Tandem Diabetes Care, Inc. (TNDM) Q2 2022 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to Tandem's Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Susan Morrison, Executive Vice President and Chief Administrative Officer. Please go ahead.

Good afternoon, and welcome to Tandem's Second Quarter Earnings Call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, product development time lines and financial performance and operating plans and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the Risk Factors portion and elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements whether as a result of new information, future events or other factors. In addition, today's discussion will include references to 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. Our call today will be led by John Sheridan, our President and CEO, and he'll be joined by Brian Hansen, our EVP and Chief Commercial Officer, and Leigh Vosseller, our EVP and Chief Financial Officer. Following their prepared remarks, we'll open up the call for questions. Thank you in advance for limiting yourself to 1 question and 1 follow-up before getting back into the queue. I'll now turn the call over to John.

Thanks, Susan, and thanks, everyone, for joining today's call. Looking back at the first half of 2022, I am proud of the team's performance and the progress we're making throughout the business, with more than 375,000 people using the t:slim X2 in more than 20 countries worldwide. We are delivering on our mission to provide a positively different experience for people living with diabetes. The highlights of Q2 stand out as exceptional as they were achieved in a more challenging operating environment compared to recent years. Our progress and our ability to navigate new headwinds to our business is a direct result of the passion and drive of our talented employees, we thank for their continued efforts. The highlights for this quarter reflect our continued leadership position in automated insulin delivery technology. We also saw steady sequential growth in the number of new customers purchasing a pump from Tandem once again, expanding global demand for the t:slim X2 and meaningful product development and operational progress. More recently, we've also advanced a number of key strategic initiatives such as last month's U.S. launch of our mobile bolus feature that we offer through the App Store on both iOS and Android smartphones. Our establishing the commercial and operational framework to begin distribution through a European third-party logistics provider and our acquisition of infusion set developer, Capillary Biomedical. These were all achieved why we were navigating a few macro and industry-related dynamics, which align in 3 major groups: first, the continuation of global pandemic related pressures that have fluctuated throughout the past 2 years. These include an array of things from COVID case rates to endocrinology office staffing shortages and absenteeism. Next is the anticipated dynamic of competition in the United States. This is in line with our expectations as it's something we've seen with historical new product launches, including our own, when new technologies enter the market. And lastly is the evolving economic environment, including inflation and the threat of recession. Our data suggests that this dynamic began impacting new customers' decision to purchase a pump beginning in the second quarter. This is primarily a factor in the U.S. as outside the United States, it's mitigated by predominance of government health care plans. To better reflect these dynamics, we reduced our 2022 sales guidance by 2%. As these challenges dissipate, we look forward to returning to more normalized growth patterns that are driven by the strength of our technology today. And the new product offerings such as the launch of Mobi and new CGM Sensor integrations. We remain confident that we'll achieve our long-term growth and profitability objectives and in our ability to continue expanding the insulin pump market by providing new innovations and best-in-class customer care. Brian Hansen has spent much of the last quarter in the field, and I'd like to ask him to provide some commercial perspective on Q2. Brian?

Thanks, John. Overall, the second quarter was both an exciting and busy one as many of our industry trade shows take place during this period. The feedback I continue to hear about t:slim X2 is overwhelmingly positive and very consistent. Our t:slim X2 continues to receive strong accolades for its ease of use, reliability and for Control-IQ's differentiated clinical performance. It's a product we can stand behind, and we've set a high bar in automated insulin delivery. In fact, the recent data presentations demonstrate that our Control-IQ technology is a great equalizer, bringing benefit to all populations. We're also seeing an increasing number of investigator-led studies that highlighted benefits for people who may not have been considered good candidates for pump therapy in the past. Impressive data was also recently featured in the Diabetes Technology & Therapeutics journal demonstrating the real-world success of people in the Medicare and Medicaid populations with type 1 and type 2 diabetes using Control-IQ. This will be particularly helpful as we advance our longer-term managed care initiatives for Control-IQ. The strength and consistency of Control-IQ's positive clinical outcomes is substantially linked to its automated correction bolus feature. Let me take a minute to explain the significance of this feature. As a different AID manufacturer do not use consistent terminology for how the algorithms work. Control-IQ is differentiated clinically compared to other AID systems as an addition to modulating the continuous insulin delivery rate, we're also able to automatically give larger amounts of insulin if needed. It's like having 2 different knobs to turn and as the feature allows our Control-IQ technology to deliver immediate and sustained improved outcomes even in people with the most poorly controlled diabetes. In addition to our clinical benefits, I think the overall ease of use and customer experience we provide are why we continue to see an increasing number of our customers choose Tandem once again when they become eligible for pump reimbursement. In fact, our renewals have grown approximately 40% compared to Q2 last year, which is an encouraging trend as our total renewal opportunity scales across the year. The feedback on our software updatability also continues to differentiate Tandem's offerings. We are showcasing these benefits now with our recent mobile bolus launch in the United States. t:slim X2 customers are now able to deliver insulin using their iOS or Android app on more than 30 different personal smartphones. We're also able to include continuous improvement solutions in these updates, providing even more enhanced benefits to our customers. Prior to the launch of mobile bolus, we often thought of it as more of a cool feature offering both convenience and discretionary benefits. What's been impressive is to hear people describe it as a game changer and that it makes living with diabetes less burdensome. One customer captured it perfectly, saying, "It's advancements like these that may not seem huge, but the effects they have on us are life-changing." We launched mobile bolus at an opportune time as we enter the latter part of the year with a typical timing of year-end deductible resets drives purchasing decisions. In fact, in the past few years, between 30% to 35% of domestic pump shipments took place in Q4. We expect this will again be the case in 2022, but it's a different commercial environment than it was a year ago. To provide insight on the dynamics we're navigating, we recently did a sales management survey of our team. The direct and indirect impacts from COVID-19 continue to be cited as having a negative impact throughout the second quarter. In the United States and Canada, our sales and clinical field teams have been exceptionally flexible in successfully adjusting to the layers of the pandemic's complexity. Patients are seeing their health care providers less frequently compared to prior to the pandemic, and when they do, it's often virtual. We've resourced our organization to support the continued use of virtual technology, including training and have also invested in enhancing and streamlining the patient onboarding and supplies reordering experience. Outside the United States, our distribution partners are also experiencing the same COVID-related headwinds that they have in the past few years, but continue to execute very well. Control-IQ was available in all the countries we serve worldwide and is met with the high levels of customer enthusiasm that we see here in the United States. As a result, we are seeing growth across all countries, which was reflected in our meaningful increase in year-over-year pump placements. This demand is somewhat masked by the lumpiness of the sales patterns, which continue to get disrupted due to ordering and supply chain timing. To help address this and in support of our distribution partners, we laid the commercial and operational groundwork as well as the IT infrastructure in the first half of this year to begin working with a third-party logistics provider in the Netherlands. We expect to scale our utilization of their services in the upcoming quarters in support of our growing international distribution network. By maintaining warehousing operations in Europe, over time, it will help to even out ordering patterns as the unpredictability and timing for order and receipt of product will be mitigated. It's the type of solution we're putting in place today to provide longer-term benefit to our business as we are still in the early stages of our efforts outside the United States. The next market dynamic we began to experience this quarter was competition in the United States and was in line with our expectations. Noise from new AID system launch has been anticipated for more than a year. However, the exact timing was dependent on its pace of rollout and availability. This is the dynamic we've seen multiple times in the past, including in advance of our own Control-IQ launch 2 years ago. It's a broad-based pressure across all new U.S. market segments, which is consistent with what we've seen previously and is likely why our source of new customers in Q2 remained about half MDI, half competitive conversions. Historically, the disruption from new system launches last for a few quarters following product availability. The best way for us to combat the interim noise is twofold. First is by doing what we do best by leaning into promoting the strength of our current offerings and the unique features of Control-IQ. This is a large and underpenetrated market, and there is not a one-size-fits-all solution in pump therapy. Next is through innovation, which we're delivering on with the recent launch of our mobile bolus feature and through our upcoming new product launches, which John will discuss. The last dynamic is the economic environment, which quickly became significant in the second quarter, where it was not in Q1. Accordingly, we saw a meaningful increase in customer utilization of our extended pump payment plans in Q2, which were much higher than we've ever seen historically. As a mission-driven company, our goal is to offer solutions so that the cost of therapy management does not prevent people from getting the technology they need. In support of this goal, we'll be rolling out an enhanced pump payment plan in Q3. The out-of-pocket cost to a patient can vary significantly through insurance, and we are designing our plan to provide for payment options as low as $50 a month. Durable pumps typically provide customers as well as payers a lower cost of therapy over the 4-year warranty period, which may increasingly become a factor for people purchasing in today's economy. It also helps with retention as there is low ongoing cost to customers for their supplies. We'll be watching their broader economic environment closely and continue to look for ways to make therapy management more affordable for our customers. With that, I'll now turn the call back over to John.

Thanks, Brian. Innovation remains key to Tandem's growth ambitions, and our teams are continuing to identify new ways to bring benefit to the diabetes community. Mobi is our next new technology in the pipeline. It's particularly exciting as it will be the first novel form factor launched in our space since we introduced t:slim a decade ago. It's fully controlled through a mobile app, and we're utilizing the same technology and regulatory building blocks that were foundational to our mobile bolus feature. Mobi is about half the size of t:slim and with it, we'll be launching a 4-inch infusion set. The shortest set offered in the insulin pump industry and a great option in providing our customers choice and flexibility. There's a lot of excitement building at Tandem for the introduction of Mobi. We are in the final stages of testing as well as drafting the submission and intend to submit a 510(k) to the FDA this quarter through the ACE pump pathway. This regulatory strategy allows for Mobi to be integrated with interoperable CGMs as well as our algorithms like Control-IQ without additional regulatory review. While development and regulatory time lines are difficult to predict, we are preparing for clearance in the first half of 2023. Launch planning activities are underway, and we are fine-tuning our manufacturing processes with scalability in mind. CGM integration work is another top priority for us and continues to progress well with both our CGM partners, Dexcom and Abbott. Our development team's interactions with both organizations are active and frequent as they each progress toward bringing their future technologies to market through the iCGM pathway. Our goal is to commercially launch in the U.S. within 3 to 6 months following the receipt of the FDA iCGM clearance. Turning to our clinical work. We have a number of active studies underway to bring the benefits of our Control-IQ technology to more people living with diabetes. All are progressing well and a few highlights since the last call include: enrollment for our type 2 feasibility study for Control-IQ is now complete; the extension phase for the pediatric trial using Control-IQ has recently wrapped up and data will be compiled over the next few months to support regulatory filings to pursue an age indication for children younger than 6 years old; and lastly, we've now initiated a study using Control-IQ with Ninja to expand the insulin indications and provide additional choice to our customers. As we discussed at our R&D day at the end of last year, we are also working to advance our global digital health initiatives, as well as innovations that improve our customers' overall experience with the solutions we provide. Our recent acquisition of Capillary Biomedical is a great example of this as they are developing unique extended wear infusion set technology. Infusion sets provide people flexible options and insulin pump wearability and the administration point of insulin into the body is critical for all therapy management systems. Through this acquisition and through our efforts with existing infusion set partners, we plan to provide our customers with an even greater choice in personalizing their therapy management system. I'll conclude by summarizing that the t:slim X2 with Control-IQ remains the leading product in a market with large and growing demand. It's an exciting time as we launch mobile bolus while continuing to make tremendous progress towards multiple new product launches. We look forward to the broader headwinds subsiding. But even in this interim period, we remain confident in the talent of our team, the service we provide as well as the technology and solutions we offer in the diabetes community. With that, I'll now turn the call over to Leigh. Leigh?

Thank you, John. The past few years we've been able to consistently demonstrate record quarterly sales and we achieved this milestone once again in the second quarter. The fundamentals of our business remain intact. Worldwide, we shipped 32,000 pumps and generated $200 million in sales in the quarter, which is a sales growth rate of 16% over the prior year. This was largely driven by continued strong retention of our worldwide installed base, which is 40% higher compared with last year, driving over half of our sales from recurring revenue sources. On a year-to-date basis, sales grew 20% to $376 million. Beginning with the U.S. market, sales grew 14% to $146 million in the second quarter. Supply sales grew 35% year-over-year, remaining consistent with our expectations and reflecting high customer retention of the more than 265,000 people in our U.S. installed base. We shipped 21,000 pumps, which was in line with the same period last year. It was a much healthier environment in the first half of 2021, making the year-over-year comp more difficult. Typically, we see pump demand build across the months within each quarter as well as in the quarters across the year. However, Q2 did not materialize in the same way as it has historically and that pressure continued through July. Our shipments this quarter grew sequentially from the first quarter by 12% despite increasing economic pressures as we exited the second quarter. Our second quarter sales outside the United States were $55 million, representing 23% growth over last year. This includes a 70% increase in supply sales year-over-year, largely driven by the 67% growth in our OUS installed base, which has now reached nearly 110,000 people. As anticipated, pump shipments to distributors outside the U.S. were down year-over-year, considering the second quarter of 2021 was our highest comp shipment quarter ever, due particularly to timing of distributor orders last year. As Brian mentioned, the fluctuations we see in shipments to distributors do not correlate to underlying patient demand. While shipments out the door were down, the number of pump placements on patients grew in the mid-teens for the first half of this year versus the prior year, reflecting continued steady improvement in patient demand for Control-IQ. We expect we will begin to see closer alignment of shipments out the door to placements on patients as we scale the launch of our European distribution center in the coming quarters. Turning to the outlook. Since the beginning of the year, we have factored pandemic and competitive-related pressure into our guidance based on what we have experienced historically. We feel that the results today are largely in line with those expectations. The shift in the economic environment and its impact on consumer purchasing behaviors is a new dynamic that we began experiencing in the second quarter and even more so as we enter Q3. We think it's prudent to be cautious about the U.S. environment for the remainder of the year. Therefore, we have reduced our 2022 worldwide sales expectations by 2% to a range of $835 million to $845 million, representing growth year-over-year of 19% to 20%. This breaks down into an adjusted range of $620 million to $625 million in the U.S., while we are maintaining our range of $215 million to $220 million in the market outside the U.S. U.S. pump shipments in Q3 are expected to remain relatively in line with Q2. Shipments outside the U.S. are expected to dip from the impact of the typical European holiday season, which was already factored into our original guidance for the year. As to the rest of the P&L, we saw positive gross margin contributions from improvement in both labor and overhead rates from manufacturing efficiencies, offsetting the impact of product mix with a continuing tailwind from higher average selling prices. The higher ASPs reflect further progress in our long-term initiative to shift a higher percent of U.S. sales through direct channels, which increased to 35% of sales this quarter, up from 32% last year. This progress was masked in our overall gross margin of 51% due to the new pump sales pressure we discussed as well as the higher cost of pump raw materials. In recent quarters, we have in certain circumstances relied on alternative higher cost sources of particular raw materials to reduce the risk of near-term component shortages. In the second quarter, these increased costs negatively impacted our gross margin by more than 2 percentage points, which was slightly higher than we originally anticipated coming into the year. We applaud our operations team for successfully navigating in this environment and ensuring that we have been able to meet our inventory and production goals. Additionally, we continue to incur higher freight costs associated with increased fuel costs and global supply chain pressures more generally. Based on the change in sales expectations for the year and these near-term incremental costs, we are taking the same cautious approach in reducing our 2022 gross margin guidance to a range of 52% to 53%. Moving on to other key profitability measures. Operating margin was negative 6% in the quarter and our adjusted EBITDA expanded to positive 6% of sales compared to the first quarter of 4%. The change from adjusted EBITDA of 14% in the prior year is reflective of multiple factors. Most significantly, we continue to prioritize investment in our R&D programs, which are critical to achieving our long-term product development goals. R&D spending was up 5 percentage points compared to the prior year at 17% of sales. Taking into consideration our adjusted sales expectations and the acquisition of Capillary Biomedical, we now anticipate that R&D will settle in at approximately 17% of sales for the full year. Our SG&A spending growth compared to the prior year includes expansions of our field sales team from 95 to 110 territories and our customer support teams for our growing installed base as well as higher travel costs for increasing in-person interaction. Also, we recently took possession of and began improvements on a facility that will help our new technology and innovation center. This will ultimately replace more than 70,000 square feet of existing lease space that we will vacate in mid-2023. In the second quarter, this resulted in $3 million of redundant facility costs and we anticipate the full year incremental cost will be approximately $10 million. Key lean initiatives and careful review of discretionary spending remain underway as we optimize our customer support infrastructure through operational efficiencies and digital solutions. These optimization programs, combined with significant gross margin expansion are the primary drivers for operating margin leverage in the long term. Our full year expectation for adjusted EBITDA is now approximately 11% of sales due primarily to our change in gross margin expectations and the impact of our Capillary Biomedical acquisition. Our balance sheet remains strong with $635 million in total cash and investments, which has increased $12 million from the end of 2021. Capital expenditures increased to $15 million in the first half of this year, primarily to support facility improvements and manufacturing capacity expansion. We anticipate capital expenditures for the full year will be approximately $40 million. In the second quarter, we also entered into a $100 million line of credit agreement as a matter of routine corporate governance and to provide further flexibility in pursuit of our strategic initiatives. No funds have been drawn against the facility. To summarize our 2022 outlook, worldwide sales are estimated to be in the range of $835 million to $845 million, including international sales of $215 million to $220 million. We estimate gross margin for the year will be in the range of 52% to 53% of sales and adjusted EBITDA will be approximately 11% of sales. Our noncash P&L charges for stock compensation, depreciation and amortization are expected to be approximately $100 million of which $85 million is associated with noncash stock compensation and $15 million with depreciation and amortization. We remain confident in our longer-term goals to reach an installed base of 1 million customers worldwide in 2027 and meaningfully expand our gross and operating margins despite the near-term headwinds. We are already nearly 40% of the way to our installed base target, satisfaction and demand for our t:slim X2 with Control-IQ remains high and our exciting R&D programs that are necessary to deliver on future growth ambitions remain on track. With that, I will turn it over to the operator for questions.

[Operator Instructions]. And our first question comes from the line of Steve Lichtman from Oppenheimer.

John, I was wondering if you could talk a little bit more about the economic headwinds that you noted, can you -- based on what you're hearing from the field, are people not going to pump at all and staying on MDI, are you seeing a shift more toward lower upfront models like patch pump? Any more color on that would be helpful.

Sure. I think that, as we've noted over the last couple of quarters, we have seen COVID-related effects. There's been absenteeism and staffing shortages in ATP offices. And they've certainly continue to exist, and it's probably 50% of our practices are seeing the effects of that today. And we've also seen the competition come up in the second quarter. We really didn't see any in the second -- in the first quarter, but the second we have. I would say it's in line with what we expected. And just -- I would say, similar to what we saw in the second half of 2019 when we ourselves were affected by the Control-IQ. This is the first quarter that we actually have seen the economic factors. And I would say that what's happening is that people are concerned about the threat of recession and inflation. And there is making, I think, they're being more cautious when it comes to spending money. I think what we're seeing is that people get into the funnel, and they just take more time to make pump decisions or they just paused in the funnel. And so our inside sales teams talks directly with the people in the funnel. And so we know exactly what's going on, but it appears to be more timing and delays just because they are making -- they're just taking a lot more -- they're being more sensitive to the financial implications. That being said, as Leigh and Brian noted in the prepared remarks, we have seen a significant increase in request for extended payment programs. And I would say that this quarter, in particular, was the highest we've ever seen. And I think that Brian also mentioned that we're actually revising this program and we're going to be rolling it out this quarter to try to offset any of those financial implications and potential effects on that -- on those decisions, just to basically make it a lot easier for people to get past that concern over the finances. Brian, you and Leigh would want to add anything to that?

Got it. And then in terms of what you're assuming in the back half on that front, are you assuming that these new programs have any offsetting effect or help stem the headwind that you're seeing on the economic side? Or -- and when can those new programs -- with enhanced programs be put in place?

Sure. Thanks, Steve. So what we factored in for the economic headwinds is that they basically persist through the end of the year, but we still anticipate that we'll begin to see that normal seasonal uptick into the fourth quarter. So our goal is to have the enhanced programs ready to help push that uptick as we move into the back half of the [Technical Difficulty] in the next few months.

And our next question comes from the line of Brooks O'Neil from Lake Street Capital.

Just following on with Steve. Can you guys say if there's any revenue impact of a customer electing a deferred payment plan?

There is not, Brooks. It's merely how we account for our accounts receivable, not on the revenue side.

Yes. Okay, good. And then just as a second question. Obviously, it was a big quarter in the CGM market. First, you saw the approval of Libre 3 and then the announcement of a delay in G7. I'm just curious if you saw any or see any impact for your business from those developments and whether you could comment on how you feel about things going with Dexcom and Abbott now?

Sure. I'd say that when it comes to CGM, we're very focused. We're working closely with our partners. We're making great progress. I think that when it comes to Abbott specifically, they have to deal with the issues of vitamin C counter indication and why we work with their teams on the integration. They are very confident that they're going to deal with that successfully, and they're going to get the counter indication removed as well as with DexCom -- we're continuing to work with DexCom. We have a great relationship with them, and we've done several integrations already. And we really think we have -- we know exactly what to do to make this happen. We've stated that we believe that we will introduce our commercial implementation 3 to 6 months after both Dexcom and Abbott get FDA approval. So sometime probably in the early part of 2023, and we're -- again, we're excited about this. We think these are great drivers for our business in 2023 and beyond.

And our next question comes from the line of Travis Steed from Bank of America.

So on the $15 million to $20 million guide reduction for this year. You called out kind of 3 things staffing competition and kind of the macro recession. Just make sure I understand exactly. It sounds like nothing changed except the recession piece versus expectations. So is the entire reduction related to the recession piece? And how much of that did you see in Q2 versus what you expect in the second half?

Yes. Thanks for the question, Travis. So you're correct. The guidance reduction was solely around that third dynamic -- that third new dynamic. We began to really see this at the very end of the second quarter and moving into the third quarter. So it's something new that's obviously more difficult for us to predict, but we think we have good mitigations in place, and we'll continue to manage through it throughout the rest of the year.

Okay. And for -- since you saw it late in the quarter, is it fair to think Q3 revenue is going to be down sequentially or flat sequentially? And just any color on kind of Q3 revenue. Then when you kind of think about 2023, you've talked about longer term 20% revenue growth a year. I don't know if 2023s more likely a recession -- I mean a transition year. given the recession and some of these lingering impacts or if you think you can still kind of be at that 20% revenue growth for 2023?

Yes. So starting with the third quarter. In the U.S., in particular, we're expecting pump shipments to be roughly flat to what we saw in Q2 as we work through some of these dynamics. And then late in the third quarter is when we typically start to see the increase in orders that will really drive that fourth quarter seasonal uptick that we're still anticipating this year. Thinking ahead to 2023, obviously, it's a little bit early to start talking about guidance for that year as we continue to work through this and figure out how to forecast it through the remainder of the year. But we look forward to next year. There's a lot of exciting things coming as we think about Mobi as we think about the CGM integration. But when we get closer to that time, we'll obviously give more clear guidance than just always a reminder when we set our guidance initially, we don't typically include new products that we expect to have introduced. So when we come out at the beginning of the year, it will likely be more on the baseline business. And by that time, we'll have a better view as to what's going on in the environment.

And our next question comes from the line of Chris Pasquale from Nephron Research.

Curious on the international ASP. It's been around EUR 2,100 for each of the past 2 quarters. I think last quarter you said that probably comes back down, but it stayed up there, and that's helped to mitigate some of the currency pressure the otherwise would have felt. Can it stay up at that level? Or does it go back to closer to the EUR 1,800 last year?

Sure. Good question. So first, I'll just point out that we have very little exposure to currency fluctuations at this time. The vast majority of our business is currently billed in U.S. dollars. The fluctuations that you may see from quarter-to-quarter really vary based on the different geographies and where the largest orders are coming from. But because the reimbursement does vary, so it impacts what our distributors pay us for the technology. So that fluctuation is something that will -- it could still occur. But I think to continue assuming in that low EUR 2,000 per pump is probably a fair way to think about it on average.

Okay. That's helpful. And then just give some additional thoughts on what the Capillary Medical deal does for you. Do you see this as offering some flexibility that might get more patients to adopt the pump over time? Or do you see this becoming maybe a premium offering on the supply side that would actually help you drive more revenue per patient?

Yes. Thanks, Chris. First of all, we're excited to have the Capillary Biomedical team as part of Tandem now. It's really exciting technology. And I think that certainly it provides more choice to our customers, and it will improve the experience. I mean there's a number of improvements in the CapBio technology that will reduce occlusions, it's the -- there will be inserting process is actually painless. So there's a number of things like that. And also the extended wear of course, is a big addition. So we're excited about all that. I think that the opportunity really is to provide more choice and also there's an opportunity, I think, to look at margin improvement over time as we take responsibility for the technology.

And our next question comes from the line of Matthew O'Brien from Piper Sandler.

Just for starters, John or Leigh, the second half guide on the U.S. side of things, it seems a pretty steep ramp, especially in Q4, and you've got obviously O5 ramping up and then this recessionary pressure and maybe even Medtronic getting into the market with 780G. So I know renewals will be a big piece of this, but if the recession is going to be more impactful and people can't afford things, why not just extend your pump a little bit longer? Why the confidence in that Q4 meaningful ramp?

Sure. Good question. So as we think about the different -- I will bucket them into the 3 different dynamics. We've learned how to navigate with the staffing shortages and the challenges in the HCP offices, and we expect to continue to improve on that as we look throughout the remainder of the year. The noise around the competitive launch, particularly right now is more temporary in nature. And the most important thing was that we needed the product to be on the market. So everyone could actually see and experience what it is that's out there. So having that come out to its full launch is going to be very helpful. And we expect to see that noise start to dissipate in the next quarter or 2 as it becomes more widely available. The headwind with the economic environment is the one that we expect to continue and with our -- some of our mitigation plans in place. And then again, just the normal pump seasonality, which will help drive people through the funnel as more and more people have met their deductibles. We feel confident that we can achieve that fourth quarter number.

Okay. And then on the international side, again, a pretty big bump in the second half of the year. And it's still a challenging environment confidence there. And then that third-party distributor that you have, how long does it take to really get that group up and running because it seems like the opportunity internationally for you guys from a penetration and share taking perspective is sizable. So is that something that can really move the needle next year? Or is it going to take even longer than that?

Yes. So I'll start with the guidance part of it. We feel very confident in the number we put out there this year. So 2 pieces, right? We do expect that we will see continued traction in pump ordering patterns as more and more people are being put on Control-IQ, and we're seeing that in the underlying patient demand piece of it. But also as our installed base grows, you continue to see that our supplies grow pretty ratably in line with that. So those are 2 of the factors that will drive that back half healthy environment. And then when it comes to the distribution center, that's something that we've built the framework for and we're implementing it now. We expect it to be about a 12-month deal. What we're going to do is stay in different markets a few at a time, just to make sure it's running well operationally that we can greatly satisfy the distributors. And that's the point where we feel -- will feel confident that we'll start to see more alignment of the shipments out the door with the patient placement. And so we hope to reduce some of that variability that we've been seeing quarter-to-quarter on the ordering pattern.

And our next question comes from the line of Jayson Bedford from Raymond James.

Leigh, I guess Brian mentioned it, too. But the 40% growth in renewals, does that imply that renewals were north of 20% of the pumps shifting in 1Q or 2Q?

The renewals of the percent of our U.S. pump shipments were just around 20%, very similar to the level that we saw in Q1. And that's a step up from last year at about a 15% of shipment level. So it's a great demonstration of the progress that we've made with renewals and very exciting as we see those opportunities scaling up this year, and again, even doubling in size again next year.

Okay. And then just maybe on the economic headwinds you mentioned. There haven't been many companies that have cited to slow down, at least in med tech. And I'm wondering if the desire for extended terms from your customers is more a function of the competitive environment where the upfront is obviously lower. Do you have a good sense of that? And I don't know if there's any metrics you can throw out kind of delineating between kind of competitive and true kind of macro recession fears?

Sure. I think one of the most important elements to think about this is, it's typically not an economic decision of which products to purchase. The decision is should I be on pump therapy. Then the choices which form factor is going to be right for me? It's going to give me the best results in the way that I like to wear my product with the optionality that I would like in it. And so we don't see these economic headwinds as anything that would shift people's mindset to a different product just because it has a different reimbursement structure. And in fact, we think that our payment spend opportunity is the equalizer there so that it can mitigate any [indiscernible] people might have with the upfront payment. And then when you look out further in the future, if you think about it over a 4-year life, it's less expensive to be on durable pump than it is to be on a patch pump. And so that's something that we help people to understand and so that they especially in an environment where maybe they're already on the product, there's less of a question mark about whether or not they can afford the supplies as they go forward. So back to the original thought is that we don't think that this has anything to do with competitive dynamics that truly is when people are able to report with the pump purchase.

I'll also say that our -- inside sales organization and our sales force really have active communication dialogue to people who are in the front. And this is what they're hearing. It's really not the competitive issues. It's more of a -- just the macroeconomic factors.

Our next question comes from the line of Dane Reinhardt from RW Baird.

So one, just on capillary, how much R&D or kind of other SG&A spend might we have to embed into the model before we get to any sort of revenue generation?

Sure. So we did factor in the spending through the back half of this year, at least as a starting point -- and that was part of the reason we adjusted our EBITDA guidance for the remainder of the year. And then as we move into 2023, we'll give more color as we start to talk about what clinical trials might look like and other factors that would contribute to that. But for now, it's factored into that adjusted EBITDA guidance of 11%.

Okay. And then just on the international side, are you seeing any sort of competitive really implications there just because it seems like we've seen real-world data for 780G veteran sentiment kind of much better, less negative than it is in the U.S.

Yes, this is Brian. We certainly haven't at this point. The markets tend to be very consistent through the year. We see growth in all of our areas, and we don't see any real difference in the competitive pressures at this point.

Our next question comes from the line of Joshua Jennings from Cowen.

This is Brian here for Josh. I wanted to start, just given some of the current challenges relating to the availability and cost of materials, can you comment on your preparedness to launch Mobi next year just from a components and supply chain standpoint. I understand it's a smaller device, but are the materials in Mobi essentially the same as the ones you currently use for t:slim?

Good question. I'd say that they're actually very different. And we have suppliers lined up. They're producing the product for us right now. We're actually building it here today as we speak. And at this point in time, we don't see any particular problems. If you look back in this past year and the TDD issues that we've experienced this quarter, it really started back in the latter half of 2021 when we saw a lack of predictability in some of the electronic component supplies. What we have seen more recently is the -- our suppliers have been able to get back on track and are a lot more predictable now than they were back then. And so if things -- like things are beginning to return to normal to a certain extent on the supply chain, but we feel pretty confident on our ability to produce Mobi when we introduce it in the first half of next year.

Okay. And then just a clarification on the extended pump payment plan. You referenced reducing the monthly payment to as low as $50 a month, I believe. And just for the payment plans you offer now, where does that monthly payment stand typically?

Yes, it is varied pretty widely. And we have, in some cases, offered that. But what we're doing is packaging it a little bit differently and it's going to be as much a focus on the marketing of it as it is the structure of the payment plan itself. So stay tuned, more to come when we actually roll that out.

This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.