Tandem Diabetes Care, Inc. (TNDM) Earnings Call Transcript & Summary

All right. Good morning, everybody. Thanks for joining us. It's Matt O'Brien from Piper's med-tech research team on here with you. Thanks for joining our Annual Diabetes Day. Really excited to have Tandem Diabetes on with us. From the company, we've got John Sheridan, President and Chief Executive Officer; Liz Gasser, who is Executive Vice President and Chief Strategy Officer; as well as Leigh Vosseller, who is Executive Vice President and Chief Financial Officer; and Susan, who is in the background there as well. Typical format of the call. I'm going to be asking them some questions. And then, certainly, if you have questions, send them in. There's a Q&A feature at the bottom of the Zoom here. It's that, or just e-mail me at [email protected]. We have about 45 minutes here to run through these questions. So again, if you have them, please do send them over. Team Tandem, thanks so much for the time this morning.

Absolutely. It's good to see you, Matt.

So let's -- we'll get into this topic here in a second. But I think it's probably helpful just to start off with the topic that's come up recently, which is some proposed consolidation in this space. For people on the call, I know I have been chasing a bunch about this, but just for folks on the call, talk about the arrangement that you have with Dexcom on the sensor side of things?

Sure. Well -- I mean, first of all, we have a -- I mean, irrespective of what's going on and whether it's true or not, we've got a great relationship with Dexcom, and we have for many years. We've been working with them on the integration of several generations of sensors. And now, of course, we're working on the G7. And right now, we've got an agreement in place. It's a 5-year agreement. And we expect that to be an important integration in our products. And as you know, we've got 350,000 people today who are using our product and the majority of them are using Dexcom sensors. And so I think as we continue to grow and expand OUS, we anticipate that we're going to continue to use more and more Dexcom sensors and continue to build the relationship between both companies.

Got it. And Plus has already come in, which I was going to ask about as well. But the TypeZero algorithm, doesn't Dexcom own that? If there's any kind of change in Control with Dexcom or if they're -- they own another pump company, what happens to that algorithm?

Yes. Well, we were working with TypeZero now since 2016, and we actually signed the agreement with TypeZero before they were acquired by Dexcom. I think that might have been in '17 or '18. And the agreement we have, now even with Dexcom, is the license lasts in perpetuity. So we essentially have it forever. And the difference today is that -- in 2016, the reason we actually licensed the algorithm to begin with is because we didn't have the capability in-house to develop it ourselves. But over the last 6 years, we've added a strong team of algorithm developers. We've been working on developing our next-generation systems. We've been working with Dexcom to do that and other institutions. And -- I mean, the good news is today we have control of what we're doing going forward. And we anticipate making meaningful improvements to the algorithm over time.

Okay. Thanks for that, John. And just back to the relationship with Dexcom. Is it a formal contract that you have with them?

For the G7?

Yes, G6 and G7.

Yes, we do in both cases. And I can't remember the terms of the G6 agreement. I'm sure it's out there. But the G7 agreement at least is 5 years from the date we actually start to ship the product.

Okay. Got it. And just talk maybe a little bit about the community as well, the diabetes community. Having access to multiple options and how important that is to both endocrinologists, educators and the patients themselves. The likelihood that Dexcom, in my mind, shuts -- if they were to buy another pump company, it's likely that they shut you off from working with them, in my opinion, is very low. I just would love to hear your thoughts on what that would do to the clinical community or the patient population if they were to choose to go that direction? Or -- I don't think -- just your thoughts on it.

I mean I agree with you. I don't think that's likely at all. I mean, when you consider the amount of revenue that we generate for Dexcom, it's significant and it's growing. And so I just anticipate that, that's not even close to happening. But I think our interest really is providing choice to the diabetes community. We believe that there are people out there that prefer the Dexcom sensor, and there clearly are people out there that prefer the Abbott sensor. And we want to have nothing to do with the competitive dynamics between those 2 companies, but we do believe that providing choice is important. And so that's why we're working with both. And I think that if other meaningful participants come to market in the sensor arena, where they've got meaningful market share, they've got leading technology, there's no reason why we wouldn't partner with them either. Because I think that -- again, we want to provide products that address the different segments of the diabetes community. And that's why we are developing a portfolio of products. And that's why we'll also have the 2 sensors available on all of our products.

Okay. Okay. And John, I don't know if you're comfortable talking about this or not. Just -- when you -- if you do end up working with Abbott in this -- on the Libre side of things, how functional does that sensor need to be? And what I'm really getting to is the vitamin C issue. I mean, do you need to have a product that can manage through the vitamin C issue in order to integrate with the Abbott technology?

Yes. I mean I think that the important designation that Abbott needs to achieve is the iCGM designation. And while they have that today, they need to also address the vitamin C issue, which I know they're working on with the FDA right now, and I know that they're confident they're going to have that taken care of. So once you have the iCGM designation, it means that the sensor meets the communication requirements, the accuracy requirements and all of the necessary features and capabilities that are needed to work in an AID system. So I think the one issue they've got to deal with is vitamin C. And I think once they've achieved that, then we would anticipate being able to integrate the system without any of the regulatory hurdles that come along with it because it's iCGM and we'll have a base pump. And so in both cases, we'll use the interoperable pathway to move forward.

Okay. Got it. All right. So let's focus a little bit more -- outside of some of these numbers on the consolidation side of things. Talk about your business. A big pushback coming out of Q1 was the -- if you adjust for the renewals in the quarter in the U.S., which I'm not really sure why you'd adjust for them, but let's just do it for the sake of this question. In your pump business, your pump shipments didn't grow at the time. I think it was kind of mid to upper single digits. First of all, is that math correct?

Yes, I would agree with the math. But I think what's important to understand is the whole environment at this time. And so if I could go back to last year in the first quarter, even in the first half of last year, it was a much different environment. In fact, it felt like we were coming out of COVID, if everyone can remember a time where it seemed so positive. Offices were opening up. People were out and about. Physicians were seeing patients more in person than just remote. And so it's a tough comp when you look year-over-year, because for the last 3 quarters what we've seen is more pressure or challenges from the COVID environment. And that's particularly come about as the new variants have emerged. And we are hearing everyone talk about staffing shortages. So if you ask our field reps today, their #1 challenge is that the physician offices are short-staffed. And it's really the folks who help get people through the pipeline or the funnel, if you will. So when you -- if you're a physician and you're trying to priority rank, like: what can you get done most quickly? You'll start with renewal patients. They're the easiest to transition from a Tandem pump to a Tandem pump. And you'll prioritize those potentially over other patients that are new to pump therapy or new to Tandem. And so we've been seeing that dynamic for a few quarters. But frankly, our growth was still strong. We had great growth in Q1, and we expect that we can continue to grow through this, even though we're anticipating we'll have some of those same headwinds in the coming quarters.

Okay. And just to that, anglely -- I mean talk about the comp you had in Q1 of '21 versus Q1 of '22 in the U.S.?

Sure. So I mean, we're looking at Q1 of '22 being a tougher environment from a COVID perspective over a much easier environment last year. And so, last year reflected not only the markets opening up, but a little bit of pent-up demand of coming out of 2020. Just things being more free and flowing more easily and readily. So this year, it's going to be for the first half a little bit more challenging comp. But when we get to the back half, it's going to be an easier comp when we look back to Q3 and Q4.

Got it. And the staffing side, I don't think is something that's going to -- assume go away anytime soon. But is it getting a little bit easier? I mean, I don't know what you commented on specifically. I can't recall out of the Q1 call. But coming out of March and April, getting access to these facilities, has that been easier for you?

I would say it's still the same dynamic. It's a little bit difficult. I guess I would point out that we're still seeing a similar seasonal pattern that we've always seen in the past. So January is your lowest month of the year in terms of pump shipments, and it increases across the year. So we're still seeing that same seasonal pattern, but with the same level of headwind from these COVID pressures as we go into Q2. So for the full year when we thought about our guidance, we factored in that this could continue across 2022. And then we'll just see how things progress in the coming quarters.

Okay. Got it. Got it. And Liz, I'll get to you in just a couple of minutes on the product development side. But just a couple more coming out of Q1 that I just wanted to cover. But Insulet did note that they did see a bigger push from patients to get on DASH to get to Omnipod 5 eventually whenever it's fully available. Is that a headwind that you saw in the quarter where there's some folks that kind of slowed down their typical pattern of getting on t:slim because of the newer product that's on the market now?

We're not really seeing or hearing that. I mean when it goes back to our field reps, they're talking more about the COVID challenges. And that's not something that's been a pressure point. And I think it's important to keep in mind that we are attracting different segments of the market. So people who were likely to purchase a tubed pump aren't going to pause and wait for a tubeless pump and vice versa. So they may -- while they're maybe pausing in the market, I would expect that to be people who were going to go with a tubeless pump regardless. So at this point, we haven't really heard much in the way of that having any affect on our business.

Got it. Got it. Okay. I appreciate that. Another thing that I did hear coming out of Q1 as well was just people wanted more on the share capture side for Medtronic given their internal challenges. First of all, how would you respond to that? And secondly, did you get a sense that there's just a bigger group than normal of Medtronic users that have just kind of thrown up their hands and said "I have had enough of these guys" and they're getting ready to switch to another product?

What we've been seeing is, as our MDI population has continued to move at a faster clip over, the Medtronic conversions have increased at that same rate. So we're continuing to see a traction from Medtronic patients. It's been growing each quarter. It's not necessarily that there's anything in the environment that's changed that would make people accelerate or move more quickly. A lot of it is just tied to warranty periods and when their warranties expire.

Got it. Got it. So let me hit a couple of these questions that have come through. One actually overlaps with another one that I had. But one comment -- or one question is, previously the company had said they could get a G7 or Libre 3 integrated product very quickly after approval. Now John is saying 1 to 2 quarters, because of cybersecurity is something they've learned that is making this integration process likely to take longer.

I would say 1 to 2 quarters is pretty quickly. I think I -- I guess I was a little bit more specific, but I think I mean the same as I said before. And you know what? This is just the way it works. There's nothing that has changed. As I mentioned, Dexcom has submitted the independent sensor for review by the FDA. In order for it to work into an AID system, there's still work that both companies have to do to integrate it. And there's communication protocols or cybersecurity issues. And so we're working on developing that design today. And I think that, as I said, as soon as Dexcom and Abbott receive approval from the FDA to use these products, we expect that it will take us a quarter or 2 afterwards to have the product in the market. So this is just normal course of business. It's actually much faster than it was before. I think back in the G5 time frame -- that was the last product that wasn't interoperable. It took us over a year to implement that just because of all the regulatory hurdles. So G6 on the other hand, I think we implemented that in just a little bit more than a quarter. So just this -- just a normal course of business.

Okay. Okay. So I mean -- so John, I mean, basically, we're just -- there is really no change to what you've been saying. Nothing learned that's materially different.

Exactly.

It has been just that the timing is essentially faster than before.

That's right. Yes.

Okay. A couple more questions. So can you talk about the OUS visibility on the distributor reordering patterns and the lumpiness, and considerations for Q2 versus the second half of the year? How do we think about that?

Sure. So I'll start by saying our distributors have expressed that they're having the same experiences in the field as we're having here in the U.S., which is access to physicians and patients is still somewhat challenging as they're dealing with the COVID headwinds. But it's more complicated for our OUS distributors because they also have to deal with the supply chain challenges, and that's impacting the timing of when they receive their product, how they order their product and the cadence of those orders. And so that's something we've experienced for the last 4 quarters. And fortunately what's great news is that the underlying demand that they're seeing is steady and strong. So they've reported back, particularly with Control-IQ, it's demand that they haven't seen before because they've never had a product to sell like this. And so the growth is great. It's just a matter of, as they deal with supply chain challenges and the overall environment, that's impacting the timing of when we get to recognize the revenue.

Got it. Got it. Okay. And then last question is on mobile bolus. And I'm not sure I fully agree with this question, so don't shoot the messenger here. But mobile bolus that's rolling out now seems to be going slowly, which again I'm not sure I agree with. But is there some cloud infrastructure that Tandem needs to build out before this can be more meaningfully adopted? Why would this be a careful rollout if people just move from bolus on device to on phone?

Well, I think it's a good question. I think that it's a careful rollout. It's a very complicated product when you consider that it's a pump that's talking to a phone that's talking to the cloud. The cloud infrastructure exists. And what's going to happen here is once we kind of put our foot on the gas, which is not far off, we're going to go from basically hundreds of people using it to hundreds of thousands of people using it. And so we really just want to make sure that we test the infrastructure and to be sure it's just working effectively. We do not want to create a customer service issue. We want this experience to be very, very positive. And so I think this really has to do with the scale of this. I mean, right now, there's 90,000-plus people using our mobile app, the t:connect mobile app. And we anticipate that once the mobile bolus feature is available, everybody who has Control-IQ will want to update the pump for this feature. And there's over 100,000 people -- or over 200,000 people using it. So it's just a cautious approach. Again, we really want to maintain a positive experience with our customers. And it's not that far off before we really will step on the gas. And once we do, I mean, we're going to make it available to a large portion of these in a short -- a large portion of our customers in a short period of time.

Got it. But nothing outside of the typical rollout…

I mean, again, we got approval late February. And since then, we've been working just to train our internal people, to train physicians and their staff. We're actually testing it in a smaller population right now. And in the not-too-distant future, we're going to basically step on the gas.

Okay. The questions keep rolling in here. Can you talk about the dynamic of going direct and what it means for pricing?

Sure. So that's something that has been an initiative, I would say, for many years. It's just it takes many years to get moving in the payers community many times and actually see it come to fruition. And we're starting to see that now. In the first quarter, in particular, our direct business in the U.S. grew to about 35% of our sales versus about 32% a year ago. And so what we saw was a nice step-up in the pump price. And what's been happening that's different really in the last 3 years as we have the advanced algorithms that we're able to talk with the payers about, we've gotten more market share. So we're a bigger player in the space. And as we continue to produce data for them that shows in their own subscriber population the types of outcomes and benefits that their patients are receiving, it's really helping to move the needle in terms of getting more contracts, and then us pushing more volume through those contracts. And so it's been one of the levers that we've talked about for many years now in terms of our gross margin expansion. And so I'm excited that it's actually starting to be evident. And it's something that we'll continue to push the needle on that in the coming years.

Okay. And Leigh -- I mean, on the reimbursement side, are you having any discussions with payers as far as potentially providing a little bit more payment because of the outcomes you're getting for patients? I know it's been something that's talked about a little bit, but I just want to know if there's been any update there?

Absolutely. It's the #1 topic of conversation. And so 2 things: we talk about the algorithm and with those benefits increasing price. But also in this inflationary environment, we're having those conversations as well. What's unfortunate -- back to my earlier comment -- in the payer community, things tend to move very slowly. But where we are today is in a much better position than where we've ever been before, and that we're talking to people at different levels within the organization and making more progress.

Okay. Okay. So probably no update there, though, this year. Is that fair?

Nothing specific. I think what you'll see is you'll continue to see modest incremental benefit from price improvement. Much like what we've talked about on the cost side from -- leverage from having increased volumes and just natural cost improvements, you'll see modest benefit on the margin in the coming years.

Okay. Okay. Fingers crossed there. So back to mobile bolus. First of all, what's been the reaction among -- I don't think I'm going to have any more of my own questions today, by the way. I waiting for them to come in. But -- so just back to mobile bolus. Is there anything -- like any issues that you've seen that you should call out here, especially on the product safety side? And then what has been the reaction among clinicians and patients to that weak point?

No, no issues. I mean, we've -- again, we've tested this product thoroughly. We work closely with the FDA on defining many, many different safety protocols and mechanisms. So nothing at all that's going on with regards to there. And I would say that it's been overwhelmingly positive, surprisingly positive. I think that -- we intended this to be a device that's -- it's going to really help drive retention. And I would say that people have described it as life-changing, just as important as Control-IQ to them. And I think it's just because, again, the convenience and the discretion that comes along with just being able to use your mobile phone to do things that you're used to just having to step away, maybe going into the bathroom to take your pump out or things like that. It's just been, again, life-changing to people. So we're very excited to get it out there. We know it's going to have a meaningful, very positive impact on people who are using it, who will be using it. And the people who are using it today absolutely love it. And it's just -- that's about the best way to say it.

Okay. Okay. A few more questions coming in here. On the international side, why would you be impacted by supply chain? You're only shipping less than 10,000 pumps per quarter. These are small lightweight products that could be FedExed? Why would you be impacted on the supply chain side?

It really comes down to as -- the distributors, the dynamic they're trying to create. So what they would like to do is have the lowest cost to transfer the product, and they're trying to get on a cadence where they can always order by sea freight. And what happens is with all the logistics challenges in the world, the product doesn't always get delivered on time or as anticipated. So sometimes they have to react and they'll have to order and pay more to have it sent over on a plane. And so it's -- that's an example of the types of dynamics that they are managing through. And so even with -- and with the COVID waves to the timing of which they get product on patients, sometimes is different than a steady cadence. And so this all factors into the lumpiness that we're seeing in the ordering patterns for the international business. And it's likely to stay this way for another quarter or 2. We're continuing to work with them as much as possible to help smooth out these ordering patterns.

Okay.

Matt, I would just say that when we ship supplies, we load containers full of supplies. I mean it's container loads that are going OUS, not just pallets full of pumps. So it's a large significant amount of material that's being shipped.

Okay. And just to follow up on this, John or Leigh, just -- the next question is, it just seems like you're backing off a little bit on the international strength historically being linked to stocking. Is that the right interpretation? And then, again, what gives you the confidence on the growth internationally in the pump business this year and the next year as well?

I mean the enthusiasm internationally is just as strong as it is in the U.S. We're not backing off at all. It's a larger market. It's twice the size of the U.S. market. It's less penetrated. People really appreciate the technology. Again, the excitement is equivalent to what people have in the United States. We do intend to see it grow more rapidly than the U.S. I'd say there have been these COVID supply chain perturbations that have -- I think we're experiencing these right now. But I think it's a temporary situation and we'll get right through it. I mean, I have a lot of confidence that we're going to see a great deal of growth. When you talk to our distribution partners OUS, they're equally excited and they tell us they haven't seen this much interest in a product ever. And as I said, I think it's going to be a meaningful part of our growth going forward.

Okay. Okay. I appreciate that. So on Mobi, there was a nuance on the call that I think people said you're kind of backing out of the timing of Mobi. And I think it was more to say it's not going to be Q2; it's going to be sometime in the summer still, which is through August. Is that the general time frame we should expect, kind of July and August for filing? And then do we think about approval timing being something like 6 months or 9 months, something like that?

Yes, on the call and in the subsequent discussion, we recognized it wasn't going to be June. And so rather than say summer, we just became more specific and said third quarter. And we're still confident it's going to be the third quarter. Right now -- I mean, we don't have, I think, under review today. But in talking to others who we know that do have products under review by the FDA, we're hearing that people are actually beginning to return back from all of the work they've been doing to support the COVID issues, but it's not back to full strength yet. And in many cases, the people who are coming back are bright and capable, but they're not as experienced on the diabetes products yet. So it's one of those things where once we get the product in and we actually have time to interact with the FDA and see who we have, we'll get a better sense. We're hoping it's going to return to normal, which would be 2 quarters basically to get this thing reviewed. So if we get it in, in the third quarter, we expect it to probably be an early 2023 approval.

Okay. Okay. But it could be more like 9 months too. So it could be probably first half of next year. Is it fair?

I mean, we'll wait and see. And I think as we are able to sort of ascertain how much support we're getting with the FDA, we can even comment more about it when we see that happening.

Got it. Okay. A couple of questions are coming through, which I think we addressed one of them. Specifically, like partnership with Dexcom, is it at rest if the rumored transaction were to materialize, which…?

I don't think so. I don't think at all. I mean, I think -- again, we have a great relationship with that organization. There's no reason just because they're working with somebody else that they would stop working with us. Again, I think they're just as interested as we are in providing choice to the diabetes community, and that's essentially what we're doing. We're both developing innovative products that are going to support the community.

Got it. And then the next question on here, again, I think you addressed already, John. Can you talk about the supply agreement you have in place with Dexcom for G6? And what is the place for G7. I think you said 5 years for G7.

Yes. And I can't remember the exact date, but it's -- but what will probably happen is that Dexcom will transition fully over to G7 before the supply agreement for G6 runs out. And then we'll basically just start producing just G7s in its entirety. There will be a transition period of probably a year or so. But I don't recall the exact specifics of the timing for G6, but I'm sure it's equally as long as the G7 agreement is.

Okay. I appreciate that. This question, I think, is for Liz. And I'm going to bounce around a little bit because I do want to get Liz involved.

Good. Let's get one in there for Liz.

Yes. So how is the development of the patch pump going, disposable patch pump going? And what year specifically do you think you can bring it to market?

Happy to talk to the programs we have in place. We haven't actually been specific or public about the ultimate launch timing for any patch product. I think as we set out on our R&D Day call last December, we have a broadly segmented portfolio that's roughly following a time line that goes Mobi in the near term, improvements to the t:slim X2 platform past that, Mobi Tubeless sits after that as a consumable adder to the Mobi product. And then we're looking at what it will take to bring potentially a disposable patch to market past that. And so as you start to play that out, the forecast period goes through 2027 right now. And so you can logically sequence those deliverable on that time line. I think in the near term -- obviously, there's 2 main R&D programs in there, both of which are very different from each other. Tubeless Mobi is very much a -- it's a consumable play. It's a tubeless infusion site with an adapted cartridge for the Mobi product. And the primary thinking there is really extending the reach of the Mobi device, which is obviously a much smaller form factor, very discrete pump implementation. And making it accessible to people who want the option to have a tubeless wear mode, but also maybe want an option to be tubed when it suits them, right? And so that's a very specific consumables play there. And that really is an exercise in running out the development of that infusion set and adapting the cartridge. There is no new and different technical challenges there. We understand the technical work, the lift that's required to do it and how it fits with our core product. For the patch pump, obviously, that's a bit different from what we've done historically. I think from our perspective, our real focus right now is engaging on -- engaging with users very actively on what would be a meaningfully differentiated product for them. We wouldn't want to bring to market anything that wasn't a needle mover for our community of pump users. And so that one, we're not going to be specific on timing and we're going to just keep working the R&D line there with -- making sure we can deliver the best product possible.

Okay. And Liz, forgive this question. To some extent, I don't know if I deserve to be forgiven entirely. But just we've seen a lot of other companies try here on the patch side and fail. What have you learned from those failures in the past? And what gives you confidence on the patch side of things that you can get it right, whereas Insulet has done a phenomenal job and a lot of big companies with a lot of cash have not?

Yes, it's a fair question and I'm not going to hold it against you. I mean, end of the day, you've got a lot of variables here, right? Because the tendency, I think when we talk about these road maps, to discount the product itself, right? You say patch pump and you chalk it up to a form factor and you move on to all of the other pieces. The users of our products have to wear this on their body, right? It is something that is incredibly personal. And so there are large design challenges in getting to a form factor that somebody wants to wear. And I think it's fair to say that of the spectrum of patch pumps that have been brought to market over the years, not everyone gets that right. But then, of course, there's complexity of the pump itself. There's the manufacturing build-out. There's reaching the right price points. There's channel. There's all other things that come along with being in this industry. I think as a leading pump maker ourselves, we'd like to think that we're reasonably well positioned to understand the dimensions of bringing a regulated pump product to market, which, again, many of the entrants over the years have had a tendency to underestimate that. But what I will say, Matt -- and part of the reason I think we're being a little cautious in how we speak about the product and how we want to implement, is that there are many design choices ahead of us. There's a long time line ahead of us here. And we may not -- the products we ultimately deliver may not be what everyone has in their mind today as what a patch pump is, okay? We have choices to make on degree of disposability. We have choices to make on form factor. We've got choices to make on capacity. And so I think we'd like to hold open the prospects that we can adapt those to deliver a truly novel product and that we have the capability, skills and experience to do it.

Got it.

I think that's well said, Liz. I would just add that we've basically miniaturized the t:slim into Mobi. It's basically half the size, not too far off what the size of the current patch devices are in the marketplace. So we know how to miniaturize the products. And I think we can continue to do that. We have an organization that has a great deal of expertise in pumping technologies and also in automation. We have fully automated lines today. And we have a lot of people, a lot of engineers in the organization that know how to develop automated systems. And so I think that those are the 2 challenges: that's miniaturization and automation. And we have a great deal of expertise in the organization to do that. So I have a lot of confidence in our team to develop these products going forward.

Got it. Okay. All right. I appreciate that. And here -- there's a question here that just came in that you're going to have to address on the fly here because I'm sure you haven't thought about this or haven't gotten this question before. But -- so how do you compete with a theoretical integrated single unit disposable product that both senses and delivers AID in attached pump. And what they're asking is if Insulet and Dexcom can get together, put the CGM on to the pod, how do you compete with that?

I mean, I think that there's the likelihood -- I mean, I think that we are going to innovate as well. It's not just that -- it's not just going to be Insulet and Dexcom who innovate. Tandem is going to innovate like we have. We've been innovating faster than our competitors. And when you look at our pipeline, I think we have a very exciting pipeline. I mean we're not going to talk about everything that we're doing, but we also have other partners that we're working with as well, not just Dexcom. So I think that it's stay tuned. What you're talking about right here, an integrated device, is highly complex. There are people out there that have tried to do this unsuccessfully. But it is something that I think if we -- if somebody were to develop that product, I'm sure it would be very exciting and very appealing to the community. But I think that -- again, we're innovating also and I think we've got partners that we can work with, including Dexcom, to develop great products going forward.

Okay. And just -- I don't know if somehow Pod and Dexcom have cracked the code. But historically, you can't be within 3 inches of the CGM with the insulin delivery. So that's a big issue that they run into historically, right?

Yes, that's right. And that's why -- there's companies out there today that have looked at infusion sites and sensors in the same device also, and they've really struggled to do that and make it, as Liz was describing, something that people actually want to wear that's small, compact and actually has a great experience. So it's a complex challenge and people are trying to do it. And I'm sure at some point, somebody will crack the code. But like I said, we're not sitting back and waiting for this to happen. We're innovating also.

Okay.

Just one thing I would add. On top of the technical challenge around sensing and delivering, you also have disparate wear times here right now as well and a capacity issue to consider. We have 14-day sensors on market. That's great. And it's talking across a gap to a pump. Pumps in general have a defined capacity that for many -- for most -- almost all users would not last 14 days, right? Sites aren't certified for 14 days. And the idea of integrating that into a single product, there's some improbabilities to it, but at least some very meaningful challenges to overcome to make that real.

Yes. Very good point. Appreciate that. Liz, is there a specific IP that needs to expire around the Insulet patch pump before you can enter the market with an alternative path pump?

I don't think it's helpful going to the IP debate here. I think it's suffice to say we're all conscious of what we're capable of and we're all conscious of the landscape. And rest assured that anything we develop will be backed by the strength of our own IP.

Okay. Okay. I appreciate that. A couple of more questions that have come in here. First one is, it seems like Dexcom continues to value open source and partnering. Does Abbott share a similar approach? Or could Abbott vertically integrate? And what does the contract with Abbott look like?

Well -- I mean, I can't speak directly for Abbott, but I have just observed that they have other partnerships besides ours. They're working with Bigfoot, of course. And there's other companies, I think, that they've specified as well that are partners to them. So I think that both companies, both Abbott and Dexcom want to have other partners to take advantage of providing an avenue to sell more sensors. And I think that makes sense for them both to do it and I think that they are. And then as far as the agreement. The agreement with Abbott is comparable in complexity and size and timing that the agreement is with Dexcom.

Okay. Okay. Appreciate that. A question for Leigh. Are there any initiatives to drive a step function improvement in gross or operating margins? Or is it all driven by volume over time? You've done an awesome job with gross margin in the past. But in this current market environment, everybody is paying attention to the P&L versus growth at all cost.

Sure. So the 2 levers I mentioned earlier that are going to be more incremental over the years will be from ASP and then from leverage as we grow volumes, and just the incremental cost improvements we gain every year through our own lean initiatives. But the biggest step change functions will come from the new products. So Mobi's going to be our great first example of that. The manufacturing cost of Mobi is estimated to be 15% to 20% lower than t:sim X2. And so with every product that we're designing, we're really focused, obviously, on cost benefit over the prior products. And so as each product comes to market, we will continue to see gross margin improvement. That's where the step changes will come from.

Okay. Okay. So John, back to Mobi. You said that you think that, that product is going to help you unlock patients you've hadn't had access to in the past. And I'm not sure if that means Insulet patients or others. But why is Mobi this product that can help you get access to these new tranche of patients that you haven't been able to sell into before?

Well, we've done quite a bit of market research on Mobi. And I think we've discussed this in the past. But the way we've done it is we've compared our products to the existing competition, the competition that's going to be around next year, for instance. And we've looked at how does t:slim compete -- in fact, how does t:slim compete in that group to begin with. And it did quite well. And then we looked at Mobi in that same group without t:slim and it did quite well also. It's when we put both of them side-by-side in this group that we saw the greatest preference share increase. So we -- basically, there are people out there that are interested in both products. And I mean, Liz, I think you can probably add a little bit to this as well.

Yes, happy to. And that's exactly right. When you offer 1 or 3, you tend to end up with 1/3 of the market. When you offer 2 on 4, our testing shows that the combination of the 2 products clears 50% of preference share in the groups we tested with. And so why is that? Well, at the end of the day, if you think about the population as being segmented with different need stages, then it starts to make a bit more sense, right? There's a capacity difference between the products. One is a 200-unit device; one's a 300-unit device. There's a form factor difference in terms of footprint, which leads to different on-body wear modes for the 2 different pumps. One has a screen; one doesn't have a screen and is phone control, which really speaks to a segment of the market's desire for absolute discretion in how they manage their therapy. And so with the 2 products in the bag, we're effectively broadening the appeal to both customers looking at renewals, but importantly, to meet people who are new to pumps coming to the market for the first time, who are starting to make these trade-offs on what is the maximally appealing product for them and their therapy. And we do see good resonance with MDI as making that first pump choice, weighing up: "Well, do I want a smaller footprint? Okay. Well, that puts me into putting a pod and the Mobi side by side." And then what wear modes do I want? Do I want constantly on body? Do I want the opportunity to wear it in a different place on different days? Do I want the ability to detach during my 3-day wear time for the cartridge? And so it really is speaking to that decision set in a much more specific level. And we do believe it will have resonance with MDIs who might otherwise have picked pod purely for size.

Okay. I appreciate all that feedback. It's super helpful. I guess for Leigh real quick. On the R&D side of things -- I think that spending in the quarter caught some people by surprise -- how should that line item trend here in Q2 and for the rest of the year? And what was all that spend for in Q1 primarily?

Yes. So if you look at our trend for R&D, actually over the last 4 quarters it's been stepping up. And so this was really in line with the increases that we've been demonstrating each quarter. And it comes from a number of factors. So if you think about all the products that we've talked about today and the innovation and the pipeline, it's investing more so in the hardware teams, in the software teams and the algorithm teams and the digital health infrastructure. So all of those were continuing to drive. And we're committed to making investments in those to deliver this portfolio of products. Also, as you think about the FDA, the requirements have been more stringent recently than we had seen in prior periods or prior years. So as we continue to run more clinical trials, that's an increased cost burden on the business. I mean, in Q1, in particular, we ran our largest human factor study that we've ever run. And so that was -- contributed to the cost in Q1. And so this is the commitment that we laid out at R&D Day that we would continue to spend on R&D over the coming years and get our leverage from the SG&A line. In 2022, we expect R&D to settle in at about 15% of sales. So Q1 was about 19%. And you have to keep in mind with the seasonal curve of the business, it's more amplified, if you will, the spending in that period. So it will settle in at about 15% for the year. And you can see -- you can expect to see continued investment in the future.

Okay. Understood. Just a couple more for me. Actually John, a real quick question came through. Confidence in getting Mobi through the ACE process?

100%. I mean we pioneered the ACE process with the FDA. We basically worked with them to define what the specific requirements are for ACE pumps. We understand it very well. And I have 100% confidence we'll get an ACE designation.

Okay. Renewal cycle. What should we expect out of renewals in '23 and '24? And I guess bigger picture message on the recurring side of the business, which seems to get a lot of attention for one of your competitors in the pump space. Where are you at now from a recurring perspective? And then where can that percentage go for Tandem over the next several years?

Yes. So I mean renewals just get more and more exciting as you think about the coming years. This is the first year in which we'll see the number of new renewal opportunities increasing significantly, and it's the beginning of that change from the trajectory of our business 2018 forward. So this year, it's a doubling of renewal opportunities. Next year, it will double again. The following year, it's going to grow at another highly significant rate. And also this year is the first time we'll get to start renewals with the OUS market. So a lot of good things to come from the renewal opportunity. It will continue to grow as a bigger piece of our business. Right now, when you look at it from the supply versus pump perspective, where roughly 45%, 55% on sales, if you add in the renewals, it's running about 50% coming from recurring revenue streams. So as we go forward, though, with those number of new opportunities increasing and with the progress that we've been demonstrating, it will continue to grow to be a much more significant part of the business. But we do expect to continue to grow penetration in the MDI market. So I don't want people to think that it's all going to be about renewals in the future. There's a lot of opportunity from the MDI perspective as well.

Got it. Okay. And just I've got 1 minute left. Real quick. On the competitive side of things, again, if Medtronic gets back on the market maybe this year or gets to the market with 780G this year, how big of a headwind do you think that could be for your business in '23 and '24?

We're not really viewing that as a significant headwind. So as we look at what we have on market, what will be coming to market and the traction that we've made so far, we think we will continue to be highly competitive. Now will they start to retain some of their installed base at a higher rate than they have up to now, probably so. But when it comes to attracting new patients, we feel like we have the advantage there.

We're competing with right now in the OUS countries. So -- and we're doing quite well there. We're seeing a lot of interest in our products. And we're essentially in many of the countries that they are today with 780G.

Okay. Well, I can't say thanks enough for all the time. I know we're out of it. All the questions were great. The feedback was phenomenal. Thanks again to the Tandem team for helping out with us and everybody on the Zoom as well. Really appreciate everybody jumping in here with us today. So we'll go and wrap up there. Thanks, again, everybody.

Thanks, Matt. Thanks, everybody.

Thanks, Matt.

Goodbye.