Tandem Diabetes Care Inc (TNDM) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care second-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to introduce your first speaker for today, Susan Morrison, Chief Administration Officer (sic - see Website - "Chief Administrative Officer"). You have the floor, ma'am.

Thank you. Good afternoon, everyone, and thank you for joining Tandem's second-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 the press release announcing our Q2 earnings, which was 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.

In addition, today's discussion will include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. For additional information about our use of non-GAAP financial measures, please see the information under the heading use of non-GAAP financial measures in our press release.

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

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

I'm extremely proud of the progress we've made so far in 2016 across each of the Company's key initiatives. We continue to grow and further penetrate the insulin pump market with our family of products and, just as importantly, we also continue to provide our customers superior care and support. At the same time, we're looking to the future, advancing our product development efforts and managing the business toward profitability.

Some quarterly highlights and recent developments are our achievement of 46% year-over-year sales growth, our 5-point year-over-year gross margin improvement, our 45 percentage point improvement in year-over-year operating margin, FDA clearance for the Tandem device updater, FDA clearance for lower age indication for t:slim, and meaningful progress on our artificial pancreas program.

Our strong topline growth is a result of the increasing productivity of our sales force, which we expanded from 60 territories to 72 territories in the first quarter. It's also from offering three different insulin pumps that address varying needs of people with diabetes.

The t:slim is our flagship pump, which we launched four years ago. This marks a milestone both for our Company as our growth historically has been 100% organic and later this year we'll have customers who will be renewing under the typical reimbursement cycle for the first time.

Earlier this week, we announced that t:slim is now cleared for people ages 6 and above, where it was previously indicated for age 12 and above. We believe that, with this expanded claim and t:slim's modern look and easy-to-use interface, we will be able to bring that benefits of pump therapy to this younger audience.

Next is the t:flex pump, which we launched just over a year ago, in May 2015. Designed for people with greater insulin needs, we've been very happy to see this pump meet needs for both people with Type I and Type II diabetes.

Finally, the t:slim G4, which we launched in September of last year, provides the benefits of t:slim, combined with Dexcom's G4 continuous glucose monitor. Demand for CGM integration remains high, as it represented nearly 60% of the pump shipments in Q2. Our customer demographics reach products that remain pretty consistent. For example, about half of our customers continue to report being new to pump therapy. Also, approximately 90% of our t:slim and t:slim G4 customers have Type I diabetes and the average age has been the young 30s, while for t:flex, about 60% of customers have Type I and the average age skews slightly older, in the young 40s.

Offering multiple products has been a strong tailwind for us this year, as have our number one customer service ranking and our recent expansion of the sales force.

We also have headwinds, such as typical anticipated competitive launches and an evolving payer environment. The most noticeable change in the payer environments is the previously announced decision by United Healthcare that effective July 1, 2016, most of their members over age 18 no longer have a choice among insulin pump providers. It was an unexpected and disappointing decision as we strongly believe that insulin pumps are not a one-size-fits-all solution and that having diabetes isn't a choice, but how people manage the therapy should be.

Since the announcement, thousands of members of the diabetes community, as well as prominent patient advocacy and profession organizations, have spoken out against this decision. Last month, I had the opportunity to sit down with a member of United Healthcare's executive management team who was key in making the decision. I appreciated his willingness to meet and the meeting was a constructive and candid conversation, during which I shared clinical data, data on t:slim being easy to use and train, and compelling customer survey data that indicates that our intuitive user interface design has led to better outcomes.

We aren't discussing further details of our conversation for competitive reasons; however, at a high level, I can say that we do not anticipate a near-term reversal of the United Healthcare decision, but the door is open for future conversations and we look forward to continuing these discussions.

As we shared on our May 3 press release, approximately 8% of our pump shipments last year were to people who would not have been eligible for coverage under United Healthcare's new preferred relationship, which is pretty consistent with what we saw in the first half of this year.

As there were many open questions immediately following United Healthcare's decision, we did not update or confirm our guidance at that time. As you'll see in today's press release, we now have better clarity and have updated our guidance to account for the estimated impact. While United Healthcare's decision is a headwind, it's far from insurmountable for our business, and we continue to have other favorable tailwinds and opportunities, including several recent regulatory approvals in the ongoing expansion of our product portfolio, which I'll be discussing next.

As the fastest-growing insulin pump company, according to the DQ&A, which is a leading diabetes research firm, we are working on ways to further our momentum in the second half of 2016 and beyond. Key to our growth strategy is the recently approved Tandem device updater, which is exciting from both a near- and longer-term perspective.

As a reminder, the device updater is a Mac- and PC-compatible Web-based tool that allows for the remote update of Tandem insulin pump software. This clearance, combined with the flexibility provided by our pumps' touchscreen interfaces, uniquely positions Tandem as the only insulin pump company to provide its customers access to new and enhanced features without having to rely on the typical multiyear warranty hardware replacement cycle.

Near term, the first use of the device updater is for deployment of the latest t:slim software to our customers who bought their t:slim prior to April 2015. We began shipping t:slim pumps with updated software beginning in April of last year. The device updater will be used to deploy upgraded software for customers who bought their pumps prior to that time.

This provides a great opportunity to demonstrate our commitment to our customers and to afford them access through a variety of product enhancements. Longer term, we believe the device updater will be a key differentiator for our Company. It's a way for us to deliver ongoing innovation to our customers faster than the industry has been able to do in the past, which is of particular significance as the artificial pancreas efforts accelerate.

In the second quarter, we had a number of discussions with the FDA to gain clarity on open questions regarding future applications for the device updater. This has helped us refine our product portfolio and the timing of commercial launches, which I'm going to take a few minutes to walk you through in detail. But the key takeaways from a high level are we are launching a new pump platform, the t:slim X2, which we are planning to launch in the fourth quarter of this year. This new platform will be built under Class III controls to allow for upgradability through Dexcom G5 and G6 CGM integration and to support our future artificial pancreas programs.

We'll also be launching an upgrade program as a pathway for eligible t:slim and t:slim G4 customers to get a t:slim X2. In addition, we will offer current t:slim and t:flex customers a way to access integrated pump and CGM information on a smartphone app. This is an approach that underscores our long-term commitment to our customers.

Now for the details on our products in development. First, you may recall we've been working with the FDA to determine if there's a path for us to turn on the Bluetooth radio, that is already included in all of our t:slim and t:flex pumps, to allow them to communicate with Dexcom G5 CGM sensors. There's always been regulatory uncertainty around this possibility, since the t:slim and t:flex are built under Class II controls, rather than the Class III controls that are required for sensor-augmented pumps.

Based on our conversations with the FDA, we concluded that there's not a predictable path for t:slim or t:flex pumps to be updated to enable the display of CGM information on the pump; however, there is a path through the device updater to enable these pumps to communicate with a smartphone capable of displaying the pump and CGM information on a mobile application. We feel this may be an exciting alternative for our t:slim and t:flex customers and we are in active discussions with Dexcom to provide an app which displays both CGM and insulin data in one view.

Ultimately, we want to provide customers with the option to see integrated pump and CGM information on their pump, their smartphone, or both. This goal emphasizes the importance of our strategy to bring the t:slim X2 platform to market. The t:slim X2 pump will feature new hardware advancements, including a two-way Bluetooth radio for communicating with more than one external device at a time. The new radio, along with the recently approved device updater, which enables us to roll out remote software updates, makes the t:slim X2 our pump of the future and unlike any other pump on the market.

We believe these innovations have the potential to bring substantial benefits to our customer and to bring us a step closer to automated insulin delivery.

The first new feature we plan to roll out on the t:slim X2 platform will be the display of Dexcom G5 CGM sensor information directly on the pump. We are working to submit a PMA supplement for this feature before the end of the year and are estimating a six-month review process. Subject to FDA approval, customers who purchase a t:slim X2 prior to the availability of G5 CGM integration will be able to update for software using the device updater to add this feature for no charge.

We expect demand to be high for the t:slim X2 insulin pump when we roll out the first major software update for G5 CGM integration, so we are putting an upgrade program in place for our t:slim and t:slim G4 customers.

For t:slim customers, the purchase date of their insulin pump will determine the fee to upgrade to the t:slim X2 pump. The scale will range between no cost and $799. For t:slim G4 customers, there will be two options -- a service option on their existing pump for $399 or an upgrade to a new t:slim X2 for $799.

John will be discussing our upgrade program in more detail, as well as the anticipated accounting impact later on this call. Because the upgrade program will create accounting complexity, it is necessary for us to change the way that we report the growth of our business and provide guidance to the market, including providing both GAAP and non-GAAP financial measures. Additional information is also available on an exhibit that we provided with today's press release.

Upgrade programs are not something we've done historically; however, we evaluate each product launch separately and believe it's important to offer an upgrade program to the t:slim X2, as customers may have decided to purchase a t:slim in the hope that it would be updatable to display CGM information, so we feel it's the right decision to offer our customers this upgraded program.

As we continue to build on the t:slim X2 platform after Dexcom G5 CGM integration is offered, the next feature we plan to launch on the X2 is a predictive low glucose suspend algorithm. This will be our first-generation artificial pancreas product. The IDE for our feasibility study has been approved by the FDA and the study is scheduled to be completed in August. We expect to file another IDE for a pivotal study in early Q4 and, based on the typical review timing, anticipate that the study will take place in Q1 2017.

Our goal to launch this product by the end of 2017 is unchanged. We anticipate a six-month review process for this first-generation pump algorithm because it will come on the heels of an FDA review of the t:slim X2 with G5 CGM integration. The only differing feature will be the algorithm. Based on our market research, we believe this product, with all the features and benefits of t:slim, will be competitive with other AP pump offerings as it predicts hypoglycemia, which poses the greatest risk for people with diabetes.

We expect our second-generation AP pump algorithm will also be based on the t:slim X2 platform and will include the treat-to-target AP technology that we recently licensed from TypeZero, as well as Dexcom CGM technology. To date, TypeZero's technology has been used in more than 28 clinical studies with more than 475 people, with data referenced in a number of journal articles. We anticipate that this agreement will allow us to remain on schedule for a pivotal trial in 2017, followed by commercial launch in 2018.

As you can see, we are designing our products to offer a direct path for our customers who purchased the t:slim X2 pump beginning in the fourth quarter to use the device updater as a portal to having CGM integration and ultimately multiple AP algorithm options on their pump. This is a revolutionary approach to provide our customers and their healthcare providers with the confidence of knowing that the pump they choose today is also the device of the future.

The last product in development I'd like to provide an update on is the t:sport. This pump is about half the size of t:slim for people who seek even greater discretion and flexibility and will be controlled remotely. We've been in discussions with the FDA on the t:sport controller and whether it can be implemented as a mobile app or if it needs to be a separate device. Based on the feedback and concerns regarding the use of mobile phones, we believe that controlling a pump via mobile device will be a longer path to market, and so we plan to design products so that it can be technically capable of being controlled using either a dedicated controller or mobile device.

Because of the nature of our touchscreen user interface, we are well positioned to pursue either option. The final commercial implementation will be based on our ongoing dialogue with the FDA. Since we are prioritizing the t:slim X2 with G5 CGM integration and multiple AP algorithms in 2017, we believe t:sport will be a 2018 submission.

We have a solid track record of delivering new and innovative products and features to the diabetes community. We expect our exciting lineup of products will continue our momentum as the fastest-growing insulin pump company and will allow us to continue to meet the [bearing] needs of people with both Type I and Type II diabetes. As you can see, we are well positioned to expand the use of insulin pump therapy, which offers superior outcomes and quality of life.

I'll now turn the call over to John, who will provide further detail on our results for the quarter, our financial guidance, and our technology upgrade program.

Thanks, Kim. Good afternoon, everyone.

Overall, I'm very pleased we continued to deliver high sales growth, demonstrate success in selling three differentiated pump offerings, and make meaningful progress towards profitability. Today, I'll be reviewing the rolling 12-month and Q2 results, discussing our updated 2016 guidance, and providing an overview of our technology upgrade program.

Looking at our sales and product shipments, first I'll discuss our rolling 12-month metrics, which we continue to view as best indicators of our progress, followed by some particulars for Q2.

Our sales for the rolling 12 months ended June 30 were $87.9 million, an increase of 48% from $59.4 million for the previous 12 months. This growth was mainly driven by the increasing productivity and recent expansion of our sales force, as well as the contributions of t:flex and t:slim G4 pumps that were launched in May and September 2015, respectively. Pumps shipped for the rolling 12 months ended June 30 were 18,289, an increase of 44% from the previous 12 months. The t:slim G4 and the t:flex represented 62% of the pumps shipped during the most recent 12 months, demonstrating that people are gravitating to the differentiated features of our newer products. As of the end of Q2, our cumulative shipments have grown to more than 42,000 pumps.

Our average productivity per territory over the rolling 12 months ended June 30 increased to 23 pumps per month per territory from 18 pumps per month per territory for the previous 12 months.

Looking at some of the details of our Q2 sales and pump shipments, our sales were $23 million, up 46% from $15.7 million in Q2 2015. Pump sales accounted for 79% of our total sales, compared to 83% in Q2 2015. We shipped a total of 4,582 pumps, of which 1,498 pumps were t:slim, 2,591 were t:slim G4s, and 493 were t:flex. The average productivity of our sales force in Q2 was 21 pumps per month per territory, compared to 19 in Q2 2015.

Moving on to cost of sales and gross margins, our gross margin for the rolling 12 months ended June 30 was 39%, up from 31% from the previous 12 months. Our gross profits during those periods increased 84% to $34.1 million from $18.5 million. Volumes continued to play a significant role in our gross margin progress with pump shipments increasing 44%, cartridge shipments increasing 65%, and infusion sets increasing 91% during the rolling 12 months ended June 30, compared to the previous 12 months.

Our overall gross margin for Q2 was 36%, compared to 31% in Q2 2015. Our gross profit for Q2 was $8.2 million, compared to $4.8 million in Q2 2015. The five percentage-point improvement in our Q2 gross margin compared to 2015 was primarily related to the increased production volumes and manufacturing efficiencies from leveraging our three pump products and cartridges that utilize much of the same core manufacturing and operational infrastructure.

We recently received FDA approval to manufacture refurbished t:flex and t:slim G4 pumps. Our ability to now utilize refurbished pumps for three of our pump offerings will have a positive impact on our future warranty costs. Also, there is a reduced cost component in the t:slim X2, which will have a positive impact on the cost to manufacture that product in future quarters.

As part of our normal planning to support the growth of our business, we recently signed a building lease to add approximately 50,000 square feet of space to our facilities' footprint. As previously discussed in our SEC filings, key terms of the lease are that it's a seven-year lease with a flexible extension option for an additional three to five years. We anticipate the new lease will commence in December and that we will move into the space sometime in Q1 2017.

We expect that we will transition substantially all of our manufacturing operations to the new facility, which has a lower rent and operating cost structure than the space these groups currently occupy. We will transition our manufacturing operations over a six- to nine-month period. The vacated space will then be repurposed for other corporate needs. We will also benefit from seven months of free rent in the new space, starting in February.

Looking at the rest of our P&L, our operating loss for the rolling 12 months ended June 30 decreased to $66.2 million from $75.6 million for the previous 12 months. Our rolling 12-month operating loss included non-cash expenses of $11.9 million for stock-based compensation and $5.1 million for depreciation and amortization. For the previous rolling 12 months, our stock-based compensation was $14.7 million and depreciation and amortization was $4.9 million.

Our operating margin for the rolling 12 months ended June 30 grew considerably to negative 75% from negative 127% for the previous 12 months. This 52 percentage-point improvement was primarily due to the sales growth improvement in our gross margin and our ability to leverage our operating costs over the sales, manufacturing, and customer support requirements of multiple products.

During the last 12 months, our operating expenses only increased 7% year over year, while our revenues grew 48% and our gross profits grew 84%. We expect this trend of leveraging our operating expenses to continue as we progress towards profitability. Our operating loss for Q2 was $17.1 million, resulting in an operating margin of negative 74%, compared to an operating loss of $18.7 million and an operating margin of negative 119% for Q2 2015. The 45 percentage-point improvement was driven by a 46% increase in our sales and a five percentage-point improvement in our gross margin.

During Q2, we recognized non-cash stock-based compensation expense of $3 million, compared to $3.3 million for Q2 2015. Our depreciation and amortization expense for Q2 was $1.4 million, compared to $1.2 million for Q2 2015.

Additionally, our operating expenses in Q2 grew only 7%, from $23.5 million in Q2 2015 to $25.2 million in Q2 2016, despite our increasing the number of sales territories by 20% in our continuing investment in our commercial organization to support the growing customer base and our higher sales expectations.

With respect to cash, at the end of Q2 our cash and investment balance was approximately $56 million. In addition, we still have a one-time option until the end of this year to access up to an additional $35 million under our debt arrangement with CRG.

Our cash and investments decreased sequentially by $14.1 million in Q2, compared to decreasing $17.7 million in Q1 and $18.6 million during Q2 2015.

Moving on to guidance, first, I need to highlight that the guidance we are providing today excludes any estimate of the costs and accounting of our technology upgrade program. As Kim mentioned, the upgrade program creates a number of accounting complexities that can make anecdotal relationships between our historical metrics and trends not meaningfully comparable to our future GAAP results and trends. For example, beginning in the third quarter, our reported GAAP sales and cost of sales will not have the same relationship to our pump shipment metrics as compared to prior periods.

In the future, we will provide operating results on both a GAAP and non-GAAP basis and annual financial guidance on a non-GAAP basis. We believe providing our financial results and guidance on a non-GAAP basis will be the most useful information for comparison to our historical performance. It is difficult to estimate or predict the timing and utilization of the upgrade program since this impact is highly dependent on future events. As a result, it is not possible for us to provide GAAP-based guidance on sales and operating margin for 2016 or to provide a reconciliation of GAAP guidance to non-GAAP guidance with any degree of certainty.

As we noted in our press release and in Kim's remarks, we are updating our annual 2016 sales and operating margin guidance, primarily as the result of the United Healthcare reimbursement decision. Approximately 8% of our pump shipments last year were made to people who would not have been eligible for coverage under United Healthcare's new preferred relationship. However, we are not reducing our annual guidance by this full amount, due to the positive tailwinds in our business that Kim discussed, such as increasing rep productivity, recent product clearances, and upcoming product launches.

We now expect our full-year 2016 sales guidance to be in the range of $105 million to $110 million raw product on a non-GAAP basis, excluding the financial and accounting impact of the upgrade program. This effectively represents an annual sales growth of 44% to 51% as compared to the GAAP results for 2015.

With respect to the technology upgrade program that Kim introduced, we expect the t:slim X2 to be our core product offering in the future. We will no longer offer the t:slim following the launch of the t:slim X2 and will no longer offer the t:slim G4 following the availability of the t:slim X2 with Dexcom's G5 CGM integration.

A detailed summary of the terms of our upgrade program can be found in the exhibit to today's press release and on our website.

Some key aspects of the program are upgrades to the t:slim X2 pump will be available to all eligible t:slim and t:slim G4 insulin pump customers on a tiered upgrade fee structure. T:slim customers choosing to upgrade to a new t:slim X2 pump will be charged an upgrade fee that is dependent on the purchase date of their current t:slim pump. There are three purchase-date windows with different upgrade fees applicable to each window, ranging from no cost to $799.

Once we launch the t:slim X2 in Q4, we will notify customers of the availability of the upgrade program. They will have a limited period of time to notify us that they are electing to participate in the program. Once participating customers receive their new t:slim X2, they will be required to return their current pump to us.

Our t:slim G4 customers will have two different choices -- they can opt to pay an upgrade fee of $799, plus the return of their existing t:slim G4 pump. In exchange, they would receive a new t:slim X2 pump. Or they can elect to upgrade their existing t:slim G4 pump for $399 via a service process that will begin after the t:slim X2 with the G5 integration is FDA approved. If they elect this choice, the customer will mail in their existing t:slim G4 pump for a hardware retrofit with the new Bluetooth radio and other modifications. Their same pump will be returned to them and will have the same update capability as a new t:slim X2 with G5 integration.

The upgrade program is scheduled to expire September 30, 2017.

It's also worth noting, as we saw when launching the t:slim G4, an increasing number of customers may delay their purchasing decision in advance of our t:slim X2 launch so that they can include this product in their decision-making process. Also, as I had mentioned, beginning in Q3 the upgrade program will trigger the deferral of sale and cost of sales associated with all t:slim G4 pumps sold to customers who are eligible to participate in the upgrade program.

The overall cost of the program, as well as the amount and timing of deferred sales and cost of sales, will depend on multiple factors that are based on future events that are difficult to estimate or predict, especially because Tandem has not offered an upgrade program in the past and does not have sufficient history to provide a basis to predict some of these factors. Such factors include the mix of pumps sold during the upgrade program period, the percentage of people who choose to upgrade, which upgrade path the program participants choose, the timing of the launch of the t:slim X2 and the t:slim X2 with G5 integration, and the timing of the completion of the participants' upgrade process after they launch.

For t:slim customers, we currently expect the t:slim X2 will be available in the fourth quarter; therefore, we expect to defer 100% of the sales for t:slim pumps shipped on or after July 1, 2016, as a right of return and defer the associated cost of goods sold for these pumps. For t:slim G4 customers, the future CGM integrated technology is expected to be available in mid-2017, pending FDA approval; therefore, for pumps shipped on or after July 1, 2016, we expect to defer a portion of sales under guaranteed accounting rules. The portion of sales deferred for each pump is determined at the time of its initial sale, while primarily considering the difference between that date in relation to the anticipated availability of the upgraded pump. The actual amount that will be deferred will be determined by a valuation expert. At the initial sale, we will recognize the full cost of the original pump.

Also, for both products at the time the upgraded pump is delivered or the service is completed, we will recognize the upgrade fee in either the cost of the new pump or the service. The deferred sales and cost of sales for each of these pumps will be recognized on a GAAP basis when a customers' upgrade is completed or when the program expires on September 30, 2017.

As a result of the required accounting treatment, there may be a significant portion of sales and cost of sales deferred until the end of the program. We expect that pump shipments for the remainder of 2016 will be heavily weighted towards Q4 because of the normal effect of seasonality, as well as the potential for customers to delay or shift their purchase of the t:slim or t:slim G4 pump until the t:slim X2 is available, even though there is a no-cost upgrade path for anyone purchasing the t:slim prior to the availability of the t:slim X2.

As a reminder, Tandem currently allocates $100 for each t:slim G4 sold to a joint marketing fund to co-promote this product with Dexcom. This is not a term of our agreement with Dexcom for integrating their G5 or G6 technology with our t:slim X2 pump; however, as Kim outlined in our pipeline strategy, we feel CGM integration is an important offering for our customers and we'll continue to promote its benefits.

Moving on to operating margins, recognizing the progress we've made in the last 12 months, our operating margin guidance range will remain at negative 52% to negative 62% for the full-year 2016, but is now on a non-GAAP basis as it excludes the financial impact of the upgrade program. The guidance includes non-cash operating expenses of approximately $13 million to $14 million of stock-based compensation and approximately $5 million to $6 million in depreciation and amortization.

The fourth quarter of each year has historically delivered our strongest performance on a sales, gross margin, and operating margin basis. We believe this year will be similar on a non-GAAP basis, but potentially even more back-end loaded as we plan to launch the t:slim X2 in the fourth quarter and since our new territories added in Q1 will be reaching higher levels of productivity.

We are still actively working to achieve an EBITDA-positive fourth quarter this year on a non-GAAP basis, excluding the impact of the upgrade program. This will be a milestone for our business and a significant step towards profitability on a sustained basis.

With respect to cash, we believe there are some areas in which we can achieve cash flow breakeven with our current cash investments, cash available under our current debt arrangements with CRG, and proceeds from our employee stock plan 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 expectation, and ultimately our profitability timeline and potential capital needs, include the continued commercial acceptance of our products; territory productivity; our ability to develop, submit, and successfully secure regulatory approvals to commercialize new products and product features; and our ability to gain leverage within our operations as sales expand and our products gain market acceptance.

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 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'll turn it over to the operator for questions.

(Operator Instructions). Jeff Johnson, Robert Baird.

Thanks, guys. Can you hear me okay? Good afternoon, guys. So just a couple questions here, I just want to check, so I guess, John, question for you. When you're going to non-GAAP guidance and you'll report non-GAAP results, will the scenario be something like we would have sold X amount of pumps if we could have booked them all in the third quarter, but we have to defer it so the GAAP number is this and the non-GAAP is the other; is that how we are going to get presentation in third and fourth quarter?

Very similar to what you're saying. So what we will do is present the GAAP numbers according to the rules and then we will present sort of non-GAAP numbers very similar to how we do it today.

If we shipped it, then we would show you what the revenue would have been had we recognized it similar to how we have historically done it, and there will be a reconciliation actually in the Q that reconciles the final GAAP number of sales to the final GAAP number of -- non-GAAP number of sales as well, and then you'll see what got deferred, what got recognized, maybe what got upgrades during the period, and we'll do that for multiple factors and multiple lines within the P&L (multiple speakers).

So, just a couple of other things. Other things that we typically talk about on the call such that aren't sort of financial amounts, such as shipments and all that, will be unchanged.

Okay. And then in the non-GAAP number and the non-GAAP guidance, there's no presumption in there of upgrade revenue, anything like that? That is just pure kind of sales of new pumps and things like that, is that correct?

The upgrade fees that we will be charging will be recognized on the sales line -- (multiple speakers) will show up there (multiple speakers)

Are those sales -- are those upgrade fees, I'm sorry, are those upgrade fees included in your new non-GAAP guidance?

No, they are not.

Okay. So there could be upside from that if you get, which I presume you will get, a decent amount of upgrade demand going to something like X2?

Correct. Just realize what we are trying to do is for us it's really trying to get all our customers to a pathway in which they can access sort of what we believe we will offer in the future, so we are really trying to make this sort of, call it, a breakeven proposal in which we're trying to make most of the pathways sort of covering our cost, and even some of them we're actually incurring a cost, like the no-cost portion that we will incur here before the end of the year.

Understood. And then, Kim, I think you did a good job of laying out all the differences between all the pumps and what have you. I just want to make sure I'm understanding the difference on t:slim X2. So you had to put a secondary Bluetooth in there and that secondary Bluetooth is what will allow you to communicate with the phone, is that right? Or that's the one that then will allow you to display G5 details on the pump?

It's a radio that has -- it can go to two devices. So the original Bluetooth could not, so now we will be able to have in the future an app that goes to a mobile phone. So that's why that new radio is going in there.

Understood. And then, the last question for me, just, John, it sounded when you gave the cash flow update and kind of the cash update, you are now almost assuming you are going to take that $35 million from CRG. In the past, I think that was a little questionable. Obviously, you guys have a lot going on here with moving manufacturing and a lot of new, exciting products, so I guess that's somewhat understandable, but is it fair to just presume you are probably going to have to exercise that $35 million at this point, at the very least?

I think we're still continuing to manage on the cash we have today. Our burn is decreasing and typically our burn decreases throughout the year, once we've moved past the first quarter. But it is an assumption that's reasonable that we might take the money, but I have not committed to taking the money yet.

Understood. Thanks, guys.

And just to be clear, we have until December 31 to take it, and as soon as we take it, we'll be paying interest on it. So at this point, I don't need to take it, so I won't take it.

Rick Wise, Stifel.

Good afternoon, everybody. A couple of questions, maybe start with territory expansion. Maybe, Kim, just a little more color there. As you say, now you're at 72 territories. Is your base expectation still that that's where we're going to stay? And just looking ahead, should we expect sequential improvement in, maybe, John, in the pumps per rep per month? Obviously, fourth quarter should see a big one, but is it reasonable to still expect steady sequential improvement?

I'll just answer that first question. We do not have plans to expand beyond where we are. We believe that the territory improvement is always a function in time and territory and in gaining experience, but the real wild card here is going to be having multiple products to sell, and we're sort of guessing at what we think productivity can go to because there's really not been an historical basis to set expectations. So John, do you have any comments beyond that?

Yes, I would just add that we do expect the productivity to continue to increase, and as you mentioned, we have the seasonal impact, but even outside of the seasonal impact, you see territories are improving.

I think having three products in the bags of the rep is very helpful. We've talked about that in the past, and now that we have a technology upgrade program, which has hindered us in the past as compared to some of our competitors, I think that is going to be an exciting thing for our reps to be able to offer our customers.

Right. Talk a little more, if you would, about -- you mentioned in passing the possibility that as customers look ahead to the t:slim X2 platform that they could delay decision-making or purchases in advance of that. I just want to make sure I understood. First, what's reflected in your guidance? What have you assumed? And I guess I sort of ponder out loud a little bit, why should we see -- I understand they're waiting for the last year for the G4, but I'm not sure I understand, since you are giving such a clear-cut, easy pathway for an upgrade, why you might see those delays. I appreciate your caution in saying that, but a little more color there, please?

Sure. I think as we experienced with the G4 there were people sort of waiting for that product, and while you point out that there is a no-cost upgrade path for these people who buy pumps starting July 1 until we have the X2 available, maybe they don't want to worry about having to flip it out or change it and just want to wait until it's available, and then just buy it then and they can live with their existing pump for a month or two while we wait for the X2 to launch in Q4.

So what it really comes down to is somebody from a convenience standpoint says I could live for another three months until Q4 to be able to wait to see the X2 and not have to use a pump, get used to it, turn it back in, get a new pump, and reset everything.

I'd add one of the difficulties in giving guidance on this part of what's going to happen is that we really, really don't know how patients are going to behave in each one of these buckets trying to get to the X2 upgrade. So, it will be an interesting time to see how our patients, customers, really react to the actions that we're laying out.

That's a fair point. We really are trying to provide the greatest amount of flexibility that we're able to do while controlling the cost of this, and having a no-cost path for people who buy pumps starting July 1 until X2 is available is purposeful in allowing people to do what you're saying, Rick, is that there really shouldn't be any difference, but if there is a difference, we want to give them the ability to wait.

Yes. Turning to the United comments, Kim, I think it's great that you were able to sit down. I understand your reluctance to communicate too much for all sorts of reasons, but two things, I guess. One, any -- and it's a tough question to answer, I appreciate, but should we feel less concerned, more concerned -- are you less, more concerned that others will follow United's lead?

And another, broader question, given this just steady compelling flow of technology, differentiated technology, and let's add in the pediatric indication that you've got, that has to be at a minimum some significant protection insulation from this kind of thing. Couldn't United look at you on the under 18 -- the pediatric indication alone? Again, are there options like that? Sorry, it's the kitchen-sink question.

A lot of questions in that question. Let me just say it was a good conversation. I think we walked away understanding sort of the thinking behind their decision to go with exclusively Medtronic, and so we are going to work to try to bring them back evidence and information that possibly could help our case here.

You know, I think our whole strategy of having the X2 platform is that all of our future products are going to be Class III products and so we'll be the only one in the industry actually to add these feature upgrades during that warranty period. So we know Dexcom is moving ahead on improvements. They went from the G4, which we have, to the G5 that they are marketing today. We can get there through the Tandem device updater. We can do that for G6. Both of those are going to drive the AP program. A key part of the entire system is that CGM.

So I'm hopeful that we can be responsive to UHC in terms of convincing them that we have a technology migration path here that no one else can offer. I know that was part of the decision that we sort of heard through the community. So, we're just going to keep working at it and we hope that we can make progress both from evidence we can give them and progress on our pipeline.

And to your secondary questions, Rick (multiple speakers)

I may have forgotten it. I'm getting old.

For people who are 18 and under, they are able to actually purchase Tandem pumps today, so the pediatric indication does help to expand that offering for those folks, but really the preferred in-network arrangement that's in place is for people over age 18, so there still is that flexibility.

And we don't have any guess as to what percentage of that population it is, right?

We don't. The numbers, unfortunately, aren't very reliable, so it is hard to predict. And then, as far as other payers, we believe in customer choice and that most payers also recognize this value.

You could probably bet this has been shopped around, but we've been very active, proactive, here and so far we're not hearing that there's a widespread wave of this that's going to happen.

Thank you so much.

Kristen Stewart, Deutsche Bank.

Hi, everybody. How are you? (multiple speakers). I am doing well. It's been a long day, lots of earnings. So I was just kind of wondering the X2, I guess, do you guys have approval for it or a high degree of approval, I would assume, at this point for the pump?

It is essentially a t:slim with a few component changes that will have to be manufactured under Class III controls, but to my understanding, there's no PMA required for this approval, so it's really our own internal timeline on when we are ready to go on this.

Okay. So it's just a matter of getting all your ducks in a row, and so just launching it in the fourth quarter when you're ready from a manufacturing standpoint.

Yes, I'd just like to point out that the G4 was our first Class III product, so we really got experience not only on the PMA side, but the Class III manufacturing side. So, the learning curve for us is not quite as steep and we have all those systems in place, so, as I said, all of our products going forward are Class III and that's the kind of company we need to be in and we've really done a good job in getting there.

So it will be the beginning of the fourth quarter, no real risk at that, and so you will definitely be able to hit the seasonality of it (multiple speakers)

Yes. That's what we believe.

We expect it will be sometime in the fourth quarter. There's nothing that's out of our control that we don't believe that we will be able to do that.

Okay. Perfect. And then, I know you guys said that the X2 profitability is better. Is there any way to quantify that at all?

No, I mean, the main differential that I discussed was that there are some components in the X2 that are the lower cost and higher quality than the previous components that were in the G4s or the t:slims, so it's really on the manufacturing costs that we'll see. I haven't provided any detail on how much or what components.

Okay. And how have been the costs tracking from the disposables as well? Any improvements there? I would assume just from volumes.

It's volume steady improvements. I think that has continued over the last 12 months and I don't think there's anything unusual there that I think is worth talking about.

Okay. And lastly, I guess, as you are getting back all these devices through the upgrade program, you had mentioned approval to refurbish. Are those ones that you can, I guess, refurbish and put back as X2s or will you be scrapping these and taking obsolescent charges?

We refurb them and use them for the original use that they were brought in for. So we will continue to have some people that don't upgrade that will stay on t:slims, and so this will add to the pool to be able to utilize those. We'll use them for G4s, for the G4s that come back. There are other things like demos, training, other uses that we have that are called nonrevenue generating that we will stay at cost because we are able to utilize these.

You want one, Kristen?

I would. I will take one. I'll have it on my desk and it will be a nice memento.

The benefit of utilizing refurbished pumps is they're generally at a -- they are at a much lower cost than utilizing a new pump when we use replacements, so it does help our warranty costs. And up until this point, the newer products, if we had to replace a pump, it was with a brand-new pump, which is more costly than a refurbished one.

Okay. Perfect. All right. Thanks. I will get back with any other questions.

Have a good earnings season.

Thank you. Bye, guys.

Bob Hopkins, BofA Merrill Lynch.

Hi, good afternoon. Thanks for taking the question. So I just wanted to circle back on two things. First on United and the question around other payers, I'm just curious, Kim. How confident are you that you have a real sense for -- that the other payers will pass on what I agree is definitely being shopped around by Medtronic. So I just want to gauge your level of confidence today on that really important subject, frankly.

Level of confidence? I can't guarantee you anything, but from our other top payers, we're not hearing that there is a pending decision or really a lot of interest in going to an exclusive arrangement. I think these payers see things a different way, depending upon their situations, and so I'm not certain that the rest have the same motivations that UHC expressed to us, but that's about all I can tell you.

Obviously, it's a very high priority for our reimbursement folks and also for me and for Bryan Hansen, our Chief Commercial Officer. So we really want to be out there and proactive.

Why do you think United has different priorities than the other payers? What makes them different from some of the other guys in terms of their willingness to move forward with something like this?

I really don't feel I can go into that from the discussions that I had. I feel those fall in the class of confidential sharings that they had with us.

Okay. And then on the guidance, obviously there's a ton of moving parts here, but just to try to simplify things, if you look at the previous guidance you gave for 2016 and as you try to segregate things out into kind of excluding the new things for a second, the new pump, the exchange program, if we just looked at sort of the UNH decision and then the strength of the base business, are you net lowering guidance on kind of the net of UNH plus the strength of the base business? I just want to try to break this down as much as I can.

Sure. Our previous guidance was $108 million to $115 million, and historically we've seen about 8% of our business be UNH that would have been sort of unavailable to us under the new rules.

So if you were to take and apply that percentage to those numbers and also apply sort of the seasonal sort of distribution of our sales, in which about 60% to 65% of our sales are in the back half of the year, you would infer or imply that our guidance should be $102 million to $109 million, and our guidance is $105 million to $110 million, recognizing that aspect, as well as some positives that we see in the business.

Okay. So -- okay, I think I got it on that. That's helpful. And then, so the effect of the exchange program and the new pump are different issues because that's GAAP/non-GAAP.

Right.

Okay. Rather than belabor it here, I'll take the rest off-line. Thanks very much for the time.

Tao Levy, Wedbush.

Great. Thanks. Good afternoon. So a few questions here, so how do you expect the disposables breakdown to trend for the rest of the year? One of the answers you gave was there's nothing notable about that, but it was the lowest percentage that you guys have talked about in the past in sort of pump revenues versus total revenues.

I see what you're saying. Well, our installed base continues to grow and the utilization among that is going to grow, so I gave the statistics. Our cartridge volumes have grown, our infusion set volumes have grown as well.

As a percentage of the revenues, I still maintain that I think pumps are going to be the lion's share of our revenues throughout our future. It's just because of the dynamics of the price points, as well as the activity that we have, the offerings that we have, as well as what we see -- the AP, what we can do with the updater, and so forth.

And with the four-year cycle coming up and having renewals, that also adds to the process. So I think you will continue to see that. I think renewals will start in the fourth quarter, so that may generate more pump revenues than we have seen in the past as far as the percentage of sales. So I think it will bounce around pretty consistent to sort of what we've seen in the past.

And are there any other features with the t:slim, with the X2, X squared, that you haven't necessarily talked about or is it exactly the same as the t:slim plus a Bluetooth?

I come back to the fact that we did a study that we published last year, and it's actually in the Journal of Diabetes Science and Technology, and there was about 1,300 responders and these are pumpers, and nearly 91% want upgradability for their pump. They have a very, very high level of comfort with doing software updates because they have experience with their smartphones, and so they expect their pump to behave like smartphones.

So, that feature of having that upgradability, whether it's for the software layer that operates the touchscreen or updates the touchscreen and provides new features and new screens and new different displays and so forth, it can be that kind of change, but I think most importantly it's going to be the ability to follow the migration of the improvement of Dexcom CGM and then that as a driver to our AP program that will make the X2 very, very unique, because within a four-year cycle we can add these features as fast as we can get them through the FDA.

So, I just think that's revolutionary. I think that's the way cell phones killed the Motorola Razr. We now all expect it and so patients expect it of their pump, and I think it will be a revolutionary feature and advantage that we can bring to patients who really want this.

Great. But nothing necessarily on sort of like the disposables and accessories that would make it more proprietary or anything?

No.

How should we think about as you go through the upgrade program -- entering into the fourth quarter you are going to have potentially some replacements. What happens to those pumps if you're towards the end of your warranty and you decide you want to pay the $799 instead of the several thousand dollars that Tandem would've collected, I guess, from the insurance company? How is that going to work?

So if you're talking about somebody who potentially is coming up for warranty and has a choice of getting a brand-new pump reimbursed or going through the upgrade program, one facet that should be made clear is that the warranty -- just because we upgrade it, we are not changing the warranty period. So, very consistent to some of how our competitors have done it, so that is unchanged.

So, if you have a pump that you've had for two years, you upgrade, and you have a four-year warranty, then you have two years remaining on your warranty. So, that's a consideration that they have to make, whether to wait and decide whether they should just wait for their normal renewal cycle and get a new pump or to go ahead and upgrade through this program.

But you could have some patients who want to -- they are willing to pay the $799 instead of the 20% co-pay of getting a brand-new pump with the four years.

They would be dealing with the warranty issues, but they could do that. And the question is, is $799 the same to them as their out-of-pocket costs if they had bought a new pump?

Okay. So I guess we'll have to wait and see.

And then, just lastly on the timing standpoint, when do you expect to get the approvals for the G5 integration with the X2? Is that mid-2017?

Yes, mid next year is what we are forecasting.

Okay. Perfect. Thank you so much.

Ben Andrew, William Blair.

Hi, guys. This is actually Alexa in for Ben. How are you doing?

Good, Ben. Your voice got high.

We touched on a lot of the pertinent topics, so just a few quick questions for me. On the lower peds indication, how much of the market does that open up for pumps for you guys? And then, correct me if I'm wrong, this is only for t:slim, not t:slim G4, right?

It is for t:slim only at this point.

That's right. Do we have a good estimate for that, Susan, that we've given?

We don't, unfortunately, just because of the demographics that are available are very hard to decipher between Type I, Type II, and then the age stratification there, and so, unfortunately, we don't.

The one thing I would mention, though, is that today it's at the discretion of a provider, a healthcare provider, if they want to prescribe the t:slim off label to somebody who's younger. It's really up to them to determine the best pump for their patient's need, and today we do have people who will prescribe the product to people who are younger than 12; now, it would be younger than 6. So it's really hard to know, though, how many more people will actually purchase a pump because of the age indication. It's hard to kind of know what that incremental difference is.

Okay. That's helpful. And then, I know you said the X2 is not going to be too different from the current platform, but -- is there any training differences associated with the X2 platform for customers or reps once you get that into the field?

No, it would be just like the current pumps today from a user perspective.

Okay. And then, I apologize if I missed this earlier, but the percent distributor versus the percent direct, is that dissimilar to last quarter?

I think it has. I think this quarter it was 75%; last quarter, it was 77%.

Okay. And then, that metric -- so that metric moved down. Do you anticipate it moving down any further going forward or kind of staying stable at 75%?

It fluctuates. It really depends on who's buying, who our pump buyers are within a quarter because they have different insurance companies. I do think that because United is in play now that the distributor percentage would probably be reduced because we were servicing those customers through a distributor.

Okay. All right. That's helpful. Thanks, guys.

[Tom Backus], Piper Jaffray.

Hi, guys, good afternoon and thanks for taking my question. Most of mine have been asked, so I just have one quick one. Kim, you had mentioned clinical data in your conversation with United Health. I was just hoping, has that been made publicly available? And just hoping you could give us a little detail on that.

No, it is not publicly available. It was internal surveys that we have done on our own customer base that sort of give us indications of whether they are seeing better control, whether the use of the advanced feature, because they are so simple to use, has an impact on all that. So we've come to the conclusion of what we're seeing on that, but we really haven't published it.

Okay. So it was retrospective and it was against, I guess, injections, right, multiple daily injections?

It was against a bunch of different cuts. You can imagine we've looked at the entire variety of treatment options pre- and then [tantaof] t:slim post.

Okay. That's all I had. Thank you very much.

Ben Haynor, Feltl and Company.

Good afternoon, everyone. I know it's early on the warranty side of things, but you did sell a couple hundred pumps in Q3 2012. I'm not sure exactly what month that launched in, but have you started to see any upgrades from that yet or is it too early?

It's too early and most of our sales or pump shipments in 2012 were in the fourth quarter and probably heavily backend loaded to December.

Okay. That makes sense. And then, on the t:sport, can you maybe talk a little bit about how that was received at the last couple conferences? And then, any thoughts on whether the FDA might come around on the smartphone control of it by 2018 submission?

In terms of reaction to it, I think everybody that's seen it thinks it's just very, very slick. It is sort of an interesting hybrid offering between a fast pump and then a durable pump like we are offering with the t:slim. There's people who are coming off NDI that don't want to be taking a pump out because they are now wearing tubing and this way they can be very discreet and not show people that they're actually operating a pump, and that's a very important feature to that segment of the marketplace.

As to this whole control question, we just have to plan that the FDA is going to take longer to allow apps onto a cell phone that are going to operate a pump. It's just -- there's a lot of angst about operating system changes and phones being updated and are they safe controllers that we are going to address over time.

So, the strategy is to come out with a dedicated controller, which would basically have a software suite of t:slim on that controller, and that would be the first bridge, and we would probably, if we do get approval for an app-based controller, continue to provide our dedicated controller as sort of a safety backup. But this is one of those really evolving areas that I think is going to take a while to settle out, so we're moving on that dedicated controller path.

Okay. That's helpful. Thank you very much. That's all I had.

Kristen Stewart, Deutsche Bank.

Hey, guys, I'm back. Sorry if I missed this -- I think you mentioned this earlier, but I can't remember. What is the pricing of t:slim X2? Is that going to be the same as the G4?

That's correct. Same code.

Okay. And then, I know there's been a lot of talk on United, but I was just wondering if you've had any positive talks with any of the other payers, and just going back to Kaiser, I know that was one that you had signed up a while back. Just checking in to see how that has been going.

As I said, we have people in the field that our -- people that are working with payers and they have regular visits and so forth, but we're going to elevate this to my level and Brian's level and really focus on our top 10 or 20 providers to give them more exposure to senior management here at Tandem and have a good ongoing relationship with them.

These payers are having growing patient populations and we're a part of that, and I think a lot of them see the benefits of easier to train, intuitive interface, all those kinds of things, and are impressed by the fact that we have half our patient population are former MDI users and pumps are going to give you better clinical outcomes. So those are the messages that we continue to want to try to get to the remainder of payers that are out there and open it up to a very senior level.

Okay. But no payers over the last, I'd say, six months that are worth noting that are coming on board?

No. What now?

That you've brought on board or have made (multiple speakers)

No, those are steady, and we have seen this last quarter a little bit of increase in utilization on our current contract, but again that fluctuates depending on who is buying our pumps and what insurance plans they have.

Okay. All right. Cool. Thank you.

(Operator Instructions).

Anyone in the queue?

And it looks like we have no other questioners in the queue at this time, so I'd like to turn the call back over to management for closing remarks.

Okay. We thank everybody for joining us today and hearing a long and sometimes difficult to understand story, so appreciate the patience.

As for industry events, we are going to be at the American Association of Diabetes Educators Conference, which is August 12 to August 15 here in San Diego, so we have a number of activities planned for that week and we're looking forward to educating healthcare providers about the new t:slim X2 and our exciting pipeline that we've covered today and promoting our new lower-age indication for t:slim, and also talking a lot about the value of the Tandem device updater, which we think is a very, very fundamental part of our new product strategy going forward.

We're also attending a number of upcoming investor conferences. On August 16, we are presenting at the annual Wedbush conference in New York City. Then on September 7, we're going to be at the Baird Healthcare Conference, and on the 13th, we'll be at Morgan Stanley Healthcare Conference, and both of those conferences will be in New York.

So in conclusion, I think we've had a very strong first half of 2016, with great potential in the back half of the year and beyond as we bring new and innovative products to the diabetes community, so we look forward to keeping you updated as we progress on our product pipeline and our growing customer base. Thank you for listening today.

Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program and you may all disconnect at this time. Everyone, have a great day.