Tandem Diabetes Care Inc (TNDM) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Tandem's fourth-quarter and full-year 2015 earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Susan Morrison, Chief Administrative Officer. Please go ahead.

Thanks. Good afternoon, everyone, and thank you for joining Tandem's fourth-quarter and full-year 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 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, Tandems President and CEO, will be leading today's call. At this time I will turn it over to Kim.

Thank you, Susan. Good afternoon, everyone. Joining me on today's call is our CFO, John Cajigas. We entered 2015 with big aspirations for growth, product development and operational progress and I'm proud that we delivered on all those fronts.

It was our third full year of commercial sales and in those three years we've gone from offering the t:slim pump, our flagship product, to offering a full family of products to meet different needs of people with diabetes. We've also demonstrated greater than 40% annual sales growth each year and have quickly progressed to 36% gross margins, all while narrowing our operating loss and maintaining a number-one rating by customers in independent surveys.

These achievements are a direct result of the hard work, passion and dedication of our employees and I am thrilled with all that we have accomplished in a relatively short period of time. In 2015 we achieved $73 million in sales, meaningful reduction in our cash burn each quarter, the clearance and successful launch of the t:flex pump and approval of our first PMA followed by the launch of the t:slim G4 within a matter of weeks.

In looking to the year ahead, 2016 is once again positioned for out-paced growth and continued improvement with our gross margin and operating margin as we manage the business towards profitability. We also have a number of exciting product development initiatives for our customers and the diabetes community and continue to strive to provide people with diabetes the utmost care and support.

We are the first and only Company to offer three different insulin pumps that address different needs of the diabetes community, and we now have more than 33,000 customers. We continue to see that about 50% of our shipments have been to people who are new to pump therapy.

Capturing more than 15,000 pumps in 2015 and seeing a meaningful percent of our pump shipments coming from an underpenetrated portion of the market demonstrates that we are rapidly becoming a leading choice among people who choose insulin pump therapy. It's always been a goal of our Company to expand the insulin pump market through new product offerings and in 2015 we continued to deliver on that commitment.

We began sales of our second commercial product, the t:flex pump in May of 2015. As a reminder, the t:flex is an exciting and unique product, as it offers the largest capacity insulin reservoir available for people with greater insulin needs. We continue to believe it provides significant type II market growth opportunity as only about 125,000 people use an insulin pump, with a potential 1.7 million people with type II diabetes who use daily rapid-acting insulin.

We shipped 1,500 t:flex pumps in 2015, nearly 60% of which were to people who reported previously using multiple daily injections. We're also seeing an increasing number of our t:flex customers coming from people who have type II diabetes. Although it's early in our launch, we're encouraged with the initial response of t:flex and it's meeting an unmet need for many people with diabetes.

We've also had tremendous response to the most recent addition to our family of products, the t:slim G4 which we launched in September. Customers report liking the same easy-to-use pump benefits as t:slim with the integrated convenience of Dexcom's G4 platinum sensor for continuous glucose monitoring. In the fourth quarter t:slim G4 made up more than 60% of our overall shipments.

While there is some cannibalization of t:slim and this high percentage may also reflect some pent-up demand, it also demonstrates the great interest in this product. Interestingly, in a survey of our t:slim G4 users, nearly 45% of respondents said they were not using CGM before going on the t:slim G4 pump. This is very encouraging as it's expanding use of CGM technology which further supports our mission to improve the lives of people with diabetes.

I am now going to turn the call over to John to provide some more color on our 2015 results. And after his remarks I will spend some more time discussing our 2016 plans and initiatives.

Thanks, Kim. Good afternoon, everyone. Overall, I'm very happy we ended 2015 with a strong fourth-quarter performance with our record sales for a single quarter, highest quarterly gross margins ever and our entire organization continuing to manage our operating expenses and provide the highest-rated customer service in the industry. Our performance over the last 12 months, and in the fourth quarter in particular, continues to give us confidence as we manage the business towards profitability.

Looking at our sales and product shipment progress, first I will discuss our rolling 12-month metrics, which we continue to view as better indicators of our progress, followed by some particulars for Q4. As Kim mentioned, for the third year in a row we have delivered annual sales growth exceeding 40%. Our sales for 2015 were $72.9 million, an increase of 47% from $49.7 million in 2014. This growth was driven by the increasing productivity of our sales force and the contribution of our new products, the t:flex and the t:slim G4.

Pumps shipped for the 12 months ended December 31 were 15,483, an increase of 43% from the previous 12 months. As of the end of 2015, our cumulative shipments have grown to more than 33,000 pumps.

Our average productivity per territory over the rolling 12 months ended December 31 was 21 pumps per month per territory, compared to 17 for the previous 12 months. In 2016 we expect our average annual territory productivity to increase to between 24 and 26 pumps per month per territory. The higher productivity is expected to be driven by having a family of insulin pumps to offer customers and HCPs, new product enhancements that Kim will discuss and the opportunity to retain customers that purchased the t:slim in 2012 whose warranty will expire in 2016.

We anticipate that the largest increase in territory productivity will occur between the third and fourth quarters of 2016. As the current sales force continues to become more effective, new territories become productive and pump renewal opportunities begin in Q4. As a reminder, we are also in the process of expanding from 60 territories to 72 territories which is expected to be completed in this quarter.

We expect to see some sales force disruption from this expansion. However, we believe it will be much more limited than what we experienced in 2013 and 2014 when we did much larger expansions and completely reorganized all existing territories.

Looking at some of the details of our Q4 sales and pump shipments, overall our Q4 sales were $29.1 million, up from $17.9 million in Q4 2014. With respect to our limited t:slim G4 exchange program that we initiated in the third quarter, $700,000 of pump sales and $230,000 of cost of sales were deferred from Q3 to Q4. The final numbers of pumps exchanged under this program was 150. In addition to these deferrals recognized in Q4, we incurred a $200,000 charge for cost of sales of the t:slim G4 replacement pumps themselves and other associated costs with the exchange program.

Pump sales accounted for 86% of our total sales in Q4 which is in line with what we experienced in the fourth quarter of 2014 but higher than what we have seen on the last several quarters of 2015. In Q4 the high level of interest in t:slim G4 contributed to the higher pump sales percentage. And we anticipate the percentage of our total sales of pumps in 2016 will remain high.

In Q4 we shipped a total of 6,234 pumps, of which 571 were t:flex and 3,857 were t:slim G4s. This is well in excess of our previous all-time quarterly high of 3,929 pumps shipped in Q4 2014. The average productivity of our sales force in Q4 was 34 pumps per month per territory, compared to 19 in Q3 2015 and 22 in Q4 2014.

Moving on to cost of sales and gross margins, our gross margins for the 12 months ended December 31 was 36%, up from 31% for the previous 12 months. Our gross profits during those periods increased to $26.6 million from $15.2 million. Manufacturing volumes continue to play a significant role in our gross margin progress, with pumps shipped increasing 43%, and our cartridge shipped increasing 83% during 2015 compared to 2014.

We also saw improvements in our pump warranty replacement rates during the second half of 2015 as compared to the first half. Additionally, as manufacturing costs of our new pumps and refurbished pumps have decreased, our actual cost per warranty incidence is declining.

Our overall gross margins for Q4 was 46% compared to 35% in Q3 and 37% in Q4 2014. Our gross profit for Q4 was $13.5 million compared to $6.5 million in Q4 2014. The primary improvements in Q4's gross margins related to increased production volumes and manufacturing efficiencies from leveraging three pump products and cartridges that utilize much of the same core manufacturing and operational infrastructure.

As a reminder, the physical aspects are very similar among our pumps, with the primary differences only being the software and the radio. The t:slim G4 uses the proprietary Dexcom radio while the t:slim and the t:flex pumps include a Bluetooth radio. The t:slim and the t:slim G4 utilize the same 300-unit capacity cartridge while the t:flex cartridge has a 480-unit capacity.

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 margins to benefit from the additional volumes these products provide. The percentage of our total sales in Q4 represented by pumps which have a higher gross margin than our pump supplies was 86%, compared to 81% in Q3 and 86% in Q4 2014.

Looking at the rest of our P&L, our operating loss for the 12 months ended December 31 decreased to $69 million from $75.7 million in 2014. Our 2015 operating loss included non-cash expenses for stock-based compensation of $13.1 million and depreciation and amortization of $4.8 million. For 2014 our stock based compensation was $15 million and depreciation and amortization was $4.4 million.

Our annual operating margin improved significantly from negative 152% for 2014 to negative 95% for 2015. The 57 percentage point improvement was primarily due to sales growth, improvement in our gross margins and actively managing our operating costs.

For 2015 our operating expenses only increased 5% year over year while our revenues grew 47%. Importantly, this leveraging of our operating expenses, along with our gross profits increasing 74% has resulted in a year-over-year improvement in our operating margins that we expect to continue to see as we progress towards profitability.

Our operating loss for Q4 was $11.2 million, delivering an operating margin of negative 39% compared to an operating loss of $17.5 million and an operating margin of negative 98% for Q4 2014. The significant improvement in our Q4 operating margin compared to Q4 2014 was driven by a 63% increase in our sales, our gross margins improving almost 10 percentage points, and our operating expenses controlled at 3% growth year over year.

Our operating expenses for Q4 were $24.7 million compared to $24 million for Q4 2014. During Q4 were recognized non-cash stock-based compensation of $3.1 million compared to $3.9 million for Q4 2014. Our depreciation and amortization for Q4 was $1.2 million compared to $1.3 million in Q4 2014.

With respect to cash and cash flows, at the end of Q4 our cash and investment balance was approximately $73 million. Our cash and investments during Q4 decreased sequentially by $11 million. In Q3 our cash decreased by $16 million. The decrease in our sequential quarterly cash burn was primarily driven by our increasing sales, gross margin improvements, as well as our management of the growth of our operating expenses at a much lower rate than our sales growth.

Also, in January 2016 we announced the amendment of our term loan facility with CRG which will provide us access to $50 million in addition to the $30 million we borrowed from CRG in January 2013. Under the terms of the amended agreement we drew $15 million last month and we have a one-time option to access up to an additional $35 million before the end of the year.

Moving on to our 2016 guidance, we expect our full-year 2016 sales will be in the range of $105 million to $112 million for all products. This represents an annual sales growth of 44% to 54% compared to 2015 and would be the fourth consecutive year of greater than 40% growth in sales. We do expect our 2016 pump sales will continue to be a much larger proportion of our total sales than our pump supplies.

Our 2016 sales will see a quarterly pattern impacted by typical seasonality but with a slightly higher percentage of our 2016 sales achieved in the third and fourth quarters than the quarterly patterns of 2014 and 2015. This is primarily due to the combined effect of offering a family of three pumps, product enhancements to be made available throughout 2016 and the increasing productivity of our new territories in the second half of the year, as well as the contributions of early pump renewal opportunities that are likely to be realized beginning in the fourth quarter.

Also based on the significant contributions that the t:slim G4 has provided to our overall sales during the time since its launch in late September, we believe that the t:slim G4 will represent the largest percentage of our total pump shipments in 2016. As a reminder, the ASPs and gross margins for the t:slim, t:slim G4 and the t:flex are similar because they are billed using the same insurance codes and utilize the same core manufacturing other than the $100 for each t:slim G4 pump sold designated for joint marketing with Dexcom.

Moving on to our operating margin guidance, we expect operating our margin for 2016 to be in the range of negative 55% and negative 65%, which includes approximately $13 million to $14 million in non-cash stock-based compensation expense and approximately $5 million to $6 million in depreciation and amortization. We do expect our gross margins on our products to continue to improve on an annual basis, driven primarily by the increased sales volumes as well as lower product manufacturing and warranty costs. Our long-term overall gross margin expectation is 60% which we expect to achieve sometime over the next two to four years.

Our SG&A expenses are expected to increase in 2016 as our revenues and our installed base of customers grow. In addition to increasing our sales force footprint from 60 to 72 territories in Q1, we also expect other sales, marketing and administrative functions that are necessary to maintain our number-one rated customer support to grow over the course of the year.

Our core R&D expenses are expected to grow at a rate similar to last year as we focus our efforts on the artificial pancreas projects, as well as continuous improvements to both our pump and cartridge hardware. Incremental to that growth in our core R&D expenses, we expect to spend approximately $1 million for clinical trial costs in 2016.

With respect to our cash, we expect our current cash, investments, available cash under our debt arrangements and proceeds from the exercise of options and warrants will continue to be sufficient for operating needs for at least the next 12 months, and under some scenarios could be sufficient for our needs until we achieve cash flow breakeven. Key factors influencing our operating margin and cash flow expectations, and ultimately our profitability timeline and potential capital needs, involve territory productivity, our ability to develop, secure regulatory approvals and successfully commercialize potential new products and our ability to gain leverage within our operations as our sales expands and our products gain market acceptance.

For 2016, cash utilized in Q1 is expected to be higher than in Q4 2015 primarily due to our expectation of lower sequential sales due to seasonality. Additional SG&A costs associated with the expansion of our sales force, as well as the timing of the payout of 2015 sales commissions and annual bonuses that we expensed in 2015.

Our cash burn for the remaining quarters of 2016 will be dependent on such factors as the level and timing of quarterly sales and gross margins, expenditures associated with activities including product launch activities and trade shows, R&D and clinical trial progress, manufacturing and facility requirements and general headcount growth as our operations expand. And with that, I will turn it back over to Kim.

Thanks. As John outlined, we continue to have big aspirations for Tandem and are confident in our ability to reach our long-term goals. Offering three pumps is a game changer for our business, as it's an inflection point for sales as well as leveraging our internal infrastructure.

In 2016 we are managing the business toward profitability while continuing to make investments that will grow sales and further expand our offerings to the diabetes community. These new offerings can be best divided into two groups: enhancements to our current products and new products.

Starting with product enhancements, I am happy to share that we filed a 510(k) for extending our pediatric indication for the t:slim pump to ages six and above. As a reminder, the t:slim is currently indicated for individuals ages 12 and older. We believe that with an expanded claim, the t:slim's modern look and easy-to-use interface we'll be able to market the benefits of pump therapy to the caregivers for this younger audience. While approval is always at the discretion of the FDA, we are planning for clearance of a lower age indication in the second quarter, after which time we plan to submit a PMA supplement to expand our pediatric indication for the t:slim G4.

The next enhancement we are making in 2016 is the t:connect, our cloud-based data management application that is compatible with all of our insulin pump products. We've been working on an enhanced version of t:connect called t:connect HCP that simplifies the ability of patients to share their data with their healthcare providers. The t:connect HCP also allows a healthcare provider to establish a separate account that makes t:connect data from all their enrolled patients more accessible to the HCP's office.

t:connect regularly receives the number-one rating in independent customer surveys and as a Company focused on meeting customer needs, this is something that we are very proud of. Our focus for the past year has been to extend that user experience to the HCPs who provide our customers with valuable care and support. We are excited to announce that we will be begin a beta launch of t:connect HCP to a small group of accounts in the coming weeks, with an expanded launch to begin mid 2016.

Our next development project is a tool for delivering product enhancements to our customers throughout the typical four-year life of their pump. The Tandem device updater, which we previously referred to as Project Odyssey, was designed to do exactly what its name implies, to give users the ability to update their pump software at home similar to a smartphone.

The first software enhancement we plan to offer to the updater is for our early t:slim customers to provide them with access to our t:slim software that is being shipped on new pumps today. As a reminder, this new software that we launched last year incorporates a number of changes based upon customer and healthcare provider feedback to our original t:slim.

An example of a new feature included in the updated software is the streamlined cartridge change process that provides users the ability to fill their cartridge with insulin off the pump rather than on the pump and expedites the fill tubing process. Our ability to offer existing customers feature enhancements such as this without any hardware changes really highlights the true potential of touch-screen technology and our customer-centric philosophy. We anticipate receiving 510(k) clearance for our device updater in the second quarter and will do a beta rollout shortly following clearance, followed by a full launch.

Turning to our new pump products, we continue to make meaningful progress on the clinical applications of our pump. Our first generation AP product will be a CGM-integrated t:slim pump that will automate insulin delivery based on a predictive hypoglycemic algorithm that was developed internally in consultation with industry thought leaders.

We submitted a pre-IDE for this pump and had several discussions with the FDA last year to refine our clinical trials. We plan to conduct an in-clinic feasibility trial beginning in the second quarter of this year and commence the pivotal trial by year end. We believe this product will require a full PMA submission and our goal is to commercially launch this first generation AP product by the end of 2017. Included in this timeline is an IDE submission prior to the commencement of each trial.

Our second-generation AP pump will feature an algorithm to automatically increase or decrease insulin delivery in response to predicted glucose levels. We plan to conduct feasibility studies this year and a pivotal study in 2017. Overall, it's a very exciting step for the Company, as we are starting to make meaningful progress in our automated insulin delivery initiatives that have been active behind the scenes.

In addition to advancing the clinical applications of our technology, we also remain focused on the consumer applications that are at the foundation of our product development efforts. To that end, I'm excited to share that we are moving forward with the development of t:sport, which is a wearable pump for people who seek even greater discretion and flexibility.

During 2015 we completed market research on t:sport and developed several hardware prototypes. These prototypes include a pump that's approximately half of the size of the t:slim and uses a short infusion set. The pump will be controlled through a separate device or a mobile application.

The touch-screen design of our current products provide us with an advantage in t:sport's development, as our experience in touch-screen user interfaces places us in a unique position to quickly implement a safe and easily usable interface on a smartphone or other controller. This year we will be actively developing the t:sport with a goal to submit a regulatory filing next year.

As you can see, 2016 will be another busy year for us. At the heart of our Company is a passion to improve the lives of people with diabetes. Our family of product offerings, product enhancements and development efforts are in support of this mission, as are our sales and customer service initiatives.

In the process, we are committed to building a sustainable business with improving margins and moving toward profitability. In combination, these are Tandem's top priorities for 2016 and over the upcoming quarters I look forward to sharing our future achievements. With that, I will turn it over to the operator for questions.

(Operator Instructions) Rick Wise, Stifel.

Good afternoon, everybody, and truly congratulations on the excellent quarter. Kim, John, I'll start off with -- if I could ask some more thoughts and reflections on your 2016 sales guidance of 44 % to 54%. You very recently you just -- whatever six, eight weeks ago said that you thought that you could grow 40%-plus in 2016. I'm just curious, what's giving you the confidence? Although obviously 44% to 54% is 40%-plus; what's changed if anything that makes you more confident in putting a stake in the ground with such excellent growth outlook?

Probably one of the things is the fact that we have expanded our sales force, Rick. That productivity really is going to come online probably in the second half of the year as these people get more seasoned in their territories.

Also, it's going to be having the first full year of having three different products in the marketplace. So with the fast start that we had off to in the fourth quarter with the CGM-enabled product, I really have high hopes for that for the year. So it's probably those elements together that really give us confidence about that guidance.

I'll just echo that it has been very helpful in the fourth quarter that we had three pumps into the market to offer HCPs. The diabetes community basically they have their choice of what pump they want to use.

And, John, you'd talked about in the past, mid 20s-type territory productivity as a goal. It seems like you're there. Help us think through, how do we think where it can go and when it can go there?

As we look to our --

Go ahead.

Well, I think we're looking for 2016 to average between 24 and 26 as a point that is an average. So we're going to have people that are a broad spectrum of performance above and below that average. So our goal is to try to make sure we have a tighter range and a higher range and potentially take that average up to something north of that number. But really want to see where the year goes.

I think, as I mentioned, it's a family of three products is something we expect to have a high impact on productivity for the sales force. And that's why we expanded the sales force here in the first quarter.

All right. And last for me, a couple questions on gross margin. The COGS charge this quarter and the deferred cost, how do we think about those charges in the fourth quarter? Should we be looking at fourth-quarter gross margin normalized excluding those costs? Again, help us think about if you exited with a 46% gross margin in 2015, that's something like a 600 basis point expansion, should we be thinking about similar expansion or no greater even in 2016, given the volume and the mix and everything else?

Well, a couple of things for the fourth quarter. On that exchange program our margin overall was 46% on a GAAP basis. That included deferred revenue of $700,000 and deferred cost of sales of $230,000. But we also incurred a $200,000 charge for the actual G4 pumps that we sent out as well as the shipping costs going back and forth.

So at the end of the day, if you do the math on that, you can see that the impact to Q4's gross margin, we actually could have had a slightly higher margin without the exchange program, but roughly the same. The reason why it's so high is primarily because of the volume and primarily because we had high pump sales during the quarter. And that's the expectation we've always had, is that we can put three pumps into the market, addressing unique unpenetrated markets to be able to get pumps into those markets in that segment, that will allow us to maintain a high level of our concentration of our sales in pumps which have the higher gross margin.

And that's the expectation we have for 2016. I do expect gross margins to progress to a level that we see moving towards profitability. Towards that 60% that we see in two to four years.

Right. Thanks again and congrats on the outstanding quarter.

Thanks, Rick.

Tao Levy, Wedbush.

Hi, good afternoon.

How are you?

Doing good. So a couple of quick technology questions, if I might. With the device updater, while that allow a t:slim to have its Bluetooth turned on?

That's correct.

Yes, the first iteration won't actually allow for that but the long-term potential is for it to be able to turn on. The first generation or first software that we're going to be able to give our customers access to, is actually be more recent software update that we launched mid last year, which gives basically enhanced features. So we want to be able to offer early customers the same benefits that we are able to offer our t:slim customers today.

Got you, perfect. And also on the updater. Will that also potentially turn a t:slim G4 into an artificial pancreas-type device once you get the algorithm approved?

Yes, that's our hope. That would be the purpose of it would be to push through these enhancements that are really software-based. So that's very much the potential. It would have a regulatory path of its own but it definitely would be a potential.

Great. And then a last thing on the financial side. Any difference in the quarter direct versus distributor sales that might have helped your gross margin?

No, it was fairly consistent, it was right around 77%.

Okay, perfect, thanks.

Thomas Gunderson, Piper Jaffray.

Hi, good afternoon, this is actually Kyle on for Tom. You mentioned in your filing of the 510(k) to reduce the indication from age 12 and above to 6 and above. Can you talk a bit about what you think the expanded opportunity will be from capturing the younger patient cohort? And how many addressable type I diabetics are in that 6 to 11 age range?

I don't think we have any good data on what the potential increase in total market is. But I can tell you it's really hampered our activities on a marketing basis and a sales basis to pediatrics because there's no clear-cut lines in these conferences that we attend or in practices that we call on.

So we really have to be careful not to market over the limits of our indication. It will take the gloves off on those activities and I think we can be more aggressive and see sales into that segment. But we don't have a quantified number of how many are at that 6 to 12 age group.

Okay. And you said you expect to have all 72 reps on board by the end of this quarter. How many do you have now and what's your longer-term goal as you get closer to commercializing your next-gen AP pump?

Are you talking about our sales force size?

Yes.

We have expanded to 72 in this quarter, counting on it being productive in the second quarter. And we haven't really given guidance as to how large our sales force is going to be ultimately as we expand our product offerings.

But as we take market share, I would guess we'd probably have a sales force of 100 or so. We haven't really determined what steps we're going to be stepping up to that level. But that's the sort of size I would perceive based upon market share gains and product introductions.

Okay, great. Then lastly, how was pricing in the quarter?

It's fairly steady, consistent, nothing dramatic.

Okay, great, thank you.

Ben Andrew, William Blair.

Good afternoon, this is Alexa in for Ben. Thanks for taking my question. Can you hear me okay?

Yes, you didn't sound like Ben. (laughter)

Going back to that distributor question, you said it was consistent like last quarter around 77% distributor. How do you think this is going to trend going forward?

I think it's going to be fairly steady. I think my comments haven't changed. I think the landscape hasn't changed for us dramatically. So we are continuing to try to work on that, but with where we are, with the contracts we have in place, with where the payers are with consolidation, I think it's probably pretty steady for the foreseeable future.

Okay, great, that's helpful. Thank you. And then in terms of your long-term gross margin goals of 60%, does this goal of assume no change in distributor, I'm assuming?

Very modest.

Modest, okay. And then the second question for me would be on t:flex. Now that you are a couple of quarters in, could you flesh out a little bit more detail on what kind of interest you're seeing from clinicians in pushing traditional non-pumping T-IIs onto the pump? And what would it take to see adoption really accelerate in the T-II market?

Well, I think we saw and overwhelming uptick in the CGM product in the fourth quarter which overwhelmed t:flex, which was available in the third quarter, and probably more attention to it. My assessment of it, it really does have an opportunity to expand that type II segment. We're seeing that people have attitudes -- HCPs have attitudes of putting more type IIs on to pumps.

We think that we score very highly in the ease of use, ease of training categories of being able to offer that only reservoir that really meets the needs of the patient population. So we expect to have good growth over the coming several years as trends move on getting more type IIs on to pumps.

Okay, that's helpful. I think that's it for me. Thanks, guys.

Thank you.

Doug Schenkel, Cowen and Company.

This is in Ryan Blicker in for Doug. Thanks for taking my questions. Following up on the gross margin, the long-term gross margin target, can you give us a sense of what is assumed from a revenue growth perspective to reach that 60% target over the next two to four years? At the midpoint, do you need to sustain this robust 40% growth to get there? Any color would be helpful.

Sure. I am not able to give you the revenue level that we would need to obtain in order to get that margin. But I will tell you that our goal is to make sure that we grow on the long term at least 40% per year, which is what we're trending towards including 2016 in our history.

And I want to make sure that we maintain a high level of sales of pumps in our distribution of our sales among our products. So that is primarily what's going to drive that to that level, as well as the efficiencies we gain with having volume, as well as the efficiencies in the process.

Okay, thank you, that's helpful. And two pipeline questions. First, on the second-generation AP products, if all goes to plan with the first-generation hypo product, should we expect a second-generation product potentially on the market by the end of 2018?

I don't think we've announced a formal timeline on it, but it's going to be a PMA product, obviously, and start work after we are done with that first product. So that guess is as good as mine.

Okay. And lastly, on t:sport, it's been a while since we've heard you talk about this one. Can you give us a sense of what portion of the market you're missing out on here? Is this to more directly compete with patch pump competitors or any other information?

Yes, I would say that there is a desire on the part of people wearing patches to have a detachable catheter. And so what we're doing is becoming a hybrid patch pump. It's discrete, it's much smaller, it's only about half the size of the t:slim. So I think it's going to appeal to that market segment and probably into the pediatric segment as well.

It is showing pretty good marks, actually good marks, in terms of market research. We feel like it's a viable product to pursue development on in this year.

Okay, thanks, guys.

Jeff Johnson, Robert Baird.

Thank you, good afternoon, guys. Couple of modeling questions and maybe a couple pipeline questions as well. John, starting on the modeling questions, what are the end-market growth assumptions in 2016 guidance from a top-line perspective?

And then, Kim, a higher-level question. How do you view guidance? I think the feedback I've been getting from investors here, just after the fourth quarter pre-release is no upside to the year, and that was a little disappointing maybe added a little pressure to the stock. And then you put a big 2016 guide out there.

Do you aspire to beat numbers? Do you put numbers out there from a guidance perspective that you think you can beat? Do you put numbers out there that you think are a very realistic view of your outlook for the year? I just having covered you long enough, it would be helpful to hear how you think conceptually about guidance.

We think conceptually about -- first of all about guiding in ranges because a spot number is probably not a wise thing to do. But we are more aspirational probably than the guidance that we're giving out. We hope that our activities during the year give us numbers that we can raise guidance. That's certainly what we want rather than lowering guidance.

Sorry to hear that earlier guidance was disappointing, but we thought to send the message that we were going to have another year of 40% growth would send the right message to the Street. But we are looking for a higher growth than that. Again, our aspirations and how we incent our sales force is higher than that guidance.

And John anything on end-market assumptions in the guidance?

No, I think our assumption is that the market is growing mid to high single-digits overall.

Fair enough. And then Kim just on -- Sorry, John, did I cut you off?

Go ahead.

Two pipeline questions. Kim, one, I think when you talked about first-gen versus second-gen AP in the past, the FDA had given you feedback that you needed to go in a sequential nature. It sounds like you're pivotal on the second-gen could start in 2017 before you have approval for the first-gen.

Has something changed there? Are they freeing up a little bit, letting you move forward on second-gen before first-gen is completely wrapped up? Or anything I'm missing there?

No, I think it's still in the same sequence that we've given guidance on before. Exactly when we can start those feasibility and then the pivotal on the hyper portion of it is probably really going to be coming after the hypo portion is finished.

Okay, that's helpful. And then my last one on t:sport. Half the size of the t:slim, what would you -- at this point, how are you think about the reservoir size on that, number one? And number two, would you view this as an alternative to t:slim? Would this be anything where you'd expect or think that patients might buy this as a second pump to use in certain situations? Or would this be a primary pump with just a smaller reservoir, smaller size?

Yes, it will have a smaller reservoir it's targeted to have a 200-unit reservoir. So I think it is targeting that population that doesn't have the need for 300 units or 480 units. I think there's a significant part of the market for that, probably 20% to 25%, given what Animus has been able to do with a lower-volume reservoir.

All right, very helpful, thanks, guys.

Greg Chodaczek, CRT Capital.

Thank you. Just two quick housekeeping questions for you, John. How many t:slim G4s were there in the fourth quarter?

How many did we sell?

Yes.

We sold 3,857.

Fantastic. And the $100 that goes to Dexcom, can you explain where that ended up on the P&L?

Is really in a liability. And then on the P&L itself -- it's on the liability on the balance sheet, on the P&L it's on a cost of sales line.

Okay. And technology-wise, is the Bluetooth radio on the current t:slim strong enough for a G5 Dexcom sensor?

Yes. We believe it is yes. Absolutely.

Okay, I'm just checking. And in terms of the t:slim AP, what device would you go to the FDA with? Would it be a G4 or would it be a t:slim with a G5?

Right now the plan is t:slim G5, but it's possible that the G6 may be pushed up in time to be included in that product development cycle. So Dexcom has some new news on their timing on the G6, so that it may have an impact on our program.

Okay. So it would be using the Bluetooth radio and a regular t:slim using their G5, their latest and greatest G5?

That's correct.

Okay, great, fantastic, thanks, guys.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question, hi, everybody, especially Susan. Just wanted to see if I could get your thoughts on the competitive environment, given that you guys are growing so slowly at 44% to 54% and the market's only going up like mid single-digits, maybe high.

Hope that's sarcastic. (laughter)

Yes, you sense the sarcasm. (laughter) Can you talk about the competitive environment that you are seeing. Obviously entering into 2015 there was some concerns competitively-speaking with J&J's launch and Medtronic with their new pumps and you guys have seemingly done well, obviously exceeding 40% in 2015 and guiding to what you have guided to in 2016.

So you seem to be navigating the environment. If you could give us a refresh on what you have seen in 2015 and how you're thinking the landscape is going to be shaking out in 2016?

Yes --

I should clarify that with sarcasm.

With sarcasm. With the transfer it probably doesn't hear it in my voice. (laughter) We probably saw the most change in 2014 and 2015 with the availability of the Medtronic low-glucose suspend product, the threshold version of that. It's not a predictive version, it's a it's a threshold point.

And that had a lot of noise around it and seemed to confuse the market. They positioned it as the artificial pancreas and it got a lot of press and so forth. But it just simply did not do well in the market because their CGM under-performs the Dexcom product.

And then the Vibe integration with CGM also was a headwind for us. That gave us two competitors. We didn't have that feature. We had to wait till the end of the year to remove that headwind.

But our growth in the CGM segment certainly showed that we have a very competitive product with all the t:slim features and the CGM stacked on there. I think if I look back on the year, the biggest landscape changer was us in terms of being able to come to market with CGM.

In thinking through the guidance for next year, reflecting back to the beginning of 2015, you did have a little bit of that recall and the increased awareness, the higher number of territories and then the full completeness of the product. All of that should speak to a higher rate of growth for next year and for the replacement cycle that really just kicks in, in the fourth quarter?

Yes. It's a the small number.

It's really more of a 2017 growth driver, correct?

Correct.

Okay. And with that, you are building that into your rep productivity numbers?

Yes I am.

Okay.

It's a smaller proportion. Just as a reminder, in 2012 we sold about 1,000 pumps. The majority of that was sold in the month of December, so there is an assumption on our part of how many of those will actually renew in December, complete the selling process, complete the insurance verification process and be shipped out prior to December 31. That's a tall order to get through, so we have a more modest assumption on what we expect for those pumps in December that were sold in December 2012, to be renewed in December 2016.

Okay. And Medtronic has a huge call center that typically handles a lot of the referrals. Your approach is going to be doing that more through the rep at this point, rather than centralizing that?

We will utilize our inside sales force and our IVS group to do the same things. It's just trying to move it through the process that is compacted by the timing of when the year end occurs and deductibles resetting, whether they can get done in time.

Okay. All right, congrats on a good quarter and nice guidance for the year. Thanks, everybody.

Thanks, Kristen.

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

Okay, thanks, everybody, for joining us on this call today and listening to the Q&A. We will be presenting at the Cowen annual healthcare conference which is on March 9. That's going to be in Boston. So we can give you more of an update then have meetings in person.

In conclusion, I am pleased with the tremendous progress we made throughout the business in 2015 and I look forward to continuing this momentum into 2016. So we look forward to keeping you updated as the Company continues its progress in 2016. Thanks for joining us today.

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