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

My back is killing me. But anyway, so I want to talk a little bit about the insulin pump market.

First of all, hi, Joanne.

Hi.

Thank you for having us.

Good to see all you guys.

Insulin pump market okay?

Yes, insulin pump market is good.

Excellent. I'm in the right room. All right. So first, I want to start with a high-level question, which is how do you think about the market development in the U.S. and globally? How do you think about increasing the penetration rates? And I'm going to just throw a third one on the table. How do you think about type 1 versus type 2 in pumps?

Well, I would say that competition is good for diabetes. And I think that if you look over the last couple of years, we have a very competitive market, not only with our competitors, but with our partners who are all developing new technologies and these technologies are all great technologies and they're really driving a better outcome for people living with diabetes. So I think that when you see what happened maybe 5 years ago or before that, we saw maybe 25,000 people with type 1 coming to pump therapy annually. It's a small number and it was pretty consistent for the years before that. We brought Basal-IQ to market in 2018, and it was on with the G6, which was a finger -- no finger sticks. And our device basically was a simple algorithm that prevented people from getting hypoglycemia. Finally, people could sleep through the night. They didn't have to finger stick, and we saw a surge that year, people coming from MDI therapy. We brought Control-IQ to market a couple years later, and we saw another surge. We've gone from 25, I think in '18 it was 30, maybe 45, 50 or 60, and then in 2021 it was 70. So we've seen this steady increase in people coming from MDI, pens and needles, because of its improved -- its ease of use and ease of use drives adoption. And it's not just Tandem. It's our competitors. Like I say, they are both innovating right now themselves. Clearly, there's been a new competitive product in the market this year which has definitely had a favorable effect. My sense is that there are people who are using pens and needles that would not have come to market without having the tubeless device that's on the market today. And the same thing with Dexcom and Abbott. We're all driving technology, and by doing that, improving the experience, improving the therapeutic outcomes and the experience. And so I think that's the thing that has to continue, and I think when you look at the marketplace and you look at Tandem and our competitors, there's a lot of interesting technology that will be coming to market over the next several years as well, which I think will continue to drive that adoption, the penetration rate. And as we've said, our goal is to get to 1 million people using our products by 2027, and that penetration rate has to go up to roughly 65% for us to be successful doing that. If you look at the CGM companies, they have already been successful. They have gotten to the point where I think on average it's about 70% roughly penetration for CGM and they think that could even get higher. So I think that that's what our objective is to, is to get to 65%. It's driven by innovation, and I think the whole market benefits, the diabetes community benefits from it.

Okay. So how many people do you think adopted pump therapy last year?

We are now able to do that since one of our competitors came out with their earnings fall recently. And like I said, in 2021, we think it was 70,000. This year -- again this is estimates, estimates that it would basically be 75,000 to 80,000 people came to pump therapy in '22. So it did moderate a bit. It slowed down a little bit, but that's what we think the number is, and we think that it could be macro factors, could be a variety of issues, but we certainly saw it slow down a little bit but there was still growth. We think, again, this year we have several new products coming to market, all of which are going to be very appealing to people with type 1. And so we think that's going to continue to drive the growth.

How fast do you think the market is growing?

Well, this past year, it was roughly 10% or so. So that's this year, but again this was slower. I think it was growing a little bit faster prior to that. What would you say?

And in 2023 or 2024, would you like to venture, is this a double-digit pump market in the U.S. or is it a different number?

I think that depending on how the economy progresses, inflation and those sorts of things, I think it's likely to be -- we're assuming it's going to be at least as good. And I think with when we bring the new products to market, it'll be a full year with one of our competitors having the new device in the market. So I would anticipate that it would grow even more than that.

Okay. And can you talk a little bit about how the market gets divided up between traditional tubed pumps and patch pumps and how do you think that Tandem fits in that continuum?

Yes, I think that prior to this new device in the marketplace, people would go to their endo, they would have decided to get a pump -- they're going to go on pump therapy. The first question they would be asked is do you want a [ tubeless or tubed ] pump? And I think that back in when it was just a dash device, it was about 50-50, Tandem 50-50 -- we would get 50% and they would get 50% of the MDI conversions. I would say that there's been a lot of excitement about the new product on the market and so I think that has skewed in their favor this year, particularly in the last 3 quarters. So I think that there's a lot of interest in that. There's a lot of early adopters that are out there trying it and testing it. We have a slew of new products that are going to be coming to market this year and beyond, and we think that's going to continue to -- well, let me just say this, we believe that you have to have a portfolio of products to be successful in diabetes. It's not a one-size-fits-all condition. There's very different segments in the marketplace. Tubeless and tubed are clearly part of that. There's also how you want to control the product, how you want to interact with the device. There's just a variety of different mechanisms that create these segments. So we believe a portfolio approach is necessary. And so we intend to have t:slim in the market as a tubed option, we intend to have Mobi on the market with both a tubed and tubeless option, and then we intend to have Sigi on the market and that will be a completely tubeless option. And so I think that we see the portfolio approach really getting at the different segments that are in diabetes, and we think that's necessary. So there's definitely needs out there for tubed -- and there's preferences out there for tubed and tubeless. And so I think that's why we intend to have a portfolio.

So if before the introduction of Omnipod 5, the new pumps in your calculation was 50-50, new pumpers.

Yes.

What do you think it is today? And I'll even ask you, what do your numbers imply it'll be at the end of the year?

Well, I would say that it's -- as I said, it's leaned in our favor this year. I don't know what the exact numbers are, but it's leaned in our favor. I would say that the one thing that we have seen in the last couple of months is we've seen stabilization I think, and we've seen things basically remain the same. Since our third quarter call in November, we've seen things stay the same. It hasn't gotten any worse; it hasn't gotten any better. So that would imply to us that things are stabilizing.

I'm going to push you a little bit on that. If it's no worse or no better, if I'll take a look at the fourth quarter new pumpers, it looks worse. What am I seeing wrong?

The number did drop, but I'm saying since that time...

Oh, since that time. Since the end of the fiscal -- since the end of the calendar year.

Even the last month or 2 of December, I would say. The last 4 months or so we've seen things pretty much stabilize.

Okay. And how do you define stabilized?

Like getting no better, no worse. We're seeing the same -- we see competitive threats, we see the macro factors and COVID, they all still exist. And that's why I think when you look at our plan for 2023, it's conservative and it assumes that we will not see any change in the market and the market dynamics.

Okay. So one of the things that really struck me on the earnings call was how strong the renewal rate was. Why do you think that is? Because -- I'm sorry, but the impression is, is that when people have the opportunity to get off a tubed pump, they jump. Why are you seeing such strong renewal rates?

Sure. I think just what you said, it tells us that's not the case. When people have had a positive experience with Control-IQ, it shows or demonstrates that they want to stick with the product because it is the better product. And so even in a year where we didn't have a new product offering to launch to motivate people to move forward with the renewal and even in a year where there was a challenging economic environment, we still saw people renewing with our products at higher rates even than we had seen in years past. So I think it's a testament to the strength of our Control-IQ algorithm.

Yes. I would say if anybody was going to switch, you would assume that people who are up for renewal would. And if anything, this year, we saw people -- there was more stickiness. More people renewed faster. So we're seeing great strength in our renewals. And I would also say that we are not seeing attrition. I know people speak about attrition. And it's likely that there are some people who have tried a new product, and they've stayed on it for a month or 2, maybe 3, but they've come back. Most of the people that we have exposure to, they have tried it and most, if not all, have come back to Tandem. And we have great stickiness. I think the battle really today is on the MDI conversion front. People who don't know about our technology, people who are, again, a tubeless option appeals to them. That's really where the battle is and that's really what we're basically shoring up our messaging, we're differentiating our technology and products in the endo's offices and with consumers, and then we're also really focused on our pipeline.

Okay. Talk us through or talk me through the Tandem Choice Program. That's new. And just for the first time, my model has a GAAP, non-GAAP revenue line. Talk through the product program, please? And then how we should think about that revenue contribution over time?

Sure. So the Tandem Choice Program was developed really in anticipation of the Mobi launch. So today when someone buys a Tandem pump, they know that they have the comfort that if a new software innovation comes to market, they can get that software update for free. What this does is it provides a pathway for people if there's a new hardware offering. And so with Mobi around the corner, we wanted people to know if they buy a t:slim today and they decide they want Mobi in the future that they're not stuck with the product that they have while they're in warranty. What it does is it creates some very complex accounting, which is why we are now reporting ourselves on a non-GAAP basis. And the purpose of the non-GAAP sales is to show or reflect sales that are calculated with the same economic factors in place as you would have seen in historical periods, so it creates better comparability. It takes out the accounting which is heavy deferrals upfront and unknown of the timing of when you'll recognize that revenue later that comes with that program. And so I think the important pieces to note are that when we sell a t:slim today, we still receive the same price for it. We still receive it at the same time we always have. The revenue that we're deferring is not at risk. It's just a matter of when we will recognize it. And I think those are 2 key elements. And so I'd stress to look at non-GAAP sales, if you want to look at comparability over historical periods.

So if you're looking at this as sort of a bridge program, for lack of a better term, it's really just a 2023 event that by the time we get to 2024, you won't have to be bridging people.

So the program expires -- it's began already. Anyone who's buying a pump today has this as an option. When Mobi is launched, we will stop -- they will longer be eligible. People who have purchased at that time can choose between the pump of their choice, so they don't need the upgrade right. But people who have the option will have that option into 2024. So they'll have time to make that decision, so we'll see this for 2 years.

Okay. Are you finding it helps people get over the hurdle? I mean, the number was notable, but not like, oh, wow, that's a lot.

Yes. So the thing is, today, we are hardly talking about it. It's for the person who is very well connected that might have heard about Mobi and they've asked the question, wait a minute, what should I do? Should I buy a pump today or wait for this new pump to come out? It's to let them know there's a pathway, but frankly, not very many people even know that Mobi's around the corner. So it's being -- it's hardly being discussed. But I think one other key point about it is no one makes an election today, no one has to make an election or even has to consider it until Mobi is cleared. And that's when the conversations will begin in earnest.

Okay. How much is the economy impacting do you think upfront expenses associated with tubed pumps?

Right now, we have been seeing pressure across the past year and into the first months of this year. It's hard to say how much of that is economic, separated from the competitive environment separated from still some of the lingering COVID effects. And so that was the reason that we launched our broad based -- broadly marketed our payment plan offering. It can take that objection off the table. So for anyone who has the perception that pump therapy is expensive, that there's a large upfront payment, we can let them know, look, you don't have to worry about, at this time. Just call and find out what you actually owe, and we can spread that out for you, so you don't have to worry about this onetime upfront that might be a large out-of-pocket. So it's been beneficial from the perspective of the sales reps because before when they're in the field and people are asking that question, I heard there's a big upfront for yours, but this other product doesn't have one, they can explain the payment plan program to them and have people still call in and pursue the purchase, where before they didn't have the ability to have that sort of conversation.

So what I'm sort of trying to get at also -- thank you for that by the way -- is if historically revenue was, call it, 20%, some years, quarters higher, and now guidance for this year is 10% to 12%. How much of the 8% to 10% swing is economics, how much of it is competition, and maybe there's a third component that's not as obvious?

Right. That's been the challenge. So I would say 2 quarters ago we were trying ourselves to parse out how much was equal for each piece, what the weight was for each one. And what we quickly learned was that in combination it's hard to parse them out and assign a value to any of them. And so to John's point earlier, thankfully, we're seeing an environment where I would call it more stable. And what does that mean exactly? It means the ordering patterns are starting to follow more of what historical norm looks like. So where we typically see trends through the end of the year and how they grow, where we typically see a sequential step down in the first quarter due to the reset of deductibles, things are falling in line with what our historical averages look like. So even though we're still feeling pressure across the top, we feel like we're back in an environment where it's more predictable in terms of what direction it's headed.

Okay. Lots of questions to ask. One of the things that showed up on the Insulet earnings call was that 35% of new podders are coming from competitive accounts. That would imply that they are picking up Tandem users, but you're not seeing it. So help me reconcile that.

We have a variety of means and data points that we use to understand whether or not we're seeing people leaving. I would say that we have a mobile app that's used by roughly half of the people in United States where you can see the data that's uploaded from the mobile app. We also have sales of supplies. The sales of supplies are -- we can look on a quarterly basis and see are we getting the same number on average for each individual from a supply base in terms of the financial impact. We have anecdotes, word of mouth, people who are actually talking to people who have tried it and have come back. And we have several others that we use. And as I said, we do not see attrition. We do not see people leaving Tandem to go. So people have said, you're losing market share. We're not losing market share. What's happening is they're taking -- they're being more successful than they have been in the MDI front, but people are not moving over to them. It could very well be, as I said, that there might be people who have tried it and that shows up in their numbers. And it could also be that they're taking more in Medtronic. Those are the 2 things I think that -- but we're not seeing attrition.

Okay. I do want to spend some time -- or a lot of time talking about Mobi and how you're thinking about FDA approval and then planning for launch and then ultimately launch.

Yes. So of course, as we talked about in the call, we're under review right now. We submitted the 510(k) last year. It's an ACE pump. And so the ACE pump basically means that it can be used in an AID system once it's approved. So when we do get approval, it will have Control-IQ on it, and it'll be integrated with whatever sensors are available at that point in time. We received questions recently and we're basically responding to them. We're preparing our responses. We're having communications with the FDA. We're having communications that I would say is normal for this stage in the process. Some people have asked me questions as to whether or not you're going to have to repeat any clinical or human factor studies. And the answer is no. Based on the questions that we've received, we do not anticipate having to do any additional clinical or human factors work, which is time consuming. But there is work for us to do. And so we're engaged in it. We have -- I'd say that the FDA is doing a much better job in terms of their resources. There are more resources dedicated to the diabetes community, and we're seeing better support, but it's still unpredictable. It's still difficult to try to say exactly when we'd anticipate to get an approval. So what we believe is we're going to plan on a second half launch. So that's essentially what we're planning on second half launch. And we basically have said that we will basically have product in the market approximately a quarter after we receive clearance.

Okay. Do you think you'll have built enough supply?

Yes, we're building product now.

And what do you think is the right patient for Mobi?

It's back to this segmented market. I've mentioned this before, but we've done a great deal of market research on Mobi. And I think the device, first of all, it's about half the size of the t:slim. It's controlled entirely by a mobile app. It has a bolus button on it. It is going to be wirelessly charged. It's waterproof. It's got a number of advantages. It's very discrete. You can wear it. It's small. It has a patch you can actually wear, put it on your abdomen, with a very short infusion set. So there's a lot of advantages that come with it. The mobile control, it's a very discrete feature and that allows people conveniently to manage their diabetes without anybody knowing that they have diabetes. That's a very big plus. So I would say that, again, it's a very segmented market. And in the market research that we've done, there's definitely a group of people who are interested in the t:slim, and there's a group of people who are interested in Mobi. And we would probably say it's people who are more tech savvy, people who might be more mobile, and I think that people who are more interested in discretion and the convenience of mobile app. So we anticipate that there will be a significant uptake in the market once we get Mobi into the market. We expect it will be like Control-IQ and Basal-IQ when both of them came. So we think it's going to be a mover when we get it, and we're excited to have it.

The shorter tubing, 6 inches, does that mean it can be worn in different locations? Or does it limit the number of locations since it's short.

No, you can wear in multiple locations. It's 5 inches, and you can wear it on your abdomen, you can wear it back of your arm, you can wear it on the leg. And the beauty of Mobi is that we're going to come to market with a tubed version this year. But in a year or 2 in several more year, we're going to develop a -- we are in the process of developing a tubeless version that it will allow people to choose between a tubed or tubeless implementation for the exact same pump. So it's basically -- it's almost like it's a different cartridge or infusion set and a different cartridge [ or a sled ]. And either of those 2 implementations you get tube or tubeless. So we think that's the best of both worlds. And so that's something that we also think will be, in terms of just providing choice to our customer base, it's a real big positive feature.

Okay. Through the DME and through the pharmacy channel?

That's something -- you were asking about preparation for launch. That's something we're working on actively, and I'm going to say yes to both. So today, what we have is the market access team is, first and foremost, going to get it added to all of our DME contracts as quickly as possible. That's the fastest path to access for the commercial launch. Simultaneously, we're exploring the pharmacy channel. And how do we get this to fit into that channel? What are the opportunities for reimbursement there? Those are all underway. And so it's a two-pronged approach and something that we hope to be talking about a lot more later this year after we get clearance for it. I also just -- I would love to highlight, too, as John mentioned, the opportunities for Mobi that it's not in guidance this year. So when you ask about the growth rate, just to clarify that it's not part of our guidance expectations. So it would be an upside opportunity for us.

Okay. But I want to get to the words simultaneously exploring. What does that mean?

What does it mean? So the medical devices, particularly the tubed devices, have not been viewed as a pharmacy product. And so what it's about is we have to go and talk with payers and talk with payers at a different level of the organization than we have before. Not going in through the DME pathway but talking through the innovation areas of the payer organizations to say, we have a product today that's very different from maybe what your expectations are. It doesn't fit in a category like a wheelchair or an orthotic. It truly is technology-based. It provides valuable claims data and valuable information that can be used to compare to claims data. So what we want to sell is the value of the system, not just a particular device. And so we're beginning those conversations to see what kind of doors this could open up for us in terms of pharmacy access.

Okay. Is there a timeline on that?

No, it's underway, and it's something we can report about in the future.

Okay. Did the FDA request any new data that would require another clinical or human factor study?

No.

No. That's a no. Okay, straightforward. We talked about if it's approved middle of the year, it's a quarter later. You've talked about Mobi being a major contributor to your longer-term gross margin goal of 65%. Can you walk us through the benefit of both the pump and the supply side and how long it takes you to get there?

Yes, absolutely. It's a comment I often get asked is, will you see headwinds when you initially launch? And we could because when you're not building at scale, you tend to see a higher costs on your products. So I tell people to think about it as about one year from commercial launch is where we'll begin to get to scale. And then to your point of what does that really mean, the pump itself is expected to have a manufacturing cost about 10% to 15% less than the t:slim X2. So you start seeing benefit right away from the pumps as they're sold. The cartridge, on the other hand, also has margin benefit, and so the cost at scale for the cartridges is expected to be more than 20% less than the t:slim X2 today. So you think about that evolution as more and more people are using that product and the installed base is growing, you'll see continued margin benefit over time. And between now and 2027 where our goal is to be at 65% gross margin, Mobi, on both the pump and the cartridges, will get us more than halfway there.

What gets to the other halfway?

The next most beneficial contributor would be extended wear infusion sets. So as we think about that technology when it comes to market will also be a significant contributor.

When are extended wear infusion sets coming to market?

We are going to plan on implementing or initiating a pivotal study in the second half this year. So that's going to take us through probably the end of the year, make a filing, and I would assume that we'd get approval sometime in '24.

In 2024. Okay. The acquisition of AMF Medical closed in January, bringing you the Sigi pumps. Why -- I'm sorry, I've received so many questions on this product, so I'm going to just toss a bunch of stuff out there, grab it, please. Why was this the right pump, why is this the right time, and why did you then -- I understand it's better maybe than your internal program, but is it also a sign that your internal program wasn't going where you wanted it to?

All fair questions. I would say that we have been doing market research on patch pumps for quite a while. And back in 2018, end of the year -- '18 or 2019, end of 2019 -- no, excuse me, end of 2020. Okay, sorry.

Okay, '20 it is.

We had an Investor Day. And in an Investor Day we launched -- we basically shared with the investor community our R&D pipeline.

I remember.

And at that point in time, we basically said we are going to pursue t:slim X3, a Mobi tubeless option, and a patch, and we felt that again that portfolio approach was really important. So we indicated back then that we had been, and we continued to plan to work on a patch pump. So the -- and we did have an internal program. I said the internal program was focused more on a smaller device and probably using a concentrated insulin because the reservoir would have to shrink, and we had been developing that for a while, and I think we've made good progress. As we did market research this past year on patch pumps, what we found -- and we looked at patch pumps that are on the market, and we looked at patch pumps in companies that are in development, some smaller entities. We just found that the appeal of the features of the Sigi pump was just significantly better than anything out there. And I think the 2 elements that are really important are, one, it's rechargeable, so it's environmentally friendly. We're not throwing away batteries and the circuit board every 3 days and it also uses a prefilled insulin cartridge, so substantial improvement and the ease of use of loading and actually getting the system onto you. And then it's also ergonomic. It's very ergonomically and well designed. The people who designed it are incredibly diligent and understand designing miniaturization as well as design for manufacturability, so cost, automation, and things like that are going to follow on naturally. So we just felt it was a better option for the marketplace. It would do better in the marketplace than our current, and it wasn't that our current it's just we just felt it was a better option. And so I think that the reason we did it now is because we want to implement Control-IQ sensor integration onto this system. We want it to be a device that's a base pump with an AID system on it. And so if we were to wait and do it later, we would've lost that time. And so I think that by acquiring the company now our engineers can start to work with them, they can continue to optimize the pump and the pump performance, reliability, and those sorts of things while we work to implement the technology -- the Control-IQ technology and the CGM integration, so that's really why we did it. We think it's going to be a great product. And when we initially indicated that we had acquired the business back in December, we had said 2027 was our target date. I can say that we were conservative intentionally at that point because we hadn't really had a chance to sit down with the engineers from Sigi and AMF and really understand the challenges that they had as well as what will it take to integrate the technology that we just described. I can tell you that we're working closely with them right now. We're going to do everything we can to pull that data in, and we think it's very likely we will. But I just -- I think that the thing I want to stress is that we're going to do everything we can to bring this product to market as quickly as possible.

What does this quickly as possible mean?

Before 2027, for sure.

Okay. All right, because that's been a pushback I've received, which is you spend all this money to buy a product they were already developing and that it didn't pull forward the timeline.

Yes. I think it's just -- I think that we didn't have enough information to commit at that point in time. We're still working on a plan with them. It's just that we need to get to a point where we're all comfortable with it. And I think at that point, in the not-too-distant future, we'll share commercialization timelines.

Okay. So we're going to go with before 2027; with time, commercial updates.

Yes.

I'll take that for today. All right. Moving on, you're starting 2 new pivotal studies this year between your study set, extended wear infusion set, and the type 2 indication for Control-IQ. Can you walk us through those trials and what to expect in terms of timelines?

Yes. So we are -- we're working right now with the FDA on a type 2 study. The type 2 study is going to start in a matter of weeks. It's going to be a large study. It's going to be a 3-month study. And 3 months means it's probably like 6-plus months to get people enrolled and off the system through the whole study. So it's probably going to take us through the end of this year to collect that information, and we would anticipate having a filing to the FDA sometime in early 2024. So that's an exciting new indication that we'll have next year.

So that's file early 2024, approval in late 2024?

Yes. And that's what we're thinking. Again, we haven't been very specific about it, but I think it's fair to assume that that's what's going to happen.

And which product will this be on?

It will be on every product. This is the approval for the algorithm to be used in type 2. And so the algorithm will be on every pump we've got.

Because I'm struggling to see a type 2 user, even one who's insulin-dependent, using a tubed pump. Should I not be struggling with that?

I think so. I mean, right now, we have 20,000 people who are using t:slim off-label that type 2. And they get fantastic results. We see great results, and we're not marketing it. These are people who are using it by going to their physician and asking them to give them this device off-label.

Okay. So there is a market for...

Absolutely. And again, we also think, though, that Mobi, Mobi is going to be a very appealing product for them -- that community. It's small, discrete. Again, it has a mobile app. I think it's going to be appealing. And that will be really, I think, where most of the focus goes is on using Mobi.

We had a physician here yesterday that talked about Mobi as being niche. Is that right or wrong?

We really haven't had a chance to get out there and promote it. And we can't do that until it's approved by the FDA. So only if -- I think investors are aware of it and a few physicians are aware of it. But I don't think anybody's ever seen -- I don't think -- there are physicians who've seen it. It's a small number. So we still have to wait for approval, and then we will go out with aggressive marketing. And I think people...

So you don't think it's niche?

Absolutely not. No, we think it's going to be -- again, when we did market research on this product, there's definitely significant demand for it. And we will -- again, it's going to be a very popular product.

Okay. How do you think about the pathway to profitability?

Something that we're very focused on, particularly in the year where the top line sales aren't growing as fast of a rate as we've seen in the past. And so we've spent a lot of time, particularly in this budget season, making sure that we were prioritizing the right programs, the right initiatives that would drive top line, and they could also bear fruit in terms of leverage opportunities in the future. And so you see that we prioritize the acquisitions. So we have incremental spend associated with AMF and with Capillary Biomedical. We also are very focused on the savings opportunities really in the SG&A functions, and a lot of it centers around how we support our customers today. And so the Tandem Source product that will be coming out this year as well is a new baseline infrastructure off which we can build some efficiencies in our processes and more automation. And you can think about it along the lines of having a better -- almost like a retail experience for our customers as opposed to thinking about it as a medical device where they call in for every piece of information they need to share or want to ask about. So it offers solutions like an Amazon-type platform. And so that will help us over time, not to have to add as many people to support the customer base as we do today. And some of that leverage opportunity really begins in the back half of this year, but that's one of our big drivers beyond our product improvement opportunities we talked about for gross margin, but the customer service efficiencies over time will be one of the next big drivers of operating and margin efficiency.

Okay. But in terms of research and development, you called out R&D as sort of 3% of sales this year. How do you think about leveraging that?

Yes. So one piece of that from the Capillary Biomedical acquisition this year has to do with the clinical trial. So that's something that's a cost in 2023 that won't repeat itself in the future. And so the last few years, we've really been focused on R&D investments to shore up all of our teams to get the depth of expertise we need in each of the pillars, being hardware, software, mobile, and digital technologies. And now is the time where it won't grow as fast of a rate as we go forward. And so all of this was already factored into our plan to meet our 5-year targets, when we originally laid those out, as John pointed out, at our Investor Day. And so this year, it will start to be the beginning of that, and we're very focused on finding new savings.

Excellent. How should we think about international sales? Those have been lumpy. Is that the right word? What's the right word?

Yes. That's a good word for it, variable, not indicative of real demand, though. And I think that's been the challenging part. Hard to explain and see as an outsider looking in, but when you could see beyond the shipments to our distributors, for instance, in 2022, patient placements grew 20%. So that shows a very high demand in some vastly underpenetrated markets. And what we're doing to help remedy this is -- and the reason it's been so lumpy and variable has a lot to do with our distributors today have been picking up their inventory from our San Diego location and they have to deal with all the logistics challenges to get it to their warehouses. This is mostly focused on Europe here than I'm speaking of. So we have now opened a distribution center in the Netherlands, which means now our distributors get to pull inventory from that local location, and they don't have to deal with all these other challenges. And so what's happened over the years as they've been dealing with these challenges, they've been building up their inventories to higher safety stock levels to accommodate for when they have uncertainty and the timing of when something will actually be delivered. We have many examples of a distributor placing an order and they can't even find a freight forwarder to pick it up or get stuck on a boat for months, and there's unreliability in terms of when it appears on their dock. And so many of them -- their inventory levels have been built up to 3 or more months of inventory. So now we're in this winding down period where they will adjust their inventory levels to something more like 2 to 4 weeks of inventory. And then you'll start to see their ordering patterns will begin to match more closely real demand patterns. And so that's to come, I would say, starting in the back half of this year we should have this transition complete.

And what happens when Mobi gets launched outside the United States? First of all, when is that? And is that more of a U.S. product or is that a global product also?

Global product. We have not yet given the timing for the OUS markets, but every product that we launch, you should think of as a global product.

Okay. When we are here in a year, what will we be talking about?

The excitement around Mobi launch. The fact that we have choice in multiple new sensor technologies also connected to it. And I'm sure you're going to be asking me questions back then about t:slim X3, about Mobi: Tubeless, and about Sigi. But I would say that I think we're going to -- we'll be experiencing the full launch of Mobi with new technologies on sensors. And so I think that, that's going to be a big part of the conversation because we think those products by themselves get us back to growth rates that people are typically used to seeing from Tandem, and we expect that, that will happen with these new devices on the market.

Terrific. Do you want to add to that? You're good.

I will be very excited to be talking about those things as well.

Excellent. Okay. Well, John and Leigh, thank you so much for joining us today.

Great talking to you, Joanne. Thank you.

Thank you.

Have a great day.

Yes. Thanks, everybody.