Tandem Diabetes Care Inc Q4 FY2021 Earnings Call

Thank you for standing by and welcome to Tandem's Fourth Quarter and Year-end 2021 Earnings Call. Operator instructions were given. I would now like to hand the conference over to your host, EVP and Chief Administrative Officer, Susan Morrison. You may begin.

Thanks, Latif. Good afternoon everyone and thank you for joining Tandem's fourth quarter and year-end 2021 earnings call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, product development timelines, 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 and 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 adjusted EBITDA, which is a non-GAAP financial measure. Adjusted EBITDA is a key measure used by us to evaluate operating performance, generate future operating plans, and make strategic decisions for the allocation of capital. Please refer to our press release issued earlier today for further information. Hosting today's call are John Sheridan, our President and CEO; Brian Hansen, Executive Vice President and Chief Commercial Officer; and Leigh Vosseller, our Executive Vice President and Chief Financial Officer. Following the 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.

Thank you, Susan, and welcome everyone to today's call. As you can see in today's results, the fourth quarter was a strong finish to an impressive year for Tandem. And looking back at the highlights of the year, we set record sales for both the quarter and the year. We also furthered our leadership position in markets outside the United States with an expanded international launch of our Control-IQ technology. Operationally, we focused on continuous improvement throughout our business and we reached an impressive milestone of achieving our first year of positive operating margin. Finally, as we highlighted at our R&D Day late last year, we furthered our product development efforts to support our near- and longer-term portfolio. In addition to these accomplishments, just last week we achieved the exciting milestone of FDA clearance of a mobile app that enables our t:slim X2 pump users to bolus insulin from their smartphones. With this clearance, we are adding to the list of Tandem firsts, as this is the first-ever FDA-cleared smartphone app capable of initiating insulin delivery on both iOS and Android operating systems. Organizationally, we've also been enhancing our structure over the past few quarters, with the creation of new senior leadership positions. We welcome talented and experienced individuals who complement and strengthen our management team as we scale the business and prepare for continued growth, near-term product launches, and the execution of our longer-term strategy. It's an important step as Tandem has a great opportunity to further our market-leading position in Diabetes Care. Our installed base has nearly quadrupled in the past three years, which is evidence that our innovations drive adoption. I am proud that nearly 330,000 people worldwide use a t:slim X2 for their therapeutic management. Credit for these achievements goes to our talented employees. We have demonstrated great flexibility and an outstanding commitment to improving the lives of people living with diabetes. As we look ahead, 2022 is positioned to be another exciting year for Tandem. We're also being mindful of and prepared to continue navigating the challenges associated with the pandemic. It's encouraging to see headlines showing a decline in COVID-19 cases, but as we've seen historically, things can oscillate quickly. In addition, the broader effects of the pandemic, such as staffing challenges in the clinics we serve and the global supply chain headwinds will take time to recover and will trail case rate improvements. That being said, while pandemic-related uncertainties still remain, our focus and commitments to achieving our goals is unwavering. Importantly, our growth drivers from recent years are still in place today. These include an underlying worldwide market that remains large and under-penetrated; a robust competitive conversion opportunity; strong demand for our automated insulin dosing technology; our innovative product pipeline; the positively different experience we provide our customers; and the growing renewal opportunity from our current customers who are eligible to purchase a new Tandem pump again. Brian Hansen, our EVP and Chief Commercial Officer has seen each of these first-hand. And I'd now like to turn the call over to him for him to share his perspective on the quarter and the year ahead.

Thanks, John. What stands out for me is that our t:slim X2 platform continues to be the leading insulin therapy solution for the durable pump community, which is the largest segment of the insulin pump market. In fact, recent U.S. data suggests that more people chose the t:slim X2 last year compared to any other pump offering and that the market is continuing to accelerate. We estimate that more than 70,000 people in the United States adopted insulin pump therapy from multiple daily injections in 2021, which is double the number of people who adopted pump therapy just three years ago. Outside the United States, we see a similar trend that suggests pump therapy penetration is also accelerating. With this market growth, I am proud that Tandem continues to make meaningful progress in our long-standing goal to bring the benefits of pump therapy to more people with diabetes. In the fourth quarter, we once again saw a balanced source of new customer growth in the United States, with approximately half of our customers reporting that they've converted from another pump manufacturer and half from multiple daily injections. We're also gaining increased visibility into our growth sources outside the United States where we see both a high number of competitive conversions and people new to pump therapy. It's a testament to the ease of use and form factor of our platform, its software updatability from a home computer, the proven performance of our Control-IQ technology, and the customer experience we provide. In January, we held a virtual national sales meeting, which was great timing as a sales force expansion from 95 territories to 110 territories is now complete. At the meeting, we heard high enthusiasm for our t:slim X2 pump and strong conviction in our Control-IQ technology. The team was coming off a seasonally demanding fourth quarter where they put in the extra time and effort to ensure that our customers who wanted to get a new pump before year end were able to do so before the typical reset of deductibles. This year was particularly interesting as many shifted back into remote interactions in the fourth quarter during the resurgence of COVID-19 cases. Healthcare provider offices were often pressured with staffing shortages and there was a wide range in how they were operating. I was very proud that our team remained flexible, shifting and adjusting to support the prescribers in whatever way worked best for their practices. Outside the United States, our international distribution partners also continue to navigate the challenges of COVID-19 which varies greatly by country and region. Despite these challenges, we achieved record sales in only our third full year of commercial activities outside the United States. Our success was driven by multiple factors such as the scaling launch of our Control-IQ technology, which is now offered nearly everywhere we operate outside the United States. In addition, our t:slim X2 was available for a full year in both Germany and France, which represent two of our larger markets and where Control-IQ was launched in the fourth quarter. As a reminder, outside of North America, we work with experienced distributors who are responsible for all the selling, reimbursement, and customer care activities. It's been fantastic to hear their feedback on product adoption and similar to what we hear in the United States, the customer experience with Control-IQ is overwhelmingly positive. This helps to fuel demand for our products as more people experience the benefits of Control-IQ and healthcare providers see the clinical outcome improvements this innovation provides. It's been a tough environment for distributor forecasting and inventory management and in addition to the high growth dynamics of our product launch and the pandemic, they are also navigating the associated supply chain complexities. For example, the timing and availability of sea freight has been a variable that they've had to contend with that has been difficult to predict. As a result, we've seen and anticipate we'll continue to see variability in distributor ordering patterns throughout 2022. Turning to the competitive environment, it was largely consistent worldwide throughout 2021 as well as in the more recent weeks. In the United States, our sales team was thrilled to receive last week's news of FDA clearance for our t:slim X2 pump users to bolus using the t:connect mobile app. It's significant as this clearance provides people the freedom and discretion of having their most frequently used pump feature available on their personal smartphone. The updated mobile app also continues to offer the benefits our customers have already been enjoying including a convenient way to view their pump alerts on their phone, which serves as a discrete secondary display for their pump, and automatic wireless uploads of pump therapy data to our cloud-based t:connect web application. We are kicking off training for the new mobile bolus feature for our internal teams now, followed by healthcare provider trainings, and then we'll be progressing the launch as a tiered rollout throughout the spring with availability for everybody this summer. This launch is a prime example of the power of our Tandem Device Updater and how it provides the t:slim X2 with competitive advantage. In the upcoming months, we'll be able to offer nearly 240,000 of our in-warranty U.S. customers access to the mobile delivery feature free of charge. And it's easy to get through just a software update to their pump and thereafter they can perform boluses in the comfort and convenience of their own home. That's the type of innovation that truly makes our offerings positively different. It is also an opportunity for us to connect with existing customers who may be waiting on the sidelines for a reason to buy their next t:slim X2. As a reminder, customers typically become eligible for new pump purchase once every four years. Our experience is that many customers will not pursue that renewal pump purchase until well after their warranty has expired, averaging roughly a year later. We continue to enhance our internal infrastructure and process used to drive customer renewals and are seeing great results. For example, in 2021 we hit a milestone where more than 70% of customers whose warranties expired in 2016 have now purchased their second or even third pump, which speaks to the high retention for our customers over a lengthy timeframe. Our speed is improving, the percentage of customers purchasing a pump within six months of their warranty expiration has improved for the third year in a row and nearly half of our customers newly eligible in 2021 have already renewed. That is fantastic progress as many people who are eligible did not become so until the fourth quarter. As you can see 2021 was a busy and accomplished year and our commercial initiatives are well-positioned to continue being a driving contributor to our longer-term growth objectives. With that, I will turn the call back over to John.

Thank you, Brian. At our R&D Day event in December, we shared our longer-term vision and strategy for driving continued growth through innovation. It's rooted in a foundation of extensive market research, which is a practice that we began at the Company's inception. A consistent outcome from these results has been that there is no one-size-fits-all solution in diabetes management. How a person chooses to wear their pump is a big driver in their purchasing decision and it's based on personal needs and preferences. As a result, this creates segments in both the Type 1 and Type 2 markets and our portfolio approach is designed to bring new solutions to more people living with diabetes. We are continuing to invest in advancing our t:slim platform along with bringing our miniaturized durable pump to market as well as tubeless options. From a timing perspective, the next new pump we intend to launch is a Tandem Mobi which we historically referred to under its development name t:sport. Mobi gives us an opportunity to serve a new market segment with an even smaller, more discrete pump using leading-edge hardware technology. We chose the name Mobi to represent the pump's mobility in the way it's worn and as a nod to its mobile app-based interface. The Mobi pump is designed to be fully controlled through a mobile app on a user's personal smartphone. The t:connect mobile app that was cleared last week for bolus insulin delivery is also the foundation of Mobi's mobile control functionality. Last year during the regulatory review for our mobile bolus feature for the t:slim X2 platform, we were able to get clarity on the FDA's expectation for pump mobile control functionality and all that learning has been applied to the Mobi full-control mobile app development effort. Mobi has been extensively tested, including more than 15 rounds of formative human factors testing. This gave us high confidence as we entered our human factors validation study which is now underway. This is the largest human factors study in the Company's history and will be used to support the 510(k) filing to the FDA later this summer. As a reminder, Mobi will be submitted to the FDA through the ACE pump 510(k) pathway, which allows for it to be integrated with interoperable algorithms and CGMs without additional regulatory review. This is particularly relevant for the commercialization of Mobi as we will be evaluating timelines to determine which iCGM will be integrated when we first launch. CGM integration work has been progressing well with both our CGM partners, Dexcom and Abbott. These are strategic priorities for us in 2022 so that our customers can benefit from new sensor technologies along with the features of our AID algorithms and insulin delivery systems. We are also making great progress on our clinical initiatives for advancing Control-IQ's labeling and feature set with a few milestones of note. We currently are enrolling our first Type 2 feasibility study. Our pediatric trial is progressing well and as discussed in the past, we intend to use the data to pursue an age indication for children younger than six years old, and we also have several other studies in progress and in the planning phases to further support our AID programs. As we look to the year ahead, it's once again primed with opportunities to bring the benefits of our technologies to more people living with diabetes. I am confident in our team's ability to continue meeting and exceeding our near- and longer-term goals as well as delivering relentless innovation and revolutionary customer experiences to the diabetes community. With that, I'll now turn the call over to Leigh.

Thank you, John, and good afternoon everyone. The 2021 year was another record-breaking sales performance for us as we scaled from just under $500 million sales in 2020 to more than $700 million in 2021. This represents 41% growth over 2020, which we successfully delivered despite the unique and unpredictable challenges of the pandemic. We shipped nearly 130,000 pumps worldwide, of which approximately 30% were shipped in the fourth quarter alone. This brings us to our worldwide installed base of nearly 330,000 customers. Fourth quarter worldwide sales were a record $210 million, which is meaningful compared to our full-year sales in 2018. This is a significant achievement in only a three-year timeframe. Specific to the U.S. market, 2021 sales grew 26% to $525 million. More than half of our sales were driven by shipment of approximately 83,000 pumps in the year. Our U.S. installed base of nearly 240,000 customers also drove meaningful growth in our supply sales and builds the foundation for pump renewal sales in the future. Following on Brian's remarks regarding our renewal progress, we reached our goal to renew approximately 60% of the more than 65,000 pump warranties that cumulatively expired at the end of 2021. While the majority of the renewals this year were generated from 2021 warranty expirations, there were still meaningful contributions from warranty expirations as far back as 2016 and we expect continued renewal sales in the future from warranties that expired in years past. As we look at our 2022 renewal opportunity, approximately 30,000 additional customers will become eligible for renewal based on our 2018 shipments. Importantly, more than 40% of these customers will not be eligible for renewal until their warranties expire in the fourth quarter of 2022 which will influence the timing of those renewal sales across the year. Fourth quarter sales in the U.S. were $161 million on 26,000 pump shipments benefiting from the traditional seasonal uptick we experienced due to the timing of insurance deductible resets and the highest volume of renewals we have shipped in a single quarter. Outside the U.S., our presence continues to strengthen across the more than 20 countries in which we operate. We ended 2021 with $178 million in sales, which was 114% growth over 2020. Just over half of those sales were derived from 45,000 pump shipments essentially doubling our installed base outside the U.S. to nearly 90,000 customers. We ended the year with strong fourth-quarter sales outside the U.S. of $49 million on 12,000 pump shipments, reflective of the continued strong demand for our products but impacted by the variability in ordering patterns that we saw throughout the year due to the challenging COVID environment as Brian discussed. We anticipate that these fluctuations will continue into 2022. For example, certain distributors exited 2021 with sufficient inventory to meet first-quarter demand and are anticipated to place lighter follow-on orders in the first quarter of 2022. Therefore, we anticipate Q1 orders for both pumps and supplies will be lower than the fourth quarter of 2021 as distributors continue to focus on achieving optimal inventory levels. Looking to 2022 worldwide, we have significant growth opportunity from our market-leading Control-IQ technology, especially in the markets outside the U.S. where it is still in early phases of commercialization. Our recurring supply sales also represent a meaningful and predictable revenue stream that will increase proportionately in 2022 with the growth in our sizable installed base. We are maintaining a cautious approach in 2022 for impacts that COVID may have on the business, particularly as we reflect on the continuous surprises in 2021 even at times when markets began to reopen. For these reasons, we expect our 2022 worldwide sales to be in the range of $845 million to $860 million, a growth rate between 20% and 22%. Due to U.S. seasonality and international ordering patterns, we anticipate Q1 will be the smallest sales quarter of the year at approximately 19% to 20% of sales similar to years past. Our U.S. sales guidance includes annual expectations in the U.S. of $630 million to $640 million or growth of 20% to 22% with pump sales scaling up across the year in line with historical seasonal patterns. Overall in the U.S., sales in the first quarter tend to fall in the high teens as a percentage of our full-year sales due to the impact of insurance deductible resets impacting both pump shipments and supply sales. Sales expectations outside the U.S. are estimated to be in the range of $215 million to $220 million or growth of 21% to 24%. While market demand remains strong in the markets where we operate, we expect that COVID impacts on the timing of distributor orders are likely to continue to create a high degree of variability in sales across the quarters. Therefore, we are being conservative with our outside-U.S. guidance as we monitor the dynamics with each of our distributor partners. Sales are expected to be lowest in Q1 with growth across the year as we continue to penetrate the various markets and increase our installed base, keeping in mind that some seasonal pressure tends to occur in the third quarter due to the European summer holiday season. Moving on to margins, we continue to demonstrate improvement in our gross margin in 2021 increasing to 54% from 52% in 2020. This reflects an approximate 10% improvement in the per-unit production costs for both our pumps and cartridges. While overhead reductions are a contributing factor as our volumes increase, we are also seeing notable benefit from cost-saving initiatives. These benefits more than offset the impact of lower average selling prices from increased pump sales in the outside-U.S. markets as well as growth in our supply sales from our large installed base. As a reminder, U.S. pumps are our highest gross margin product, followed by outside-U.S. pumps and then overall consumables. Pump sales were 59% of worldwide sales in 2021 compared to 63% in 2020. Our fourth-quarter gross margin of 54% was essentially flat compared to the same period in 2020. We continue to drive product cost savings through the end of the year, but these benefits were partially offset with increased costs associated with global supply chain challenges that we began to incur within the period. Additionally, both international sales and supply sales represented a higher percent of our overall sales in the fourth quarter of 2021 as compared to 2020. Looking ahead to 2022, we expect to achieve an annual gross margin of 54%. This is in line with 2021 due to increased material and freight cost expectations, which we anticipate will continue to be a burden in 2022. We are continuing to drive our cost-saving programs to offset these cost increases to the extent possible. We view this as a more temporary impact to the business and remain confident in achieving our long-term goals while managing these near-term cost pressures. We expect to achieve gross margins of 65% by 2027 with incremental progress across the years from scale and cost-saving initiatives but more significantly in the future from new product introductions and reimbursement initiatives. Our 2021 operating margin of 3% marked another milestone achievement for Tandem which was the first time that we reported a positive operating margin on a full-year basis. By comparison, our operating margin was negative 2% in 2020. This is meaningful as we continue to demonstrate progress on the path to achieving our long-term profitability objectives. We continue to view our adjusted EBITDA margin, which excludes non-cash stock-based compensation, as the appropriate metric to measure our near-term profitability progress. That margin improved two percentage points to 14% in 2021 reflecting expansion in line with our gross margin improvement year-over-year. We took a more significant step up in our R&D investments in the second half of 2021 to drive our pipeline programs, including hiring key personnel and commencing a number of clinical trials. Our top financial priority is to invest in product and business model innovations to deliver sustained high-revenue growth. These investments will continue into 2022 as we also build the foundation for leverage in the long term. We anticipate our full-year adjusted EBITDA margin will be in the range of 14% to 15% and that we are well on track to achieving our long-term operating margin goal of 25%. Our cash and investments substantially increased by $139 million in 2021, ending the year at a balance of $624 million. We believe we are well-positioned to make the necessary investments to execute on our strategic plans. To summarize our 2022 outlook, worldwide sales are estimated to be in the range of $845 million to $860 million including sales outside the U.S. of $215 million to $220 million. We estimate gross margin for the year to average 54% and adjusted EBITDA to be in the range of 14% to 15% of sales. Our noncash charges for stock compensation, depreciation, and amortization are expected to be approximately $90 million included as components of both cost of sales and operating expense. In conclusion, I am proud of our financial achievements and overall execution in 2021 that were made possible by the efforts of our amazing employees. Tandem is positioned to break records again in 2022 as we continue to carry out our mission by bringing the benefits of our solutions to more people living with diabetes. With that, I will turn it over to the operator for questions.

Operator instructions were given. Our first question comes from the line of Chris Pasquale of Guggenheim. Your line is open.

Thanks and congrats on a nice finish to a strong year. Wanted to just drill in on the renewal opportunity, something that should be a big driver for you guys over the next couple of years. It would be great to just get an absolute number for what you think the renewals were in 2021. You gave a lot of details around rates, but it'd be great to have a baseline there.

Sure. Thanks for the compliment, Chris. I'm happy to talk to you today. So with regards to renewals, first of all I'd say that yes, it's becoming a growing opportunity, which will be much more meaningful in the coming years. For 2021 and even again for 2022, the vast majority of our pump sales will still come from pumpers new to Tandem. And we have made great progress though and it's not that we are renewing people, it's just that the opportunity volume hasn't grown as much. So in 2022, it's going to increase by about 30,000 new opportunities, which is where we'll really start to see more contribution, but it's pretty back half-loaded, so we can think about it as more of a 2022 into 2023 opportunity and just to give you maybe a little more perspective on that breakdown, you can think of the new pumpers as still being more than 80% of what we shipped in 2021.

Okay, that's helpful, thanks. And then on margins, flat gross margin, '22 versus '21, maybe not too surprising given some of the cost pressures the industry is dealing with broadly, but it was good to hear you reiterate the long-term goal. Just curious on the drivers there, how much of it is dependent on new products? How much of it is dependent on reimbursement, which is a little bit out of your control as you think about getting to the 65 long-term?

Sure. So when you think about it, I usually put it in three buckets. What you've been seeing that's demonstrated is really the incremental benefits each year as we grow our volumes, leverage our overhead, and keep identifying cost-saving initiatives and efficiencies within the processes themselves. The real step changes will come when we launch new products. So for example with Mobi coming, once we get to a level of scale, we've estimated that that product cost should be about 20% better than the t:slim itself. So you can see that's where you will start to see step changes going towards that 65% long-term goal. The reimbursement initiatives are more similar to incremental progress like we're seeing on the volume side; it's really about continued conversations with the insurance payers, getting more direct contracts, and looking for price increases as we move along, especially as we're using our clinical data to share the benefits that their patients are seeing. So you can think about it within those three ways.

Our next question comes from Brooks O'Neil of Lake Street Capital. Your line is open.

Thank you and good afternoon and congratulations on the terrific finish to 2021. I'm just curious, if you could talk a little bit about the assumptions you include in the 2022 guidance. John mentioned I think two CGM partners, both Dexcom and Abbott, and I'm curious how you think about the impact of G7 and Libre 3? And then whether you've included in assumptions any contribution from Mobi in the 2022 guidance? Thanks a lot.

Okay. Thank you, Brooks. So in terms of guidance, our overall philosophy is we typically do not include products not yet approved in any of our guidance. So to answer your questions on CGMs as well as Mobi, those would not be factored into our 2022 guidance at this point. What has been included though is the continued enthusiasm for Control-IQ. It still has not yet reached its full market potential even here in the U.S. where it's been around now for two years, but especially outside the U.S. where we're just starting to roll it out in France and Germany in recent months. And so we still think we have a great runway with Control-IQ and now with the addition of mobile bolus, it gives us a lot to talk about with our customers.

Our next question comes from Larry Biegelsen of Wells Fargo. Your line is open.

Hi, this is Nathan on for Larry. Just a question sticking to 2022 guidance. What are you assuming for competition? We just saw Omnipod 5 approval, we also have Medtronic's warning letter and potential impact to their pump. So what should we assume for that in your guidance?

Sure. And thanks for the question. So when we think about what's included, I already mentioned Control-IQ, but in particular we still think we're going to continue penetrating the MDI population and see growth in competitive conversions year-over-year. As we think about competition this year, we really factored it in more at the noise level. If you think about it, we're still the leading pump player in the durable pump segment, which is the largest of the segments. We don't see a lot of switching back and forth between tubed and tubeless pumps and so at this point, we are treating competitive activity as noise similar to what we've seen in the past where new products are launched and sometimes that causes a little bit of near-term disruption.

Okay, that's helpful and then you previously indicated the plan on beginning the Type 2 Control-IQ pivotal study in '22. Can you provide an update on timing? What do you think you would need to show in the study to achieve traction in Type 2? And also, when would you expect the Type 2 label and how important is this to you?

Thanks, David. Well, right now we're enrolling our Type 2 feasibility study, and this is something that we worked with the FDA on to just understand the various segments of the Type 2 community and to test them out in a smaller study. It turns out that we would probably initiate our Type 2 pivotal study in late 2022 or early 2023. It's going to be a large study, and I think that's roughly what we would expect for timing. So I think we're looking at an indication probably in the 2023 timeframe.

Our next question comes from Alex Nowak of Craig-Hallum Capital. Your line is open.

Great. Good afternoon, everyone. With several diabetes approvals making their way to the FDA in the last couple of weeks, are you starting to see the backlog at that agency start to ease a bit here? And then when you take the learnings from mobile bolus, you document those and then you fold them into Mobi, how are you thinking about what you need to change to Mobi—additional studies that might be needed on the bench side? And then how are you thinking about timing for approval there?

Yes. Good questions, Alex. I would say it's difficult to say still whether the FDA has additional resources that have come back from supporting COVID-related work. We need to wait and see. They've been very supportive with the limited staff and we're appreciative to have received the recent clearance, but it's still early and I think we need another quarter or two to see if things change. Regarding Mobi, we learned a great deal during the mobile bolus review. There was not a lot of new information that came as they approved the device, which was good. We've incorporated the learnings from the questions we received last year into Mobi. We've really transitioned from a development mode into more of a testing mode. As I indicated, we're involved right now in the largest human factors study we've done; we completed many formative studies leading up to it. It's a complex study that will take several months and involve multiple cities and multiple segments of the diabetes community. We also have additional verification and validation studies and testing to do internally. So I think that schedule puts us targeting a summertime submission and we feel good about that.

And then with outside the U.S. just becoming much more important to the company, can you give us an update on where you stand today as far as your pump share and the installed base of pumps out there, the share of new pumps being placed outside the U.S. market? And then how has Medtronic's 780G launch there changed the sales process for you?

So I'll start with a little bit on where we stand today. When you think about where our business is coming from, it's similar to the U.S.: there is a high level of competitor conversions coming our way as well as people new to multiple daily injections. So we continue to penetrate those markets and we're especially excited about Control-IQ and the demand we're seeing as we look forward.

Yes. As we see here in the U.S., we see the power of Control-IQ in our international markets as well. We really haven't seen a dramatic influence or shift from Medtronic's 780G in the markets where we compete. We feel pretty good about our position. We have great relationships with our partners and balanced growth across all regions we're in right now. So the early indications are Control-IQ is doing very well.

Our next question comes from Steve Lichtman of Oppenheimer and Company. Your line is open.

You saw solid 4Q, so obviously able to overcome COVID headwinds. I was wondering what kind of impact you did see from COVID in the quarter and what you're seeing as the year turned, as John mentioned COVID cases have started to come down?

I'll take that one. It was an interesting year for sure. We remain cautious because we've been here before. In Q3 we saw things kind of open up, but it was characterized by an extended holiday and vacation period. As we moved into Q4, we were optimistic but a new variant emerged and began to change access for us to our patients and healthcare providers. We saw impacts first in Europe and then in North America. We migrated back towards a remote model in many regions and we were pretty good at that. The difference in Q4 was we saw a lot of COVID-19 positives among healthcare providers, some of our patients, and internally with our staff and partners. So it was an odd quarter to navigate through. We did so successfully. We hope that it moderates now as we head into clearer waters in 2022, but again we are cautious.

I think there is still uncertainty as we move into this year and we'll continue to monitor it closely.

And then also on the commercial organization, what kind of tailwind could your sales force expansion provide in '22? Is it getting you into new regions you weren't in before or more about going deeper? Will we see a material benefit from the expansion in '22 or is that more meaningful in '23?

I'll start with the purpose behind the expansion. One reason was to reduce workload on our existing staff because territories had become large. Going from 95 to 110 territories eased that burden, allowing us to go deeper in existing accounts and to see additional accounts we may not have spent as much time with. This allowed us to right-size the sales and clinical teams and I do think it's going to provide benefit this year. Our teams are pleased to have that additional capacity.

No. That's great.

Our next question comes from Matthew O'Brien of Piper Sandler. Please go ahead.

Good afternoon, and thanks for taking the question. So just to put a little bit finer point on the potential tailwind on the Medtronic side of things, I think they said $200 million to $300 million is the impact they expect this year. Just using the midpoint of that, $250 million, I think around half of that is insulin pumps and supplies and I'm assuming the majority of those folks are into durable pumps. So as I look, Leigh, at the domestic guidance, it looks like you're only factoring in, I don't know, somewhere in the $10 million to $20 million range from that tailwind. Are those numbers kind of ballpark? And then I guess why be still conservative with the potential tailwind on the Medtronic side?

Thanks for the question, Matt. We haven't quantified how much we're thinking about that tailwind specifically. One point to make is coming into this year many thought our competitive conversion opportunity might decline; in fact, we still expect it to increase this year and maintain a healthy balance of new pumpers from MDI and competitive conversions. We still think the opportunity is strong but given the COVID environment and other uncertainties, we're going to be cautious initially until we see continued trends that suggest otherwise.

Okay. So there is some conservatism built in based on what you've seen from Medtronic so far?

That's correct.

Okay, thank you. And then on the competitive side, the Control-IQ momentum that you have—is the form factor enough to really dislodge a bunch of existing patients or even new-to-pumping patients heading into the full launch of Omnipod 5, or do you need to see real-world data for a year post full approval? Is the momentum so strong with Control-IQ that it's going to be difficult to slow things down from a momentum perspective?

Briefly, we're comfortable with our position. We haven't seen a reduction in our pipeline as competitors launch new products; it's early to tell the full market impact. Control-IQ and the outcomes we've seen continue to be a real positive for us. Launching mobile bolus is an exciting opportunity to visit accounts. Our product pipeline and the services we provide put us in a good spot.

Matt, to add, when you look at the algorithms and results, there isn't a lot of significant differentiation architecturally—there's some convergence. Form factor is important. Our pipeline includes Control-IQ and t:slim doing well today, Mobi filing shortly, additional sensor partner integrations, X3, tubeless options, and a patch in coming years. We feel very well positioned to compete, and we'll learn more over time, but our position is strong.

Our next question comes from Matt Taylor of UBS. Your line is open.

So I did want to ask one follow-up on you mentioned that you're baking in some conservatism to the international guidance—maybe just talk about what you're seeing and how conservative you're being? And what's the FX number that we should be using for international?

Sure. Hey, Matt. I'll start with the simplest one first which is we have very little FX exposure. So there's nothing material to speak to from an FX perspective.

Okay. Thank you.

We have great relationships with our partners and strong visibility to their activities. As we prepared to launch Control-IQ in Q3 and Q4 in new geographies, we encountered factors that made things complex: unknown demand in large markets like France and Germany, different distribution models, and unique supply chain issues in Q4 affecting air and sea freight. There's plenty to learn from Q4, but the good news is demand for Control-IQ continues and the variability should smooth as we move into the middle of the year. I remain pretty bullish on what we're doing.

Our next question comes from Danielle Antalffy of SVB Leerink. Please go ahead.

So congrats on a strong end to the year. Just a question on where we are with penetration today. Leigh, I think you mentioned that something like double the number of new patients started on pump therapy this year versus three years ago. How are you feeling about your long-term target for pump penetration in Type 1 based on where we exited the year?

Danielle, we feel positive about continued pump penetration. It's not just tandem driving it; the diabetes med-tech community has produced a lot of innovation recently and more is coming, all aimed at reducing burden and improving ease of use which drives adoption. We've stated we think we can get to 60% to 65% penetration and with our pipeline, we believe we have innovation to continue driving that, not only in the U.S. but outside the U.S. as we bring technology to Europe and other countries.

My follow-up was about major international markets—what's the incremental runway for penetration versus where we are today? What's going to drive growth internationally over the next few years?

The factors driving pump penetration in the U.S. are similar outside the U.S. Our numbers suggest pump penetration in the markets we're in today is approximately 5% to 10% and we think that can likely double or more in the next three to five years. The market size is much larger when you include the countries where we operate; there's a big runway for growth as penetration increases.

Our next question comes from Jayson Bedford of Raymond James. Your line is open.

I have a few questions. Brian, you mentioned over 70,000 folks adopted pump therapy in 2021. Embedded in the guidance, what's the expectation for that number in 2022?

We haven't given a specific number for new pump adopters in 2022, but we expect continued ability to penetrate the MDI population, more competitor conversions, and an increase in renewals shipped this year. Those are the drivers we'll be watching.

On renewals, you mentioned an incremental 30,000 coming due in 2022. Can you update us on the actual number of renewals either exiting 2021 or for 2022 so we can back into one of the years? What's the actual number of renewals out there?

What we achieved by the end of 2021 is that more than 65,000 customers have had warranties expire over the years and we renewed a significant portion of those. Nearly half of the people whose warranties expired in 2021 have already renewed. You can think about that as you look forward into 2022 and how the additional 30,000 opportunities might provide sales. There are still people with warranties that expired in prior years who will continue to be renewal opportunities.

Okay. I had a number about 60,000 exiting '22. Is that in the ballpark for cumulative renewals?

Of the more than 65,000 customers with expired warranties over the years, we've renewed approximately 60% of them by the end of 2021.

Yes.

And then in terms of mobile bolus in Europe, can you talk about where you are and the challenges of introducing such technology in Europe where there are stricter privacy laws?

When you look at our revenue mix, about a quarter came from outside the U.S. We are committed to providing mobile bolus and Mobi and all of our products in our international markets. There is complexity with privacy and regulatory frameworks, but we are building our product pipeline with international availability in mind. We're rolling out Tandem Source in the UK in an early release state and the intent is for Tandem Source to integrate with mobile technology. We haven't provided specific timing for mobile bolus internationally, but it's on our roadmap and will be communicated in due time.

So mobile bolus in Europe is more of a 2023 dynamic than 2022, is that fair?

That's a fair way to think about it; we haven't given specific timing, but that characterization is reasonable.

Our next question comes from Jeff Johnson of Baird. Your line is open.

Thank you. John, maybe one clarifying question for you and then one pump volume modeling question for Leigh. On the clarifying side, you talked about ACE pump submission for Mobi maybe mid-summer this year. Is there anything within the ACE pump submission that would make us think it is more than a typical or less than a typical six-month 510(k) review pathway? Historically a 510(k) is about six months. Is that fair for the Mobi submission or might this be late '22 or early '23 approval timeline?

I think the six-month timeframe for a 510(k) is a fair starting point, pre-COVID. Right now, there is uncertainty in FDA staffing and resources due to pandemic-related demands. We hope things return to normal and we can complete review in a typical timeframe, but there remains some inherent uncertainty about agency resources. We'll need to wait and see how that plays out.

Okay, so ex-FDA staffing uncertainties, a typical six-month review is fair to think about?

Yes.

And Leigh, from a pump volume standpoint, I know you don't guide to pump volumes, but is it reasonable to think pump volumes in the U.S. in 2022 might grow somewhere between the growth rates you saw in the first half and the second half of 2021 given easing comps and hopefully COVID falling off a bit?

It's challenging to take 2021 growth rates and apply them to a sense of normalcy. 2020's first half was heavily impacted by COVID and the back half of 2020 showed pent-up demand. Growth rates in 2021 reflect that dynamic. Thinking somewhere in the middle for 2022 makes sense. We look more at seasonality patterns with U.S. pump shipments typically being a high-teen percentage of full-year sales and fourth-quarter seasonality influenced by deductible resets and product launches.

Our next question comes from Josh Jennings of Cowen and Company. Your line is open.

This is Brian in for Josh. Thank you for taking my questions. I have two longer-term ones on the tubeless opportunity that's in the pipeline. First, a competitor revealed intent to commercialize patch pumps—does that change your view on Tandem's eventual opportunity in the patch market segment?

Not at all. We were aware of their investment in the space and it's not surprising they're considering commercialization. It doesn't change our decisions or strategy to move forward with products that address both tubed and tubeless segments.

Okay, thank you. And my follow-up: can the U.S. regulatory success you're accruing for t:slim and Mobi be leveraged to streamline the FDA process for developing a patch pump, or are those distinct reviews? I'm thinking about pivotal trial size and scope of work.

Our team has extensive experience working with the FDA and we understand the data depth required for filings. Interoperability initiatives benefit us broadly and the regulatory pathway under ACE pump can apply to various device types, including patch pumps. The regulatory landscape shouldn't prevent us from proceeding; we need to deliver rigorous analysis and justification for any technology and if we do that, we expect to be successful.

This concludes today's conference call. Thank you for participating. You may now disconnect.