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spk11: Good day, and thank you for standing by. Welcome to the Tandem Diabetes Care Third Quarter 2022 Earnings Call. At this time, all participants are on the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during your session, you may press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Morrison, EVP and Chief Administrator of... Please go ahead.
spk10: Hello, everyone, and thank you for joining Tandem's third quarter earnings call. 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-K, quarterly report on Form 10-Q, and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or other factors. In addition, today's discussion will include references to 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. For additional information about our use of non-GAAP financial measures, please refer to our press release issued earlier today. Our call today will be led by John Sheridan, our president and CEO, and Lee Vossler, our executive vice president and chief financial officer. Following their prepared remarks, we'll open up the call for questions. Thank you in advance for limiting yourself to one question and one follow-up before getting back into the queue. I'll now turn the call over to John.
spk14: Thanks, Susan, and welcome everyone to today's call. In reflecting on 2022 so far, and the third quarter in particular, it's been a year filled with both successes and challenges. I'm going to spend a few moments up front talking about our recent business trends before asking Lee to provide some color on our financial results and near-term expectations. Then we'll conclude our prepared remarks with a pipeline update. Starting with a highlight from the quarter, TANF has a long-standing goal of bringing the benefits of our technology to more people living with diabetes. In the third quarter, we reached an incredible milestone of having more than 400,000 people worldwide using our T-SLIM X2. It's an achievement I'm proud of, and it's evidence that we are making measurable strides towards our longer-term goal of having 1 million customers. As we advance toward this goal, we do not expect our growth to be linear. We anticipate there will be periods of more moderate growth between more exceptional periods driven by our introduction of new technologies. where we stand today is more of the former, in part due to the timing of our own product cycles, in addition to the recent macro environment and industry-related headwinds. Similar to what we discussed in our last earnings call, we've largely been pressured by three dynamics that continued throughout Q3. First were the pandemic-related pressures that have fluctuated throughout the past two years. These include an array of things from COVID case rates to endocrinology office staffing shortages. Second was a competitive environment in the United States. And third were the economic conditions, including inflation and the threat of recession. To provide an update on each of these dynamics, the broader COVID-related pressures began escalating in Q3 of last year in all our markets. It's now a consistent factor when looking at the year-over-year comparison and an environment that we anticipate operating in for the foreseeable future. The second dynamic is the competitive environment in the U.S. This intensified across the year in line with the competitor's scaling launch of a new AID algorithm, which is on a device form factor that we've competed with historically. In surveying our sales management, the majority said the disruption associated with this launch is less than what we've experienced a few years ago when another competitive AID system launched. That being said, it creates noise in the market that we'll be navigating and managing for the few quarters. What's been very rewarding in this heightened competitive environment is to hear the broad clinician feedback that ControlIQ remains the leader in AID systems. The vast majority of our customers have ControlIQ, and we've amassed more than 100 million patient days using the system with incredible user experience and clinical results that demonstrate immediate and sustained benefits using our technology. It's also been great to see our customer satisfaction remain high. and as a result, our low levels of attrition are consistent with what we have seen historically. This substantial visibility to custom utilization data comes from our iOS and Android mobile applications that launched about two years ago, which automatically and wirelessly upload data to the cloud from our T-Slim X2. I am also proud that we continue to expand the insulin pump market As in the third quarter, about half of our new customers reported adopting insulin pump therapy for the first time. On the final market dynamic, the impact of the economic environment on customer purchasing behavior is primarily a U.S. phenomenon. This pressure is something that we saw build quickly at the end of Q2 and has remained steady. To support our U.S. customers who want the benefits of our technology but are concerned about cost, We began broader marketing of our payment plan program beginning in September outside the United States, partially mitigated by the predominance of government healthcare plans. Overall, the level of pressure from each of these dynamics fluctuated throughout the quarter. In the U.S., we typically see a steady seasonal uptick in demand across the month of Q3. This year, August results were in line with these expectations, which we noted at the beginning of the momentum build. But then, different from years past, the same level of momentum did not continue across September. The variability of each dynamic makes it difficult to speak to any one of them as getting better or worse, but has been consistent in aggregate since the latter part of Q2. In this environment, our teams are motivated and confident in our product offerings available today. This is what we remain focused on in advance of our new product launches, which we continue to invest in heavily. Operationally, we are also focused on identifying and working to implement lean initiatives to further leverage our infrastructure. This includes systems improvements, such as a cloud migration of one of our key core systems in Q3, which created some disruption in September operations, but was important to have done so before the fourth quarter. We're also furthering our efforts outside the United States, where the number of people using our TESOL Next2 pump continues to grow. In the third quarter, we launched our TISM X2 with ControlIQ in Israel and Portugal, which brings the geographies we serve to approximately 25. We'll continue to look at new opportunities to bring our technology to people living in smaller markets outside the United States while executing our primary international strategy of driving greater adoption in the under-penetrated areas we serve today. We're also working to expand our product offerings outside the United States and in support of this goal, in the third quarter, submitted a regulatory filing for our mobile app. This is the first step towards being able to offer mobile phone-controlled delivery of insulin to our customers outside the United States. Reflecting on our recent experiences in the past few quarters, we are taking the opportunity to recalibrate expectations for the fourth quarter and set a new baseline for 2023 with even greater caution. As Lee will discuss, we will be factoring in the persistence of the current macro pressures in anticipation that they will continue to exist for the foreseeable future and that any relief from them will serve as upside opportunities. Similarly, we anticipate driving additional upside opportunities through our introduction of new technologies to the diabetes market. I want to be clear that this reset is to properly align your term expectations. It does not change our consistent continued expansion of the insulin pump market or that we continue to capture competitive share. With pump penetration just over 35% in the U.S. and typically less than 20% in countries we serve outside the United States, we remain focused on the large market opportunities available to us and further delivering on our goal to bring the benefits of our technology to the diabetes community. I'll now turn the call over to Lee for more on our financial results and our guidance expectations.
spk01: Thank you, John. Looking back at the quarter, it was notably our highest Q3 sales performance in the company's history. We continue to expand the insulin pump market while also benefiting from our growing install base of more than 400,000 customers. This large install base also continues to drive strong pump renewal shipments and recurring supply sales. As a result, third quarter worldwide sales grew 14% year-over-year to $205 million. On a year-to-date basis, worldwide sales grew 18% to 581 million. Taking a closer look at our results in the U.S., sales in the third quarter were 146 million, growing 10% over last year. On a year-to-date basis, our sales in the U.S. grew 16% to 423 million. We now have more than 280,000 people in our U.S. install base, a 28% increase over last year. Total pump shipments were approximately 20,000 units in line with our expectations, which was essentially flat, both sequentially and compared to the prior year. As John mentioned, the quarter was unusual and that the monthly sales trends did not follow historical patterns, but did include outperformance on our renewal pump shipments, which increased nearly 70% year over year. This strong rate of retention is a reflection of the high level of customer satisfaction in this segment of the insulin pump market we serve. We also saw continued steady improvement in our average U.S. selling prices, which resulted in a U.S. comp sales growth of nearly 3% year over year. This was driven by price increases and a greater percent of sales through direct channels, which improved to 34% of total U.S. sales this quarter from 32% a year ago. Notably, comp sales in the U.S. included deferral of approximately $600,000 associated with the Tandem Choice program we launched late in the third quarter. This program anticipates our upcoming introduction of the Mobi Pump and provides a pathway for existing Tandem customers to access new hardware innovations within their warranty period, similar to programs we have offered in the past. Revenue deferrals associated with this program will increase in advance of Mobi's commercial availability and will then be recognized as customers adopt the new technology. The amount of the deferrals and ultimate timing of recognition of the deferred sales is difficult to predict. Therefore, we will begin discussing our sales outlook in terms of non-GAAP performance, excluding the impact of these deferrals. Our supply sales in the U.S. increased meaningfully by 20%. This is strong growth that fell just short of our expectations due in large part to timing. Approximately 1 to 2 million in supply sales were anticipated at the end of Q3, but instead will materialize in Q4 due in large part to the software system migration John mentioned. Moving on to our operations outside the U.S., sales exceeded our expectations in the third quarter, primarily due to the timing of order fulfillment that muted the impact of anticipated seasonality. Our OUS sales grew 26% year-over-year to $59 million on a 15% increase in pump sales and a 37% increase in supply sales. We shipped approximately 12,000 pumps in the quarter, and our estimated install base outside the U.S. has now surpassed 120,000 people. On a year-to-date basis, our OUS sales grew 22% to $158 million. As we have discussed in recent quarters, our pump shipments to distributors outside the U.S. do not necessarily correlate with actual customer demand or what we refer to as placement. On a year-to-date basis, shipments to distributors were essentially flat, but placements have grown as distributors continue to work through their inventories and manage challenging supply chain conditions. We recently began operating a distribution center in Europe that benefits our distributors because it eliminates the variable of transit time when they place orders from our warehouse in the U.S. We expect to scale our utilization of this new warehouse over the next few quarters at a pace more quickly than we originally anticipated. In the longer term, this will result in a closer alignment of revenue shipments to placement. However, over the next 12 months, we anticipate it will impact the timing of sales to our distributors in Europe as they reduce their safety stock levels to account for the shorter transit time. As a reminder, we have had very little foreign currency exposure in our markets outside the U.S., and that is expected to remain consistent through the end of 2022. It's important to note, though, that another effect of commencing operations at our European Distribution Center is that our exposure to fluctuations in foreign currency will increase in 2023 as we scale. On a worldwide basis, the environment we are operating in continues to be more variable than what we have seen in years past, making it very difficult to predict future trends. Accordingly, we believe it is prudent to recalibrate expectations for the remainder of 2022. As we look ahead, we now expect 2022 total non-GAAP sales in the range of $800 million to $805 million, reflecting 14 to 15% year-over-year growth. This includes reduced U.S. sales guidance of $592 million to $595 million. We are also adjusting our guidance outside the U.S. to a range of $208 million to $210 million, primarily to account for the accelerated scaling of the European distribution center and continued variability in ordering patterns for the remaining markets. Turning to margins, our gross margin performance of 51% in the third quarter was in line with the second quarter on approximately the same level of sales. From an operational perspective, this reflects continued execution on our initiatives to expand gross margin, beginning with progress towards our ASP goals. Our higher average selling prices and reduced costs from manufacturing efficiencies year over year offset both product and geographical mix changes. Beyond that, global supply chain challenges continue to pressure our gross margin by approximately two percentage points. This was consistent with our expectations as it was primarily related to higher plant material costs from specific components we purchased earlier in the year to avoid the risk of product shortages, as well as increased freight and fuel costs. Based on the level of inventory we are carrying at these higher costs, we expect continued pressure on margins through the first half of 2023. Due to the change in our sales guidance, we now expect our 2022 gross margin to be approximately 52%, which was the lower end of our guidance range. Moving on to spending, we continue to prioritize investments in R&D, particularly as we prepare for the launch of three major products that will drive the next sales inflection in our business, as well as pursuit of other innovations that support our long-term sales and gross margin expansion plan. R&D, which now includes the operational cost of capillary biomedical, was approximately 18% of non-GAAP sales in both the third quarter and on a year-to-date basis, and is our expectation for the full year 2022. Our operating margin in the third quarter of negative 23% was meaningfully impacted by the accounting treatment for the acquisition of CatBio. This resulted in a one-time charge to operating expenses for acquired in-process R&D of $31 million, or 15% of sales. Our adjusted EBITDA margin in the third quarter was 5% of sales when excluding the impact of the CatBio transaction and the revenue deferral associated with Tandem Choice, as well as non-cash stock-based compensations. Due to the nature of these transactions, we believe that adjusted EBITDA is a more representative measure of profitability. Our 2022 adjusted EBITDA is estimated to be in the range of 7% to 8% of non-GAAP sales. We continue to generate strong cash flows. Year-to-date, our operating cash flow was $45 million before taking into consideration strategic acquisitions and investments and $28 million in capital expenditures for our new tech and innovation center. We ended the third quarter with $609 million in total cash and investments. To summarize our 2022 outlook, worldwide non-GAAP sales are estimated to be in the range of $800 million to $805 million, including international sales of $208 million to $210 million. Our gross margin expectation is approximately 52%. Adjusted EBITDA is estimated to be in the range of 7% to 8% of non-GAAP sales. Our non-cash P&L charges for stock compensation, depreciation, and amortization are expected to be approximately $100 million, of which $85 million is associated with non-cash stock compensation, and $15 million with depreciation and amortization. Looking ahead, we are particularly excited for the series of new product launches beginning next year. Each will serve as a future growth driver for sales, bringing the benefits of our technology to more people living with diabetes. Our future product portfolio is also designed to drive gross margin improvement. For example, Moby's pump and cartridge gross margin benefit at scale is expected to drive more than half of the progress toward meeting our longer-term 65% gross margin target. And extended wear infusion sets also have the opportunity for meaningful contribution. Because regulatory and commercial launch timings are difficult to predict, we would like to level set the starting point for 2023 expectations worldwide at a non-GAAP sales growth rate of 11 to 12% over our 2022 guidance. This growth rate is similar to recent trends we've seen since pressures intensified. In the U.S., this assumes continued caution for the challenging macro environment. Once we have more certainty on the regulatory timing and general availability of new products, we will factor in the anticipated benefit from those launches. Outside the U.S., it anticipates the re-leveling of distributor pump and supply inventories in the first half of 2023, which could be an impact of up to eight weeks of sales in certain markets. 2023 is an important year for us as we continue to invest heavily in R&D and execute on multiple strategies that position us for both near and longer-term success. I will now turn it back to John to provide our latest pipeline updates.
spk14: Thank you, Lee. Tandem is a company founded on innovation, and the opportunities in front of us with our products and development are meaningful. Starting with Moby, we have filed a 510 case submission with the FDA through the ACE pump pathway. Our research shows that Moby largely appeals to the segment of people who otherwise would not adopt insulin pump therapy with the options available today. It's a catalyst for driving further growth in the market. Moby is about half the size of T-SWIM, fully controlled through a mobile app, and with it, we also plan to launch the shortest infusion set offered in the industry, providing our customers with greater choice and flexibility. While timelines are difficult to predict, we are using this opportunity to further product development and to test and refine our manufacturing processes in preparation for clearance. Planning for commercial rollout is also underway and will include a robust marketing and training campaign. With Moby's novel design, we want to be certain clinicians have the opportunity to experience our newest technology before making it broadly available to customers. We will provide more color on our launch plans and timing as we move closer to clearance. In addition to having two pumps on the market, we are also looking forward to offering new sensor integration with both our CGM partners, Dexcom and Abbott. Starting with Dexcom, G7 will be our fourth integrated sensor. As new generations of their technology are approved, we recognize the importance of ensuring our shared customers can benefit from Dexcom's newest sensor with our ControlIQ technology. Turning to Abbott, we are actively working toward offering our first integrated AID solution using LibreCGM data. Following Abbott's receipt of FDA clearance for the Libre use in an AID system, it will mark the first time that their U.S. customers will have an opportunity to benefit from advanced hybrid closed-loop technology. We look forward to serving this unmet need in the diabetes community. For both Abbott and Dexcom, our goal is to launch our integrated offering in the U.S. within one to two quarters after their receipt of clearance. In addition to our sensor integration work, we're also off to a strong start in our collaborative efforts with Capillary Biomedical Team, who joined tandem at the end of July. We're in the planning process for our pivotal study for an extended word infusion set and intend to use the data to support a regulatory filing with the FDA. Rounding out a development update, we are also making great progress on our clinical activities. Our type 2 feasibility study using control IQ is now complete and the results will be presented November 10th at the diabetes technology meeting. Also, the results of the initial portion of the PDF study evaluating control IQ in children under six were recently presented at the ISPAD meeting in October. The results for this first phase of the study were very encouraging, and the extension period for PDF is now also complete, and the data is currently being compiled. Lastly, we recently completed the enrollment of a study to evaluate control IQ in a population of high insulin-using adults with type 1, which we refer to internally at higher IQ. We anticipate the data from these studies will help support future regulatory filings as we work to expand our labeling indications for control IQ while further enhancing its features and benefits. As you can see, the near-term innovations that we are working to commercialize span all of our R&D verticals and represent a number of firsts in the industry. We are applying the same user-centric philosophy as we did when designing the TSLMX2 in our control IQ technology. The overwhelmingly positive feedback we receive on the solutions and services that we provide today are solely attributable to the hard work, talent, and dedication of our employees who are passionate about improving the lives of people with diabetes. We greatly appreciate all of their efforts, and together, we'll be working to deliver new and exciting innovations that further our leadership position in diabetes care. With that, I'll now turn the call back over to the operator for questions.
spk11: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Matt Mixick with Barclays. Your line is now open.
spk03: Oh, hi. Thanks so much for taking the question. A couple of follow-ups on some of the comments you made, John and Lee, on share trends and deferrals. It sounded like you're going to start talking a little bit more about the impact of deferrals in the coming quarters, but maybe you could clarify whether you felt that there was an impact in the quarter. I had just one follow-up on the market environment and the share environment, if I could.
spk01: Sure. Thanks for the question, Matt. When it comes to the deferrals that we spoke of, it's related particularly to the Tandem Choice Program, which we launched late in the third quarter, which is our new technology access pathway for people as we think about new hardware solutions coming while people are within their warranty cycle. Since it was only recently launched, the deferral in the third quarter associated with that was only $600,000. We do expect it to become more meaningful in the coming quarters as we get closer to the Mobi launch. And because there's a lot of technical accounting behind it, it's difficult to predict it, so we'll be reporting our sales on a non-GAAP basis. For this quarter, it was not very material, but we wanted to make sure people were prepared for what would be coming in the future.
spk03: Got it. That's helpful. And then just a follow-up on, as I mentioned, some of the utilization trends or share trends in the U.S. You mentioned the share pressure is there, obviously. Can you talk about, you know, maybe the impact of the promotions that are taking place in the marketplace competitively and your expectation, if you have any, for how either those or your own efforts will kind of stabilize things in the next couple of quarters? Or is this an environment that you're just sort of expecting to remain in place until, you know, until Moby comes to market?
spk14: Yeah, hi, Matt. I would say that we definitely expect to have these three dynamics continue on for the foreseeable future. And as we indicated with our recalibration, it's very difficult to predict this. I mean, we certainly are doing what we can to combat the noise from the competitive situation by promoting the strengths of our products. And Control IQ is really the best product on the market, the best AID system on the market today. We hear this strongly from our clinicians who use it, and we hear it also from people who benefit from the clinical results and also the ease of use. I mean, we have immediate and sustained improvement. We have customizable basal rates. We've got transparency in data and usability improvements. So we're going to do our very best to continue to make the strengths of our products very visible to our customers as well as our physicians. and continue to, you know, to continue to promote the product until we actually see the new product movie come to market along with G7 and Abbott next year.
spk03: Great. Well, I appreciate all the color and the outlook, the color on 23 as well. Thanks so much. Thanks, Matt.
spk11: Thank you. Our next question comes from the line of Brooks O'Neill with Lake Street Capital Partners. Your line is now open.
spk07: Good afternoon. I'm curious if your current outlook contemplates a greater or more or less the same impact from Omnipod 5 in 4Q and into early 2023.
spk14: Brooks, it's difficult for us to actually isolate which of the three factors that we described, the three market dynamics, are getting worse or getting better. I would say that, as I mentioned, we believe we have the best products on the market right now. But, you know, the competitive environment right now is that I would say that the impact that we're seeing from the current competitor is what we expected. As I mentioned, our sales force has indicated that they don't believe this is as disruptive as we saw another competitor come to market several years ago. So it's not as disruptive as that. But we are seeing pressure on new starts. And even with that, though, if you look at the third quarter, 50% of our new starts did come from MDI. We have very low attrition, and our renewals are strong. So I think that it's pretty much in line with what we expected, but it's one of three factors that we're dealing with right now. Sure.
spk07: All that makes total sense. I'm just curious also, could you comment on whether you feel you need to offer additional payment plans? to respond to the current difficult environment from an economic perspective?
spk14: Yes, good question. We actually rolled out and began marketing a new plan in September, and that's intended to help people who are feeling the pressures from the current economic conditions. It's early to say just how well it's being utilized in terms of numbers, but I can say that anecdotally we've seen a lot of very positive feedback on it. And we think it's a meaningful way to try to help address the current inflation and recessionary experience that people are having in the marketplace.
spk07: Great. Thank you very much. Thanks, Brooks.
spk11: Thank you. Our next question comes from the line of Chris Pasquale with Nefron Research. Your line is now open.
spk02: Thanks. I wanted to follow up on the international market and the impact of the new distribution center. You said about eight weeks. of inventory being drawn down in certain countries. You have any visibility at this point on the timing of when we should expect that? You know, the results this quarter continue to look pretty strong there. So just want to make sure that we're factoring that in going forward.
spk01: Yeah, great. Thanks for the question, Chris. Really, the impact of that will begin in the fourth quarter, which is the primary reason that we adjusted the guidance for this year. To your point, we've had outperformance on our OUS markets the past few quarters. And this came about, we commenced the launch or operations there in the third quarter with a phase-in plan for all of our markets in the next 12 months. And based on how things were performing and things were going, we decided to accelerate that phase in, which is why it's being pulled into this year a little bit ahead of what we had originally anticipated. But you can think about it as a dynamic beginning in the fourth quarter and lasting through the first half of next year is what we think at this point. And it is expected to impact up to eight weeks of sales. If you think about some of the distributors are carrying three-plus months of inventory, and so they will want to work that down to levels that are more consistent with being able to draw the inventory, you know, locally, if you will.
spk02: Okay, that's helpful. And then just to put a finer point on the three headwinds you talked about, in the U.S., it feels as though the competitive environment one may still be on the upswing in terms of the impact you could feel from it. but the COVID one should be at least stable, if not improving. And then the economic one is still TBD. Is that a good way to think about it? Or how would you characterize the directionality of those three headwinds at this point?
spk01: Yeah, you know, I'm going to follow on to John's comments a little bit about the headwinds and the fact that it's really the combination of all of them together, which makes it so difficult and challenging to predict. And as we thought about the guidance and setting expectations going forward, Rather than trying to factor in the rate that these will improve or the timing in which they'll improve, we've assumed consistent pressure continually throughout the year and even as we think about entering 2023. So, in this case, when we set our expectations, we're erring more on the cautious side and then leaving the opportunity for SOs begin to dissipate as upside scores as we look forward.
spk03: Makes sense. Thank you.
spk11: Thank you. Our next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is now open.
spk15: Afternoon. Thanks for taking my questions. And sorry to be blunt here, but, you know, you guys were talking kind of in early September about things being okay. You know, you've got a, there's another company in diabetes, Daxcom, that just reported they can go through the pharmacy. They just put up a good, you know, Q3 in the U.S. and, you know, the expectations for a good Q4 there. you guys can't go through the pharmacy. So I'm just wondering, you know, just given the environment, what really changed here in the last few weeks for you to pull down expectations, especially in the U.S. so much, you know, both in Q4 and going forward? And what gives us the confidence that next year can even be 11 to 12, you know, with all these headwinds that you're now facing?
spk14: Thanks, Matt. I think that's a fair question. You know, we mentioned that back in the June-July timeframe, we saw soft months. And in August, we absolutely saw this change in the momentum build, which was in line with what we've seen historically for the end of the third quarter. You know, unfortunately, in September, we just didn't see that trend continue. We saw continued pressure. You know, I would say that, you know, we've tried to estimate the third quarter, taking into account the extreme market dynamics, and we didn't get it right. And I think we've just concluded that it's very difficult to predict them. And that's really why we've basically recalibrated guidance for the fourth quarter and for next year. It's really intended to properly align our near-term expectations and really doesn't change our commitment to expansion of the insulin pump market or competitive gains. When you look at it, we have the most exciting pipeline. We have a great team that can execute. And we've got a great deal of confidence in our future. I think it's a matter of being pragmatic about these market conditions and the ability to predict them. I don't think we wanted to continue to go back and forth and not achieve the numbers that we set going forward. You know, I will say that when you consider what's happened to Dexcom this quarter, you know, they have another pump company now providing their sensors as well. So there's definitely upside that probably has come from that. And I think that I'm sure that helped them through this quarter. Certainly, we, we haven't got that going on. We don't have a new product schedule for some time next year.
spk15: Okay. Okay. And then speaking of the new product, either John or leave, but, you know, you filed for movie. That's great expectation. I would assume is still by the end of the year, get get approval early next year. What are the plans to roll out that product? And then it sounds like you're already getting a little bit of disruption as people are waiting for that. So how does that impact things next year as far as cadence goes? Thanks.
spk14: Yeah, I wouldn't say that we're seeing any pausing at this point, Matt. I think it's a bit early. We just wanted to get the Choice Program out there in advance so that if, you know, sometime next year, if people were considering that, we could allay that from happening. You know, the team has done a great job in the filing. We did get it in. You know, our activities initially are going to be focused on Just getting manufacturing ready, working with physicians to get them up to speed on the product, and, you know, working on our training and our marketing plans. Right now, I think that we're anticipating we're going to get clearance in the first half. And I think as we get closer to clearance, we'll be more specific about what our commercialization plans are at this point in time.
spk15: Okay. Understood. Thank you. Take care.
spk11: Thank you. Our next question comes from the line of Steve Lichman with Oppenheimer. Your line is now open.
spk17: Thank you. Hi, guys. Just wondering, relative to your guidance for the fourth quarter and your thoughts on 2023, to what extent do you factor in the benefits of the new pricing program And for 23, the pipeline, I know historically you've not included that. I just want to see sort of what you are or are not including in your update.
spk01: Sure. Thanks for the question, Steve. I would say it's important to underscore, I'm glad you asked the question, too, that for 2023, we have not factored in benefits from any of the new product launches. We wanted to set an appropriate baseline so that everyone could come together and get in the same range. And I'll be thinking of it the same way. I think different people are modeling it in versus out. And so as we think about that, what we've built into the guidance for remainder of this year and early next year is caution related to this environment. We're not assuming necessarily any relief based even on the programs that we've offered from the headwinds that we're facing. And again, it's to make sure we're getting a good baseline that we feel confident that we can achieve. and exceed as these start to dissipate.
spk17: Okay. Got it. You mentioned that relative to the type 2 program, the clinical work that that's progressing. You know, on the CGM side, there's been some positive updates from CMS. What's the latest that you've heard with regard to potential changes to the NCD relative to insulin pumps and how that may potentially benefit the market in type 2?
spk01: Sure. I would say that the work that's happening at CMS right now is underway when it relates to insulin pumps. We were very encouraged to see some of the changes that they made on the CGM side, which means that they're open and receptive to thinking about some of the ways that they've set up the approval processes in the past. And so today, it's not that a person with type 2 diabetes can't get access. It's just or difficult to get the approval through the process, and so what we're looking forward to is CMS considering some of the apps which would simplify that process and make access simpler and easier. As you well know, they don't move very quickly, so we're not anticipating this is going to happen in the next month or two, but I can say that it's underway, and they're taking some of the recommendations into consideration, and I'm hopeful that we'll see something, you know, in the coming quarters or get some feedback at least.
spk17: Got it. Thanks, Leigh.
spk11: Thank you. Our next question comes from the line of Matt Taylor with Jefferies. Your line is now open.
spk16: Hi. Thank you for taking the question. The first thing I want to ask about was if you could be any more specific about the trends that you saw. Like, what would you normally see pick up in September versus what you saw? And same for, you know, up until now. Could you give us any sense for how that diverged?
spk01: Sure. I would say the traditional trends would say that the momentum builds across the year. Even in the first quarter, as you see, it's nearing more and more people meeting their deductibles, getting closer to the end of the year. And, you know, as we discussed a few moments ago, we saw a bright spot in August, which led us to believe that we were about to see typical seasonality, but that didn't persist. And I can point out that October has come back to at least August levels. And so, as John said, we're not going to try to get ahead of this and predict when we think things might get better. We're going to, you know, maintain that cautious side here and consider that these could be persistent through the end of the quarter. But I will point out that we do still expect growth in the fourth quarter and even a step up in pump shipments from the third quarter in the U.S. And keeping in mind that the renewals continue to have an increased number of opportunities, which will be a great bright spot for us in the fourth quarter, even looking into next year. We do anticipate adding new pumpers, just not at as high a rate as we have seen in the past. And this is the expected trend in this more moderated growth period until we can see the inflection from our new product launches next year.
spk16: Okay, great. And let me ask a follow-up. I guess in the past, I know at least at certain points you've characterized the typical pressure or the historical pressure that you've seen from competitive product launches is lasting, you know, a couple quarters of trialing, and then it tends to tail off. Is that still what you expect here, or has any new learnings changed that expectation?
spk01: Yeah, I would say, you know, maybe slightly different from what we've factored in as I've talked about keeping the same level of pressure through the end of the year. What we've typically seen is one to two quarters of pressure following a full launch. That launch having occurred at the beginning of August, you know, that puts the most intense pressure right now and still some through the end of the year could trickle into next year. So, based on our historical reference, that is a normal expectation.
spk14: Very great. Thank you. Thanks, Matt. Thanks, Matt.
spk11: Thank you. Our next question comes from the line of Alex Nowak with Craig Hallam. Your line is now open.
spk04: Okay, great. Good afternoon, everyone. With all the market challenges, competition, organic U.S. pump growth decline this quarter, do you think the goal to get to a million pump users by 2027 is just too optimistic at this point?
spk14: Alex, I think that you have to take into account the fact that our 2023 guidance does not include any new product activity. So it's, you know, from the start, it's lower than we would anticipate after we have new products on the market. And if you remember, you know, we intend to launch Mobi next year, as well as the G7 and the Abbott integration. So, you know, I think that that's an important consideration as you look forward. I'd also mention that, you know, our growth's not going to be linear. You know, there's going to be periods of moderated growth that we're experiencing right now, followed by, you know, exceptional growth that is close to our new product introductions. And, you know, we recalibrate, you know, because we want to make sure that the near-term expectations are consistent and that we continue to focus on expanding the insulin pump market. And we continue to want to capture competitive share. We have a history of innovation. We have an exciting pipeline. And we've demonstrated the ability to execute. And we have a great team. And we are confident that we can achieve this. I think right now we're going through – a muted spell because we haven't got a new product on the market at this point in time. And there are some challenging economic conditions out there. I think next year will be very different.
spk04: I understood. And maybe taking those comments, but then applying it to the profit side. I mean, you know, going into this year, there's a pretty healthy EBITDA level to start off. And we've seen increased investment. We've seen the revenue issues that definitely hit the EBITDA gains. So I guess going into next year and you're thinking about spend, you're thinking about that investment, do you need to keep those investments up or do you expect more of those incremental revenues from new products to start to flow to profit and start to slow that investment line?
spk01: Sure. Thanks for the question on that. It's something that we talk about every day. And we believe that we're making the right investments today in what's critical to our long-term future. particularly R&D, as it will drive the top line. And I would say second to that are customer service operations to make sure we can keep that high level of customer satisfaction and the best customer experience that patients can have. And I think that's coming through in our renewal accomplishments and that we continue to keep people in renewing at a high rate. And so that's something we'll think about as we go forward. You know, even in a period of moderated growth, We need to think about what those investments are and how they tie to the long-term future. So we'll be conscious of that, and we'll be very closely monitoring and being very prudent about where our spending goes. And so as we get closer to our year-end earnings call, we'll give more color on what I would say the profitability targets are for next year, but we will keep investing in those critical areas.
spk04: Okay. Thank you for the update. Sure. Thank you, Allison.
spk11: Thank you. Our next question comes from the line of Jason Bedford with Raymond James. Your line is now open.
spk06: Hi. Good afternoon. Just, I guess, a couple for me. You know, 22 looks like it'll come in over $50 million lower than your initial expectations. And I appreciate kind of the dynamics and the pressures you outline there. But when you look back, what played out differently here? I'm still struggling a bit with this.
spk14: I mean, I think the thing that we didn't anticipate when we originally set guidance, Jason, was the macro factors that we saw coming in the latter part of the second quarter. Coming into the year, we definitely were anticipating the COVID pressures. We were definitely anticipating the competitive pressures. But I think that the economic environment changed dramatically, and I think people became a lot more sensitive to it. And, you know, our sales force began seeing that in conversations that they were having with potential customers. And, you know, we continue to hear it now. We meet with our sales organization on a routine basis, and they are, you know, continuing to hear caution from people who are considering making investments right now. And I think that's just – it's reflective of just, I think, a more cautious outlook that people have with the current financial situations.
spk06: And your comfort that it's more macro, is it the fact that there's still kind of extended payment plans that are being utilized like there was in 2Q?
spk14: Well, I think we wanted to make that more available, make people more aware that it was available. I mean, that's certainly something that we did once we started hearing about these pressures. And, you know, again, we've seen a great deal of interest, and we've heard a lot of very positive accolades about the program so far, but it's a little early to really talk about the uptake that we're experiencing with it so far. But we think this is the right approach. It's a flexible program, and we really do work with the individuals to try to do something that they can handle financially.
spk06: And have you seen any change in attrition?
spk14: Absolutely not. In fact, that's one of the things that's what we've seen. As we've talked about, we've seen great growth and renewals. And we have a lot of mechanisms out there to actually look at attrition. We have, you know, we have iOS and Android mobile apps that wirelessly update the clouds with current data. And we look at that, and we don't see attrition there. We also have a great sales organization who has very close connections with our customers, and we don't see attrition there. We have people who have tried it, but they have come back to the tandem product and technology. And we think that, you know, I think that the battleground really is on the new starts, and that's where our focus is.
spk11: Thank you. Our next question comes from the line of Jeff Johnson with Baird. Your line is now open.
spk12: Thank you. Good afternoon, guys. Two maybe just follow-up here for me. Lee, first off, I just want to make sure I understand this eight-week comment on the international inventory. So, I mean, is the math as simple as next year if we think new pump sales in international markets would have grown 20%? Then we subtract off like 15 points of growth, eight weeks over 52 weeks is like 15%. So then just assume there's like a 15 point headwind to international growth next year. Is that how the math kind of works? And does it all fall into next year? Thanks.
spk01: Yeah, you know, I think I'm going to frame it a little bit different way, but we're going to get to the same point here. If you think about it, first of all, I should point out this is just for our European markets, which represent about 70 to 75% of our sales outside the U.S. So if you think about what you would consider a run rate on a monthly basis, we could be shy one to two months of sales for that percent of our OUS market. It will start here in the fourth quarter, and it will be still impactful in the first half of next year. But you're right to think about it, you know, as impacting the growth rate for next year. But again, as I always say, not indicative of the true customer demand, this is And this is why it's so important for us to shift to the European distribution center is that we want to have a better or closer alignment to what our shipments look like to what our real demand is. And so we just need to work through this phase-in period, you know, up through the middle of next year, and then it should be more reflective.
spk12: All right, that's helpful. And then, John, I'm going to come back to one question just on timing of kind of the shift or the slowdown. It's a question I'm getting from investors tonight, and I frankly still don't know how to answer it. And it's, you know, you were at our conference September 12th, and the words you used were momentum has returned to the business. And, you know, I guess I'm trying to figure out what is your visibility on your U.S. sales? Does that take a couple weeks to filter up? Had September sales already started to slow and you just hadn't gotten a fresh report? Or, you know, how does from September 12th to the end of the quarter we see this big of a shift in kind of the U.S. dynamics? Thanks.
spk14: Yeah, I mean, I think that we have visibility to the sales in September. And as I said, you know, we had a strong month of August. And as we began to enter, it just sort of began to tail off. You know, and I think that's just the best way to describe it. You know, it began to tail off, and it was weaker than we anticipated. Typically, we see it accelerate. And, you know, once we see that momentum shift, it begins to, it's additive and it continues to grow. And, you know, again, in this particular case here, it started to tail off. But like Lee said, when you look at October, October is pretty much in line with what we saw in August. And I think we've comprehended the fourth quarter now in our revenue guidance.
spk12: Okay, I get that, but if it began to tail off, I guess I still don't understand why you used the word momentum has returned on September 12th. I mean, it just seems to me, you know, obviously that has caught quite a few people by surprise today, and, you know, it's not going to be good for your stock tomorrow. So I guess I'm just trying to still understand, you know, that tail off versus the comments you used.
spk14: Yeah, I would say that as of September 12th, we still had confidence in the numbers. It really was that it tailed off in the latter half of the month.
spk12: All right. Thank you. Yep.
spk11: Thank you. Our next question comes from the line of Joanne Walsh with Citi. Your line is now open.
spk08: Good evening. It's actually Anthony on for Joanne. Thanks for taking our questions. Just one. I guess, can you just flesh out more? some of the puts and takes on margins in 2023 and maybe talk about how you're thinking about the first half versus second half dynamic. Thank you.
spk01: Sure. So thanks, Anthony. And you said margins for 2023, which we haven't given much color to at this point, if I heard you correctly. But I can talk to you about some of the puts and takes to think about, you know, what's happening now and how to think about the longer term. And so from a gross margin perspective, In order to achieve our 65% goal in five years, it's really driven by new products. And so Moby alone, the whole system, when it gets to scale, will drive more than half of that gross margin expansion from where we are today. I should also add that right now we have about two points of additional pressure that's just coming from the supply chain challenges. And it mostly points to higher cost inventory that we purchased earlier this year. We should have worked through that by middle of next year, so it will continue to plague us a little bit in 2023. The other factors that drive gross margin, I would say smaller in nature, but still beneficial would be just our normal lean initiatives, manufacturing efficiencies. We get continued price improvement as we look ahead, but the real driver will come from new products. And I should have also mentioned from our infusion set technology as we looked at that, and again, another example of a new product that we expect to have meaningful gross margin contribution.
spk08: Great. Thank you.
spk11: Thank you. Our next question comes from the line of Travis Steed with Bank of America. Your line is now open.
spk05: Hey, thanks for taking the question. I just want to follow up a little bit more on the margin commentary for 2023. I know there's a lot of variability on margins, which is important right now. And new starts drive a big percentage of your gross margin mix. So I don't know if you'd be willing to commit to like a couple things, which would be like, can gross margins still be above 50% in an environment where you've got 11% to 12% revenue growth? And EBITDA margins, can those still be positive, 7% to 8%? year, do those still stay positive for next year, or are they likely to go negative?
spk01: I'm going to first just be very clear that we're not giving a lot of color on the rest of the P&L for next year at this point. We wanted to make sure, most importantly, that we got right set on the sales line. But just thinking about some of those puts and takes, I will point out, I wouldn't say it's just new pumpers that drive the margin. It's all pumpers. And one important fact about 2023 is how much larger the renewal opportunity will be for us that will continue to drive pump sales. And so if you think about it, last year there were about 17,000 new opportunities in the U.S. This year that climbed to about 30,000, and next year it's going to grow almost 80%. So if you think about that, we still have a healthy opportunity from renewals alone that will help with some of the pressures that we're seeing on the new patient side of things.
spk05: Okay, and I guess my follow-up was actually on the renewals. I don't know if you gave a percentage this quarter, but kind of what you've got assumed in 11% to 12%, if you're starting to see any competitive pressure on renewals as those people come up, or if you've baked any of the competitive pressure on the renewal opportunity in that 11% to 12%. And then if you still expect, historically it's been 50-50 MDI versus competitive wins. If you think that mix is going to stay the same, or you see that shifting in 2023?
spk01: I'm sure so with renewals first, The last, I think, metric we gave about progress other than just growth rates was when we exited 2021 with those opportunities that had already come to the table in that year alone, we'd already renewed about half of them. And as we look at progress this year with new opportunities coming to market, I would say we're renewing more at a faster clip. So that renewal rate is actually improving each quarter as we move along. So when you think to 2023, that bodes very well for an opportunity base that's going to exceed 50,000 people. So I think that, and I should make a strong point, even with all these challenging dynamics that we've seen, it has not impacted our renewal progress. And like I said, we've actually improved it over the last few quarters. So we feel very strong about that. And again, it goes back to customer loyalty. how much they love the pump, how much they love control IQ, and people don't want to leave. And so we feel very good about that piece of it. When you think about the new customer dynamics, you know, unusual environment, but I'll give commentary, I guess, on what I've been saying all along, which is we've always expected the competitive conversion opportunity to start to go down over time. Probably will start a little bit next year just because of the sheer number of opportunities won't be as large as it has been, you know, up to now. But we do still expect to attract new pumpers, and particularly with our product launches next year, where we're seeing more moderated growth in those now, we expect to be back to what we would call more exceptional growth after those launches.
spk05: Okay, great. Thanks for taking the questions. Yep, thank you.
spk11: Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from Josh Jennings with Cowan. Your line is now open.
spk13: Hi, good evening. Thanks for taking the questions. I wanted to just, I was hoping to get some more details on the customer benefit programs, and do these programs help patients finance the pump, or is it the whole system, the pump, the CGM, the infusion sets, and the cartridges? And the reason I ask is, just one of the better and similar things parents do for a patient is deductible. If they only are helping access to the pump, can these patients kind of disassociate the CGM and the T1X2 and get their CGMs through the pharmacy channel to not impact their medical deductible? Sorry for the granular question, but just wanted to just better understand the dynamics you guys are putting in play for these patients to help them get access.
spk01: Sure. Thanks for the question, Josh. One thing about healthcare, and you mentioned deductibles in pharmacy versus medical, it varies so much from plan to plan. In some plans it's that way, in some plans it's a deductible for the whole thing, no matter what your channel is. And so, first of all, I think that there's a complexity there. Secondly, one thing I would highlight is that when a customer obtains their CGM, it's not through us. So they work through Dexcom for that in whatever channel Dexcom offers to them, depending, again, on their plan as well. So the plan that we offer to patients is focused on the pump purchase, and it's all about what their coinsurance or deductible amount that they'll do is when they buy the pump. And we have made that program very flexible. offering payments as low as $50 a month and terms as long as four years. And so we hope that we can help patients who are having trouble, you know, making those decisions on when they can move forward and help them through any financial concerns and also to some extent equalize to the other business models that might be easier to digest in an environment like this.
spk13: Thank you. And so just to follow up, are the patient accesses a tandem pump through There is one of these benefit programs. Is there deductible remain intact or do you? Is there a financing where they get reimbursed? The deductible that is used for the current year and then just the follow up would be just on terms of 2023. Just thinking about the potential for Medtronic to launch the 780 G. Any assumptions there baked into the kind of high level commentary for next year? Thanks.
spk01: Sure, I'll take the question on the deductible so you can think about it as the regular process through insurance. which dictates how much they owe. Separate from that, when they come to us and they say they owe, call it $1,000, we will finance that for them. And so it doesn't change at all how it's being processed through the insurance plan. It's just more about when they need to write the check to us, how we help them put it into on an installment basis.
spk14: And Josh, relative to the next potential competitive product on the market, I think that, you know, we're competing effectively against it today in the OUS countries in which we operate. And so I think that we look at it as an incremental improvement to the algorithm on the product, but it's still the same product. So, you know, we feel comfortable. We will be effective competing against it. Thanks so much. Yep.
spk11: Thanks, Josh. Thank you. Our next question comes from the line of Matthew Blackman with Stifel. Your line is now open.
spk00: Good afternoon, everybody. Thanks for taking my questions. Just a question on the Tandem Choice. You've offered this sort of upgrade pathway in the past. Get a sense of what uptake was when you first offered it. I don't know if there's a way to frame it, 10% of patients eligible that did it or 20%. Just some way to frame that opportunity, and then just one quick follow-up after that.
spk01: Sure. Thanks, Matt. We haven't ever quantified it publicly, but I can say it's a very low percentage of uptake. The most important part is that we have something that helps comfort people that they have that opportunity if they choose. And I think one major difference this time, too, is when you look back to what we offered before, it truly wasn't upgrade. People were moving from a standard pump to a pump that had the updatable software. So there was a significant difference in that versus With Moby, it's a choice. It's a choice between two excellent platforms offering the same control IQ algorithm. It's just a matter of how they want to see their data or interact with the pump. And so it'll be interesting to see about it, but the uptake or the percentage has always been very low for us in the past.
spk00: Got it. And then on Moby, John, I think you mentioned you were refining, taking some time to refine some of the features on Moby. Did I hear that correctly? And do you think you can give us some flavor of what you're playing with. And if that's the case, would these be refinements that you would file for after you get the original approval? I'm just trying to help me understand what you're doing with MOBI, some of the comments that you made.
spk14: Yeah, there's no changes that are going to require additional filings. I mean, the work we're doing right now is really original. a submission and a clearance. You know, it's increasingly focused on manufacturing and things like that. But, you know, there's this technical debt that we're working to resolve between now and the actual introduction of the product. And that's essentially what we're doing.
spk00: Got it. Okay. Appreciate it. Thank you. Yep.
spk14: Thanks, Ben.
spk11: Thank you. And I'm currently showing no further questions at this time. This does conclude today's conference call. Thank you all for your participation. You may now disconnect.
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