Tandem Diabetes Care Inc (TNDM) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care Q1 2015 earnings call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press * then zero on your touchtone telephone. As a reminder, this conference is being recorded. I'd like to introduce your host for today's conference, Ms. Susan Morrison. Ma'am, you may begin.

Thank you. Good afternoon everyone, and thank you for joining Tandem's first quarter 2015 earnings conference call. Today's discussion may 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, 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.

Kim Blickenstaff, Tandem's President and CEO, will be leading today's call, and at this time I'll turn it over to Kim.

Thanks, Susan. Good afternoon, everyone. Joining me on today's call is our Chief Financial Officer, John Cajigas. 2015 started on a high note for us with the FDA's clearance of the t:flex pump in early January. It was the first of several highlights during the quarter, including our achievement of 53% year-over-year sales growth, reaching the milestone of having more than 20,000 t:slim customers, our continued progress with new products in development, and more recently, our launch of the t:slim with enhanced software.

The first quarter is always particularly challenging due to the anticipated seasonal sales drop associated with the timing of insurance deductibles, and spending accounts being reset at year end, and the related reduced manufacturing throughput that impacted our gross margins. Overall, I'm extremely pleased with our progress in the first quarter, and believe we have strong momentum toward achieving our goals for the year.

On our last call we discussed the company's focus on key catalysts that will allow us to achieve sustained above market growth. The three initiatives that we identified were our sales force productivity, our ability to commercialize near-term products and advance our long-term pipeline. And I was very pleased with the progress we were able to make in each of these areas during the quarter.

Starting with our sales force, in early March we held our national sales meeting. Enthusiasm was high and the team has made great strides since our disruptive expansion that took place last year. As anticipated, Q1 productivity was less than Q4 productivity due to seasonality. We averaged 14 pumps shipped per month per territory in the first quarter of this year. By comparison, in 2014, we averaged 12 pumps per territory in Q2, which was our first full quarter with 60 territories. This reinforces our view that the sales force is continuing to mature, and supports last year's decision to invest in the expansion of our business.

To further support the field's productivity, last week we announced that we'd begun shipping t:slim with updated software. This new software incorporates a number of changes that are based on customer and healthcare provider feedback to our original to t:slim. An example of a new feature included in the updated software is a streamlined cartridge change process. This new process provides users the ability to fill their cartridge with insulin off the pump rather than on the pump, and expedites the fill tubing process.

We were able to add the new features by modifying the t:slim software without any hardware changes, which really highlights the benefit of offering a touchscreen insulin pump and a USB access point for software updates. The new features included in t:slim's updated software were submitted to the FDA as part of the 510(k) filing and received clearance in Q4 of last year.

We're excited to offer new customers the updated t:slim software, but as we enhance our products, we also want to be able to offer these new features to our existing customers as quickly as possible. This is why Odyssey is such an exciting project for us. As we discussed on our last call, Odyssey is our 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 continues to progress well, and we are on track to file a 510(k) with the FDA for this product by the end of the year.

In looking at additional efforts to support sales productivity, I'm excited to share that we will be pursuing a pediatric indication for the t:slim pump. As a reminder, the t:slim is currently indicated for individuals aged 12 and older. We believe that with an expanded claim and t:slim's modern look and easy to use interface, we'll be able to introduce the benefits of pump therapy to a younger audience. We'll be conducting human factor studies this summer to support a 510(k) filing by year end in pursuit of a lower age indication.

Turning to our launch plans for our near-term pipeline, activities are well underway for both the t:flex and the t:slim G4 insulin pumps. Starting with t:flex, since we received 510(k) clearance in January, we've been training our field sales force, ramping up manufacturing and preparing for launch. The t:flex software is very similar to the updated t:slim software, and will offer users the same enhanced benefits with the largest capacity insulin cartridge available on the market.

This is why in structuring our launch plans it was important for us to commence updated t:slim shipments prior to t:flex. It allowed us to leverage training efficiencies, both internally and with healthcare providers, as we first introduced and provided training on the new t:slim features. Then any further trainings for t:flex require minor and incremental [training] relating to its 480 unit capacity. The official launch of t:flex will be announced in the upcoming weeks, and we will begin active marketing at that time. Following the customers' insurance verification process, shipments are expected to begin in June.

We 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 a lab testing to gain in network insurance reimbursement benefits.

That being said, we believe the t:flex pump provides us with a significant and unique opportunity as only about 125,000 people use an insulin pump of the potential 1.7 million people with type 2 diabetes who are insulin dependent. And in our market research, two-thirds of endocrinologist cited limited capacity as the number one barrier to insulin pump adoption in our targeted type 2 market. So we are excited to launch the t:flex pump and bring our second commercial product to market.

Our next near-term pipeline product is the t:slim G4, which will 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. As a reminder, we submitted our t:slim G4 PMA in July of 2014, and are preparing for launch in the second half of this year.

We continue to have positive and interactive dialogue with the FDA, and most recently we heard that any open questions following our site inspection are now considered closed, which is a positive milestone. While the timing of approval is at the discretion of the FDA, we will be prepared to launch the t:slim G4 as quickly as possible after we receive approval. 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 markets by offering people the convenience of an integrated device.

Turning to our longer term products in development, I'm very pleased with the progress we are making on our artificial pancreas efforts. As a reminder, our first AP product we utilized Tandem's proprietary technology platform and will partially automate insulin delivery based on CGM information and predictive algorithms. We are near completing a pre-investigational device exemption package to submit to the FDA. This is a precursor to our IDE submission later this year to gain insight from the FDA on our product design and clinical trial protocol, which will help us [define] our first commercial AP product.

Overall, it's been a busy start to the year, and I'm very pleased with the progress we've made across all of the company's initiatives in the first quarter. I'll now turn the call over to John, who will provide more detail on our first quarter results.

Thanks, Kim. Good afternoon, everyone. As Kim mentioned, we are very pleased with our performance in the first quarter. I'm happy with the continuing trend of our high year-over-year sales growth and improving operating margins that we saw in 2014 and here in Q1.

Looking at some of the details of our sales and product shipments, overall our Q1 sales were $12.3 million, an increase of 53% from $8.1 million in Q1 2014. Sequentially, our Q1 sales were down 31% from $17.9 million in Q4 of 2014. Generally factors such as insurance out of pocket costs and the timing of resets of annual deductibles at the beginning of the year influence the timing of insulin pump purchase decisions. As such, we typically experience a sequential quarterly drop in sales between Q4 and Q1, which we have now seen in each of the last two years.

Pump sales accounted for 81% of our total sales in Q1, compared to 86% for both Q1 and Q4 of 2014. With our pump shipments being heavily weighted towards the second half of the year, we expect that pumps will represent a similar percentage of our quarterly sales for the remainder of the year.

T:slim sales in Q1 grew 45% year-over-year, while pump supplies grew 100%. In Q1 we shipped 2,487 pumps compared to 1,723 pumps in Q1 2014, and 3,929 pumps in Q4 2014. With a year-over-year growth of 44% in pump shipments, we demonstrated a strong performance in what is typically the lowest pump selling quarter within any given year, while also competing with the launch of a new product offering in the market.

As of the end of Q1, our cumulative shipments have grown to more than 20,800 pumps since t:slim launched back in 2012. Sales to distributors represented 76% of our total sales compared to 68% in Q1 2014, and 79% in Q4 2014. The year-over-year increase in Q1 was primarily attributable to a distributor who began servicing United Healthcare members in the middle of the third quarter of 2014. As we've discussed during our prior calls, this provides UHC members with greater access to our products on and in-network basis, and we're seeing a meaningful contribution to our overall sales from this opportunity.

As Kim mentioned in his remarks, the average productivity of our sales force in Q1 was 14 pumps per month per territory. Based on our current assumptions regarding the organic growth of our business, and the uptake of t:flex, we expect quarterly average productivity to increase throughout 2015 and a year-over-year basis.

Moving on to cost of sales and gross margins, our gross profit for Q1 was $2.8 million compared to $900,000 in Q1 2014, and $6.5 million in Q4 2014. Our overall gross margin for Q1 was 23% compared to 11% in Q1 of 2014 and 37% in Q4 2014. Manufacturing throughput continues to play a major factor in our gross margins. The improvement in our Q1 2015 gross margin year-over-year is primarily due to increased volumes and efficiency gains in our production processes.

The decrease in gross margin sequentially from Q4 was primarily attributed to lower manufacturing output, as well as an increase in the percentage of our sales representing pump supplies. To provide some additional color, from Q4 2014 to Q1 2015 we experienced a 37% drop in pumps shipped, and our gross margin dropped from 37% to 23% sequentially.

We experienced a similar decline from Q4 2013 to Q1 2014, on a relative basis, keeping in mind the impact of our voluntary cartridge recall last year. Pump shipments declined 28% sequentially during that period, while our gross margins dropped from 12% to 11% sequentially. However the gross margin in Q4 2013 included recall costs of approximately 13 percentage points, and the gross margin in Q1 2014 included cartridge recall costs of approximately 4 percentage points.

Similar to prior quarters, our Q1 gross margin was also impacted by factors beyond pure manufacturing related items, such as our percent of sales channeled to distributors where we generally do not capture infusion set revenues under positive gross margins, the percentage of sales representing pump supplies which have a lower gross margin than t:slim, a changing mix of third party payers with a varying level of reimbursement, and after shipment costs, such as warranty and training cost.

For these reasons, we continue to anticipate variability in our gross margins in future quarters as we experience quarterly fluctuation in sales volumes, a changing product mix of sales, and as we scale and adjust our manufacturing operations and process for higher volumes and to include new products and additional automated manufacturing equipment.

Looking at the rest of our P&L, our operating loss for Q1 was $20.4 million, compared to $20.8 million for Q1 2014, and $17.5 million for Q4 2014. Our operating expenses for Q1 were $23.2 million, compared to $21.7 million for Q1 2014, and $24 million for Q4 2014. Our operating loss includes non-cash stock-based compensation. During Q1 we recognized stock-based compensation of $3.8 million compared to $3.8 million in Q1 2014, and $3.9 million in Q4 2014.

The increase in our operating expenses on a year-over-year basis was primarily associated with the head count growth in our commercial organization as we expanded from a 36 territory footprint to a 60 territory one. On a sequential basis, our operating expenses decreased primarily because of lower employee-related costs, such as bonuses and sales commissions in Q1 compared to Q4. Our operating expenses in Q1 only increased 7% year-over-year, while our revenues grew 53%.

Importantly, this leveraging of our operating expenses has resulted in improvements in our year-over-year operating margin, which we expect to continue to see for the remainder of the year. Our operating margin for Q1 was negative 166% compared to negative 258% for Q1 2014, and negative 98% for Q4 2014.

With respect to cash and cash flows, at the end of Q1 our cash and investment balance was approximately $118 million. I'm pleased that during Q1 we were able to successfully raise approximately $65 million in net cash from an equity offering. And we were able to amend our debt agreement with CRG to extend the interest only period on our debt from March 31, 2018 to December 31, 2019.

Our cash investments during Q1 increased sequentially from Q4 2014 by $49.1 million, including $65 million in net cash raised from the equity offering, compared to decreases of $18.7 million in Q1 2014 and $12.6 million in Q4 2014. Cash utilized in Q1 included the pay out of incentive compensation recognized in 2014, such as sales commissions from Q4 2014, and 2014 annual bonuses for our other employees.

Moving on to guidance, we are reaffirming our previous guidance with respect to sales and operating margins for 2015. We still expect our full 2015 sales will 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 our 2015 sales will see a quarterly pattern similar to what we experienced in 2014, with sales being weighted more heavily towards the second half of the year, and in the fourth quarter in particular.

Included in the revenue guidance are revenues for t:flex sales of $1 million to $3 million. We plan to begin shipping t:flex pumps in June. Our guidance does not include any financial impact of our t:slim G4 product because that product remains under FDA review and is not yet approved for sale.

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

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 profitability timeline and potential capital needs, involve territory productivity, our ability to secure regulatory approvals and successfully commercialize potential new products, and our ability to gain leverage within our operations as sales expand and new products currently in development roll out.

Our cash burn for the remaining quarters of 2015 will be dependent on such factors as quarterly sales and gross margins, expenditures associated with our commercial activities, such as t:flex launch activities and trade shows, R&D milestone payment, and general headcount growth as our operations expand.

And with that, I'll turn it back over to Kim.

Thanks, John. I am very proud that in a relatively short period of time, more than 20,000 people have chosen t:slim to manage their insulin therapy, and more than half of those purchased their t:slim in the last 12 months.

We continue to ask our customers who have purchased t:slim if they were previously managing their insulin therapy with multiple daily injections or a pump, and very consistently approximately 50% have reported being new to pump therapy. As we've shared in the past, it's a strategic goal of our company to expand the insulin pump market as only 27% of people with type 1 diabetes use an insulin pump. So we're very happy to see this trend continue.

After 2 1/2 years of scaling commercial efforts, I believe Tandem has built a strong foundation from which we can continue to grow our business. As John has mentioned, we anticipate the year will follow a typical seasonal pattern and will be backend loaded with Q4 being the strongest. We're making great progress with our sales efforts, but we also have tremendous future potential with the launch of our next commercial products, and as we work to develop new products that will further support the diabetes community.

With that, I'll turn it over to the operator for questions.

Thank you. (Operator instructions) Our first question comes from Bob Hopkins of Bank of America. Your line is open.

Hi, thanks. Can you hear me okay?

Yes.

Yes, hear you fine.

Hi, Bob.

Great. Good afternoon. So I just want to ask a couple of quick questions on t:slim G4. First of all, in this quarter, do you get the sense that there's any potential customers that are you know waiting for that product? Do you think that had any impact at all on your Q1 sales or is that not something you're seeing?

I'd say that's probably not something that we're seeing, and we certainly can't quantify it, but I mean people who do want that feature may hold off. But we certainly didn't see it within the quarter, you know we can't quantify what that would be.

Okay. And then what's the earliest you guys would be ready to launch that product?

The early stages, probably --

Probably 30 days following approval would be the earliest.

Okay, but it won't -- okay. But if you got approval at the earlier end of your range, you could be out in a full launch just 30 days post?

Sure. And just as a reminder, after we launch, we actually have a 30-day period of time typically in which people, after they place their order, were going through an insurance verification process, and so shipments would follow sometime shortly thereafter. But for our launch to commence, it would be pretty quick (multiple speakers).

Right. And our 18-month mark is what, through the year?

Through to the end of the year.

In the year, yes.

But it sounds like you guys are pretty confident in the regulatory pathway and that you know all the conversations with FDA have been constructive. I mean do you guys feel a little more positive that it could come a little earlier in the range that you've projected? You know, just wanted to get a sense there.

We still are going to stick with that range because you never know what could come up. And so far it's been positive, and we've been very pleased with the progress so far, but just getting it across the finish line, we can't predict whether that will be early.

Okay. And then lastly, just any comments on the overall market? You know it's hard for us to see sometimes because the competitive data is difficult, and obviously some of the bigger players haven't reported. But just wanted to get your sense on any updates or information you've had in terms of market growth and what you're seeing there. Thank you.

No, I don't think we've seen any update on market growth. I think it continues at the same pace. You know those numbers are pretty widely known. I don't see anything really changing that. And again, I don't know that the Vibe launch had much of an impact, you know it's within our range of expectations and I don't think they've increased their market share substantially with the integrated Vibe device.

Okay, great. Thank you very much.

Thank you.

Thank you. Our next question comes from Tao Levy of Wedbush. Your line is open.

Great.

(multiple speakers) Tao.

Hey, how are you doing? So maybe just a follow-up to the last question, you know in front of the t:slim G4 launch, you know you said it's going take you maybe a month post-approval to do all the paperwork, insurance, (inaudible) in place. How do you keep that funnel of new patients sort of intact so that you know things don't move around to the following quarter? In other words, you know patients who might have ordered you know the standard t:slim, you know wanting the newer one.

Well I think they probably would hold off their orders and wait. They have some discretion in when they can trigger their renewal. Certainly this will all be happening within the second half of the year, so I think it will happen within the, you know the deductible reset period. So I think people will, you know if they really want that integration, they'll sit on the sidelines until it's available in the fourth quarter.

Got you. And I assume, I mean will you have some sort of promotions or -- you know you can't really market it, but I guess new technology upgrade program. You know one of your competitors had run something like that.

We won't have an upgrade program. You know we basically are taking the position that you buy what is available at the time, and we will not have an upgrade program for those that buy and then want to upgrade to the G4.

And then just lastly, do you expect that distributor sales, you know as a percent of revenue, to kind of stay at these levels, sort of like mid-70% range, for the rest of the year?

This is John. Hi, Tao. It's probably going to be sort of in this range. I don't see it dramatically changing. Nothing is going to cause it to do that besides just our you know brick and mortar work and trying to get contracts and then trying to move volume through the contracts that we have today.

Perfect. Thank you.

Thank you. Our next question comes from Kristen Stewart of Deutsche Bank. Your line is open.

Hey, guys.

Hello, Kristen.

How are you guys doing?

Good. Hi, Kristen.

So I just want to clarify one of the statements Susan had. So Susan, with the G4 pump, the revenue recognition follows 30 days after the shipment -- or 30, at the insurance verification and at shipment, is that correct?

It would be at shipment to a direct patient, as well as to distributors. It's actually upon receipt to the direct patient. But typically, to your point, we're going to announce launch, and then there will be at least a 30-day period, and then that's really when the insurance verification process is taking place. So you can imagine, from the time we get approval, it's going to be 30 to 60 days before we have our first commercial sales recognizing revenue.

It will be 30 days, and then the sales force will probably be going, you know out actively marketing it. And then as orders come in, it's generally a 30-day process to get through the insurance cycle.

Okay. And with the approval of t:flex, I'm sure while the launch isn't planned until 2Q, I was just wondering if you can give us some perspectives on anything you've heard in the field, I guess just as your sales people obviously can note that it has been approved not launched, you know are endocrinologists enthusiastic and waiting about it? How do you feel about that product and the confidence in I guess the $1 million to $3 million in sales you're modeling in for the year?

Well I think we've figured out we have about 10% of our current customers who are type 2, so there is a demand on the type 2 side. And we do have a bit of a backlog that's built up because people are aware that it's coming. So, you know, I'm pretty excited that we can make those numbers and it will contribute in that kind of a range for the overall revenues of the year.

Great.

But really, Kristen, we haven't begun marketing it in any active way, so it's hard to see whether we're creating any enthusiasm among endocrinologists or not.

Yes. Good to have some demand though and a backlog. And then just lastly my question on the t:slim G4, what's really left I guess to do now? You had commented that the FDA came in for the site inspection, all (inaudible) questions are closed. What's just sort of the process between now and the FDA granting approval? Anything --

Well originally there was a list of questions, you know and deficiencies obviously that you get, that you have to respond to. So it's cycling through those answers to those questions that are really left to do. We've made some progress on that, but there's still some questions that we haven't really gotten into the specifics of what those questions are, but those are all part of the follow-up of additional information and testing and information that the FDA requested. And so we're satisfying that and that's the last part of sort of the response that we need to get to them.

Okay. But from a manufacturing perspective, it sounds like the FDA is fine with the process and no issues on that end?

That's correct.

Great. Perfect. Thanks very much. Congratulations on the quarter.

Thank you.

Thank you.

Thanks.

Thank you. Our next question comes from Thom Gunderson of Piper Jaffray. Your line is open.

Hi. Kim, I'm wondering about G4, and your comments on integrated CGM, or even using CGM on 30% of people who are on pump. In the past we've talked about there's a certain segment out there that wants integrated CGM. Do you have a sense of what that might be? Not at the beginning like most of the questions have been here, but if we look into 2016, or a little bit further, what percent of your product do you expect might be integrated CGM?

You know, we really haven't done any work that would give us a forecast looking out over time, Thom. You know we think it probably will mirror the market in terms of those that want that integrated feature, but we really haven't done a forecast that's forward-looking that would give you any help on that question.

Any sense of maybe objections you've had in the past, or issues that the sales force has brought up, that this will help you gain share above and beyond what you're already gaining by having (multiple speakers)?

Yes, absolutely. People want that integrated system, and that's been an objection that we've been fighting against. So, you know, as we compete against MiniMed, obviously they have the only integrated system to date. And so that's a major objection that we've fought with maybe 20% to 30% of their customer base that were considering t:slim. And so we would lose customers that would potentially be t:slim customers to that objection. So I think it's going to be a helpful product addition, you know will make us competitive in that segment, which is probably, as I said, anywhere from 25% to 30% of the pumping market.

And then my last question ties into something Bob was asking about on the market. And that is, you know having something that's easier to use, simpler, intuitive, one of the thoughts was that this was going to increase the penetration into the other 70% plus of T1s to start using pumps. Have you seen any indication that the growth of penetration is accelerating?

Well I would say our customer base is still on the margin looking like it's 50% of the MDIs, the new pumping experience type patients, which is going to grow that, you know that overall market share, although we're obviously a small player with about 6% of the total market out there. But no, I would agree with you, we continue to see the ease of use and the ease of training, especially that first time training experience, makes it so that it will pull MDI patients over to using a pump.

Okay. Thanks. That's it for me.

Thank you. Our next question comes from Ben Andrew of William Blair. Your line is open.

Good afternoon, guys. Thanks for taking the questions.

Hi, Ben.

John, can you talk a little bit about what you're seeing in terms of competitive behavior? And you've given us some insights the last couple of quarters about Medtronic and incentives and things of that sort. Is that same, worse, better this quarter?

I think this quarter it's pretty much the same story. I think the only sort of new story is the Vibe was launched in the quarter. We've seen mixed results on that. I don't know if it's just because it's early and it hasn't taken full effect, and so we still expect to see some impact, probably for another quarter or so, until we see a full impact of that. But I think the rest of the competition is pretty much the items that we talked about in the past that we're used to dealing with.

Okay. And then, John, any perspective about you know the shift in the distributor mix? You'd given us a different guidance last quarter (inaudible) still there because obviously that was similar this quarter. So it's not better, worse versus that.

Yes, it's gotten a little better. Went from 79 last quarter to 76 this quarter. Some of that is just timing of when the distributors order their items. But I don't think it's going to, as I mentioned earlier, it's not going to markedly change one direction or the other. I think it's going to be a steady climb towards what our ultimate goal is long-term, which is probably a 50/50 split.

Okay. And then on the AP product, Kim, you were careful to say kind of the first version thereof. Is that first version going to be a single or dual hormone product? And, you know, what is that development path look like in terms of kind of timeframe and maybe even a project cost? Thank you.

Well it will be modulation of insulin only, so it will be some of -- along the spectrum of predictive low glucose suspend all the way to what we call hypo-hyper minimizer where you're actually tenuating insulin and giving more, more basal insulin when needed. So it's going to be within that spectrum, and our first step really is to work with the FDA to outline what the clinical trial pathway looks like on that spectrum, and which end of the spectrum we'll aim at first, and that's really going to determine I think the project length.

The clinical trial work is probably the biggest portion of this project in things like software or hardware integration. I think that's going to be fairly easy once we have the CGM integrated. So I think that's yet to be determined. I'm not trying to avoid giving you specifics, but really depends upon that clinical trial timeframe and which end of the spectrum we land at.

Have you identified a vendor for the second hormone, kind of a longer term aspect?

We really are not accentuating a dual hormone product right now. We're really working on the insulin only because these strategies are near-term and are very promising, whereas the second drug for a dual hormone product is very problematic. There's stability issues and there are dosing issues with whatever candidate that you look at. So the drug side of it has not kept up with the engineering side of what we can do, and so that's a longer term project.

Great. Thanks.

Thank you. Our next question comes from Rick Wise of Stifel. Your line is open.

Good afternoon everybody. Let me come back to t:flex again if I could, Kim. I mean I know that you've made the point several times that essentially the customer (inaudible) endocrinologists are you know the same account, the same basic approach as a t:slim. But are there -- can you give us a little more color? Are there target accounts that you're able to focus on or identify that have greater concentrations of type 2 or more open to the idea? How do you get after this?

Yes, I think there are practices that have greater concentrations, so we can get after it in that manner. And you know we, again, have not started marketing to endocrinologists on the availability of this, but I think that's going to be a big driver. How do we get after this? Well we think it's the same customer base, and it's just another product expansion, and it's a matter of education within accounts. So we do think there's going to be a bit of support in terms of the endocrinologists for the type 2s if they're trying to get better control for when they see the advantages of this larger reservoir and it opens up the possibility of those patients being amenable to pump therapy.

Right. And just on that point, and that's sort of where I was heading, I mean is there an identifiable population, and it's too strong to say failed or poorly controlled type 2s, I mean and you know that that's X percent of the population? I mean is that the right way to think about it or no it's vaguer than that?

Well you know the total is about 1.7 million people with type 2 who are insulin dependent.

Sure.

And only about 10% of those are probably on pumps right now. So there has been an effort, obviously over the years, that's a big segment when you annualize the dollar value of it. So we will go after that existing population that want that larger reservoir, and then we will try to expand that segment by making it available obviously, because that was the number one objection that endocrinologists cited as to why they're not putting type 1s onto pumps, is that reservoir has been too small in the past for convenient use pattern on the part of their patients.

Right. And I wanted to be clear, John, again it might be a silly question, but I assume that the t:flex consumable consumption revenue potential is the same as t:slim, you know it's not more. And just to follow on to that, thinking about gross margins, does the extra volume of t:flex trump let's say early learning curve manufacturing, you know maybe lower margins? Do margins go up because of t:flex, stay the same, go down?

Sure. So a couple things. The usage profile that we expect these patients to use is going to be similar to the type 1 patients, that they'll be utilizing cartridges and infusion sets at the same rate. The targeted usage is to have a three-day therapy for them, so we typically expect them to change out those supplies on that timing. So those folks are expected to use the same pattern as the type 1s and the t:slim users today.

As far as the margin impact, or the expected margin impact, we are launching a new product and anytime you launch a new product you will expect to see some hiccups along that process. I do believe, as you mentioned, that we are pretty much utilizing the same manufacturing, the design is fairly similar, just a larger capacity device. So we should be much further along the development scale of the gross margin than we did with t:slim launching out of the gate.

The material costs are going to be slightly higher because of a slightly bigger device, so that's going to be slightly higher. I think all said and done, bottom line, it's probably going to be a similar margin profile to what we see today with t:slim. And it is the same pricing. So there isn't any increased premium pricing because of it, so it's pretty much the same.

Got you. And just last for me, maybe if you all could comment on -- you talk about the (inaudible) of it, maybe the Medtronic 640G launch, any impact on the quarter there? But maybe, Kim, you could help us reflect on you know that Medtronic seems to be pretty active. They have this new partnership with IBM. I'm not sure fully what that's going to mean, but you know developing real time personalized care plans, diabetes management databases. I mean is this -- help us -- I'd love to hear your thoughts on what this means for the industry, for Tandem going forward. Are these initiatives you need to be involved in, in some way? Thank you.

You know what, we really don't yet see what the strategic logic is behind these partnerships, so it's very early. They're more press release oriented than they actually are you know unmet needs that we see in the marketplace. Certainly the automation of insulin along the spectrum of the 530G and the 640 and the 760, that's where we're really focusing our efforts and where we think the most benefit's going to be because you're going to get better, you know tangible clinical outcomes from those.

We're trying to monitor where Medtronic really is in the launch of those products. The 640 series depends upon a new platform that has not been approved yet by the FDA here in the States. So we're continuing to monitor those products and are probably more concerned about that spectrum of clinical impact than we are these other announcements that they've been making.

Got you. Thank you.

Thank you. Our next question comes from Shaun Rodriguez of Cowen and Company. Your line is open.

Hey guys. Good afternoon. Thanks for taking the question. So first just to clarify, on the t:flex commercial launch, what's the incremental time you're seeing between the approval there in January and the start of shipments in June I believe? I'm just trying to understand how this period compares to the expectations for the G4, which I think you're saying could be 30 days. Not a big difference, I'm just curious about what could drive the G4 timelines beyond the 30 days.

Sure. The t:flex was actually approved in a very short period of time. I think that's one thing, is it was really expedited through the agency review process, so it did come in a little sooner than expected. And really just building up our manufacturing and preparing for the launch of that product, we also felt as though it was important to launch our updated software for the t:slim first, because there's training efficiencies that we really can recognize because both the t:flex and the updated t:slim software are really based on that same core software platform. And so we wanted to make sure that we were launching that into the market first so that we could train healthcare providers and really t:flex then is an incremental difference. So it was just more of the succession of things that we needed to do within the organization.

When we look at the t:slim G4, that's something that we are actively prepared to launch and really is going to be an additional product offering, and so we think it's going to be a shorter period of time.

Okay. That's very helpful. Thank you. And sorry if you discussed this, but on the longer term pipeline, what's the update on progress towards securing an algorithm partner, how we should think about timing? And also an update on timing for Bluetooth capabilities. And I suppose somewhat related, while I'm at it, how should be we think about integration with the next generation of Dexcom sensors?

Well we really haven't announced our plans on the next generation you know Dexcom sensor integration plan. We certainly want to work with them. It's central to our AP program, driving -- you know you need that sensor to drive those algorithms. And we have not given an update on the specificity of what algorithm partners that we're using and what the progress is of securing you know licenses and that sort of thing. So we've been pretty vague in the outline of the program.

Okay. Thanks. And lastly, quickly just to make sure I got this right. So the pacing of revenue for the year, was the commentary there that you expect similar pacing to last year, and this is even considering obviously t:flex contributions will be late in the year?

That's correct. (Inaudible).

Thank you.

Thank you. Our next question comes from Erik Shoger of Northcoast Research. Your line is open.

Hi. Thanks for the question. First one, another kind of question on Vibe. I was just curious, you talked about you know that you didn't see a ton of impact from it in the quarter, and certainly it's a seasonal slower period of the year, but did it give you any read through as you think about launching the G4 product later this year in terms of what Animas was able to do with their integrated product?

Well you know there's a lot [unclarity] about what the size of their sales force is and what resources they really brought to bear on that launch. So you know there are things outside the product feature that really probably impact maybe the lack of impact that we saw during the quarter. So you know I don't know that we can take much away from their experience, all I know is that it's the single most asked for feature in our market research, and we hear it in the field, and we expect it to be a significant incremental benefit to our sales efforts.

And I guess the reason I ask is because certainly integration is important, and obviously a patient that wants integration could get it with the Animas Vibe. But do you think it's, you know not just the integration, but it's the feature set that t:slim provides, you know plus that integration that people really want?

Yes, I believe that's true because the Vibe really is sort of appealing to a pediatric subset, people who are looking for you know a smaller pump. And it has a lower volume so it serves a very limited segment, probably only about 30%, 35% of the market, and their share reflects that. So I think our wider, broader appeal, plus that added feature, will have much greater impact than the Vibe has.

Yeah. Okay. And maybe one last one for John. I think you said pump sales were 81% of total sales in the quarter. And then you -- I missed a comment you gave about your expectations for that number for the rest of the year. Can you just repeat that?

I expect it to be very similar. I think as our install base grows, I expect revenues that's contributed by the supplies to grow, but I expect that the pump sales and shipments during the remainder of the year to be much higher, and have a much greater impact for sure.

Right. Okay. Okay, great. Thank you.

And we have another question from Kristen Stewart of Deutsche Bank. Your line is open.

Hey everybody, thanks for taking the follow-up. I was just wondering if you could give us an update on some of the managed contract wins. I know last year we talked a lot about Kaiser, and then how that's I guess been progressing relative to your expectations. And then just thinking ahead to what extent you know you think t:flex and G4 may help you move some payers across the finish line in terms of getting coverage. Thanks.

Sure, Kristen. I think for us it really is just moving along at a steady pace. There's nothing extravagant that's really happening because of having t:flex out there. It is just another sort of pump offering. I think it does help us having a multi-product, but I don't think it's been an incremental sort of big win for us.

I think the reason we've seen some progress on it is because some of the contracts that we signed later in the year last year are starting to pay dividends for us. United Healthcare is one of those, Kaiser's another, and so that's helping. And then you know we had a contract out there for a very long time, CareCentrix, that's also one of our larger contracts as well.

Thanks. Perfect. Thank you.

Sure.

At this time I see no other questions in queue. I'd like to turn it back to management for any closing remarks.

Okay. It sounds like questions are over with, so I'll thank you again for joining us today. We have two upcoming investor conferences that we will be presenting at. The first is the Deutsche Bank Annual Healthcare Conference on May 6th, which is in Boston. And then at the Bank of America Merrill Lynch Healthcare Conference on May 13th, which is in Las Vegas. So we will be there and we have I think a lineup of conversations already.

As for industry events, the company will be attending the ADA Conference in Boston on June 5th to 9th, and the Children with Diabetes/Friends for Life Conference in Lake Buena Vista, Florida July 6th through 12th. So we'll have a presence there if you're interested in attending those conferences.

So in conclusion, I'm pleased with our early momentum in 2015, and look forward to building upon it throughout the year. And we look forward to keeping you updated as the company continues to progress during our next scheduled conference call. So thank you for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may all disconnect.