Tandem Diabetes Care Inc (TNDM) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Susan Morrison.

Thank you. Good afternoon, everyone, and thank you for joining Tandem's fourth quarter and full-year 2014 earnings conference call. Today's discussion may include forward-looking statements. These statements reflect Management's expectations about future events, product development timelines and financial performance and operating plans and speak only as of today's date.

There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the risk factors portion or elsewhere in our most recent annual report on Form 10-K and in 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.

The Company also announced today, in a separate press release, the commencement of the underwritten public offering of its common stock. The focus of this call is to discuss the Company's financial results for the year and quarter ended December 31, 2014. In light of that and SEC rules and regulations, the Company will not be discussing or answering any questions about the proposed financing. Kim Blickenstaff, Tandem's President and CEO, will be leading today's call. And at this time, I'll turn it over to Kim.

Thank you, Susan, good afternoon, everyone. Also with me today is our CFO, John Cajigas. So last year and the fourth quarter in particular were tremendous for Tandem in many ways. Most notably was our achievement of 71% year-over-year sales growth, our more than doubling of the t:slim installed base since the end of 2013. Our 10-point improvement in gross margin, the exciting results of independent surveys that continually rank the t:slim Pump number one in overall user satisfaction and product features throughout the year and our significant progress with new products in development.

We also faced some challenges such as the disruption caused by our sales force expansion which tempered growth in the first half of the year and an evolving payer environment which has kept our utilization of distributors at a higher rate than originally anticipated. Overall though our positive achievements in 2014 far outweighed the challenges and I'm extremely happy with the progress we've demonstrated.

2014 also was a year in which we continued to build the Company's foundation for future growth. When we look at the catalyst in our business for achieving sustained above-market growth, its primary driven by three initiatives. Our sales force size and productivity, our ability to commercialize our near-term pipeline products and advancing our long-term pipeline.

Starting with sales force sizing and productivity, this was our primary focus for driving growth in 2014. We made a significant investment early in the year by expanding our nationwide sales force from 36 to 60 territories. Between sales and clinical employees based in the field and internal teams supporting our growth, our growing install base and increasing product demand, we added more than 100 employees to our organization.

It was a large and disruptive effort but strategically important that we quickly scale the business in advance of Q4. As a reminder, the second half of the year was typically the strongest due to the timing of when people tend to make purchasing decisions relative to meeting their insurance deductibles. Our strategy was validated in the fourth quarter with sales of nearly $18 million, which represents 75% growth over last year.

In evaluating further sales force expansion opportunities, we've decided that our current 60 territory structure is the right size for the Company in the near term and we will continue working to increase our reps productivity and any future territory expansions will be more measured.

This brings us to the Company's second initiative for driving growth, which is commercializing our near-term product line. We developed Tandem's technology to be adaptable and address different segments of the diabetes market, which allows us to leverage operational efficiencies and manufacturing customer service in our sales and clinical efforts.

In 2014 we made meaningful R&D progress with our PMA submission for the t:slim G4 Pump and the 510(k) filing and clearance of the t:flex Insulin Pump. We designed t:slim G4 to offer people the same easy-to-use pump benefits as t:slim with the integrated convenience of Dexcom's G4 platinum sensor for continuous glucose monitoring.

Less than 30% of people with type 1 diabetes use an insulin pump and only about 10% of people with type 1 use CGM. So we think there's a significant opportunity to expand both market segments by offering people the convenience of an integrated device.

As a reminder, we submitted our t:slim G4 PMA in July of 2014 and anticipate a 12- to 18-month review cycle. Our conversations with FDA have continued to be positive and interactive. Most recently we've completed our FDA site inspection and we were very encouraged by the outcome.

We're actively working to respond to the agency on their most recent questions. And while we await their reply, we will continue to prepare for the commercial launch of the t:slim G4 in the second half of this year. Of course, we all recognize that the specific timing of approval is not entirely within our control, but we will be prepared to launch this new product as quickly as possible after we secure approval.

More immediately, launch activities are well underway for t:flex, which received 510(k) clearance in January and we plan to begin shipments in the second quarter. At 480 units, the t:flex Pump will offer the largest capacity insulin cartridge available. I was extremely pleased with the speed of the FDA's review of this filing. With just over two months between filing and approval, it was a testament to the high quality of work by our team in putting it together and our strong working relationship with the agency.

The t:flex is designed for people who require more than 100 units of U-100 insulin per day, such as teenagers with type 1 diabetes and people with type 2 diabetes who require daily administration of insulin. In our market research, two-thirds of endocrinologists cited limited capacity as the number one barrier to insulin pump adoption for people with type 2 diabetes who were insulin-dependent.

Although approximately 10% of Tandem's customers have type 2 diabetes and are using the t:slim's 300-unit cartridge, only about 125,000 people of the potential 1.7 million people with type 2 diabetes who are candidates use an insulin pump. So we believe that t:flex aligns well with our strategic growth initiatives by providing a significant opportunity for market expansion. Our current 60 territory sales and clinical teams plan to market t:flex to the same prescribers and bill under the same codes as t:slim.

However, pump eligibility criteria for people with type 2 diabetes can be different and often requires additional documentation and lab testing to gain in-network insurance reimbursement benefits. John will discuss how this impacts our guidance assumption in more detail. But overall while we strongly believe there's a significant opportunity to expand this market, we believe the ramp will be at a considerably slower pace than t:slim due to the insulin pump market being less established for people with type 2 diabetes.

The launch of t:flex and the potential launch of the t:slim G4 in 2015 are exciting growth catalysts for Tandem. The launch of additional products brings us to a new level as a Company as we'll now offer product portfolio rather than a single product. We believe this will allow us to compete even more effectively in the marketplace by better meeting the range of product needs in the diabetes community.

It's this mindset that brings us to Tandem's third initiative for driving growth, advancing our long-term product pipeline. We are uniquely positioned to leverage our product's modern features such as our micro USB connection, the touch screen and wireless technologies to advance our future product offerings.

In smartphones, when a new software version or a new feature is available by the company, a user connects their phone to the Internet and has the option of updating it. We believe something similar is also possible for insulin pumps. I'm excited to share with you the project we refer to internally by its development name, [Odyssey].

Odyssey is our proprietary PC and Mac compatible web-based system that is being developed to allow users to update their pump software at home similar to their smartphone. Development work is well underway and we anticipate filing a 510(k) with the FDA for this product in the fourth quarter of this year.

Initially Odyssey may provide users with an opportunity to update the version of their pump software which would allow us to continue to enhance our customers' experience with our products. Longer term, I have a broader vision for this technology in which Tandem can offer a next-generation universal pump platform.

And through Odyssey a customer and their healthcare provider would have the flexibility to select the most fitting software based on the person's evolving needs throughout their four-year pump cycle. Odyssey highlights the true potential of touch screen technology and our customers' centric philosophy.

The next feature we have an opportunity to leverage is our wireless technology, primarily our Bluetooth low-energy radio which you may not be as familiar with. A Bluetooth radio is included but not enabled in the commercial t:slim, but a research version of the pump is available with the radio turned on. Beginning in 2013 and throughout 2014, we've actively supported leading investigators in advancing their development of artificial pancreas solutions by providing Bluetooth-enabled pump hardware and software.

We are committed to continue advancing the clinical applications of Tandem's technology. To this effort, in 2014 we initiated the R&D concept phase of our artificial pancreas offerings. Our first AP product will utilize Tandem's proprietary technology platform and will partially automate insulin delivery based on CGM information and predictive algorithms to aid a user in maintaining their targeted blood glucose level and may reduce the frequency and severity of hyper or hypoglycemic events.

Conceptually there are two incremental opportunities for this product's algorithm. The first is an algorithm that would use a person's CGM data to predict when their blood glucose level was trending toward dropping below a specific threshold. In advance of reaching that threshold, the person's pump would cease insulin delivery which we refer to as predictive low suspend. Predictive low suspend is an exciting step in artificial pancreas technology, but preventing or reducing the frequency and severity of hypoglycemic events is half of the equation.

The second opportunity for this technology is not only designed to address hypo but hyperglycemia as well, and we refer to it as basal closed loop. This technology is being designed to operate similar to the predictive low suspend except it uses a person's CGM data to predict when the blood glucose level is trending above a certain threshold and the user's pump would adjust their basal rate accordingly. An accurate CGM sensor combined with our pump technology, which offers the benefit of the smallest insulin delivery increment, are key of this offering.

In the second half of 2015, we plan to file an investigational device exemption, or IDE, within the FDA for a clinical study involving our first AP product. Our discussions with FDA surrounding this IDE will help define the regulatory pathway which we anticipate will require PMA approval and will include data from one or more clinical studies. Clarity of the regulatory pathway will also help us in determining if we'll be pursuing one or both of the algorithms in our first commercial AP product. Overall it's a very exciting step for the Company as we focus on both the clinical as well as the consumer applications of our technology.

As you can see, across all of Tandem's initiatives we are making meaningful progress and have significant opportunity for both near and longer term growth. Our efforts and successes in 2014 have further strengthened Tandem's foundation and we now look to further expand the insulin pump market in 2015 through our new product offerings. I'll now turn it over to John who will provide more detail on our 2014 results and guidance for 2015.

Thanks, Kim. Good afternoon, everyone. As Kim mentioned, we are very happy with our performance in 2014 as a whole, and in particular, I believe we have an outstanding fourth quarter in many respects, from our sequential growth and sales to our operating margin performance.

Turning to the details of our sales and product shipments, looking at Q4 first. Sales for Q4 was $17.9 million, an increase of 75% from $10.2 million in Q4 of 2013 and growth sequentially of 32% from $13.5 million in Q3. Pump sales accounted for 86% of our total sales in Q4, compared to 87% for Q4 in 2013. t:slim sales in Q4 grew 73% year over year while supplies grew 84%.

In Q4 we shipped 3,929 pumps, almost 1,000 pumps more than what we shipped in Q3. With sequential growth of 34% in pumps shipped, we demonstrated strong performance in what typically is the most competitive and productive pump-selling quarter within any given year.

Sales to distributors represented 79% of our total sales, compared to 76% in Q3 and 66% in Q4 2013. The increase in the percentage of sales to distributors in Q4 was primarily attributed to the higher level of sales to a distributor servicing United Healthcare members for a full quarter for the first time. The distributor began servicing UHC members in the middle of the third quarter. This new arrangement provides UHC members with greater access to our products on an in-network basis and we are seeing contribution to our overall sales from this new opportunity.

For the year, our sales were $49.7 million, an increase of 71% over sales of $29 million in 2013. This is an outstanding performance in my mind in light of the sales disruption we experienced during 2014.

For the year, we shipped over 10,800 pumps, which reflects an increase of 67% compared to approximately 6,500 pumps shipped in 2013. As of year end, our cumulative shipments since our t:slim launch in 2012 have grown to more than 18,300 pumps, which we believe represents about 4% of the total US insulin pump market.

Our sales force continues to see sequential quarterly gains in their average productivity after our sales force expansion in the first half of 2014. The average productivity of our sales force increased in Q4 raising the overall average for 2014 to the high teens in pumps per month per territory. We do expect the average productivity of our sales force to continue to increase in 2015 on an annual basis when compared to 2014.

Moving on to cost of sales and gross margins. Our gross profit for Q4 was $6.5 million. And for the full year 2014 it was $15.2 million. Q4's gross profits increased 49% sequentially from Q3. Our gross profit for the fourth quarter alone exceeded the gross profit for the entire 2013 calendar year.

Our overall gross margin for Q4 was 37% compared to 33% for Q3 and 12% for Q4 of 2013. Our gross margin for the full year 2014 was 31%, up from 21% for 2013. Our Q4 and 2014 gross margin improvements primarily resulted from increased volumes and efficiency gains in our production processes.

Also as a reminder, our gross margin for Q4 of 2013 included the financial impact of our voluntary cartridge recall announced in January 2014, which reduced that quarter's gross margin by approximately 13 percentage points. For the full year 2014, the recall impacted our gross margin by less than 1 percentage point.

Similar to prior quarters, our gross margin was also impacted by factors beyond pure manufacturing related items, such as the percentage of our sales channel to distributors where we generally do not capture the revenues and associated positive gross margins from the sale of infusion sets. The percentage of sales representing pump supplies which have a lower gross margin than t:slim, a changing mix of third-party payers with varying level of reimbursement and after-shipment costs such as warranty and training costs.

We still continue to anticipate variability in our quarterly gross margins for these reasons, and as we experience quarterly fluctuations in our sales volumes, driven by seasonality, especially sequentially between Q4 and Q1, and as we scale manufacturing operations for higher volumes and to include new products, improve our processes and implement additional automated manufacturing equipment.

Looking at the rest of our P&L, our operating loss for Q4 was $17.5 million, compared to $19 million for Q3 and $16.5 million for Q4 of 2013. Our operating expenses for Q4 were $24 million, compared to $23.4 million for Q3 and $17.7 million for Q4 of 2013.

On a sequential basis, our operating expenses increased primarily because of increases in employee-related costs, such as bonuses and sales commissions based on our strong performance in Q4. The increase on the year-over-year basis was primarily associated with headcount growth in our commercial organization.

Our operating loss includes non-cash stock-based compensation. During Q4, we recognize stock-based compensation of $3.9 million, compared to $3.7 million in Q3 and $2.8 million in Q4 2013. Our stock-based compensation for 2014 was $15 million in total, compared to $4.5 million for 2013.

Despite the year-over-year increase in our operating expenses, our growth in our revenues and gross profits grew at a faster rate. This leveraging of our operating expenses has resulted in sequential improvements in our operating margin.

Our operating margin for Q4 was negative 98% compared to negative 141% for Q3 and negative 161% for Q4 of 2013. We finished 2014 with a full-year operating margin of negative 152%, improving from negative 170% in 2013 despite our significant investment in our commercial operations.

With respect to cash and cash flows, at year end our cash and investment balance was approximately $69 million. I'm pleased that we've been able to reduce our cash burn during the last three quarters. The Q4 cash burn was $12.6 million, compared to $14.4 million in Q3 and $16.5 million in Q2.

Moving on to guidance. We expect our full-year 2015 sales to be in the range of $70 million to $75 million. This represents an annual sales growth of 41% to 51% compared to 2014. We expect that our 2015 sales will see a similar quarterly pattern to what we experienced in 2014.

For example, our sales for the first quarter of 2014 represented approximately 16% of our total sales. And 2014 sales overall were heavily weighted towards the second half of the year. We also anticipate some competitive noise primarily in the first half of 2015 relating to the second CGM integrated insulin pump that was launched in Q1.

Included in the revenue guidance are revenues for t:flex sales of approximately $1 million to $3 million, which we intend to begin shipping in late Q2. As Kim mentioned, t:flex will be built using the same reimbursement codes and pricing as t:slim. However, due to the differences in pump eligibility criteria for people with type 2 diabetes, we're assuming that it will only modestly contribute to our average territory productivity in 2015.

From a productivity perspective, our current expectations for t:flex pump sales translates into an average territory initially selling one incremental pump in a month which may scale to three pumps over a 12-month period. Because our t:slim G4 product remains under FDA review and is not yet approved for sale, we are not including the financial contribution of that product in our guidance at this time. We expect our territories on average will sell at least 20 pumps per month during 2015 with the greatest increase in territory productivity occurring between Q3 and Q4.

Moving on to our operating margins. We expect to see our operating margins for 2015 in the range of negative 100% and negative 110%. This includes non-cash stock-based compensation that we currently estimate could range from $13 million to $14 million.

Our SG&A expenses are expected to increase as our revenues and install base of customers grows. They will also increase to support new and anticipated product launches. However, as Kim mentioned earlier, we are not planning a sales force expansion in 2015 at the scale of expansion we performed in 2014.

Our R&D expenses are expected to grow at a rate similar to prior years as we begin to increase our efforts related to support of the artificial pancreas projects that we are now focusing on. With respect to our cash, we expect our current cash, investments, available debt and proceeds from the exercise of options and warrants to be sufficient for our operating needs for at least the next 12 months.

Key factors influencing our cash flow expectations and ultimately our Company's profitability timeline and potential capital needs, involve sales rep productivity, our ability to secure regulatory approvals and successfully commercialize potential new products such as t:flex and t:slim G4, and our ability to gain leverage within our operations as sales expands and new products currently in development roll out.

For 2015, cash utilized in Q1 is expected to be higher than Q4 primarily due to our expectations of lower sequential sales due to seasonality as well as the timing of payout of incentive competition such as sales commissions and 2014 annual bonuses that all non- field-based employees at Tandem are generally eligible to earn and that we expense in Q4.

Our cash burn for the remaining quarters of 2015 will be dependent on such factors as the quarterly sales and gross margins, expenditures associated with commercial activities such as t:flex launch activities, and trade shows and R&D milestone payments and general headcount growth as our operations expand. And with that, I'll turn it back over to Kim.

Great, thanks, John. I'd like to conclude our remarks by highlighting last week that we announced the release of our t:simulator app which is a marketing tool that mirrors the same steps used on the t:slim pump for many of the most commonly used insulin pump tasks. The app is available at no charge, can be used on the iPhone, iPad or iPod touch, and an Android version is currently in development.

Although the t:simulator is for demonstration purposes only, we believe it distinguishes us from our competitors and that it will be a useful way for people interested in a t:slim to grasp the power of the technology platform and easy-to-use touch screen interface. We also believe the app will give us greater experience for potentially using our touch screen for possible future mobile applications.

As you can tell, we are all externally proud of the progress we've made to date, particularly that there are more than 18,000 people who have chosen t:slim to manage their insulin therapy and about half of which report being new to pump therapy. Just last week, the most recent results from the dQ&A US Patient Panel Report were released, and once again showed that t:slim ranked as number one among insulin pumps, both for overall satisfaction and customer support satisfaction. In fact, the t:slim was once again ranked number one in 14 of the 19 categories, including effort required for training.

This Patient Panel Survey consisted of about 1,200 people and I was very happy to see this recognition of our product and especially of the excellent service provided by our team who train and support people who use the t:slim. Receiving such high marks once was an exciting accomplishment, and to continuously be ranked so highly is an honor and not one that we take lightly. It's motivation for us to continue to innovate and build the business to support the diabetes community.

2014 was a very exciting year and one which we saw significant momentum in the adoption of the t:slim pump. We continue to be thrilled with our customers' response to the t:slim Pump's easy-to-use features and modern design, as well as the excellent training and support our employees offer. Looking to 2015, it's an exciting time for the Company as we prepare to launch our next commercial products and work to develop new products that will further support the diabetes community. With that, I'll turn it over to the Operator for questions.

(Operator Instructions)

Rick Wise, Stifel.

Hi, guys, it's actually Matt Blackman here for Rick. A couple of questions, first of all congratulations on the quarter. I was wondering if you could reflect on rep productivity? Obviously you had a nice uptick, here in the fourth quarter, as expected.

But as we think about your reps broadly, is it a bell curve distribution of productivity? Or, are there more reps that are further along than you thought there would be or less? Any way to characterize that? And then as we think about peak productivity a couple years out, are we still comfortable with that 25 pumps per month as a metric to work with?

Sure, this is John. Productivity, we're not going to comment on the scale, but as you can imagine there is a range of productive reps, with some very highly productive reps, and some reps that are at the lower end of the productive expectations.

But the average for the year was in the mid-teens, which quite happy with, and the expectation is they will move towards 20 as the average for 2015. Longer term, I do still expect it to move towards the low- to mid-20s as a potential for the overall productivity of the reps with multiple products.

Okay, that's helpful. And then, John, this one is probably also for you. I'm curious your guidance for 2015, does it reflect any potential, and I'm going to call it G4 sensor warehousing in effect, patients that may have been t:slim candidates who are going to decide to wait until your t:sensor comes out? Is there any of that reflected in your guidance?

There is no new sales impacted by t:slim G4. At this point we are assuming that we don't have it, at that may impact us from a competitive standpoint, especially with Vibe being in the market.

Okay, and I'm going to sneak in one last one. Is there any update, or do you want to provide any update on your thinking on a proprietary infusion set?

It's something that we've been interested in, we've evaluated. But from an R&D perspective, we're always considering different things to address that issue with distributors that you're referring to. From an R&D perspective, as well as from an overall business or agreements or different things with the distributors. So, no definitive project to actually speak to today, other than to acknowledge it is something that we have looked at and we're considering. But we're heavily market research focused and we'll continue to be.

Thanks so much.

Kristen Stewart, Deutsche Bank.

Thanks for taking the question and congratulations on the results. Kim, I was wondering if you could go in a little bit more detail to the extent that you can on the G4 products? It sounds to me like, relative to the last update, you're feeling a little bit more encouraged there.

To the extent you can comment on what these site inspections have, and maybe timelines to where you might get a little bit more comfortable with saying more definitively that you would be able to launch the product in the second half of 2015, versus something more closer to the end of the year? Thanks.

Well, there are a couple of key steps. Number one was that site inspection, and to have it completed before Christmas, that was a big deal for us. So, I think that was one of the big things that are on the checkmark.

Then, responding to the deficiency letter is probably the second major milestone. We haven't given guidance about when that's going to be, but we think it's within that range of guidance that we've given that we can get that wrapped up and be into the marketplace in the second half of the year.

So I think, overall, our interaction with the agency was pleasing, and I think they want the product on the market, from what I can tell. So, we'll give you more warmth about how we feel about this as we move on, but we are preparing to commercialize.

Okay, and then, John, I wanted to triple check, there is no assumption of any sales for G4 in this year's guidance of $70 million to $75 million, is that correct?

That is correct.

Okay, great. And, on the warehousing issue, you have, it sounds to me, like taken into consideration the fact that the Vibe is out there and that there may be some patients trying to decide which product to use in light of that product or potentially your product as well. So that has been a consideration in that guidance as well?

It has been a consideration, not only in the full-year guidance, but as well as what I talked about as far as how the quarterly distribution of the sales would be impacted.

Okay, perfect. Thanks very much, guys. Congratulations, again.

Thank you.

Thom Gunderson, Piper Jaffray.

You may have said this, I missed it, I apologize if I did. But, did you say anything about how much of your Q4 sales were coming from gaining share from competitors on their exchanges versus expanding MDI?

We did not, but it's still roughly consistent with what we've had in the past, which is roughly a 50/50 split.

Okay, thanks. And then, I know this is difficult to do, but I'm going to ask if you can give us some idea on the predictive low suspend. There was quite a bit of talk at the Paris meeting on the 640G from Medtronic, and it seems like that's coming down the line, et cetera.

The details you gave us, Kim, submit for an IDE in the middle or second half of this year, if we assume a PMA takes a year and maybe, just pick a number, a year to actually do whatever the FDA asks you to do in an IDE, are we talking late 2017 for something like this at the earliest?

Yes, that's not an unreasonable timeline. That's the big buckets of activities that would have to happen in order to get into the market.

Right. And then, a quick follow up to that and I'll get back in queue, is whose PMA is that?

That would be our PMA.

Okay, but you'd be using the Dexcom sensor right?

The Dexcom sensor? Yes, we'd be using the Dexcom sensor.

Right, but you have -- the only reason I ask, and I'm a little confused, you have a 510(k) pump, they have a PMA sensor, but when you put them together, it's your PMA?

It's a PMA, correct. We don't do the clinical trial part on the current products on the patient's side of things. All that will be determined as we moved into this predictive low glucose suspend or the more closed loop basal algorithm. That may be clinical trials that we're signing up for.

Got it, thanks. That's it for me, guys.

Bob Hopkins, Bank of America.

Hey, guys, this is Kevin Strange in for Bob. Thanks for taking the question. To start, and I apologize if I missed it earlier in the script, but in terms of your guidance, does your guidance assume that the rep disruption that we saw earlier in the year that, that is, really at this point, fully resolved? Or, are we still seeing some lingering results from that?

I would say it's fully resolved. I think now it's just working the productivity up from the low expectations.

Okay, thank you. And then, on your assumptions for next year, in terms of percent of sales from distributors versus direct sales, what's embedded in your guidance there?

I think the quarter came in a little bit higher than we were expecting at 79%, but how are you thinking about percent of sales coming from direct channels next year? And then, if you could comment on the trajectory of the conversion over the next couple of years, how we should be thinking about that, that would also be helpful.

Sure. It was roughly 80/20, and I think now that we have a full quarter of United Healthcare being serviced by the distributor, I think we've seen that sort of impact. That is a big plan, so it may continue to slightly increase, depending on how the mix of payers plays out and how we sign contracts going forward. But I think long term, I still believe that we'll move towards something like 50/50 as a achievable goal that we believe is a conservative goal.

Got it. And then, lastly for me on the competitive front, I know it's early in the launch of the Vibe, but can you comment on what you're seeing in the field sales approach to promoting that product? And then, also if you could touch on the Asante products, what you're seeing in the field from them as well?

Well, on the Vibe, I think the fact that it is sensor-enabled broadens the number of companies that are out there with sensor-enabled products, so that's raising that issue as a sales barrier. So, it's important that we get progress on our PMA so that we can nominally be in that game of hopefully the improved products by the second half of the year. So, as John said, they're going to be pretty strong coming out of the gate because they are number two with that sensor-integrated offering.

As far as Asante goes, I think we were pretty clear last time they were doing a free sampling program, try it before you buy it. It was a regional offering, it wasn't nationwide. We haven't really seen much change from that strategy.

That's a part of what we saw in their road show activities is that was one of their major selling features is that you could try it without actually having to buy it. But, we won't know what the effect the recent financing activities is going to have on their nationwide rollout plans, which we had factored into our guidance for the year.

Great, thanks much for taking the questions.

Shaun Rodriguez, Cowen and Company.

This is Ryan Blicker filling in for Shaun. Thanks for taking my questions. So looking at the sales to distributors, going back to that, you touched on last quarter that greater volume is needed to make the cartridge sales breakeven or profitable. Can quantify what level of volume is necessary to reach breakeven on cartridge sales, and whether or not you think you may reach this in 2015?

I'm not providing the level of detail at that level for the cartridge manufacturing or the gross margins by product. I will say we are making progress, meaningful progress, in that margin improving as we move along. But, it is still something that we expect to see higher margins with our pumps than we would see in our supplies in the immediate year ahead of us.

Okay, thanks for that. And maybe a little bit more color on the newly announced products. Can you talk a little bit more about the Odyssey software that you expect to file at the end of the year?

Can you talk to one type of features will be upgradable for customers in the first generation of the product? And maybe a little -- elaborate more on your long-term vision? Just so I'm understanding, it sounds like the plan is to one day make it a decision support tool and collaborating with payers?

The concept of it is that it's a conduit to upload new versions of software to the various products that we're selling. So obviously, we'll have the base t:slim, we'll have the t:flex, and then we'll have the t:slim G4. So, what it will allow us to do is to remotely upgrade that software that's resident on each of those three pumps to make that the latest and greatest version.

And there's a lot of smaller esoteric features you don't have a good vision to, like the load sequence can be improved and we're trying to improve that. And, this is a mechanism to get that software improvement out into the field very easily, just like you upgrade your phone. So, that's the vision of what Odyssey is all about.

And once it's 510(k) approved, it's not the flow through, it's the fact that we are approved to actually update pumps in the field. The flow through will be the 510(k), if it's needed, or a letter to file type of application for regulatory upgrade for the specific device itself. So, that's how we view it. And, I really didn't catch that second part to that question.

I was asking to elaborate a little bit more on the long-term vision and whether you see it as a decision support tool, but that was helpful. Thank you.

Maybe if I can sneak one more in an competitive bidding, I know the second round just ended recently. Have you seen any impact in the impacted regions, and can you elaborate on anything on what you're hearing or seeing?

It's quieted down. It has dropped off the map, from our perspective, so competitive bidding really isn't the sort of threat if was when it first raised its head about 1 year, 1.5 years ago. In fact, it's not part of the competitive bidding packages that are out there now.

Okay, thank you.

Ben Andrew, William Blair.

Two things, I guess, for us. One, talk a little bit more, John, about the distributor mix this year. Did I hear you right that we may see something higher than 80/20 on a full-year basis in 2015, or you're hoping that still starts to come down later in the year?

I expect it to come down later in the year, the 80/20 is what we saw this year.

Right, and then so what makes that happen? Because, obviously, UNH is 15% of the market, and what allows that, is that just your sales guys changing the focus? Or, how does that actually happen in the field?

A lot of it is signing new contracts. A lot of it is just taking advantage of the contracts we have in place that have not been utilized.

Okay. And then, Kim, on the AP project, it sounds like you're starting to ramp that up and be more public with that. What do you think that project is going to cost suit-to-nuts to get even a first-generation, low-threshold suspend kind of thing, much less the second algorithm platform to market?

We don't really have any guidance we can give you at this point in time, but what we do is we have a clearing agenda on the part of our R&D group. Our R&D group, in the last two years, has been spending so much time on getting catch up 510(k)s approved to PMAs approved, development of flex and the G4. And so I think capacity is going to free up to allow us to do more work.

But, there's going to be a clinical component that we haven't had to deal with before. I don't think it's tens of millions of dollars, but it's going to be some incremental spend of what we've seen. And, we have not yet built that into any projections or really given any guidance about that.

Okay. And then, I guess one last question for us, you're closing in -- you're three years plus on the market, now, in the US, and closing in on year four, so you'll have some of your own pumps starting to roll up later this year, maybe early 2016. How do think about holding onto those patients, number one?

And then a related question, what you are you seeing on pump pricing, as we went through Q4 and over the course of 2014, and what's baked into guidance for 2015? You talked about competitive pressures, but what do you have baked in there, John? Thanks.

Sure, as far as the renewals, they will start to hit at the end of 2016, we launched in Q3 of 2012. So roughly a four-year renewal cycle that we'll start to see some renewal activity. Hopefully, at that point, we'll have G4 onto the market, which will be hopefully an upgradable option for these folks who come off our t:slim product.

So, that's one opportunity for us. And as far as pricing, it's been fairly consistent and steady, roughly, it's roughly around $4,000, and hasn't really moved that much in the last few quarters.

Okay, and are you seeing a different level or any kind of change in competitor responses or promotions, aside from Asante's programs, but in terms of the more substantial competitors?

As Kim mentioned, there's the Asante program that's out there, as well as our largest competitor, Medtronic, has used some economic incentives. That hasn't changed, here in the last few quarters, it's still a significant part of our sales barriers as we come up against them.

Thank you.

Tao Levy, Wedbush.

I was wondering, to be clear, and maybe I wasn't sure about this, but the t:slim G4, that's a completely different pump than the t:slim, in terms of actual device, is that --?

True, different radios, there's some different innards on the inside that make them very different.

Down the road, would you have both systems, a t:slim G4 and a regular t:slim? Or, would you just go with one, and whether you decide to -- or whether the patient decides to enable the CGM or not, leave it up to the patient, physician?

I think it's going to be a matter of they're going to be separate SKUs, so they will be separate product lines that are maintained. And, their softwares will be slightly different, because obviously, one has integrated CGM display information, the other one doesn't.

Got you, so it's not just the software difference?

Correct, no there's hardware differences.

Yes, and even our future generations might be different pumps as well.

Got you. So that leads me into my other question, which is when is the right time to start thinking about providing some of the promotions or upgrades to patients out there? I remember when Medtronic launched the 530G, I think they were like a year early.

Well, we hope that we do not have to get into this upgrade game. We hope that we're going to get approval quickly enough that those who have been, probably delaying a buying purchase decision, because they wanted to integrate a CGM, will be able to access it sometime later this year, and will continue to hold on it to wait.

They do have the discretion to keep using their pumps, as long as they keep working, and they could delay that decision. So, we're hopeful that we don't have to get into this upgrade game that others have tried to play in order to hold their installed base.

And then, lastly, so if you come in at the earlier end of your expectations, let's say it takes 12 months for approval, how soon would you be ready to start manufacturing and selling the product?

We're starting to prepare a little bit now, but assuming we get an approval, there'll be some lag time from which the sales force would have to get trained, develop their marketing and sales strategies to be trained at. And then, once they start to sell, we'll have to go through the normal cycle of generating sales orders, as well as going through an insurance verification process, which typically takes 30 days or so. So, it's usually one -- two to three months after we start selling, probably.

Okay, so similar to the t:flex?

Very similar, yes.

Okay, great. Thanks a lot.

Ben Haynor, Feltl and Company.

One of the things that we've picked up on in our survey work with some of the existing animus customers is that, that also have the Dexcom CGM, is that the G4 AP algorithm, with the CGM device, has them so hooked that they would not or would be reluctant to upgrade to the animus Vibe, due to it not having the G4 AP algorithm.

Would Odyssey be something, the Odyssey program, be something that could enable that upgrade, or is this something that can be upgraded without Odyssey?

No, Odyssey would not be able to upgrade that.

And, is that something that would require an amendment to the PMA, or how could you do that?

It would be a new PMA.

Yes, any future generation would be a separate project.

Yes, we'll address what our strategy is towards that interim improvement at a later date, as we talk more about our evolving Dexcom relationship.

Okay, great. And then, on the questions that you've received from the FDA, can you characterize those? Are they relatively easy to answer? Do they require a lot of additional work? How does that shake out? And, I'll jump back into queue.

Relatively minor amount of work, some retesting, nothing that was fatally flawed. So, it was just more time, rather than risk, we feel. So, we feel like we're in a good position to respond in a timely manner and be within the time frames that we've given.

Great, thank you very much.

And, I'm not showing any further questions at this time. I'd like to turn the call back over to Kim Blickenstaff for closing remarks.

Well good, we appreciate an attentive group, today, on a wide variety of different topics. Sorry we had to be a little bit cryptic because of the offering that we're undertaking. But, we look forward to keeping you updated on our progress and talking to your on our next earnings call. We'll talk to you then. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.