 2024 contribution, just based on the timing of how things are flowing in the year.
Okay. In terms of the other near-term changes that you've made, you know, late last year, you talked about expanding your monthly payment model. Can you sort of update us on that? You know, what is the model looking like these days? Is it sort of an 18-month opportunity still for patients to pay over? What has been the uptake as you've been more proactive in promoting that opportunity for patients?
Sure. We launched that program officially at the very end of September in 2022, it's still fairly new. I will say it's been a great marketing tool from the perspective of the field, because when they're faced with the conversation with patients or even physicians that talk about the differences in how you pay for a tube pump versus something through the pharmacy, that there is this upfront commitment. It helps them have that conversation that we can now level the playing field. What we offer is actually very flexible. We will spread the payment plan as long as the four-year warranty cycle, for as low as $50 a month. It pretty much equalizes it in terms of, I would say, financial outlay from a patient.
Once we launched that program, we were in the fourth quarter, which is where most people have met their deductibles, and so they're really at their lowest point in terms of what their out-of-pocket is. We didn't see a significant change at all really in the actual usage of it. I'll say as we go into the beginning of this year, that may change as more and more people's deductibles have reset, and they might have a higher out-of-pocket here at the beginning of the year, and they could access the program at this time. The one thing that we did notice in terms of usage, though, is that where we did see more interest would be from patients that were new to Tandem as opposed to our own renewal patients.
I think that continues to go back to say a lot about once people are on the pump, once people are accustomed to Control-IQ, some of these other external factors aren't influencing when they make their purchasing decisions.
You know, I guess maybe just since you mentioned it on renewals, you know, obviously, you know, Insulet's done quite well over the last few quarters as they've launched Omnipod 5. It seems like your current patients are, you know, very happy and staying on. I mean, just in terms of the numbers. Can you talk a little bit about that? You know, sort of what you've seen, and maybe put some numbers behind it from the renewal opportunity and you're how you're capturing that opportunity, you know, even in the face of some new product launches.
Sure. Happy to. So you're right. From a renewal perspective, when we look at our own internal metrics, we actually improved our renewal rates in 2022 versus 2021, and it was steadily improving across the year. What does that mean? It's not necessarily about measuring the sheer volume of renewals compared to the year before because the opportunities did grow as well, so you would expect that to go up. It's really looking at the traction of how many people are renewing within those cohorts and how quickly they're renewing. We look closely at, I have particularly been watching the 90-day renewal rate just to monitor, especially in the more challenging environment, the nearest term that you can view to see if you see any changes in behaviors, and we didn't.
The, the numbers that I've shared has been when we exited 2021, where we had about 17,000 new renewal opportunities, we had renewed just under 50% of them when we closed that year. In 2022, the opportunities grew to about 30,000, and by the time we exited the year, we had renewed a little more than 50%. Like I said, the, you know, even in the face of the challenging environment that we were seeing, which includes competition as well as the economic environment, we're continuing to see our own patients renew at a faster clip than we have seen before. I think then that's really important as we go into 2023 and we think about the number of renewal opportunities stepping up once more, growing to over 50,000 people.
it's great that we've been able to get this traction, in this environment and, you know, I think again, it's a testament to how committed people are to Control-IQ.
The 90-day, can you define that a little bit more? That's 90 days post when the warranty is up or?
Exactly. I mean, you can imagine we look at every metric possible internally. We look at how many people renew within 30 days of their warranty expiration, within 90 days of their warranty expiration. Across the year, that continued to improve all the way through the end. Fourth quarter was our best renewal rate of all time in that fourth quarter.
Because, I mean, the actually 90 days is, patients can wait even longer, of course, right? That's 50% at 90 days is actually pretty good.
Yeah. To be clear, Steve, the 50% is not at 90 days.
Oh, okay.
It is a high percentage within the 90-day timeframe.
Oh.
The 50% is a measure of. Exiting 2022, how many for that year, that cohort renewed by the time we exited that year.
Got it. Just on the share side, just a question that came in just relative to the market share of new patients. As you look back in 2022, if we're MDI moving to pumps, you know, how did that share dynamic change as Omnipod 5 rolled out? You know, what was the, what kind of loss share did you experience in terms of the new patients, and what are you assuming in 2023?
Sure. When we look at the overall opportunity first, I'll say the number of people that came to market from the MDI population, we estimate was somewhere between 75 and 80,000 in total. That is a step up from the prior year, which we estimated was about 70,000. First of all, just wanna highlight that the market continues to grow. Before I would say the launch of Omnipod 5, we were effectively, I would say, splitting that market with Insulet in terms of new pumpers coming in. Roughly 50% attracted to Tandem, 50% attracted to Insulet. As we look at the end of the year after their full commercial launch and as, you know, things continue to evolve, and there's always interesting dynamics when a product is first launched into the market.
It appears that they took a little bit more of the edge there and maybe pushed upwards to 55% or 60% of that share. That's not unexpected when you think about a product that's attracting a different segment of the market than the segment that we're trying to attract. As we go into 2023, we took this into consideration as we look at how many people we estimate could be coming to market. We looked at various scenarios of what our capture rate could be, and actually we look forward to the opportunity when we have Mobi coming to market, when we'll be attracting a different segment of the market than either t:slim would've attracted before or Omnipod 5. I would say as new products come to market, you would expect these sorts of inflections.
You might see a little shifting around in the balance of share attraction. We think that we have the right products in hand to continue to drive us to get our own fair share of new pumpers coming to market.
Do you think as we look in the back half of the year, the year-over-year decline in new patient adds, obviously you added patients, but, you know, less than the prior year, was that the bigger impact in terms of % of new MDIs, or was it them capturing more of Medtronic share than previous? Or is it a pretty equal combination of both?
I would say a combination. We still maintain the ratio that we've seen pretty consistently, which is of new pumpers to Tandem. About half were coming from competitive conversions and about half were coming from MDI.
We talked about, you know, some of the near term opportunities relative to Libre integration, Mobi, you know, with the hopeful start launch in the back half of this year. As we think a little bit beyond that, I think Mobi Tubeless is slotted later in your pipeline than the next-gen t:slim. Why is that? Is that because of required development milestones? And relative to Mobi Tubeless, what are the next steps that we might hear on that project?
Yeah, I think that's correct. It is slotted after t:slim X3. I'll say that we've been working on both programs now for a while. The importance of t:slim X3 is that I mean, if we don't take care of it almost immediately or in the next year or so, as we've said, there's the potential to have supply chain problems with a lot of the integrated circuits that are used inside t:slim X2. That's really the priority is to address the supply chain issues because we do believe that t:slim is a product that's gonna be on the market for quite a while.
If you know, it's been about 10 years since the product was designed, and while we have made improvements to it over the years, there's still this potential that's out there in time. It's really to address that.
Then just relative to Mobi Tubeless, I mean, what are sort of the, you know, the, Will we see any sort of milestones from investor side over the next twelve-?
Yeah
months, or what are we thinking about?
We're planning an investor tech day at the ADA this year in June.
Okay.
I think what we'll do is we'll actually show it to you and give you sort of like the look and feel. You'll get to see how it's how it'll work, how we'll implement it, and we'll talk more about timelines in that meeting.
Thinking about Type 2, I guess a couple of questions I have. You know, what is Type 2 mix for Tandem today? From your guys' perspective, what % of the intensive Type 2 patient population is on pump? What's holding it back from being higher in your view?
Yeah, it's good questions. We have, when you look at the Type 2 market in the U.S., there's about 2.3 million people with insulin intensive Type 2. Of those, approximately 100,000 people use a pump. It's less than 5%. It's a small number. I would say that in Tandem, we have almost 300,000 people in the U.S. using our pump, and about 20,000 are using or, excuse me, have Type 2. It's a good number. I think that, you know, it's something that we think it's an important market to focus on. We certainly need the indication for Control-IQ, that's really where the focus is right now. As we, you know,
We finished a feasibility study last year. The results look great. We're, you know, probably any week now, we're going to start this Type 2 study. We're very close to starting it. It'll probably take us into the latter part of this year to get the data submitted, and I would anticipate that we'd have the indication next year. When you look at Type 2, it's very different than Type 1. I mean, people obviously with Type 1 need insulin every day to live. I think that as people progress through Type 2, when you get to the point where you're using insulin every day and you need it's almost the people feel as if they've lost. They've lost the battle. There's a different mental state that you have to deal with.
I think, you know, people still are incredibly sensitive to just the fact that they have Type 2. They don't want people to know. Discretion is hugely important. You know, I think that we've been looking carefully at the market, at the people who are potential candidates for pump therapy. There's, I would say, it kind of breaks into two groups. There's one group of people who want nothing to do with technology, nothing at all. They would just continue to use pens and needles as needed. There's a group who are, I'd call, near-term pumpers. These are people who, I would say, are tech savvy. They probably have good insurance.
They are personally interested in improving their situation, and they have a family or a network of supporters who are also working to help them. We think this is a group that we can target, and we can move into pump therapy. Certainly, we don't see it going the same, the same penetration as the, as Type 1, which we anticipate in the next four or five years will get to 65%. We think going from 5% to 10% to 15% in that same timeframe would be very successful, would be a very positive movement for that group. First, it's really let's get Mobi on the market with a Type 2 indication. Then I think we also believe that in time, we need to simplify the user interface.
The product today is really developed for someone with Type 2, and excuse me, Type 1, and we need to have a simpler interface that someone with Type 2 would be more likely to use. There's a lot of work going on there.
A few follow-ups to that. One, do you see Mobi as being sort of your lead Type 2, or will the reservoir size be a hindrance there?
It's a good point. I would say that, just based on what we're seeing with some of our competitors, the reservoir size doesn't seem to be as important as the discretion that comes along with the size of the product. Obviously, both products will be available to the community. But we believe that Mobi will be appealing because it's controlled by a mobile app, and you can interact with a device on the mobile app when you're out and about in public and deliver boluses and things like that, which I think is, it's not only convenient, but it's a very discreet way of managing diabetes.
Then second, you know, I think from a reimbursement perspective, I think there's been some hope that, you know, CMS may, you know, may look to reduce some of the hurdles for patients, particularly on the DME channel, I think, that would impact Type 2 is. What are you hearing on that front? You know, is this something that could happen, do you think, in 2023 or any, anything you've heard from the field?
Sure. You know, it's always really hard to put a timeframe on anything through CMS. I would say what's encouraging has been that there's been traction on the CGM side in the last six months or so. The simple fact that they're actually looking at reviewing the guidelines and making proactive changes, I think is very important. There has been a submission with a proposal to CMS to look at some of the guidelines for getting approval for someone with Type 2 Diabetes to have access to pump therapy. It's got a lot of backing from the healthcare community, so I'm hopeful that there will be a change. I would be reluctant to put a date on it, though, and say it could come as early as 2023, but we obviously, the whole industry continues to lobby for this.
Got it. Before we continue on the pipeline, I wanted to ask a little bit, also about some near term things on the P&L, maybe, Leigh. Can you tell sort of why you decided to open a new distribution center in Europe and what the benefits will be on that? Then sort of secondarily, I guess, walk through the mechanics of how it's impacting, you know, 1Q sales and gross margin as you guys have guided to.
Sure. The decision to open these operations in the Netherlands was really, first of all, for streamlining. It's much more efficient, particularly for the distributors that we work with, in order to have a hub outside the U.S. Up to now, what's been happening is, when distributors place orders, they have to secure a freight forwarder and pick it up in San Diego and have it delivered. That's challenging in its own way when you don't have the additional impacts from the COVID environment on top of it. What we've seen is that distributors have had significant challenge in getting that inventory delivered timely and having any sort of ability to predict when it will show up or predictability to when it arrives.
We've had examples where some distributors have ordered inventory, and it didn't show up for five or six months because it was overseas and on the boat, and it was just took a long time to get there. What that has done is has created an environment where distributors have to carry higher safety stock levels of inventory. In some cases, were carrying more than three months of inventory on their own shelves because they were trying to navigate this environment. With opening this will help them be able to take away that impediment.
What's happening right now is that the distributors, and this is the European markets only, it's about 70%-75% of our OUS business, are starting to de-stock their inventory down to normal stocking levels, which I would put in the two to four week type of category. They're weaning them down. While they order from the Netherlands, it will be a much simpler process. Most of that impact is coming here in the first quarter. We had about $6 million of revenue headwinds because of it in the fourth quarter, and we're expecting about $25 million more in total, as I said, mostly in the first quarter. That challenges what our year-over-year revenue growth rates look like.
It puts a little bit of pressure on gross margin, but I think even more so it puts pressure on our adjusted EBITDA, keeping in mind that in our OUS operations, we don't have a lot of operating expense associated with it. When we talked about adjusted EBITDA being negative in the first half of 2023, this transition is a big piece of that. In the first quarter alone, it will be negative to the tune of low double digits, so low teens, for adjusted EBITDA perspective. Once we work through this, we'll be back on track, and our revenue that we report will start to more closely align with the real demand behind the scenes that the distributors are experiencing. That's probably something I should have highlighted from the very beginning.
When you look at what we reported in 2022, our pump shipments to our OUS markets were actually flat year-over-year, but the underlying demand showed that there was a 20% increase in pump sales had we been reporting it along the demand line. And this will be very beneficial after we get through this transition.
Just quickly, gross margin at scale for Mobi versus t:slim will be what, approximately?
Yeah. You know, it's one of the single biggest contributors to our gross margin expansion in the next, three to four years. The pump itself, when you compare it to t:slim, has about a 10%-15% lower manufacturing cost. After we get to about, I would say, 1 year from launch, you'll really start to see that show its benefit in our gross margin. Beyond that, our cartridges as well have a more than 20% reduction in cost compared to t:slim. As more and more people are part of the installed base and that grows, our supply margins will start to improve as well. Like I said, it's one of the single biggest contributors to that expansion.
All right. John, I wanted to go back to something you mentioned earlier. I think you said, Type 1, pump penetration potential, a lot of Ps there, to 65%, which is higher than, you know, number I think you talked about before, kind of thinking about let's get to that 50% mark, and then go from there. I know that's a little longer term, but, what gives you the confidence, you know, that the market can get there, and what would be the major drivers?
When we outlined our long-term plans in December of 2021, we indicated that we, you know, by 2027, we would have 1 million people using our pumps and our technology. We'd have a gross margin of 65%, we would have an operating margin of 25%. I think in order for us to get that, there's several things that have to happen. Certainly, we have to get the penetration rate up, we believe that it can go from 35% to 40%, where it is today, up to 65% in that timeframe. The things that drive it really are new technologies that reduce the burden, that, you know, reduce the hurdle that people have to overcome to wear a device 24/7.
We think that, you know, that Tandem, our competitors, and our partners are all innovating at a very rapid rate right now. Even with the newest entrant to the AID space this past year, there are people who probably would never have considered pump therapy if that device wasn't on the market. Certainly, they're bringing people from MDI into pump therapy. I think that when you look at our pipeline, we have a very exciting pipeline. We have a lot of innovation. We're going to be providing choice. We're going to have a portfolio of products. We think that design, along with the innovation that comes with our CGM partners, is going to lower that burden, and we believe that will drive the adoption.
The other things that we have to do is we have to work with organizations that affect how and when people can get onto AID systems. Right now, there are selection biases out there, and there's a sense, at least with some physicians, that you have to be in control before we can put you on an AID system. The reality is that the people who see the best results and the most significant improvement are the ones that have the worst control. I think that we're working with a variety of different organizations. We're generating clinical data, all with the intent of developing the market as well as innovating in the space.
All right. You only have less than two minutes, so I have to choose from a few questions here. I guess, thinking about the Sigi Patch Pump long term, what are the next steps in development? I know you've talked about, you know, not thinking about revenue out until 2027. What needs to happen over the next couple, three years? What are the key milestones that investors can be on the lookout for?
Yeah. We acquired AMF Medical and the Sigi Patch Pump because we felt that it was highly differentiated. We actually did quite a bit of market testing with our own product, with the competitive products, and with a lot of the startup products that are, you know, kind of in the early development phases. Sigi just stood out. It was actually the most interest, the most preference share increase compared to anything that of the group I just described. I think that we felt like it was such a highly differentiated product, it would basically help us achieve our objectives with a patch device faster and better. We basically shelved our internal development effort, and we acquired Sigi. That's what we're working on.
I would say that the product today, it's a very well-thought-out product. I think I would call it a, an advanced prototype. There's still a lot of hardening that needs to go on with the manufacturability, the reliability, and the safety. Those are things that we're working with the team on. Obviously, it's early. We just started. You know, the real acquisition ended in January. Our teams are now working together, I'd say. That's a major element of that. The other is just the integration of the Bluetooth technology, the CGM integration, and the AID systems. I would say it's a combination of those two things right now.
I think as time progresses, we'll be looking to automate the manufacturing process and develop the automation and the manufacturing capabilities to build it in high volume. Those are kind of the three steps, really. Let's harden the design, let's integrate AID, and then let's get the manufacturing process to the point where it's highly automated, and really drive the cost out of the system, so we can continue to see gross margin benefits as it comes to market.
Okay. Got it. That makes sense. Well, I think we're out of time. John and Leigh, thank you so much for joining us. Thanks everyone for joining us as well. Hope everyone has a great week.
Thanks, Steve. It was great talking to you.
Thanks, Steve.