Tandem Diabetes Care Inc (TNDM) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen and thank you for your patience. Welcome to Tandem Diabetes Care first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Chief Administrative Officer Ms. Susan Morrison. Ma'am, you may begin.

Thank you. Good afternoon everyone and thank you for joining Tandem's first-quarter 2016 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 rest result of new information, future events or other factors.

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

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

2016 is off to a strong start and I'm very pleased with our first-quarter accomplishments. Our early momentum is very encouraging and gives us confidence in our ability to exceed our original guidance and continue managing the business for profitability.

Some of the highlights of the quarter include our achievement of 63% year-over-year sales growth, our 12 point year-over-year gross margin improvement, continuing strong demand for our t:slim G4 integrated CGM product, our 70 percentage point improvement in year-over-year operating margin, our continued number one customer service rating and progress with our new products in development. Our Q1 sales of more than $20 million was our second highest quarterly sales performance ever, topped only by the fourth quarter of last year.

As a reminder, we expanded from 60 to 72 territories in the first quarter, maintaining our one-to-one sales rep to diabetes educator ratio in each territory. As anticipated there was minimal disruption from this expansion thanks to our swift and successful hiring efforts. We were very pleased with the performance of both our new territories and the existing territories in Q1.

Notably our average territory productivity divided over 72 territories in Q1 was the same as our average productivity in the second quarter of last year which was only divided over 60 territories. In late February we held our national sales meeting where there was an all-around high level of enthusiasm. With our strong recruiting beginning in late Q4 we were especially pleased that the majority of the new sales and clinical employees were on board in time for the meeting.

Selling a family of three different insulin pumps that address different needs of the diabetes community distinguishes us from our competitors. As a reminder the t:slim is our flagship pump that is small, sleek and features an easy-to-use touchscreen. Leveraging the same platform is our t:slim G4 pump which offers the same benefits as t:slim with the added integration of the Dexcom G4 continuous glucose monitoring sensor.

And finally, our t:flex pump which also shares the same insulin pump platform but its cartridge has the largest insulin capacity available and was designed for people with greater insulin needs. We experienced a similar mix of product sales in Q1 to what we saw in the fourth quarter of last year with t:slim G4 representing approximately 60% of pump shipments followed by t:slim representing 31% and t:flex representing 9%. While the uptake of the t:slim G4 may still reflect some pent-up demand, we believe that the t:slim G4 will continue to hold a prominent share of our sales mix for the remainder of 2016.

I've been very pleased that so many people feel the t:slim G4 is the best fit to manage their therapy needs. Customer feedback has centered around the sentiment that people enjoy the convenience of having their CGM information displayed directly on an easy-to-use pump with a large color touch screen so it's simple to see trends and make more informed decisions. We are encouraged by the continued positive response from customers as the t:slim G4 was designed to help simplify diabetes management.

In looking at the break out between our customers with type 1 or type 2 diabetes it's been consistent in that more than 90% of our t:slim and t:slim G4 customers report having type 1 diabetes. For t:flex it's a different mix and approximately 60% of people report having type 1 and 40% report having type 2.

Two main takeaways for t:flex are that it's great to see that a larger volume cartridge helps fulfill a need with the type 1 community and it's very encouraging that we are bringing the benefit of pump therapy to so many people with type 2 diabetes. As traditional marketing efforts have focused primarily on people with type 1 diabetes, the benefits of insulin pump therapy are considered to be less widely known for the type 2 community. As a result we believe the momentum for this product will build over time as our sales and marketing efforts take hold.

Also with our launching the t:flex and the t:slim G4 about four months apart from one another, much of the salesforce's attention was focused on the t:slim G4 immediately post-launch but now is increasingly being spent educating people on the features and benefits of our full family of products. The overall profile of our customers continues to have a wide age distribution that averages in the young 30s and is close to an equal mix between men and women. More than half of our customers report that they use multiple daily injections prior to selecting one of our pumps and this is a consistent trend between products.

More than 38,000 people have now chosen the Tandem pump to manage their insulin therapy. And feedback on all of our products continues to be very strong. I'm also very proud that for the third consecutive year we were ranked number one for customer support by pump users in an independent survey by dQ&A, a leading diabetes research firm.

This is particularly meaningful following a year where we launched two new products. In that same survey during the fourth quarter of 2015, more users reported choosing a new pump from Tandem compared to all other pump companies combined. This is quite an accomplishment and one that I credit to the hard work, passion and dedication of our employees.

Overall it's been a busy start to the year. And I'm very pleased with the progress that we've made across all the Company's initiatives in the first quarter.

I will now turn the call over to John who will provide more details on our first-quarter results.

Thanks, Kim. Good afternoon everyone.

Overall I'm very happy with our strong first-quarter sales that we achieved while incorporating 12 new territories into our commercial organization. Our performance over the last 12 months and the year-over-year advances in our operating margin in particular continue to give us confidence as we manage the business towards profitability.

Looking at our sales and product shipments, first I'll discuss our rolling 12-month metrics which we continue to view as a better indicator of our progress followed by some particulars for Q1. Our sales for the rolling 12 months ended March 31 were $80.6 million, an increase of 49% from $54 million for the previous 12 months. This was mainly driven by the increasing productivity and recent expansion of our salesforce as well as the contributions of the t:flex and t:slim G4 pumps that we launched in May and September 2015 respectively.

Pumps shipped for the rolling 12 months ended March 31 were 17,038, an increase of 47% from the previous 12 months. As of the end of Q1, our cumulative shipments have grown to approximately 38,000 pumps. Our average productivity per territory over the rolling 12 months ended March 31 was 22 pumps per month per territory compared to 16 for the previous 12 months.

Looking at some of the details of our Q1 sales and pump shipments overall our Q1 sales were $20.1 million, up 63% from $12.3 million in Q1 2015. Pump sales accounted for 81% of our total sales in Q1, which is in line with what we experienced in 2015.

In Q1 we shipped a total of 4,042 pumps of which 1,255 were t:slim, 2,416 were t:slim G4 and 371 where t:flex. The average productivity of our salesforce in Q1 was 19 pumps per month per territory compared to 14 in Q1 2015.

Moving onto cost of sales and gross margins, our gross margin for the rolling 12 months ended March 31 was 38%, up from 32% for the previous 12 months. Our gross profits during those periods increased 79% to $30.7 million from $17.2 million. Manufacturing volumes continue to play a significant role in our gross margin progress with pump shipments increasing 47% and our cartridge shipments increasing 70% during the last 12 months compared to the previous 12 months.

Our overall gross margin for Q1 was 35% compared to 23% for Q1 2015. Our gross profit for Q1 was $6.9 million compared to $2.8 million in Q1 2015. The 12 percentage point improvement in our gross margin in Q1 compared to 2015 was primarily related to the increased production volumes and manufacturing efficiencies from leveraging three pump products and cartridges that utilize much of the same core manufacturing and operational infrastructure.

Looking at the rest of our P&L our operating loss for the rolling 12 months ended March 31 decreased to $67.8 million from $75.2 million for the previous 12-month period. Our rolling 12-month operating loss included non-cash expenses of $12.1 million for stock-based compensation expense and $5 million for depreciation and amortization. For the previous rolling 12 months, our stock-based compensation was $15 million and our depreciation and amortization was $4.7 million.

Our operating margin for the 12 months ended March 31 improved considerably to negative 84% from negative 139% for the previous 12 months. This 55 percentage point improvement was primarily due to the sales growth, improvement in the gross margin and our ability to leverage our operating cost over the sales, manufacturing and customer support requirements of multiple products.

During the last 12 months our operating expenses increased only 7% year over year while our revenues grew 49%. This leveraging of our operating expenses along with our gross profits increasing 79% has continued our history of year-over-year improvement in our operating margins that we expect to continue to see as we progress towards profitability.

Our operating loss for Q1 was $19.2 million resulting in an operating margin of negative 96% compared to an operating loss of $20.4 million and an operating margin of negative 166% for Q1 2015. This 70 percentage point improvement was driven by a 63% increase in our sales and our 12 percentage point improvement in our gross margin.

Additionally, our operating expenses grew at a much lower rate of 13% year-over-year despite our increasing the number of sales territories by 20% and continuing to make investments in our commercial organization to support the growing customer base and higher sales expectations. Our operating expenses for Q1 were $26.2 million compared to $23.2 million for Q1 2015.

During Q1 we recognized non-cash stock-based compensation expense of $2.8 million compared to $3.8 million for Q1 2015. Our depreciation and amortization expense for Q1 was $1.3 million compared to $1.2 million in Q1 2015.

With respect to cash, at the end of Q1 are cash investment balance was approximately $70.4 million. In January we announced the amendment of our term loan facility with CRG which provided us access to an additional $50 million beyond the $30 million we borrowed from CRG in January 2013. Under the terms of the amended agreement, we grew $15 million in January and we have a one-time option until the end of this year to access up to an additional $35 million.

Our cash and investments decreased sequentially by $17.7 million during Q1 excluding the $15 million debt drawn in January. As is typical with the seasonality of our business there was a sequential decrease in our quarterly sales and a corresponding increase in our quarterly cash burn. Also contributing to the Q1 cash change were incremental costs associated with our sales force expansion, a $6.3 million payout of 2015 annual bonuses and sales commissions and a $2.5 million increase in inventory in anticipation of growing sales volumes.

Moving on to our 2016 guidance, this year is off to a strong start and we are increasing our sales and operating margin guidance ranges. We now expect our full-year 2016 sales to be in the range of $108 million to $115 million for all products which is an increase from our previous guidance of $105 million to $112 million.

This represents an annual sales growth of 48% to 58% compared to 2015. This would be the fourth consecutive year of greater than 45% annual sales growth.

Shipping more than 4,000 pumps in the first quarter, which is typically our most challenging quarter within any given year, has provided us confidence to increase our sales guidance. Our new range assumes our sales for the year will have a similar distribution between quarters as we've seen historically.

For context, over the past three years our Q2 percentage of sales was approximately 20% and the second half of the year was heavily back-end loaded with the largest increase in territory productivity occurring between the third and fourth quarters. Factors contributing to the quarterly sales distribution include the rising awareness of our family of three pumps with a common core platform, increasing productivity of our existing territories as well as our new territories that on average we anticipate will take nine to 12 months to be fully productive, new product enhancements that become available as well as the contribution of our early pump renewal opportunities that are likely to be realized beginning in the fourth quarter.

We continue to expect our average 2016 productivity to be between 24 and 26 pumps per month across 72 territories compared to our 2015 average of 21 pumps which was across 60 territories. We are also increasing our operating margin guidance range to negative 52% to negative 62% for the full-year 2016. Previously the guidance was negative 55% to negative 65%.

This updated guidance includes approximately $13 million to $14 million in non-cash stock-based compensation expense and approximately $5 million to $6 million for depreciation and amortization. We do believe our quarterly sales will continue to increase throughout 2016, our overall gross margins will increase and our operating expenses will increase at a much lower rate than our sales growth.

The fourth quarter of each year has historically delivered our strongest performance on a sales, gross margin and operating margin basis. We are actively working to achieve a positive EBITDA quarter which would be a milestone for our business and a first step towards profitability on a sustained basis. Our strong first quarter provides us the confidence that we are moving towards this goal and that an EBITDA positive fourth quarter is a possibility this year.

With respect to our cash we believe there are scenarios in which we can achieve cash flow breakeven with our current cash, investments, cash available under our debt arrangements and proceeds from our employee stock plans and the exercise of warrants. At a minimum we continue to expect these resources will be sufficient for our operating needs for at least the next 12 months.

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, submit and successfully secure regulatory approvals and commercialize new products and our ability to leverage our operations as sales expand and our products gain market acceptance. For 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 product launch activities and trade shows, R&D and clinical trial progress, manufacturing and facility requirements and general headcount growth as our operations expand.

With that I will turn it back over to Kim.

Thanks, John. I'm happy to share that we've continued to progress on a new products in development. We recently provided a full update on our 2016 product enhancement and development efforts on our last call but to recap these initiatives, first we have a 510(k) on file with the FDA to lower t:slim's age indication from age 12 to age 6.

We are in the active review process now and are seeking clarification from FDA on recent feedback. It remains our goal to receive clearance in the second quarter but that will depend in large part on the outcome of our ongoing discussions with the agency.

Next we have a 510(k) on file for the Tandem device updater. This tool was designed to give users the ability to update their pump's software at home similar to a smartphone. This is also in the active review process and remains our goal to receive clearance in the second quarter.

Our next product enhancement is t:connect HCP which simplifies the ability of patients to share their data with their healthcare providers. The beta launch of t:connect HCP recently commenced and we are working to offer an expanded launch midyear.

Then we have significant efforts going toward our artificial pancreas initiatives, the first generation of which will be a CGM-integrated t:slim pump that will automate basal insulin delivery based on a predictive hypoglycemia algorithm. We recently filed our IDE with the FDA and are on track to begin an in-clinic feasibility trial in Q2 and commence a pivotal trial by the year-end. It remains our goal to commercially launch this product by the end of 2017.

Finally, we have t:sport which is a wearable pump about half the size of t:slim for people who seek even greater discretion and flexibility. It's in active development which includes a regulatory analysis to determine if the pump will be controlled through a separate device or a mobile application.

As you can see 2016 is off to a very busy start. Our performance over the last 12 months, in the first quarter in particular, demonstrates that we are well-positioned to meet our 2016 goals by offering our family of insulin pumps through our expanded sales and clinical team, through our commitments to improving margins and creating a sustainable business and by progressing our product development initiatives. By doing so, it allows us to further our Company's mission of improving the lives of people with diabetes.

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

(Operator Instructions) Kristen Stewart, Deutsche Bank.

Hey, good afternoon everybody. I was wondering -- congratulations on the good quarter.

So I was just wondering just in terms of it's pretty impressive that the productivity of the reps was pretty much the same as the second quarter. So I guess how should we just think about that productivity as it goes through the year because I mean 19 for this first quarter, especially against rolling 12 months of 22 pretty good. So what you see is the upper limit and I guess any comments there?

So we're still sort of estimating that we will do somewhere between 24 and 25, sorry, 24 and 26 pumps a month per territory over the full year. So you'll see it progressed from 19, as we move toward the fourth quarter you'll see productivity be well above that number. But I think overall would expect the average to still be somewhere in the 24 to 26 range for the full year.

Okay. And then just in terms of feedback I guess in the marketplace from a competitive standpoint with G4 any changes from the quarter I guess from fourth quarter to first quarter?

The mix is the same, so I think it got that point, it's about 60% of our shipments for both quarters. We don't have a good view to whether this is still pent-up demand or there's something very unique about the product.

Just some background our own internal work sort of gave us the takeaway that the Dexcom CGM is perceived as the best out there and our pump was perceived as the best out there. There was some surveys last year where it compared us to the Medtronic product and the J&J product and we won on ease-of-use, the touchscreen and the slick consumer look but we lost on a lack of CGM.

So we knew that it was very important competitive feature that we were operating without all of last year. And again the uptake of 60% of our mix is just sort of beyond what the industry averages had been forecasted. For the use of CGM with pumps it was something like 25% or 25% to 30% of all pumpers were thought to be using CGM.

So we're going at a higher rate than what we've seen is the industry averages and we think it's our product features coupled with the Dexcom product and again we're going to keep our forecast for the balance of the year is the same mix. But we're off to a great start. It's a bit surprising to us but we're very pleased that we're getting chosen over all other products at a high rate.

Okay. Perfect. I will get back into but congratulations on good quarter.

Tom Bakas, Piper Jaffray.

Great, thank you. Hey guys, thank you for taking my questions. Congrats on a great quarter and I apologize if I'm redundant here.

I was jumping around to another call earlier. So I guess my first one was for John and on your comments on EBITDA profitability, I'm wondering obviously because of seasonality in your business that we would look at Q4 for that potential. Street estimates are for a $5 million EBITDA loss, so I'm just kind of hoping you can maybe give us some comments and bridge that for us.

Well I think we typically have seen a seasonally back-end loaded year and I think we don't see anything being different this year. In fact, there are some things coming into play this year that we haven't seen in the past.

One is the renewal cycle. We will start to see renewals in the fourth quarter. We do expect to see some product enhancements potentially be approved by the FDA here throughout this year that we will see a full impact in the fourth quarter hopefully, and so that's what's kind of back-end loaded for that.

And then the other thing that sort of happens, it's just a steady progress as we mentioned to Kristen of the salesforce expanding their productivity, both the existing territories that we had in place before the year started as well as the new territories that came onboard here in the first quarter. So that's going to drive the sales line. I think we will continue to see margin improvement as sales sort of increase and we are obviously continuing to manage our expenses quite proactively.

Okay, that's helpful. And just to follow up on the replacement cycle, I was hoping you could maybe obviously this year it's going to be a little more limited in terms of quantifiable impact but I guess over time can you just help us think about how that drives revenue and what the impact is there? And then if you have any initial thoughts on reorder or attrition rates just built into your own model?

Well, this year we have sort of a conservative modest expectation. There was about 1,000 pumps that we sold in 2012. Most of that was in the fourth quarter and most of that primarily within the month of December.

So as I mentioned in prior calls, the challenge is whether or not those that were new in December 2016 will actually go through the renewal cycle and valuation process, the sales cycle, quickly enough as well as insurance verification process quickly enough to become sales within the fourth quarter. If not then they become a potential for us in 2018 when along with probably 6,000 pumps are also going to be available and then the following year after that it's over 10,000.

So it becomes a bigger and bigger portion for us to be able to try to recapture. I think from when we launched in 2012 we now have three pump offerings that potentially are better fits for them individually that we could go to as well as the things that Kim has talked about in the past potentially offering an AP product in the future years.

Thank you very much.

Rick Wise, Stifel.

Thank you. Hey, Kim, truly congrats on the terrific quarter.

You know, I think maybe I'll start with the t:flex. Where are we to launch? You're sort of signaling momentum is going to build over time.

Are you where you expected to be? It sounds like you're not -- what's the right mix? How do we think about ultimately the contribution of t:flex? I think you had said you had given some numbers in the past, I'd just appreciate your updated thinking there.

You know, just to comment that market is smaller than the type 1 side of the business. So we're going to always expect that it's going to be sort of a fraction of our type 1 users of the t:slim, the t:slim G4. So we're in that 9% range this quarter.

I don't remember what it was last quarter but it's in basically the third quarter of its launch. So it is probably going to remain 10% to 20% of our sales, something like that.

Again it's really hard to predict what the CGM product, the G4 product will continue to do. So mix is probably one of the hardest things for us to forecast but just remember that all the pumps sell for the same price, so getting mix wrong doesn't affect our revenue numbers but that's where we sort of expect it to sell out.

Right. Turning to your comments about profitability, you stressed repeatedly your accelerating path to profitability and gave us updated operating margin guidance. Maybe John this is a question for you.

Help us think through, is the improvement a balance between better gross margins and lower OpEx more tilted to better gross margins? And maybe just reflecting that OpEx, as you proudly and correctly stated it's up 13%, is that the kind of should we think about it in terms of growth rate, is that a growth rate we should be modeling that kind of range going forward?

Sure. I would say you know obviously sales is going to be the key driver of the profitability. And I think for us it's always been a story about being able to offer multiple products and I don't think that story has changed.

I think as we look at Q1 and as we look to Q4 having three products helps our salesforce knock on doors, get people's mind share as they're looking at Tandem as a Company and then looking at which product fits for them. Because as Kim mentioned it doesn't matter which product we sell them because basically they are billed at the same price.

So for us it's really the sales uptake that we expect to see, the productivity gains we expect to see in the salesforce as well as the margin improvement that we expect to see from a volume standpoint both on the pumps as well as the supplies. And as a reminder, the pump margin is much higher than the supplies, so for us to be able to recapture renewals as well as organic growth within the sales side on the pump side is very important for us. And I think seeing that happen in the first quarter I think is something we will continue to see throughout this year as well as next year.

And on the expense side, the growth as I mentioned last year at the earnings call, the Q4 earnings call I mentioned that our expenses had grown roughly at 5% to 7%. I don't see that changing. I think there's some incremental costs that we had talked about such as the clinical trial cost which we still estimate to be about $1 million this year and then the additional costs associated with the salesforce expansion which was 12 territories.

And generally when we see a territory added it's roughly $700,000 to $800,000 in cost all-in beyond just the rep and the CDE. It's also the people in-house as well. So I don't see any real change.

I'm sorry?

I don't see any real changes on that.

Got you. And another margin question, just reflecting on your comments about some of the pipeline products, maybe thinking about updater specifically, and I may not be asking this correctly but it seems like some of these products are more software-based, obviously COGS you know dramatically lower. Shouldn't we assume that those kinds of products are going to provide a potential positive gross margin benefit and if that's right, if that's correct thinking, how do we dial that into our analysis as we look ahead?

You're correct. We'd like to see potentially that Odyssey or the updater product will allow us to update softwares in the field in the current existing installed base. And what that does is if there are fixes just like software fixes you see in the consumer world, we can address those and potentially reduce our warranty cost and replacement costs.

So there is a potential for that. It's highly driven by each individual update that we do as well as what the FDA or regulatory path that's required for each of those.

So until we get one out there I think it's going to depend on which one each one individually. I think we talked about it in the past, the first thing we'd like to do is update the software of our existing installed base to the latest software that's being shipped with the current pumps today.

Just one last one for me if I could, sort of a bigger picture question. There seems to be an increasing number of pump companies, startups, not-for-profit new product offerings, big new products coming obviously some of the major competitors in the field.

Kim, just maybe reflect on do you have any incremental competitive concerns out there? You've got a great product but does the sale get more complicated with all this innovation and news? How do you see the pump market evolving over the next years and how do you expect to compete in that environment?

Well, you know I think there's a lot of noise and then there's reality out there. So a lot of these will things that you're hearing about, Bigfoot for instance and I don't know all the other one, what was the other one that just -- Biometrics or Bio something or other.

Anyway they have to build a company, they have to raise the capital, they have to get the product approved and so they got along with the go to be competitive on the near-term horizon. Probably the biggest competitive thrust that is going on is the automation of insulin delivery. And so Medtronic is playing that game.

Their 670G is reported to be approvable or going to be approved late 2017, isn't that what we've heard? Mid-2017 to late 2017. And so that product is going to have sort of the first treat to range or treat to a point kind of a control algorithm.

So competing with that will be an interesting challenge. Obviously we have our own products. We think we're going to be launching them within a competitive timeline.

We also know that our product with CGM on it is very competitive to that to the 670G because in the early phases only your power users are really going to want adopt something like that and be the guinea pig to try to see whether that's going to improve control. We sort of saw that with a 530G which was the threshold shut-off product.

So that's where I see it going and we have programs to be competitive with that. I think we will be competitive as Medtronic leads the way and brings the products out into the marketplace.

But the others I just don't think have the marketing muscle to do much with the ideas that are getting a lot of press out there. So that's sort of my take on it.

Thanks very much.

Tao Levy, Wedbush Securities.

Great, thank you. I was wondering if you had any insights into how many of the t:slim G4s are currently using CGM functionality?

How many of the t:slim G4 --

Yes, are actually using the CGM part of it I don't know if there's software or data reads that you get.

No, we don't have an answer to that one. We don't have the data to tell you whether they are buying it and sort of shutting it off and not using it or whether they are actually using that feature.

One of the things I can tell you is that 50% of the G4 users so far are former MDI patients. And I can't imagine that they are taking on both pump therapy and CGM therapy unless they are using the two in combination. I mean that's a shocking number to me because generally patients start with either CGM or pump but not both because CGM, that pump is hardest to learn, CGM is a little bit more intuitive.

Learning to use those numbers to manage your therapy is not quite so intuitive. But it's a great tool for controlling your HbA1c longer term but a pump also is a huge part of that.

So to have MDI users switching to both those tools or telling me that they are probably using them synergistically. The other part is 50% are switchers and if they are switching they are most likely using CGM. So they are probably switching to a better pump and a better CGM.

The only reason I was asking is because you do hear a lot of the Medtronic users who use the pump but don't use the CGM part of it. And so that's why I just didn't know if you were seeing any of that with your embodiment.

We've heard that too and we've also heard that if they got the low threshold suspend they don't use that feature either. Many don't.

And then I was wondering the age reduction, the filing that you have in place, what do you think that does to your growth rates? Is that -- I know you mentioned earlier on that you are expecting some approvals later on this year that could help with the growth rate and your positive EBITDA target for the fourth quarter. Is that a critical part of it?

Well we don't have a good assessment of how many under 12s that we're missing by not having that indication. So I can't quantify for you but I can tell you that we have carefully avoided off-label marketing and that means we have to avoid a lot of these summer camps where you had kids of all ages down below our indicated approved age.

So we've been very careful not to market aggressively at those. And so with that indication we think we can be more aggressive, get to a broader adolescent group and be less tentative along that age group. But we really don't have numbers on how many under 12 over 6 patients there are out there.

Perfect. And then just last question for John, the cartridge, in the past you talked about it as being a negative margin product for you guys. Is that still the case or are you at enough volume now that it's turned positive?

It's still the case that the margin has improved dramatically over the last 12 months.

Okay great, thank you.

Ben Haynor, Feltl and Company.

Good afternoon everyone. Thanks for taking the questions.

First for me on what would it take for you to go forward with another sales territory expansion? Is there kind of a number in your head of pumps per month for instance that you have in your head that would necessitate that?

No, I think for us we want to see how 2016 plays out, having three products going through a single reps bag whether that helps improve the productivity or is there still a ceiling because there's only so many days in a month that you have to operate and visit accounts. So I think for us it's sort of watching where we go. I think our goal this year is to watch it move on average from 24 to 26.

I will say last year I saw many reps well above that number. So there is a potential for a rep productivity fee north of that number. But on average that's where we're sitting today.

I think we will look at sort of the productivity, we will look at the reach, we will look at whether or not we are seeing calls or complaints that we're not able to visit accounts or visit patients and look at those as other factors that we'll use to decide when and where we'll add territories. I think as we add territories in the future we will do something very similar to what we did this year which will be very targeted and very limited to specific situations that make sense for us. And we will typically do those in the early part of the year when it's least disruptive and most beneficial for them to be up to speed by the time they get to high pump selling season which is the third and fourth quarter.

Okay, very helpful. And then on productivity, and I know t:flex has only been out there for a handful of quarters now, but is there any indication that it takes longer to sell the t:flex to a type 2 patient than an average pump or a t:slim to a type 1 patient or is it essentially the same?

Well, on the type 2 side there's definitely we believe a much greater educational effort that we have to go through, not just with the patient but also with the offices. So that process we think is going to be slow. The reimbursement side of the equation is also something that can be challenging if there are people who are primarily on Medicare which makes it very difficult for us to gain the reimbursement.

So that's a factor that makes it slower. And sometimes those can be overcome through appeals and so forth, that makes the process longer.

I was going to mention, the other thing is whether they are a current pump wearer and they are a switcher that's probably an easier sell than trying to go with somebody that's injecting insulin and you are trying to get it -- get them onto a pump. But I don't think we have any visibility to what our mix is so far of t:flex.

But that's a good point. When we started our initial marketing, there was we believe roughly 125,000 out there that we could potentially go after. I'm sorry is it 50,000?

125,000.

Sorry, 125,000 that we could potentially go after that are on pumps today as convention. Those likely have less barriers on the reimbursement side and can switch to a Tandem pump if we can get in front of them. So those are going to be our primary targets as we start out.

That makes sense. And then lastly for me, you mentioned switching and I think it was also in response to Mr. Levy's question.

In terms of switching from existing pump CGM combos, we've seen quite --I wouldn't say quite a few, but a number who have switched from the Medtronic device but quite a bit fewer from the animus device and obviously the relative market share plays a factor into that. But are you seeing a lot of switching from the existing pump CGM products that are out there?

Yes, about well 50% are switchers. So there's probably switching as you said along the lines of market share that's out there right now with those that have integrated CGM which is Medtronic and J&J.

So I know you've done some work and that may be consistent with what we're seeing. I think it is.

Yes, that's what we're seeing. All right, thank you very much. That's all I had.

Erik Shoger, Northcoast Research.

Hi guys, I wanted to go back, maybe flesh out a comment you made in the prepared remarks. And maybe this is just me reading into it a little too much, but I thought you said that more than half of your new t:slim or new pump users are coming from MDI and that's maybe a little different from the 50/50 split you've talked about in the past. I'd be interested if you're having more success converting from MDI than maybe in the past or any comments you might have there that you're seeing out in the market?

No, we haven't. That's pretty much our base. That's pretty much what it is on the margin as we go through every quarter.

It's what we're seeing with the G4 product which is sort of surprising for the reasons I've already mentioned. So we're not seeing much of a difference there.

I think we're doing in terms of new pump starts better than anybody in the industry and there's some data out there to support that. So I think that's back to the ease-of-use, the ease of getting somebody started on the t:slim pump versus a traditional pump. The whole software education burden is very high with the traditional pump, and so I think we've brought down the barriers to adoption so our mix remains the same and remains the same on the margin.

Okay, fair enough. And then maybe to go back on your comments about sort of the pediatric opportunity, somewhat of a similar question but maybe asked in a different way, what sort of appetite just based on your own observations is there for a pump at all among kids as young as six years old, particularly as you have new products in the CGM side that allow parents to view their CGM remotely and that that obviously they don't get that feature with the t:slim G4. So I'm just interested what you're hearing or what you're seeing and how it all plays in with some of the different dynamics going on out there?

I've never seen any data that breaks out pumpers versus MDI by age groups. So I mean I really don't have a good answer for you on that.

You know just anecdotally, it is really probably those that are very aggressive and the parents are vitally involved in the switch to the pump. And so I don't know what that percentage is but it takes a real sort of power user, a family that's really trying to get the best control early on so they get the best long-term results. I just don't have a good breakout on what that might be.

I mean I guess in the end they could still get a t:slim and use G5 for instance and be able to share their info. And it doesn't matter much to you I guess which pump they choose.

That's correct.

Okay. And then maybe lastly just on the new territories, do you have any sort of breakout?

You talked about sort of a nine to 12-month ramp in terms of the new territories. I mean what sort of difference where you seeing in the new territories in terms of pumps per day versus maybe your existing ones in the first quarter here if you have any color there?

It's just the mix. I think the pleasant thing we saw in Q1 is I think we did a very good job in our hiring, we did a very good job in our training up front as well as the handoffs within the territories as well as what territories we were picking to make sure that those transitions were going to be as least disruptive as we thought that we should be.

I think that's where we saw the benefits. I think most of those folks are moving up the scale. Some of them have inherited territories where the business was already moving and the existing rep moved into the new sort of call it greenfield and some of them took over greenfield.

So it's a mixed bag, so it's hard to give you a flavor that's generic across the whole new territories. But I would say we're quite happy that they are all onboard doing well. I think they will move and be very effective here in the third and fourth quarter.

Okay, great. Thanks for the question.

Doug Schenkel, Cowen and Company.

Hi, this is Ryan Blicker in for Doug. Thanks for taking my questions.

A couple of pipeline ones. First on the first-gen AP product, is there any chance that that could incorporate the G6 sensor? Is it pretty safe to say that will definitely be G5 at this point?

We haven't really discussed what the integration plan is for the G5. Did you just refer to the G6 as well?

Yes, I meant for the first-generation AP product that you talked about launching in late 2017, which sensor do you plan on using? Will that definitely be G5 or is there a possibility that could be G6?

That will be G5. No possibility it's going to be G6. It's not approved.

I don't know what the approval timeline is on it. Their call was today or yesterday so I don't know what the update was, maybe you'd do better. But G5 we can count on, G5 we have something we can count on to get in our timelines.

Okay. And for t:sport can you provide more color on your discussions with FDA to allow control of the device through a mobile phone? Where is FDA on this today and when do ultimately think you'll find out which route you're going to go for that product?

Well, that's something that is really under sort of hot debate right now. The FDA has issued guidelines and they consider this whole concept of controlling from a phone to be a class III device. So it's going to have more scrutiny obviously then class I or class IIs.

And the whole question is the operating system of the phone is considered to be part of the product. And so it has to be verified and validated just like any internal component that we put on the phone. And as you probably know every phone out there has its own version of an operating system.

So the universal coverage of phones operating pumps today would be impossible to have that kind of wide choice among Droids and then Apple products. This may be changing over time.

The thinking is probably on a two- to four-year horizon. But that's the guidance document that we have today. So we're planning on a dedicated controller and hoping that an app someday is going to be a possibility for us.

Okay, that's helpful. And last one for me, you've talked about your being number one in customer support and that's obviously a key differentiator for Tandem. As the installed base continues to grow, how do you guys maintain that number one customer support rating and how should we think about that from an investment perspective.

What is the risk that that OpEx core growth rate you talked about earlier in the call may need to increase a bit to maintain that rating? Thank you.

Well, you know we have to ramp those costs up on a ratio of the people in the field because they are placing pumps that are at a volume that we can calculate and estimate how much headcount that we need here. So we don't think that those ratios are going to change as we go up the volume curve here.

And I would say what we're also focused on just making sure that the ease-of-use stays easy to use as we move through multiple generations of products. And that will keep us sort of in the number one position, as well as having t:updater potentially being a source of updates to allow people to get the latest and keep them from being having complaints about certain things that aren't being fixed or being shut out of innovations that come down the road.

Okay, thank you. Congrats on a great quarter.

Jeff Johnson, Robert W. Baird.

Thank you, good evening guys, so just three quick wins here for me. So first John, or Kim I guess, on the device updater and the 12-year-old or the six-year-old indication for t:slim, if you would get 2Q approval would you consider that then a catalyst for numbers relative to where guidance is today? Is that a potential upside driver or are you already kind of assuming that in the updated guidance?

We're assuming it in the guidance.

Okay, you're assuming it in guidance, is that what you said, John?

Sorry, yes.

Okay, great, thank you. And then on the low glucose suspend and potentially starting that pivotal before year-end, Kim, any idea on then the basal adjustment or the hyper side of things? I think the last update you gave was maybe a staged process that the FDA was talking you through but just any update there would be helpful.

You know, that would be the second step. That's the advice that we've gotten from the FDA. So I think the predictive low glucose suspend from all research that we've done indicates that that is really probably the major concern is going low, having a hypo event.

Obviously, you wake up and you have a very bad day. I mean meet obviously it's like having the worst hangover you ever had. And it sends you into this sort of a rollercoaster of not being in control during the day.

So avoiding hypoglycemia is probably the number one thing that patients want to get out of an automated insulin delivery product. So we think that PLGS will be a very competitive.

And then the second focus is keeping you going high in the range. Those are going to give you better term, long-term control on your HbA1c and we will be in feasibility throughout 2016 on that product.

Okay, would the FDA do you know at this point let you start a pivotal on that before the pivotal and approval comes on the low glucose suspend?

We wouldn't be in a position to do that.

Okay. All right, that's all I've got. Thanks guys.

(Operator Instructions) Ben Andrew, William Blair.

Good afternoon. I will try to be quick. I know the hour's late.

Kim, two questions I guess for me. What does your market research suggest is the number of patients who are starting pump therapy or whether it's MDIs or new diagnoses, kind of a total not just you all?

How many are starting? 25,000 a year is probably what we have as a number kind of a guess. But that's probably within the range of reality.

In the US of course?

Yes, we're talking US here.

Sure. And then as you talk to patients and to physicians, how important is a non-injective claim for dosing insulin? Because Dexcom, that's become the kind of topic du jour with a panel scheduled. But is that does or doesn't get approved, what is your all's take about the impact on of your product potentially?

You're talking about the G6 product? That's no longer adjunctive, is that what you're talking about?

Well, they are talking G5 for the non-adjunctive initially and that's the subject of the panel that they are scheduled for July. I'm just curious if it would drive a different level of usage of sensors broadly including your G4?

We don't have a lot of research on it. But obviously if you have to confirm every glucose value before you make a dosing decision, that's a lot of extra work. So to be able to free yourself from blood glucose sticks and rely on your CGM, that would be a big deal.

Okay, that's it for me. Thank you.

At this time I'd like to turn the call back over to Mr. Blickenstaff for any closing remarks. Sir?

Thanks again everyone for joining us today. There's a couple of conferences that we're going to be attending here within the next couple of weeks. The Deutsche Bank Annual Healthcare Conference on May 4 and we're taking investor meetings at that conference as well as presenting.

And we're also at the Bank of America Merrill Lynch Healthcare Conference on May 10. And we're taking investor meetings also on that day. As for industry events, the Company is also going to be attending the ADA Conference in New Orleans on June 10 through June 14, the hottest time of the year, and the Children with Diabetes Friends for Life Conference in Orlando Florida on July 5 and 10.

So in conclusion, I'm extremely pleased with our early momentum in 2016 and we look forward to building upon it throughout the year and we look forward to keeping you as the Company continues to progress. So we're talk you on our next conference call for the second quarter. So thanks for being on the call today.

Thank you, sir. Ladies and gentlemen, that does conclude your program.

Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.