Tandem Diabetes Care Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 14 speakers on the call.

Operator

Thank you for standing by, and welcome to Tandem Diabetes Care's 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer I would now like to hand the call over to EVP and Chief Administrative Officer, Susan Morrison. Please go ahead.

Speaker 1

Hello, everyone, and thanks for joining Tandem's 2023 4th quarter and year end earnings call. As a reminder, today's discussion will include forward looking statements. These statements reflect management's expectations about future events, product development timelines 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 ks, quarterly report on Form 10 Q and in our other SEC filings.

Speaker 1

We assume no obligation to publicly update any forward looking statements, whether as a result of new information, future events or other factors. Today's discussion will also include references to a number of GAAP and non GAAP financial measures. Non GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non GAAP financial measures facilitate better comparisons of operating results across reporting periods. Any non GAAP information presented should not be considered as a substitution independently or superior to results prepared in accordance with GAAP.

Speaker 1

Please refer to our earnings release, quarterly report on Form 10 ks and the Investor Center portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. Leading today's call is John Sheridan, Tandem's President and CEO, who will be joined by Lee Vosseller, our Executive Vice President and Chief Financial Officer. I'll now turn the call over to John.

Speaker 2

Thanks, Susan. We appreciate everyone joining us today. Looking back on 2023, we exited the year on a high note, demonstrating positive momentum across key areas of our business. In many ways, our efforts in 2023 focused on building and preparing for the future as we executed on multiple strategic initiatives. Most notably is the unprecedented accomplishment of being in various stages of launching 4 new products in the United States.

Speaker 2

These include 2 CGM integrations along with the introduction of TandemSource, our next generation data management platform and the milestone of adding Tandem Mobi, our new platform to our portfolio. Other strategic initiatives we completed include the onboarding of our European distribution center and driving operational cost savings across all products and processes through lean activities and other manufacturing efficiencies. We've also been evolving our organization as we've expanded our leadership by attracting key talent with global experience to complement the team and help us prepare for the future. Lastly, we made meaningful advancement in progressing our channel strategy in the development and in the development activities of our longer term portfolio. The team has been executing particularly well on our strategy to provide people with insulin dependent diabetes and their care teams, flexibility and choice in insulin delivery.

Speaker 2

These achievements were made possible thanks to the hard work and perseverance of our employees. Thank you everyone for your continued dedication and efforts to contribute to building our business and executing our vision to improve the lives of people with diabetes. Evidence of this vision was highlighted in recent months as we are now the only pump company to offer users choice in CGM integration in the U. S, having launched the t:slim X2 with both Dexcom's G7 and Abbott Freestyle Libre 2 plus sensors. The diabetes community has been enthusiastic in the response to having choice in their therapy management.

Speaker 2

Thank you again to our CGM partners for your collaboration. We are proud to be a leader in sensor integration and being the 1st insulin pump company to offer compatibility with your incredible newest technologies. In addition to CGM integration, just last week, we achieved the defining milestone of launching Tandem Mobi. We are now offering people choice in insulin pump platforms, so they can decide how they want to wear and operate this device, while getting the benefits of our number 1 rated Control IQ technology. The response from internal and external people who participated in the early access program as well as our healthcare providers has been emotional and inspiring.

Speaker 2

Participants say that Mobi exceeded their expectations, sharing sentiments that is freeing and liberating. An external former MDI user put it very well, saying that MOBI gave my brain time to process real world and not just how I manage my diabetes. It's this kind of feedback that underscores our progress in furthering our mission to improve the lives of people with diabetes through relentless innovation and revolutionary customer experience. Operational and commercial readiness for the Tandemobi launch was the primary focus of us in the Q4. We are well equipped to continue scaling this exciting new technology, first with the Dexcom G6 integration, which is now available, followed by Dexcom G7 integration later in the second quarter and then integration with the Freestyle Libre 3 technology.

Speaker 2

Another highlight that continues to stand out in the 4th quarter is that Tandem customers are highly satisfied. We see this reflected in both independent and our own customer surveys and in our continued high renewal rate. With Tandem technology, people are able to wake up happy by sleeping well through the night and thinking less about their diabetes. It's from their experience with our company and our AID solutions, which consistently demonstrate improved clinical outcomes. It was an honor to have the data from Control IQ trials cited in recently updated American Diabetes Association Standards of Care to support their guidance that AID systems are preferred over non automated pumps and multiple daily injection and should be offered for diabetes management to youth and adults with type 1 diabetes.

Speaker 2

We're continuing our commitment to AID advancement, which we delivered on in the 4th quarter with our receipt of FDA clearance to lower the age indication for Control IQ and expand its feature set with options for greater personalization. We're proud to offer the number 1 rated automated insulin delivery system by patients and healthcare providers and we'll continue to innovate with new indications and features. As we've seen across the industry in the past 5 years, innovation drives technology adoption. It's a competitive market, yet remains large and underpenetrated. Approximately half of our new customers have converted from multiple daily injections and the remainder from competitive conversions.

Speaker 2

With the launch of our new products this year, we are focused on increasing pump adoption, bringing the benefits of our technology to more people living with diabetes. As we expand the pump market, we expect to see new customers for multiple daily injections begin to outpace growth and competitive conversions. Turning to our performance outside the United States. 2023 was a year of transition for us. It included a number of unique one time events that pressured our sales, such as the transition to our European distribution center to improve supply chain efficiency and then the more recent change in the French reimbursement structure.

Speaker 2

With these events now behind us, our focus is returning to a meaningful growth rate. We've welcomed new commercial and international leadership with global diabetes experience who are furthering our strategy to bring the benefits of our technology to more people worldwide. The geographies we serve are increasingly competitive, but we have a strong offering today with our number 1 rated t:slim X2 with Control IQ and a significant opportunity as the markets we're in internationally are typically less than 20% penetrated. We are also focused on bringing our technology offerings outside the United States closer to parity with our U. S.

Speaker 2

Portfolio. This began last month with our scaled international rollout of DexCom's G7 integration, only 1 month following its broad U. S. Availability. Other innovations we plan to begin offering internationally this year include the deployment of our TandemSource data management application, the launch of our mobile application for the t:slim X2, which features the ability to deliver bolus from the phone along with valuable data insights and the t:slim X2 integration with the Abbott Freestyle Libre 3 sensor.

Speaker 2

We're also taking steps to offer Mobi outside the United States, which includes regulatory work and localization. In addition, we are working to advance our portfolio of future products, which centered around our 3 pump platforms, t:slim, Mobi and Siggi, each of which are designed to appeal to different segments of people living with diabetes. For our t:slim and Mobi systems available today, we are working on exciting features such as the extended wear infusion set and a tubeless wear option from Mobi. For CIGI, we're in active development of an ergonomic patch pump that features the use of prefilled insulin cartridges and like all our pumps is rechargeable as it's part of our commitment to sustainability. We have a number of clinical studies underway and planned for this year in support of these development initiatives.

Speaker 2

We'll also be advancing our automated insulin delivery algorithm and expanding its indications to include people living with type 2 diabetes. As we look ahead, 2024 is positioned to be a year of tremendous opportunity for Tandem. The strengths that drove meaningful growth in the past are once again in place today. These includes having a differentiated portfolio of technology solutions, our highly rated customer service, our number 1 rated automated insulin delivery algorithm and our international opportunity. I'd now like to turn the call over to Leigh, so she can share more details on the Q4 results and our financial expectations for 2024.

Speaker 2

Leigh?

Speaker 3

Thanks, John. As a reminder, unless otherwise noted, the financial metrics I'll be discussing today are on a non GAAP basis. Reconciliations from GAAP to non GAAP results can be found in today's earnings release as well as on the Investor Center portion of our website. We ended 2023 with more than 450,000 customers receiving the benefits of the t:slim X2 worldwide, which is 7% growth over the prior year. Our 4th quarter sales exceeded our baseline expectations at $209,000,000 bringing the full year to $773,000,000 in worldwide sales.

Speaker 3

Starting with the U. S. Market, this was the highest shipment quarter of the year at 21,000 pumps, including our highest ever quarter of renewal pumps. Standard seasonal trends were evident with 24% growth in pump shipments over the Q3. The ability to buy X2 and switch later to Mobi through Tandem Choice was an appealing opportunity for many.

Speaker 3

As expected, there were customers who decided to wait to purchase pump once Mobi became available. Renewals continued to meet historically high capture rates, demonstrating strong customer satisfaction and retention. Half of our customers whose warranties expired in 2023 have already purchased a new t:slim X2 pump. We also continue to see high rates of people whose warranty expired in prior years purchase a new t:slim pump and as a result, our total renewal shipments year over year grew by more than 50%. U.

Speaker 3

S. Sales in the 4th quarter were $163,000,000 and sales reached $580,000,000 for the full year. Sales in both periods were once again fueled by supplies and installed base growth with about half of the sales for the year coming from supplies. We are now serving more than 310,000 people in the U. S, an increase of 7% compared to the end of 2022.

Speaker 3

Dynamics were similar outside the U. S. With supply sales being a meaningful contributor in the year. Our in warranty installed base has now reached approximately 140,000 people, growing 8% over 2022. Adoption of our technology outside the U.

Speaker 3

S. Has been remarkable over the past 5 years as our installed base has grown to levels that took us more than 8 years to achieve in the U. S. Supply sales to support this base grew 35% year over year in Q4. This was due in large part to variability in ordering patterns in the prior year before the distribution center was fully operational across all European markets.

Speaker 3

4th quarter sales outside the United States were $46,000,000 on 6,000 pump shipments. As anticipated, these results reflect 2 one time events. The first was from a distributor in a larger market shifting their pump order into 2024 as they managed inventory levels in anticipation of t:slim's integration with the G7 sensor, which began rolling out internationally in January. The second one time impact was an $8,000,000 sales related to the implementation of a new rebate structure in France associated with our existing installed base. Excluding the impact of that rebate, sales in the 4th quarter have been more in line with recent quarterly levels.

Speaker 3

We do not anticipate the rebate will have a material effect on OUS sales going forward. Full year 2023 sales outside the United States were $193,000,000 reflecting both the $8,000,000 rebate reduction in the These unique events were disruptive to our near term results, but allowed us to lay the foundation for opportunities to grow this business more efficiently and meaningfully going forward. Turning to margin performance. Our 2023 gross margin was 51% compared to 52% in 2022. We saw improvement year over year in underlying key fundamentals, including higher average selling prices and lower manufacturing costs for pumps and cartridges.

Speaker 3

These benefits were offset by unfavorable product mix with pumps representing just under half of our worldwide sales in 2023 as well as geography mix and the impact of the rebate pricing adjustment in France in the Q4. The rebate adjustment was most impactful to our 4th quarter margin results. Gross margin was 51% in the 4th quarter, pressured 2 percentage points by the rebate and our adjusted EBITDA margin was 2% of sales, which was pressured by 4 points. Despite this adjustment, we maintained positive adjusted EBITDA for the Q3 in a row as we continue to focus on operating efficiencies across the business to fund investments to support our R and D projects and new product launches. For the full year of 2023, our adjusted EBITDA margin was slightly negative at 1% of sales.

Speaker 3

Turning to cash, we funded several key initiatives in 2023, including $69,000,000 for an acquisition, $25,000,000 for strategic investments and $27,000,000 for capital expenditures primarily associated with increased manufacturing capacity for new products and build out of our headquarters as part of our facilities consolidation efforts. We remain thoughtful about how and when to address the $288,000,000 in convertible notes, which will become a current liability in the 2nd quarter. Our balance sheet remains strong with $468,000,000 in total cash and investments. Looking ahead, we are excited for the opportunities that our new product launches offer in 2024 with a return to sales growth. Our non GAAP sales guidance is approximately $850,000,000 in 20.24 or 10% sales growth with the majority of sales coming from recurring revenue streams.

Speaker 3

This does not assume any inflection or acceleration in sales and does not reflect our bullish enthusiasm for new offerings. We will continue to gather and assess data related to new product adoption to inform updates to our guidance in upcoming quarters. U. S. Non GAAP sales are expected to be $625,000,000 or growth of 8%.

Speaker 3

This contemplates a competitive environment consistent with 2023 with growth largely based on our more predictable supply renewal sales with a growing renewal opportunity. Looking back to pump shipments 4 years ago, the number of warranties expiring in 2024 alone grows by more than 30% to approximately 70,000. We have historically renewed approximately half of new renewal opportunities within the same calendar year. Both pump and supply shipments are typically impacted by seasonal patterns across the quarters associated with insurance dynamics in the U. S.

Speaker 3

For example, 1st quarter pump shipments typically declined from the Q4 by approximately 30%. This step down may be more pronounced in the Q1 of 2024 due to the mid quarter launch of Mobi and Mobi integration with G7 planned for the Q2. The back half of the year typically benefits from seasonality, particularly in the Q4, which for the past few years has represented nearly 30% of our U. S. Sales for the year.

Speaker 3

Our multi channel managed care strategy continues to advance in an exciting way and we anticipate signing contracts in 2024 to begin serving Mobi pharmacy channel. We will update you on our progress and the expected longer term benefit in future quarters. With that in mind, we are providing you additional direction on Q1 2024 for the first time, where we anticipate U. S. Sales in the Q1 to be approximately $122,000,000 The remainder of the year is expected to follow historical seasonal patterns where both pump and supply sales scale up across the year.

Speaker 3

Sales outside the U. S. For 2024 are expected to grow 17% to $225,000,000 taking into consideration an increasingly competitive environment. This also assumes a return to pump average selling prices of approximately $2,300 which is more similar to what we experienced in years prior to 2023 and contemplates impact of the new French rebate structure. 1st quarter sales are expected to be approximately $53,000,000 or an outsized growth rate of nearly 40% due to an easier comparison to the sales disruption in the Q1 of 2023 from the start of our European distribution center operations.

Speaker 3

Margins in 2024 are expected to be in line with 2023 with gross margin at approximately 51% of sales and adjusted EBITDA breakeven. While we expect to continue driving efficiencies across the business to fund the new product launches and future leverage, the launch of Mobi will initially create incremental pressure. The Q1 in particular will see the greatest impact where we expect gross margin of approximately 48% and adjusted EBITDA of negative 15%. As comp sales grow and Mobi volumes increase across the year, both margins are anticipated to improve with adjusted EBITDA margins returning to positive in the second half of twenty twenty four and free cash flows to follow accordingly. After volume scale, we anticipate Mobi will be the greatest contributor to our longer term gross margin target of 65%.

Speaker 3

To summarize our 2024 outlook, worldwide non GAAP sales are estimated to be approximately 850,000,000 dollars including sales outside the United States of $225,000,000 Our gross margin expectation is approximately 51% and adjusted EBITDA is estimated to be breakeven. Our non cash P and L charges for stock compensation, depreciation and amortization are expected to be approximately $120,000,000 of which $100,000,000 is associated with stock comp and $20,000,000 with depreciation. We are also providing Q1 guidance with worldwide sales of approximately $175,000,000 gross margin of 48% and adjusted EBITDA of negative 15%. I will now turn the call back to John.

Speaker 2

Thanks, Lee. As you can see, it was a busy close to 2023 and an exciting start for 2024. Thanks to the unwavering commitment to our teams, we are now in the home stretch of completing the rollout of 4 new products, making significant progress on the next phase of our pipeline and maintaining the highest levels of customer service, while generating operational efficiencies. The opportunity for Tandem Diabetes Care remains meaningful and I look forward to providing you updates throughout the year as our company continues to progress. We'll now open up the call for questions.

Operator

Our first question comes from the line of Steve Lichtman of Oppenheimer and Company. Please go ahead, Steve.

Speaker 4

Thank you. Hi, guys. Congratulations on the progress, including the recent launches. So I guess my question, I know it's very early, but what are you hearing from the field in terms of where new interest lies as it relates to Mobi versus Heaslim? Are you expecting Mobi sales to really lead the way here over the next few quarters?

Speaker 4

Do you expect it to be pretty balanced? What sort of the initial read you're getting from the field?

Speaker 2

Hi, Steve. How are you doing? Well, first of all, I'll say the response has really been incredibly positive, from early access participants and ATPs. A lot of ATPs are actually using it and it's certainly exceeding our expectations. I mean, it's tiny, it's very light with an adhesive sleeve, it's expanding wearability options and the cell phone control provides very discrete interactions with the system.

Speaker 2

People actually forget to have it on and the common sentiment we're hearing is it's liberating and it provides freedom from the burden of diabetes. I think Mobi is going to change the narrative from tube to tubeless to wearability and choice with the number one rated AIG system and our sales force is highly motivated. There's been HCP events that have been occurring over the last several weeks. They're very well attended. And I think that the response and feedback has been very positive.

Speaker 2

So I think it's going to I think there's certainly going to be people out there that are interested in T Slim and T Slim will continue to be a meaningful part of our revenue. But I think Mobi is going to begin to accelerate as we get into the Q2 and the G7 integration is made possible in the late spring. And I think that it will continue to progress throughout the year.

Speaker 4

Got it. Great. And then just as a follow-up to that, I know you said that Mobi kind of allows you to first step into the pharmacy. I know, Lee, you mentioned that. Can you talk a little bit more about sort of the next steps there and maybe a little more detail on what you mentioned in

Speaker 5

the prepared remarks.

Speaker 3

Sure. Thanks, Steve. So when it comes to pharmacy, you're correct. Mobi is introductory product into that channel and it's proving itself as we're having active conversations these days with different payers and PBMs. And so we feel very confident that we'll be signing a contract this year.

Speaker 3

We don't right now have anything factored in, in terms of from a material perspective in 2024. But as we progress, we'll certainly give more information on that.

Speaker 4

Great. Thank you.

Speaker 2

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Matt Miksic of Barclays. Please go ahead, Matt.

Speaker 6

Hi. Thanks so much for taking the question and congrats on the upside year in Q4 to your estimates, to our estimates and projections. So great finish. It's been in for a lot of folks kind of a bumpy year of preparation for the future as you talked about, John. So one question on some of the comments you made about renewals, strong renewal year and some of those folks seem like they were kind of out of warranty for a period of time and renewing.

Speaker 6

And I'm wondering if you have any data points you picked up from these folks through your channels or surveys or anything that would indicate like where have some of these folks been? What has kind of caused people to come back to Eastland or to Mobi? And then I have one follow-up.

Speaker 3

Sure. So thanks for the question. So renewals is one of the best brightest spots that we've seen in 2023. As you mentioned, it has been quite a challenging year. But even with that, we have been capturing our renewals at peak rates compared to even with 2022 and what we've seen in our history.

Speaker 3

And I think it says a lot about when there are a number of new products on the market, the Tandem customers are sticking with Tandem and choosing our product once again. So for the people that have been sitting out there for a while, I mean, these are folks who are just content to use their product out of warranty. And as they're thinking ahead to what comes next, they're being motivated by some of the new opportunities that are being offered, for instance, the G7 integration, the Mobi switching opportunity. And so I think that's what's driving people forward who have been out there. But we've been very successful with people whose warranties were newly expired as well.

Speaker 3

In fact, everyone in 2023 whose warranties expired, we have already renewed 50% of them. And so I think that's great progress for us.

Speaker 2

And I'd also say that we've said our goal is 70%. And I think that if you look back over the last couple of years, we are absolutely achieving 70%.

Speaker 6

Great. Well, congrats on that. The follow-up, I was curious, John, you mentioned some of the things that you're doing to just kind of expand the utility of your recently launched products, launch LoMoBI and t:slim and G7 integration and so on, but then also mentioned CIGI. And I was wondering if you could walk through maybe just an update on the timeline for things like the tubeless option for Moby, the 7 day infusion set and maybe Sigi, just to kind of level set us for what to expect and when? Thanks.

Speaker 2

Yes, sure. Well, we've talked about a portfolio of products and that being essential to address the many segments that exist within diabetes today. And our platforms are clearly t:slim, Mobi and ciggy. And we've talked about basically a technology upgrade to t:slim to t:slim X3 that's underway. And then we're also working with the team in Switzerland to develop a rechargeable pump that uses prefilled cartridges and has a very ergonomic form factor, a patch pump.

Speaker 2

So those are additions to the platform. In addition to that, we're working on a tubeless option for Mobi. It's the exact same pump. It's just a new cartridge and it's a sled that has an infusion site on it. So that's obviously underway as well.

Speaker 2

And we're working on an extended wear infusion set. In addition to that, we've got a great deal of work going on to future enhancements to Control IQ. So honestly, I think we have the most exciting pipeline in the business. I think that we have a lot going on, but I think that our teams are making great progress and we're very pleased with the performance. But I think we've chosen to basically just not pause on given specific updates on these products from a timing point of view until we actually get closer to the commercial launch.

Speaker 2

And so that's what I think you're going to hear from us in the next couple of quarters. And as we do get closer, which we expect to, we'll be more specific in the future.

Speaker 6

Okay, understood. Thanks so much.

Operator

Yes. Thank you. Our next question comes from the line of Matthew O'Brien of Piper Sandler.

Speaker 7

Hey, this is Phil on

Speaker 8

for Matt. Thanks for taking our questions. I guess just for starters on guidance, specifically for Q1, by our math, it looks like about 15,000 pumps here in the United States. How many of those are renewals? How many of those do you expect to be new pumpers?

Speaker 8

And I would assume that this is the case, but is this your expectation for the last big quarter of Pawsey and ahead of MOBE's commercial launch?

Speaker 3

Yes, great questions. Thanks. So as we think about the Mobi trajectory, to your point, Mobi just became commercially available in the middle of Q1. It will become available with G7 in late spring. So we do still have a bit of this dynamic of there may be people waiting for the right feature that's appropriate for them.

Speaker 3

And so the guidance in Q1 reflects that for certain that there might be people pushing to a future quarter, but the interest is still there. And so we're really excited about that opportunity. In terms of renewal versus new shipments, we're not breaking out that piece of information. But if you want to look back to what the opportunities were, you could refer back to the Q1 of 2020 as a reference point for what new opportunities become available. But again, the timing of Mobi's availability with the appropriate features might still affect when people make that next purchase.

Speaker 6

Thanks. And just as

Speaker 8

a quick follow-up, I guess just given all the pausing that we've seen in the market, do you expect a snapback? I know you just said people might continue waiting for a specific feature. But outside of typical seasonality, is your current guidance taking in like an outsized Q3, Q4? What are your thoughts on cadence throughout the year?

Speaker 3

Sure. So the way we built the guidance for the year, keeping in mind that we do not, first of all, have any inflection for the new products that are coming to market. So you can think about it as somewhat standard seasonality, maybe a little more depressed in this Q1. I would like to use the word depressed, but a little more pressured right now because of that MOBE timing. And really thinking back to how the renewables scale, they are one of the largest pieces that are underpinning what our guidance is for this year on top of supplies.

Speaker 3

And so the way the renewal scale 4 years ago, 35% of those don't become available until the Q4 themselves. And so I would say the scale is more about when renewals become available. And then as we get more information on the trends for the new products, we'll certainly give updates to that in future quarters.

Speaker 7

Makes sense. Thanks so much.

Operator

Thank you. Our next question comes from the line of Brooks O'Neil of Lake Street Capital Markets. Please go ahead, Brooks.

Speaker 9

Thank you very much. Good afternoon. I have a couple of questions. I think the integration with Libre is one of the more exciting and interesting opportunities you have this year. Is it too early to say whether you think that could be a tailwind behind new pump purchases for you guys?

Speaker 9

Or what are you seeing from the response so far?

Speaker 2

Well, I mean, first of all, hi Brooks, how are you doing? We've had a great deal of interest and excitement about the InfuSight Liberty 2 and G7 integration. And as you know, we have the only system in the market today that offers choice and sensor integration. And all the units that we're shipping today have the latest software that enables G6, G7 and Freestyle E Brake 2 implementation. So everything that's being shipped since the early part of January is that way.

Speaker 2

And then we've also had a significant number in the tens of thousands of pumps that have been updated using the remote software update process. So, we are excited about it. We agree. We think it's going to be a meaningful part of our longer term growth. And but we specifically don't plan to talk about pump volume is relative to the sensor integrations at this point in time.

Speaker 2

But we think it's going to be meaningful going forward.

Speaker 9

Sure. Me too. So the second question I had was, obviously, this French rebate program is something new. I was hoping perhaps Lee could just give us a little bit more detail about what that program looks like, what's driving it and whether you think it's something other countries in the international sphere or the EU might adopt as well?

Speaker 3

Sure. I'll go to the last part of your question first. It's very unique to France. It's common for them to use a rebate structure first time for us, but we haven't seen this in other markets. So today, we feel like it's contained there.

Speaker 3

The biggest, most material impact we expect to see would be what we just reported in the Q4. And this is from the implementation, I would say, of it. And so if you think about it, this is a rebate liability that's associated with the installed basic party amassed in France. So as we look ahead, it will just blend into our normal ASPs as we ship new pumps and recognize that obligation alongside it. And so I hope that we're not talking about it in the future.

Speaker 3

I think the good news is that Control IQ as an advanced algorithm has been differentiated from a reimbursement perspective and we look forward to driving the business in France and all of our markets outside the U. S.

Speaker 10

Okay. Thank you, Lee. Sure. Thanks, Brooks.

Operator

Thank you. Our next question comes from the line of Chris Pasquale of Nephron Research. Your question please, Chris.

Speaker 10

Thanks. John, the competitive landscape has evolved quite a bit over the past year, but your mix of MDI conversions versus competitive switches has stayed pretty consistent quarter to quarter. Curious how you're feeling about the competitive headwinds you're facing today? And do you feel like you kind of have the stage to yourself here with the Mobi launch to really make the kind of impact that you'd like have some of those other launches, kind of gone through their initial hype cycle to clear the field for you a little bit?

Speaker 2

Yes. Thanks, Chris. Yes, well, certainly, we think that the diabetes market is large and under penetrated. And so there's a lot of opportunity both in the U. S.

Speaker 2

And outside the U. S. I would say that when you look at the last year or so, it's been the competitive pressures that we saw in the U. S. Were pretty much in line with expectations.

Speaker 2

There was definitely pressure, but they stabilized probably early in the 2023 timeframe. And there's a number of new entrants and they're going to come and go. But I would say that the primary competitors we have are the 2 big ones and I think you know who they are. Outside the United States, the environment is becoming increasingly more competitive and we've been hearing this from our distributors. It started happening roughly in the second half of last year.

Speaker 2

And there's been one patch I entered that was the U. S. That's come into the market with a new device and there's also been a smaller OUS competitor that has generated some noise and made some progress. So, I think that you're exactly right though. I think we are focused on our new products and we think these new products position us to take advantage of these larger markets.

Speaker 2

This is really the first time we'll have had a significant new product opportunity in the last 18 months. And I think that when you look at our competitors, both of them have brought new products to market. So I think we're very focused on getting these devices to market. We've got new sales leadership. We've got a very energized sales team.

Speaker 2

And I think both in the U. S. And OUS markets, we think that these products are going to make a big difference, turn things around for us.

Speaker 10

Thanks. And then would just love an update on the Type 2 opportunity, how you're thinking about that for both of the products and timelines there?

Speaker 2

Yes. We're actively engaged in the clinical study. We're enrolling patients, making good progress there. I think from a timing point of view, the study is probably going to get done sometime in the mid to latter half of this year, a filing. And I would say that roughly rough timeframe, we'd probably see the product in the market sometime in 2025.

Speaker 2

I think that we believe that Mobi with advanced sensor integrations and a Type 2 indication is going to be a very appealing product to the Type 2 community. And we've got a lot of focus on developing the business case, the commercial strategy, the launch strategy, the product strategy for Type 2 underway as we speak.

Speaker 10

Great. Thank you. Yes.

Operator

Thank you. Our next question comes from the line of Travis Steed of Bank of America. Please go ahead, Travis.

Speaker 8

Thanks for taking the question. I wanted to ask about Q1 specifically on the Q1 shipments, just kind of what you're seeing in January, February, why you're starting off the Q1 revenue guide where you are? And on the margins down 15% in Q1, just trying to get comfort with the margin ramp over the course of the year, looking at last year's ramp, starting the year 11.5% margin, getting to negative 1% or almost breakeven for 2023. So 20 24 margins a bit steeper on that ramp. So just wanted to kind of get some clarity on your conviction and the margin ramp over the course of the year.

Speaker 8

And when does Mobi actually become accretive to margins? That something happens in 2024?

Speaker 3

Yes. Great question, Travis. So Mobi is a big it has a big impact on the margin profile this year. So if you look at any year, it's not as steep of a tilt. It usually does follow pump sales across the year with the lowest in the Q1 improving across through the Q4.

Speaker 3

With the way the Mobi is scaling, we anticipate it will be a little more pressured upfront and also not just with the COGS associated with the lower volumes that we're producing, but the spending in order to effectively carry out that launch. And so across the year, we expect that as we're building at higher volumes, we'll start to see more and more benefit. And by the time we're exiting the year, Mobi will actually start to be making a contribution to margins. So really it's a 2025 story in terms of seeing a real difference and we still firmly believe it's one of the best drivers of our long term gross margin goal, will get us more than halfway there. This year, it's going to start it was going to have a little steeper tilt just because we're actually going to see momentum come from Mobi and that improvement as the volumes increase.

Speaker 8

Okay, helpful. And maybe longer term, like when you think about that 65% margin goal, like I like to think about it in terms of like installed base. You had 450,000 installed base today. I think before when you gave that 65% margin goal, the goal was for 1,000,000 installed base. Is that the right way to think about what you need in terms of patient growth to get to that 65% gross margin longer term?

Speaker 3

Yes. That's the right way to think about it. It's closely correlated to 1,000,000 customers and install base.

Speaker 8

Great. Thanks a lot.

Speaker 3

Thanks, Travis.

Operator

Thank you. Our next question comes from the line of Larry Biegelsen of Wells Fargo. Your question please, Larry.

Speaker 11

Hey, this is Simran on for Larry. Thanks for taking the questions here. Just starting off with Mobi, how should we think about your share of new starts as Mobi rolls out over the course of the year? Do you expect it will expand the market, take share from MDI other pumps and or take share from X2?

Speaker 2

Yes. I would say that if you look back maybe 18 months ago, we believe that on the MDIs coming to pump therapy, we are essentially splitting it fifty-fifty with one of our competitors. And I think that as they brought their new device to market, that changed and that was probably more like sixty five-thirty 5 or maybe seventy-thirty. I would say that we absolutely believe that MOBI is going to reverse that trend and we're going to return. We may not get all the way back to fifty-fifty, but we are definitely going to see improvement towards taking more MDI.

Speaker 2

We also think it's going to have a favorable effect on competitive conversions as well. I mean the form factor, the wearability that comes along with this device is a substantial improvement. And when you talk to people who are using it, their response and reaction has been incredibly positive. And these are people who use a variety of different pumps besides Tandem. So, I think that we really believe that this is a year of transition for us.

Speaker 2

And when we have Mobi with the advanced sensor integrations, I think it's going to be a meaningful favorable effect on our new pump starts.

Speaker 11

Okay, great. That's helpful. And maybe just a follow-up on the renewal opportunity. How are you thinking about the renewal opportunity OUS in 2024? And do the same dynamic supply OUS as in the U.

Speaker 11

S?

Speaker 3

Yes. Good question. So I would say the opportunity is really beginning in 2024 for us outside the U. S. They do have standard 4 year warranties as well, much like we do here.

Speaker 3

The difference is right now in terms of expectations, we're assuming a somewhat slower ramp than what we're seeing in the U. S. Right now. So think of it back to what we experienced in the U. S.

Speaker 3

Years ago as our distributors are developing their own best practices and learnings and how to go out and attract the renewal customers. And so we think it's a great and growing opportunity, but we're being cautious about how we start off with it and this will be the 1st year we start to see anything meaningful.

Speaker 11

Great. Thank you.

Operator

Thank you. Our next question comes from Mike Kratke of Leerink Partners. Please go ahead, Mike.

Speaker 4

Hi, everyone.

Speaker 10

Thanks for taking our questions. So in your presentation today, you highlighted that less than 40% of the 1,900,000 people living with Type 1 diabetes in the U. Use an insulin pump. What does your current guidance range assume as to where this goes by year end 2024? What are the key factors that you expect to drive increased adoption for 2025 beyond?

Speaker 3

Yes. So we haven't given any specific color on where we think adoption goes by the end of this year, other than we think it could get to well north of 50%, even 60% in the coming years. And so a lot of that depends on how everyone's driving the market. We do believe with the products that we're offering that we will be the disruptors this year and we will begin to expand the market in a way that we haven't been able to in the last 12 to 18 months. So we're very excited about what we can do to push that forward.

Speaker 10

Got it. And just maybe one clarifying one. I think you mentioned that your guidance doesn't assume any inflection from the new product launches. I mean, does that kind of include any kind of enthusiasm that you've talked about in terms of the Mobi launch and just how that impacts attrition rate or overall pump penetration?

Speaker 3

So the way we developed the guidance for 2024, I was thinking of it more along the lines of what are the predictable sources of revenue and not building in anything incremental for what the new products can do for us. So we're very like you said, very enthusiastic about the opportunity they bring to the table. But from a guidance perspective, we're starting with, I would say, more certainty in terms of the supply stream that we typically see, the renewal opportunity that is growing substantially. Just the number of renewals opportunity alone is growing more than 30%. So there's enough growth drivers in there that we can get to 10% growth worldwide.

Speaker 3

What we want to do is while we believe that we're going to make a real difference in the market with these new products, we want to gather data and trends to use that to better inform updates in the future so that we don't get ahead of ourselves and you don't get ahead of us. And so right now, it's starting off with what we feel very confident in that we can see in front of us and that has good predictable patterns.

Speaker 10

Understood. Thanks very much.

Operator

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

Speaker 2

Hi, thanks. Can you hear me okay? Yes. Hey, Matt. Hey, good afternoon.

Speaker 2

Thanks. So I just want to follow-up on that question and clarify. I mean, it seems like you're essentially guiding to growth just coming from supplies and renewals. Could you be specific about whether the guidance includes any potential for new pumps to grow? And I guess, why wouldn't they grow given the easy comps and all the new products that you have and the distribution center being in place?

Speaker 3

Yes, it's a great question. And so we are really focused on that buildup with the supplies that grow and the renewals that grow. And we do firmly believe the new products will make a difference. But until we see these data points, we want to make sure that it's an informed addition to the guide. And so right now what's factored in is that new pumpers will be approximately flat or even slightly down from what we saw in 2023.

Speaker 3

And as we gather these data points, we'll be able to give you additional information about the direction that we're headed. But there are a lot of exciting opportunities to come. We want to make sure as well that we are basing it on trends and that they are sustainable trends. Because many times when a new product launches, you'll see a little bit of a hype cycle with people who have been waiting that pent up demand coming in at one time. And so we want to make sure we understand how what it's going to look like after that point in the curve.

Speaker 2

Okay. Thanks, Lee. I'll leave it there. Appreciate it.

Speaker 3

Awesome. Thanks, Matt.

Operator

Thank you. Our next question comes from the line of Danielle Antalffy of UBS. Please go ahead, Danielle.

Speaker 12

Hey, good afternoon guys. Thanks so much for taking the question. Just wanted to ask Lee a follow-up on the potential contract with the PBM that you're maybe signing before the end of the year. This might be too early to ask this question, but and we're not going to model this yet, obviously. But just thinking about the financial impact there, I mean, just the way the business is set up today and what that could mean, again, not trying to model this right now, but just even qualitatively from a margin perspective and sort of as you make this shift and how you think about the business longer term, as it relates to pharmacy versus DME?

Speaker 3

Sure. So I think one important point is that we intend to be a multichannel company. Our number one goal with advancing into the pharmacy is to get the broadest access possible and to get to the lowest out of pocket cost for a patient. Pharmacy can be a good addition to what we offer to DME, but there are still times where DME might be the better solution. For example, today, we still have roughly 30% our direct patients that don't even have an out of pocket when they buy the pump.

Speaker 3

So what we want to make sure is we're getting the right solutions for people. What does this mean for the business long term? When you get into pharmacy channel, it opens the door, I would say, for other opportunities to look at your business model. It's too soon to say which way this will go, and it may vary by payer and by PBM. It could look just like the DME from the overall revenue perspective or it could look different with shifts of more dollars to supply than off of the pump.

Speaker 3

And so that's the TBD part that we'll talk to you in the longer term as we have more information about the contracts that are in place and the materiality of those to the business.

Speaker 12

Got it. And then just a quick follow-up. As we think about integration with G7, but especially with Libre, and Libre has a very large Type 2, including insulin intensive Type 2 base. And just curious about how you're thinking about I hear what you're saying regarding guidance for this year, but just over the next few years and access to the very large Libre installed base, many of whom are insulin intensive Type 2 and what that could mean for Tandem? Thanks so much.

Speaker 2

Yes. I mean, the product is very popular with the Type 2 community in the U. S. And particularly OUS. And so we see it as a big opportunity for us longer term as well as the Type 1 community as well.

Speaker 2

I mean, there's a significant number of people in the U. S. Today that are using the Freestyle sensor that are not using pumps. And so it's almost it's a clean slate for us to go after and work with Abbott to basically get people aware of the benefits that pump therapy has. So certainly in the longer term, we think that integration with Abbott is an important part of our getting to a 1000000 people using the product in the next several years.

Speaker 12

Thank you.

Operator

Thank you. Jason Bedford of Raymond James. Your line is open.

Speaker 13

Good afternoon. Just a couple for me maybe. Of your G7 integration so far, what percent have been kind of internal conversions, if you will, versus new users?

Speaker 2

We haven't been specific about that. I don't think we're going to talk specifically about people using either of the sensors. I will say that there's been significant uptake. I would say probably since there's like many tens of thousands who are updating the have updated their pump, That is probably a larger number at this point in time. But that's about as much information as I think I can give.

Speaker 13

Fair enough. Maybe just going lower on the P and L here. Working through the model, it looks like there's a bigger step up in OpEx. Where is it coming from? Is it more on the R and D side, SG and A and maybe any changes to the size of the selling effort given new leadership?

Speaker 3

Yes. So the investments we're making in 2024 will continue to be similar to what we talked about in 2023 and it's focusing on advancing our program. So there's R and D investments to come, as well as investing in our sales and marketing activities to make sure that we effectively launch these products this year. We are still generating savings though from a number of initiatives that have been underway, primarily in our customer service and customer technical support organizations. TandemSource is the foundation that allows us to continue to bring efficiencies in how we interact with customers.

Speaker 3

And so it can remove some of the requirement or need for having people on the teams available to answer phone calls 20 fourseven. And so that's something that we're going to continue to be focused on. This year is not really a year of margin expansion overall for Tandem though, and that's mostly because of getting Mobi out the door and getting it to scale. But we do have our sight on leveraging in the future and meeting those long term margin targets.

Speaker 13

Is this are you increasing the size of the sales team?

Speaker 3

It's always under evaluation.

Operator

Okay. Okay. Thank you.

Speaker 2

We're definitely looking at investing in the sales organization in OUS. That's one of the things we are doing. But, U. S. Is still under evaluation.

Speaker 2

We just as you know, Novara just joined the organization and he's working with sales leadership to evaluate that carefully for the U. S.

Operator

Got it. Thank you. Thank you. Our next question comes from the line of Jeff Johnson of Baird. Please go ahead, Jeff.

Speaker 10

Thank you. Good afternoon, guys.

Speaker 5

Maybe just two clarifying questions at this point in the call. So Lee, did you say that, sorry, renewals in the U. S. Were up 50% or slightly above 50% for the year or for the Q4?

Speaker 3

For the year, they were up more than 50% the shipments themselves.

Speaker 5

Okay. So that our math would put renewals probably pushing the upper 12,000 maybe even not quite to 13,000. I know you don't give that number, but is our math for the 4th quarter renewal number somewhere in that $125,000 to $13,000 range at least ballpark accurate?

Speaker 3

I would say that's a little on the high side, Jeff. I can help size up, I would guess, I would say for the year. When you think about we had about 50,000 opportunities for the year and we said we renewed about half of them. Also, we still have people from years prior. And so as we think about, as John mentioned earlier, our renewal goal is 70%.

Speaker 3

So moving the needle from that 50% to 70%, for instance, on that cohort from 2022 compares on top of that. And so, not going to really give you any specific color on Q4. Again, I would say that your number was a little bit on the high side.

Speaker 5

Okay. That's helpful. That's good enough. And then, John, you mentioned in the call that you expect the MDI competitive convert kind of percentages fifty-fifty where it's been quite a while, the competitive convert part of that number to go down going forward. I mean, one, how quickly and to what extent does that decline from the fifty-fifty mix that you've had?

Speaker 5

And I don't know if I heard in the Q4, was it close to fifty-fifty and you just expect that ratio to maybe shift going forward or

Speaker 10

did it already start to move

Speaker 5

in the Q4? Thank you.

Speaker 2

Yes. I mean, I think that there's 2 things going on. One is we think we're going to be more successful penetrating the MDI conversions. So more people are going to move to pump therapy, which is going to obviously make the MDI conversions a larger portion. At the same time, when you look at competitive conversions, the renewals for our competitors also the number of installed base is dropping.

Speaker 2

So I think that the available competitive conversions is dropping as well. So I think that's kind of the 2 dynamics. And I think it's just one of those gradual trends we'll probably start to see. It could be by the end of this year or early next year, it will be more meaningful.

Speaker 3

And we can confirm it did stay around the fifty-fifty market.

Speaker 2

Yes, it stayed fifty-fifty for the Q4, but I think it's something that we're going to see in time.

Speaker 10

Yes. That makes sense. Thanks guys.

Speaker 2

Yes.

Operator

Thank you. Our next question comes from the line of Joanne Wuensch of Citi. Please go ahead, Joanne.

Speaker 7

Hi, this is Felipe on for Joanne. Just quickly on the competitive environment, it seems like some of your competitors are bridging the gap on AID offering. So I'm just wondering, have you seen especially in the U. S, have you seen any pickup in competition from 2 competitors? And then OUS, maybe one of your competitors is releasing a patch pump with an AID integration.

Speaker 7

So I'm wondering if you're feeling anything there.

Speaker 2

Well, I mean, I think I know which competitor you're talking about in the U. S. And I would say for us at least, it's kind of hard to parse their numbers. I think that what were the pump starts last year? Are they new pumps or updates.

Speaker 2

And so there's just a number of things out there that really make it hard for us to figure out what's going on there. I will say though that our U. S. Competitor with the 2 pump has got a better product in the market. And I think, as a result of that, they're doing a better job of retaining their own renewals.

Speaker 2

I would say that that dynamic has been relatively stable over the last two quarters. We absolutely saw an impact, but it's been relatively stable. And I think that as we bring new products to market and they become more visible in the marketplace, we do expect to see competitive conversions grow as people become familiar with the enhanced wearability and choice of our portfolio. So we think that it's a timing issue with us. I mean, I think that we're just getting started now in the introduction.

Speaker 2

I think in the Q2 or late spring when the when X2 with excuse me, when Mobi with G7 is available, we'll see an uptick from that and I think we'll see steady progress throughout the year. So I think that again, I think that our portfolio is going to help us just keep the competitive conversions in our favor this year. OUS, there's we've been competing against the product that you're talking about in the U. S. We're very familiar with it.

Speaker 2

We think that Tandem still has absolutely the best AID system in the market. We hear that from physicians. And I think that with the wearability options that we're providing right now and choice with sensors, we think that in combination with our AID system really does differentiate us here and in the OUS countries. And I'll say that we're making a really focused effort to drive our portfolio and innovation and new launches OUS to be more effective competing against that market.

Speaker 7

Great. Just following up on Mobi, I'm wondering like any early signs of adoption? And then I know the integration with G7 is going to be a big turning point. I guess, is that when you're going to really start to see some revenue contribution? Thank you.

Speaker 10

I mean,

Speaker 2

I think the G7 integration is certainly going to help us. We're seeing a very significant interest and excitement right now. It's only been a week or so. I think that if you talk to the sales organization, they're very pumped up. There's a great deal of interest from the physicians in the marketplace.

Speaker 2

They're asking them to come into their offices and see the product. They've heard about it. As I said, we've had a number of HCPs were part of our early access program who have been speaking about it. And I think it's going to be a big product for us and it's going to exceed our expectations, I think. So we're all very excited about it.

Speaker 10

Thank you.

Operator

Thank you. Our next question comes from Alex Nowak of Craig Hallum. Your line is open, Alex.

Speaker 7

Okay, great. Good afternoon, everyone. So any reason why Mobi didn't launch with the G7 and Libre3 integration and it did launch with G6 and Libre2?

Speaker 2

Well, I think that we have a lot of experience with G6 and we tried to control the number of variables that we're introducing. We wanted to make sure the pump itself is performing as we expected to. And I have to say that it's been incredible how well the system has performed in the market. So it's just a fast follow to get G7 onto it. And this was the intent all along.

Speaker 2

It's not that far off now as we're just talking absolute weeks or just maybe 2 months before it's in the market. So it's I think it was just it was a strategy to make sure that we minimize the variables as the product came to market. So we understood exactly how it performed.

Speaker 3

And a point of clarification, Alex, it's not yet available with Libre 2.

Speaker 7

It's not yet. Okay. That's helpful. A lot of moving pieces with all the integration. So that's helpful.

Speaker 7

And then when should we nail down the timelines with whether it be Mobitubelis, t:slim X3 or Siggi? When can we get some real clarification there?

Speaker 2

I think that we're going to be more cautious about discussing timelines for competitive reasons. And I think that we understand the need to have access to that information. So I think as we get close and we are more confident in the availability and the specific timing, we'll share those on future calls.

Speaker 7

Okay. That sounds good. Thank you so much.

Operator

Thank you. Our next question comes from Joshua Jennings of TD Cowen. Please go ahead, Joshua.

Speaker 13

Hi, thanks for taking the questions. John, I heard you just reference the early experience with Moabie and creating less of a differentiated or gap between tube and tubeless systems. And the question basically is, would you have investors think that Tandem is less reliant on the Siggy patch pump development program for out year success? Or any further follow-up on the comment you made, I think in your prepared remarks and one of your answers on just how the size and footprint of Mobi could be more competitive with the tubeless options? Thanks.

Speaker 2

Sure. I mean, I think when you look at the portfolio and the specific platforms, we think there's a need for a patch pump, absolutely. There are people out there that probably would not wear a pump unless it is a patch pump. But we think that the flexibility that comes along with Mobi when it has a tubed in tubeless option as well as the wearability that it has right now just with the adhesive patch, it's it just it gives people a lot more flexibility and it almost it mitigates that tubed tubeless discussion. I think that some people are going to want to wear it as a tube pump at certain times in their day and they're going to also want to wear it as a patch device.

Speaker 2

And so I just it gives you that added element of flexibility that either a completely tubed pump or a completely patch pump does it. And there are people out there that want that flexibility. And so I think that we feel the market research really has indicated that there's a need for the 3 and that when we have the 3, we will do a much better job of addressing the various segments of use out there. Great. Thanks a lot.

Speaker 2

Take care, Joshua.

Operator

Thank you. And that does conclude the Q and A portion of our call. That also concludes today's conference. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Tandem Diabetes Care Q4 2023
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