Tandem Diabetes Care Inc (TNDM) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care third-quarter 2015 earnings call. (Operator Instructions). As a reminder, today's call is being recorded.

I would now like to turn the conference over to Susan Morrison, Chief Administrative Officer. Ma'am, you may begin.

Thanks. Good afternoon, everyone, and thank you for joining Tandem's third-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, 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 on 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. At this time, I will turn it over to Kim.

Thanks, Susan, and good afternoon, everyone. Joining me on today's call is our Chief Financial Officer, John Cajigas.

The third quarter was an exciting one for Tandem as we continued to achieve new milestones that advance our business. We received approval for our first PMA product, the t:slim G4, in September and we are now able to offer the diabetes community a choice of three differentiated Tandem pump options. It was an exciting achievement, but as anticipating, the timing caused customers, as well as distributors, to pause in their buying decision process as they evaluated what the FDA approval and the launch of the t:slim G4 means to them.

That being said, we were still able to demonstrate meaningful progress this quarter, including strong adoption in adding to our family of pump offerings; 35% gross margins, an increase from 31% in the second quarter; sequential reduction in our quarterly cash burn; and a 55-point improvement in our rolling 12-month operating margin.

Looking forward, our focus is a strong finish for 2015, but also equally on 2016 and beyond. By offering three unique products -- the t:slim, t:flex, and t:slim G4, we are leveraging our infrastructure while providing multiple solutions to the more than 3.3 million people in the United States who use daily rapid-acting insulin.

Starting with t:slim, we continue to see a strong demand for this number one ranked product, which represented about 70% of our pump shipments in Q3. About half of our t:slim customers have consistently reported that they are in need of pump therapy for multiple daily injections, which is encouraging as it is a sign that we are continuing to grow the insulin pump market.

As our flagship product, we continue to invest in ways to enhance the t:slim. We plan to file a 510(k) to reduce the syndication from age 12 and above to age 6 and above by year-end. We anticipate an approximate six-month review cycle and it is our goal to receive clearance prior to the start of the summer camp season in 2016.

Also, the key to providing continuous t:slim enhancements is Project Odyssey. We've made meaningful progress on this Web-based system that is being developed to allow users to update their pump software at home, similar to their smartphone. We are on track to file a 510(k) for this product by year-end.

The first applications for Project Odyssey will be to provide customers who purchased a t:slim prior to April 2015 with the opportunity to update their pump software to our latest version that we began shipping after that time. They will then be able to enjoy features and benefits, such as being able to fill their cartridge off the pump.

We have historically discussed future applications for Odyssey, including turning on the Bluetooth radio within t:slim and t:flex, which will be our next focus for the project after we receive initial clearance.

Turning to the t:flex pump, Q3 was our first full quarter of sales for the t:flex. This is an exciting, unique product as it offers the largest capacity reservoir available for people with greater insulin needs. Shipments of the t:flex pump were up nearly 50% sequentially, which is meaningful as we believe last quarter shipments included a significant amount of pent-up demand surrounding the launch.

The profile of our t:flex user still includes a majority of people with Type 1 diabetes who are converting from an existing pump. However, of our t:flex customers with Type 2, they have primarily reported being new to pump therapy for multiple daily injections.

While it is still very early in the launch, these trends indicate that additional insulin volume has been an unmet need in the Type 1 pump community. It also supports that t:flex provides a significant Type 2 market growth opportunity, but that will take some time for our marketing and educational efforts to begin to gain traction and expand this segment of the market.

Finally, I would like to spend some time discussing a new addition to our product portfolio, the t:slim G4. As a reminder, the t:slim G4 now offers people the same easy-to-use pump benefits as t:slim, with the integrated convenience of Dexcom G4 PLATINUM sensor for continuous glucose monitoring.

This is our first integrated pump offering and was designed to provide the diabetes community a feature that it directly asked for since the launch of t:slim. It is also allowing us to compete in accounts that were strong supporters of integrated pump and CGM technology, where we were not able to previously.

Thanks to the tremendous efforts of our employees and a great working relationship with DexCom, we were able to obtain FDA approval for this product in just over a year, began taking orders immediately, and were able to commence the initial shipments less than one month following the approval. I am proud of our ability to accomplish so much in such a short period, as we want our customers to receive the therapy they need with the pump they want as soon as possible.

And in the third quarter, we shipped 486 t:slim G4 pumps, which does not include any pumps associated with people who opted to participate in our exchange program. As a reminder, we offered customers who had received either the t:slim or t:flex pump after August 1 an opportunity to exchange their pump for a t:slim G4 if they notified us by October 2. In total, we had 178 people opt to participate in the exchange program. These pumps will ship and the associated revenue and expenses will be recognized in the fourth quarter.

John will discuss the exchange program in greater detail, but we believe that a majority of the people who ordered their pump in August have factored the potential availability of the t:slim G4 into their decision-making already and so did not opt to participate in the exchange program.

As anticipated, the quarter was also impacted by people who paused in making a pump purchasing decision, either in advance of or following approval, to consider the t:slim G4 among their choices. While the actual number of people who delayed their purchasing decision is essentially not possible to quantify, there has been extraordinary customer interest in the t:slim G4 since we announced this approval. This may be somewhat of a catch-up from the Q3 sales in September in particular from people who paused in their decision-making and they're now moving forward.

I am very encouraged by the significant increase in our preliminary pipeline orders in the queue for October that we are beginning to verify for insurance. In fact, these preliminary orders reached a record high level in September and it looks like October is on track to exceed September. Since it's early in the launch, we do not yet have visibility whether these pipeline orders will convert to shipments at a rate similar to our other pumps, but the early trends are very encouraging.

Some level of cannibalization between products is to be expected, but as we are in the midst of two new product launches, it is difficult to forecast the breakout between product. For us, it is really by customer choice and people getting the pump with the features that work best for them.

We are now entering the strongest time of the year seasonally for our pump sales with the added benefit of having two new differentiated product offerings. This helps drive our overall business as we continue to expand the market, capture market share, and leverage our infrastructure, which is already evidenced by our improving operating trends.

It is so early in the launch of t:flex and t:slim G4 it is difficult to know whether the early adopters are people who would otherwise have chosen t:slim. That being said, we are confident to our start of Q4 and our ability to achieve our $70 million to $75 million in sales guidance.

I will now turn the call over to John, who will provide more detail on our Q3 results.

Thanks, Kim. Good afternoon, everyone.

Overall, we were very happy with our Q3 results and the addition of the t:slim G4 to our product family. Our sales and gross margin performance continued to contribute to our positive momentum over the last 12 months, despite the impact of the t:slim G4 approval and launch timing. And during that same period, we have continued to manage the growth of our operating expenses at a rate much lower than our sales.

Looking at some of the metrics highlighting the progress of our sales and product shipments, first I will discuss the rolling 12-month progress, followed by particulars for Q3. As we have discussed previously, looking at longer comparative windows rather than individual quarters is important to understanding the progress and trajectory of our business. This is even more important because of the t:slim G4 approval and launch timing that took place in the third quarter.

Our sales for the rolling 12 months ended September 30 were $61.6 million, an increase of 46% from $42.1 million for the previous 12 months. This was mainly driven by the increasing productivity of our expanded sales force, as well as the first full quarter of contribution of t:flex and the initial shipments of t:slim G4 in the last week of September.

Pumps shipped for the rolling 12 months ended September 30 were 13,178, an increase of 42% from the previous 12 months. Our average productivity per territory over the rolling 12 months ended September 30 was 18, and year to date, it was 17. The average productivity of our sales force for Q3 was 19 pumps per month per territory, compared to 16 in Q3 of 2014.

We expect the annual average productivity of our sales force to continue to increase, based on our organic growth and anticipated market acceptance of t:flex and t:slim G4 pumps. Last year, our territories averaged at about 17 pumps per month for the full year, while in 2015 we anticipate the average will increase to at least 20 pumps per month per territory.

Looking at some of the details of Q3 sales and pump shipments, overall our Q3 sales were $15.7 million, up from $13.5 million in Q3 2014. Pump sales accounted for 81% of our total sales in Q3, which is in line with what we have experienced in recent quarters. With a series of new product launches expected over the next several years and pump renewal opportunities beginning in 2016, we anticipate that the percentage of our sales from pumps to remain high.

In Q3, we shipped a total of 3,431 pumps, compared to 2,935 pumps in Q3 2014. Of the pumps shipped in Q3, 555 were t:flex and 486 were t:slim G4. As of the end of Q3, our cumulative shipments have grown to more than 27,000 pumps. Capturing more than 13,000 pumps in the last 12 months demonstrates that we are rapidly becoming a significant player in the insulin pump market.

To provide more color on the impact of our t:slim G4 approval and launch timing, there are a few factors that were headwinds in the quarter -- our limited exchange program, the delay of pump sales in anticipation of and following the t:slim G4 approval, a brief period where we suspended shipments to contact customers with open orders, and the associated delay in distributor orders.

At September 30, we deferred $700,000 of sales and $230,000 of cost of sales for pumps shipped in Q3 that will be swapped under our one-time exchange program announced in conjunction with the FDA approval of the t:slim G4. This program was a temporary modification of our normal 30-day return policy, offering customers who received a t:slim or t:flex pump on or after August 1, 2015, a limited opportunity to elect to exchange their pump for a t:slim G4. There were 178 t:slim or t:flex pumps exchanged under this program.

As a reminder, the associated sales and cost of sales of these exchanges will be recognized upon the delivery of the t:slim G4 pump to the customer in Q4. In addition to the amounts deferred at September 30, we will also record the cost of the t:slim G4 replacement pumps, shipping, and other associated fulfillment costs.

As Kim discussed, we believe that prior to receiving approval for the t:slim G4 there was an increasing number of people who delayed their purchasing decisions in early Q3 while anticipating its availability.

Also, on September 9 when we announced the FDA approval of t:slim G4, we temporarily halted shipments to proactively contact customers still in the insurance verification process with a pending t:slim or t:flex order to inform them of the availability of t:slim G4 and ask whether they would like us to place a hold on fulfilling their current order while they determined if the t:slim G4 was a better fit for their needs. This resulted in customers taking additional time to consider the t:slim G4 in their purchasing decision, as well as satisfying any additional insurance verification or approval requirements. Similarly, this also impacted typical distributor order patterns.

However, as Kim commented, we have seen a significant increase in consumer interest since receiving FDA approval for the t:slim G4 and our preliminary orders to be verified by insurance reached a record level in September, and October is on track to exceed September.

Moving on to cost of sales and gross margin, our gross margin for the rolling 12 months ended September 30 was 32%, up significantly from 24% for the previous 12 months. Our gross profit during that period doubled to $19.7 million from just under $10 million. Our overall gross margin for Q3 improved to 35% and our gross profit for Q3 was $5.5 million.

The primary improvements in Q3's gross margin related to increased production volume and manufacturing efficiencies from leveraging our three pump products that utilize the same core manufacturing infrastructure. As a reminder, the physical aspects are very similar among our pumps, with slight differences only in software and the radio. The t:slim G4 utilizes the proprietary DexCom radio, while the t:slim and t:flex pumps use a Bluetooth radio. The t:slim and t:slim G4 utilize the same 300-unit capacity cartridge, while the t:flex cartridge has a 480-unit capacity.

Volume played a significant role in our gross margin progress, with pumps shipped increasing more than 40% and our cartridges almost doubling during the rolling 12-month period, compared to the prior 12 months. We also saw improvements in our pump warranty replacement rates. Additionally, as the manufacturing cost of our new pumps and refurbished pumps have decreased, our actual cost per warranty incident is declining.

Going forward, as our sales for t:flex and t:slim G4 provide incremental contributions beyond our t:slim sales, we also expect our manufacturing infrastructure and gross margin to benefit from the additional volumes these products provide.

Looking at the rest of our P&L, our operating loss for Q3 was $18.7 million, compared to $19 million for Q3 2014. Our operating expenses for Q3 were $24.2 million, compared to $23.4 million for Q3 2014. There was a $1 million milestone payment to DexCom included in our R&D expense line in each of those periods.

Our operating loss included non-cash expenses. During Q3, we recognized stock-based compensation of $3 million, compared to $3.7 million for Q3 2014. Our depreciation and amortization expense for Q3 was $1.2 million, consistent with Q3 2014.

On a rolling 12-month basis, our operating expenses only increased 12% year over year, while our revenues grew 46%. Importantly, this leveraging of our operating expenses has resulted in improvements in our operating margin, which we expect to continue to see in Q4. Our operating margin for Q3 was negative 119%, compared to negative 141% for Q3 of 2014.

On a rolling 12-month basis, our operating margin was negative 122%, compared to negative 177% for the previous 12 months. The 55 percentage-point improvement in our operating margin is primarily associated with the growth in sales, improvement in our gross margins, and our operating expenses growing at a much slower rate compared to our sales growth.

With respect to cash and cash flows, at the end of Q3 our cash and investment balance was approximately $84 million. Our cash and investments during Q3 decreased sequentially by $16 million. In Q2, our cash decreased by $19 million. Included in our Q3 uses of cash was the $1 million DexCom payment and approximately $600,000 associated with t:slim G4 launch activity.

Moving on to guidance, we are updating our previous guidance with respect to total sales and operating margin for 2015. We still expect our full-year 2015 sales will be in the range of $70 million to $75 million for all products. This represents an annual sales growth of 41% to 51% compared to 2014.

Included in the guidance are t:flex pump sales of $4 million to $6 million. As it is still early in the t:slim G4 launch and with the high level of customer interest in the new pump addition we have discussed, especially in September and October, we cannot estimate the incremental contribution of t:slim G4 versus its cannibalization of t:slim at this time. We do expect that t:slim G4 will represent the largest percentage of our pump shipments in Q4.

As a reminder, the ASP and gross margins for t:slim, t:slim G4, and t:flex are similar because they are billed using the same insurance codes and utilize the same core manufacturing.

With the typical seasonal flow of our pump shipments, continued acceptance of t:flex since its launch in May, and the high level of interest in t:slim G4 since its launch in September, we feel very confident in our ability to capitalize on the availability of our family of pumps during the fourth quarter and achieve our sales guidance range.

As a reminder, Q4 sales will include the recognition of approximately $700,000 of pump sales associated with the exchange program.

Moving on, we're updating our operating-margin expectation for 2015 to be in the range of negative 95% to negative 105%. Previously, we provided a guidance range of negative 100% to negative 110%. This includes non-cash stock-based compensation expense we currently estimate could range from $13 million to $14 million. The primary contributors to the improvement in our operating-margin expectation relate to our operating-expense management, as well as lower product manufacturing and warranty costs.

With respect to our cash, we expect our current cash, investments, and proceeds from the exercise of options and warrants will continue 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 include the following -- 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 our new products gain market acceptance.

This is especially important in 2016 as our sales force will have t:slim, t:flex, and t:slim G4 to provide healthcare providers with diverse product choices that share a common, easy-to-use interface. We also expect to see our gross margin trajectory increase as our sales increases and that we will reach our long-term goal of 60% gross margins in three to five years.

Where we fall within this range is highly dependent on the key factors I just outlined that impact our cash flow expectations. As much of our manufacturing infrastructure is designed to service t:slim, t:flex, and t:slim G4, increasing manufacturing volumes through organic sales growth or through incremental volume supplied by the new products should have a positive impact on our overall gross margin.

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

Thanks, John.

I would like to provide a few other updates on our products in development. I mentioned previously that we will be filing a 510(k) for lower age indication for t:slim by year-end. We're pleased to report that we are also planning to submit for lower age indication for t:slim G4 in the first half of 2016.

The other product enhancement we have been working on is for t:connect. As a reminder, t:connect is our state-of-the-art Mac and PC compatible data management software that provides Tandem pump users and their healthcare providers a fast, easy, and visual way to display data from their pump and supported blood glucose meters. It has been continuously rated the number one consumer software in independent customer surveys, and now with a family of products available to more than 27,000 customers who want to enhance the experience healthcare providers have with our t:connect offering.

In the first half of 2016, we plan to launch our t:connect [ATP] portal, which will offer prescribers features they have been asking for, such as different reporting capability and streamlined access to multi-patient data. It is a project that our development group has been working on behind the scenes and that we are excited to introduce to HCPs as an additional value add for their practices.

Our R&D team also continues to make great progress on our AP efforts. In Q3, we met with the FDA regarding our pre-IDE submission, which provided insight on our first commercial AP product design and clinical trial protocol.

Our next step will be a feasibility study, followed by a pivotal study and a regulatory submission for our first-generation AP product. This product will be an integrated t:slim with CGM pump that will automate insulin delivery based on predictive hypoglycemia algorithms. We are on track to submit an IDE to the FDA for a feasibility study by year-end.

Our second-generation AP pump will be an integrated t:slim with CGM pump, featuring both a predictive hypoglycemia algorithm and a predictive hyperglycemia algorithm. We initially had hoped to complete the studies for our gen-one and gen-two AP pumps simultaneously, but in working with the FDA through the pre-IDE process we feel that the sequential development will allow us to begin offering customers the benefit of automated insulin delivery features based on the most accurate CGM available most quickly.

Through the strong momentum of our family of pump offerings, combined with the exciting additions in our portfolio for 2016, we recognize the need to further expand our 60-territory sales force. We are in the process of adding an additional 12 territories for a total of 72, which will come on board over the upcoming months to provide additional field support.

Our commercial organization has accomplished an incredible amount since the launch of t:slim in Q3 2012. These efforts have been led by our Executive Vice President and Chief Commercial Officer Bob Anacone. Bob has been with the Company since 2009 and, as you will see in today's 8-K, he has decided the time has come to move into retirement.

Timing wise, he will see things through the Q4 busy season here while we continue to build out the commercial management team, and thereafter we anticipate he will be available for a period as needed to help ensure a smooth transition. On behalf of the full team here, I would like to express our thanks to Bob for all of his efforts and contributions at Tandem and we wish him well in the future.

If I was to characterize the year so far, I would say it has been one of tremendous accomplishment for Tandem. We launched t:slim and t:connect enhancements, as well as two new products with the t:flex and t:slim G4 [components]. We made meaningful progress in advancing our future pipeline, particularly in our AP efforts, and we are well positioned to continue bringing new products and features to the diabetes community.

Operationally, we have also made great strides in increasing our efficiencies, leveraging our infrastructure, and we are beginning to reduce our cash burn. These are all key accomplishments which continue to position us for sustainable long-term growth as a business and as a Company dedicated to improving the lives of people with diabetes.

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

(Operator Instructions). Rick Wise, Stifel.

Congratulations truly on an excellent quarter in a complicated period here. There are so many things to ask. It seems like you are having great momentum with the new products.

Maybe start with some perspective. You mentioned, Kim, I think, opening up of new accounts. Help us understand the new accounts you're opening. Are you being helped because of the three products? Is it specific to t:slim G4? How many new accounts are you opening? Just additional color around that if you would.

Well, I can't quantify and give you a number on the number of new accounts, but I'd definitely say the integration of CGM really is the leader in terms of opening up these new accounts.

You have seen products available from Medtronic and then later Animas that were integrated, and so that was a feature set that we didn't have. So, this is really a landmark for us to be able to offer that product offering because it really does open up accounts that were dedicated CGM technology integration fans and we hadn't been able to really play in those accounts. So, we are hopeful that it's going to begin to expand our penetration as we expand our sales territories as well.

And maybe, John, just turning back to guidance here. You didn't change your guidance range, obviously. But I think I just heard you correctly, the product guidance did not assume or include, at least as best I understood, t:slim G4. So does that also imply that you are thinking about 100% cannibalization here or should we view it -- obviously, it implies very strong growth. Don't mistake me on that. But it still would seem conservative based on the early launch, the early reaction, new accounts, et cetera. How do we think about it?

I don't think it assumes 100% cannibalization, but there is a high level of interest in the t:slim G4. Our preliminary orders for September and October that are going through insurance verification now are highly skewed towards the G4 product. It is the newest product and, as Kim mentioned, those are accounts and customers that are looking for that feature that we now are able to offer.

I hear you. It's still hard to understand. It seems like you got a lot of momentum and the numbers could prove conservative.

Just one last question from me. Kim, you are adding 12 territories. That makes a ton of sense. Just what's the timing of that? How are you going to stage that or rolled that out? And obviously in an earlier stage of your evolution, you increased territories and it was a little disruptive. Should we be concerned? How can you reassure us that we won't see that same kind of disruption, we will get the good stuff, none of the bad stuff? Thank you.

I think that what we are doing here is filling black holes, areas that were poorly covered areas that really didn't have good representation. So we hope we are able to accomplish the expansion by the end of the first quarter. We are starting on it now, obviously, and we would like to have that up and running by the end of the first quarter.

We don't expect to see the kind of disruption that we saw when we nearly doubled the sales force and changed every territory out in that process. So, we think it will be far more additive and less disruptive than the additions we have done in the past.

And just a quick follow-up, how quickly could those be incremental contributors to the topline? Does it takes six months, 12 months? What should we assume? Thanks and I will drop (multiple speakers)

Yes, six to 12 months is a reasonable expectation for them being productive and adding to the topline. That's part of our goal for increased revenues next year. The first line is new products, the second line is expansion of the sales force.

Thanks again.

Thom Gunderson, Piper Jaffray.

Just to start, a couple of clarifications. Rick was talking about the 12 territories. Just to make sure we have our words right, these are 12 new territories, commission carrying, not managers, not juniors. This is new territories. Is that the way to think of it?

Yes, that's right.

All right. And then, the other is I know you got the FDA approval in early September. Did you say the 487 shipped all in the last week of the quarter?

That's correct.

Okay, then for the question, we're all going to try and figure out how much is cannibalization and how much is going to be new, and you commented quite a bit in your prepared remarks. I'm just wondering. As you look at those preliminary orders that come through for t:slim in October, are those maintaining a rate that was within the range that you were expecting, given the launch of the other two products? In other words, if we were to look at a overall growth rate for t:slim based on the first six months of the year, is that fitting within your expectations as we head into Q4?

The percentage of the pump orders that are running through the process now are highly skewed towards the G4, and at this point it is too early to tell whether that is pent-up demand or if that is really a continuing trend that we will see continuously. The orders for t:slim are generally lower than that, so that leads us to believe that there is some cannibalization going on.

Okay, and then final question. By definition, everybody on the call has heard about these products and probably heard about these products for the last six to nine months, but that doesn't mean that all your customers are as up to date, particularly because you couldn't market until after September 9. Can you give us a little feel of what has happened between 9/9 and 10/29 as far as informing the diabetes community about G4?

Certainly, we had a strong effort in trying to inform our own customers who were in the queue as to the availability of the t:slim G4. So there was a lot of activity there, but all I can tell you is that based upon the demand we are seeing from our own customer base, there is a great deal of interest in the product.

Obviously in the larger community, the availability of more integrated CGM options is something that is highly in favor in the community. So we hope that's going to continue to expand demand, but I really can't quantify that for you.

Okay. That's it for me, guys. Thanks.

Ben Andrew, William Blair.

Thanks for taking the questions, guys. John, can you give us a sense what percentage of the orders went through distributors this quarter, as you typically do?

It was consistent. It is 77%.

Okay, great. And then, Kim, I thought you said that you're going to file for the G4 algorithm upgrade in the first half of 2016. Is that right?

The algorithm upgrade?

On the t:slim G4, excuse me.

For AP?

[Adult] pediatric.

For pediatric (multiple speakers)

Oh, for pediatric (multiple speakers), yes, that's correct.

I missed what that was for, so are you planning to file for the new algorithm -- software algorithm that DexCom got last fall?

No.

Okay. And so, the next upgrade is just you're going to go straight to the AP versus anything else on the sensor side?

Correct.

Okay, that's helpful. And then, just to clarify, do you get a price advantage when you sell a t:slim G4 over a t:slim?

No, they are billed under the same codes among our three products, so there really is no differential in the pricing for us, generally.

Okay, great. And then, it is early days as some of the other people were asking about with the product in the marketplace and you talked about a majority of the pumps being G4 in the fourth quarter. Where should we look for that to be over time? Is there a consensus evolving? I know it's still early, but what have you heard back from the user base, both patients and physicians?

That's probably one of the hardest questions to answer, really, at this point looking forward is what percentage of that base is going to be the t:slim G4 versus the base t:slim, and we really don't have a good handle on that yet, which is part of the problem with having good guidance here in the fourth quarter.

So, we expect it to be a high percentage because it has been. It is the number one feature that people have asked for, but I really can't give an answer on -- that is going to quantify it for you.

I think that longer term that we still believe the t:slim has the advantage as we move towards AP products because of its Bluetooth radio, and so with Project Odyssey, hopefully we will get that approved next year and be able to utilize that capability to bring added benefits to the t:slim product.

Okay. And then, Kim, you walked through the timing on the AP project a little more granularity this time with the hypo and hyper algorithms. Is that just a function of the number of patients and the size of the trials perhaps that FDA would require to do both at once or what was the back story there?

It is the guidance that we got from the FDA that it was better to do it sequentially than it was to try to do it simultaneously. We haven't given really any granularity as to what the studies are, but they're decidedly different studies and they are stepwise moving towards an in-home setting. And so, it was the advice that we got from the FDA that we split them up and we do it sequentially.

Okay, great. Thank you. That's it for me.

Doug Schenkel, Cowen and Company.

This is Ryan Blicker filling in for Doug. Thanks for taking my questions. Starting with the pediatric indication expected for next year, do you believe the lack of a pediatric indication to date has been a real bottleneck or have doctors been comfortable offering t:slim to pediatric patients off label?

No, I think it's -- we have been pretty strict about our marketing guidelines and so we cannot market below the age indication that we had approved, and so I think that may be obviously, since we can't market it actively, it doesn't inform the community, obviously, the availability of it for lower usage. There has been, obviously, physicians who make the choice to prescribe it, but we certainly can't promote that.

So I think it's a real opportunity for us to do marketing activities that we've really stayed away from, including summer camps and activities where the lower age indication where we weren't approved were present. So, we have been hamstrung by this indication and this will take that limitation away.

Okay, thank you. That's helpful. And then shifting to the AP program, it sounds like you made some great progress. Can you provide an update on your search for an algorithm partner and when does this really need to be secured in order to remain on track with your timelines?

We haven't really given the details of who our algorithm partner is and which one we're using. So, I can't really give you any indication on that, but we have selected it and it is part of the protocol that we review with the FDA.

Okay, thank you. And then, last one for me with operating margin. After making some heavy investments in 2014, you have done a great job managing OpEx so far in 2015, both with SG&A and R&D. Moving to 2016 with the sales force expansion you talked about, as well as a number of ongoing R&D projects, including your AP program, how should we be thinking about OpEx? Should growth here track a bit closer to revenue growth than what we have seen in 2014?

No, we're not giving 2016 guidance in particular at this time, but I can tell you that we are moving towards trying to get to cash flow breakeven, and we do expect that our progress that we've made on the operating margin line over the last year, year and a half, is going to continue into 2016 towards that.

Okay, thank you.

Tao Levy, Wedbush.

So maybe if I could ask a little bit on the September insurance verification that you talked about. Do those start to kick in now in the October time frame in terms of pumps that are shipped?

That's correct.

Generally, it is a 30-day sort of insurance cycle. Sometimes it can run a little long with the G4 here because people are also looking to verify their CGM insurance at the same time, so now you're going through two processes at the same time.

Okay. It sounds if -- you have had one record month and then followed by another record month there. You're well positioned for the fourth quarter. Is there anything that could derail some of these trends that you have seen over the last, I guess, month?

The only question is whether or not what we have seen early on in the launch of G4 is the pent-up demand that will level out, but we don't consider that to be a high likelihood. I think, obviously, a lot of excitement from the customer base, feedback. Our sales force is excited to have this added to their bag and it is also our seasonal high quarter where we generally see the most of our pumps sold. So, I think we are highly confident we're going to hit our guidance range on sales for the year.

Okay, great. And anything -- is there such a thing as a t:flex G4?

No, there is not.

Is there a need, do you think, in the marketplace?

We don't think that there is a need in the marketplace at this point in time. Type 2s generally are not CGM using patient population, so we really don't have it in the pipeline.

But you are seeing, if I understood your comments earlier properly, you are actually seeing more uptake in the Type 1s than the Type 2s.

Correct.

Okay. And then, just lastly, maybe a clarification. When you talked about the sequential clinical trial process that the FDA is asking you to do for the AP program, I think -- I thought I heard you mention that the agency wanted you to use the most accurate CGM sensor for the second tranche of patients. Are you referring to the G5? And if so, when do you start to talk to us about G5 integration with -- I don't know which pump that will be, but --

Right, yes, the integration rollout. Yes, we will probably give you more guidance on that next quarter. We haven't really disclosed which sensors we're using and in which trials, but we have discussed that with the FDA and we will be giving you more granularity when we have our next conference call.

Okay, great. Thank you very much.

Jeff Johnson, Robert Baird.

Just a couple questions here. Kim, maybe just on the FDA feedback on the AP, would be interested in hearing why they thought sequential would be better than running them simultaneously. Is it just ease of looking at the data? And I think I heard you it makes sense that you start hypo first, but I just want to make sure that's what I heard correctly.

Yes, you heard that correctly. No, the first one is just a feasibility study, and the second study is more of a validation study, and that's very typical in clinical-trial process with the FDA. So it is just the normal standard way they would go about looking at it.

But I just want to make sure I am understanding, then. You still will be going after a hypo indication first --

Yes, correct.

-- and then having to pursue a hyper later?

That's correct.

And you'll have to get the hypo indication approved before you can start any work on the hyper, is that what the FDA's telling you?

No, we haven't really talked about that, but -- no.

Okay, that's helpful. And then, just on t:connect, when that portal goes live in the first half of 2016, just remind me. Is there any way to monetize anything there or is that just a selling feature that obviously improves the attractiveness of your offering?

It's the latter. It's really an added benefit we want to provide our customers, and then also the HCPs.

All right, thanks, and then last question, John, I guess for me is just more on the cash burn rate. It has come down here in the last quarter; I guess even if we adjust for the DexCom payment, it came down even nicer. It looks like to me you could probably shake out in the mid-60s here for the year on a cash burn rate. As we go into next year, I know you're not providing guidance, but as some of the G4 t:slim launch costs are still in there, you're expanding territories and that, is there any way to think about that cash burn rate coming down below $60 million or do we probably need to stay above $60 million just as we think about 2016?

Again, not really giving specifics on 2016, but again with three products going into 2016 versus going into this year with a single product, plus we intend to hopefully get some approvals for some other products that we can offer next year that will help our credibility with the customers and the HCPs, I think you'll see not only an uplift in sales, but gross margins, as well as operating margins, moving towards that profitability.

Okay, that's helpful. Thank you.

Kristen Stewart, Deutsche Bank.

Most of my questions have been answered, so just a couple clarifications. Just with respect to the sales guidance for the year, I always had thought that some portion of t:slim G4 had been included. I just wanted to make sure that I understood that correctly because I think when you had answered Rick's question, you had said that it wasn't. I just want to make sure I understand what was originally included in the $70 million to $75 million.

Sure. In the original guidance we provided at the beginning of the year, Rick was correct in what he understood in that it was $70 million to $75 million and did not include t:slim G4.

Okay.

And part of the reason we are looking at this and not adjusting the guidance is that because it is so early in the launch, we are seeing a high interest in t:slim G4. We do see some cannibalization of the t:slim product itself, as well as just what the sequential growth expectation is between Q3 and Q4 and what we see in the pipeline. We think that's adequately representative of what we think we can do for the year.

Okay, so you always thought it was going to get approved this year, but never included any incremental revenues for it?

Correct. Well, the key new assumption is the cannibalization portion that (multiple speakers) level up since we've launched.

Got you.

Now whether that's just the pent-up demand aspect or that's a continuing trend remains for us to be evaluated.

Okay, so the earlier approval certainly would enhance your confidence to get certainly to the range?

Definitely.

Okay.

We are highly confident we will be in the range.

Okay, then can you just walk through again -- I just want to make sure I understand the expansion of territories correctly, and the number.

We intend to have 12 territories and we're working on recruiting those today, and the timing of when those come on board is highly dependent on when the offers occur. But it is probably -- they will all be on board probably in the next six months and up and running. And as Kim mentioned, we would like to see those become highly productive within six to 12 months.

Okay, perfect. And then, just the improvement in the operating loss this year, what is driving that? Just control (multiple speakers)

Obviously, there is a sales growth component that you see overall. On the expense side, it really is -- we have put an infrastructure in place that we are now beginning to leverage against the sales. I won't say that we won't make incremental additions to the operating expense infrastructure as the business grows; we will. But we expect that to be at a much lower rate than our sales growth.

Another key aspect is the gross margin is improving as the volume has increased. We also are making improvements that have helped our warranty costs come down and that has also played a big portion of what we had started to see here in the third quarter.

Okay. And no improvements in terms of cost of goods sold for the disposables outside of just the benefits of increased scale?

There is increased scale. We're also working on just moving -- sorry, improving our efficiencies in that process and that is happening. Those margins are increasing as well.

Okay, perfect. Great. Thank you very much and great quarter.

Ben Haynor, Feltl and Company.

Thanks for taking the questions. First off, how long was the suspension of shipments? I know you said you suspended them on September 9? Was it just the two weeks until the launch on the 23rd or was it shorter or longer?

What we did was basically when we announced it on the 9th, we suspended shipments for three days. No shipments went out the door at all for any products, and we did an outreach to all the customers who had open orders with us and basically informed them that t:slim G4 was available and asked them if they would like us to place a hold on their order while they determined whether or not that new product was something they would like better than the t:slim or the t:flex.

And then after that, if they had told us immediately that they wanted to stay with their orders, we would fulfill that order. But if they wanted time to evaluate it, we would basically put a hold on their order until they came back to us.

Okay, that makes sense. And then, a couple quick ones on R&D expense. First off, following on Kristen's question, I think, was the DexCom milestone originally included in guidance?

Yes.

Okay. And then, would you -- for Q4, would you expect that the total R&D expense to step down sequentially by about that amount or will some of the other development efforts cause the decline to be somewhat less there?

I think there will be a step down equivalent to that milestone payment. There will be some nominal increases in R&D as activity increases with the projects they are working on, but nothing extravagant.

Okay, great. Thank you very much.

(Operator Instructions). Bob Hopkins, Bank of America.

So, two quick questions. First, I am sorry if I missed this, but can you give us a sense as to trends in terms of percentage of pump sales coming from wins over competitors versus MDI conversions? I am not sure how closely you are able to track that, but just curious as to trends in the quarter in that regard.

The trend continues to be consistent. We are continuing to see right around 50% of our business coming from conversions from competitor pumps and 50% new to pump therapy MDIs.

Okay, and that's been pretty similar the last few quarters?

Definitely. That trend has been there for a while.

Okay, and the other quick thing I wanted to ask about is just the consensus, I believe, is a little over $100 million for you guys for next year in revenues. And you will talk about this more later, I realize, but I'm just wondering. Are there any things that you would have us consider either positive or negative for next year? Obviously, a lot of the disclosures today seem quite encouraging, suggesting that number might be pretty conservative. So, I just wonder if there are some things that at this point, without giving specific guidance, you would have us consider as we think about modeling for 2016.

I will say that we will go into 2016 with the three pump offerings that we -- that we didn't have here at the beginning of this year; we had just t:slim.

And so, us getting t:flex and t:slim G4 approved with the ability to have some experience in 2015 bodes well for us going into 2016. We wouldn't be adding territories, the 12 territories, if we didn't feel highly confident that the products that we are going to sell during 2016 would be utilized by the sales force at a high level.

And then, we will see some time to ramp, but I think 2016, the gross margin line will improve as well. I think from the other thing on the sales line to consider is that 2016 will be the first year in which renewals will become a portion of the business that we can basically go after, so that will be new incrementals that we haven't seen prior to. But that will also be not very much. I think it is about 1,000 pumps starting in August of next year that we will be able to go after. But 2017, that number will jump to close to 6,000.

Okay, great. That's helpful. That's all I had. Thank you.

I am showing no further questions at this time. I would like to turn the call back over to Mr. Kim Blickenstaff for closing remarks.

Okay, thanks again, everyone, for joining us today.

I will give an update, really quick update, on two upcoming investor conferences that we are going to be attending. On November 18, we are presenting at the Stifel conference in New York City, so we will be there at that conference. And then on December 1, we will be at the Piper Jaffray Healthcare Conference, which will also be in New York City. So we'll be traveling to New York.

So thanks again for joining us on today's call and we look forward to keeping you updated as the Company progresses. Thanks for joining us today.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.