Tandem Diabetes Care Inc (TNDM) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You've joined Tandem's Fourth Quarter and Full Year 2017 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 Fourth Quarter and Full Year 2017 Earnings Conference Call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, product development time lines 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 and 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 these non-GAAP financial measures facilitate better to comparisons of operating results across reporting periods that we'll be discussing during today's call. 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, and welcome, everyone, to today's call. Also joining me today is Leigh Vosseller, our Chief Financial Officer. For anyone who has not yet had the opportunity to meet Leigh, she assumed our CFO position at the first of the year and is already off to a strong start, bringing a passion for leading teams and delivering results.

And looking back at 2017, it was a unique year, and I'm very proud of our ending results in the fourth quarter in particular. We demonstrated our most successful quarter to date with the greatest number of pump shipments and the highest sales in the history of our business as well as continued gross margin progress.

We also successfully executed several strategic initiatives, such as the launch of the t:slim X2 with the Dexcom G5 integration in the third quarter; the launch of our custom t:lock infusion sets also in Q3; the transition of manufacturing to our new facility and the advancement of our pumps with automated insulin delivery algorithms in the clinical trials. These, in addition to making meaningful operational progress and process improvements to improve our leverage, allowed us to close the year very strong. Our positive momentum from the fourth quarter has continued in the first quarter of 2018.

Last month, we successfully completed a $69 million financing, which was beyond our original expectations, and we anticipate will support our goal of reaching cash flow breakeven in the second half of 2019. Demand for the t:slim X2 remains strong, and we anticipate demonstrating robust growth this quarter compared to the first quarter of 2017.

We also reported outstanding results from our pivotal trial for the t:slim X2 with Basal-IQ, which features a predictive low glucose suspend algorithm and recently submitted a PMA application for the FDA's review, which keeps us on track for our target to commercially launch the product this summer. We are also making meaningful progress in setting the foundation for sales outside of the United States beginning in the second half of 2018.

These achievements were made possible thanks to the resilience, perseverance and hard work of our employees, especially over the past year. Thanks, everyone, including our distributors, suppliers and clinical partners, for your continued dedication and efforts that contribute to building our business and improving the lives of people with diabetes.

In taking a deeper look at Q4, the high demand for the t:slim X2 was driven by our successful launch of integration with Dexcom's G5 Mobile CGM. The X2 is the smallest durable pump on the market and offers big feature like a color touchscreen and Bluetooth radio. When we launched G5 integration in September, we set a new standard in the industry by simultaneously offering the feature to both current and new t:slim X2 customers. We were able to do so through our revolutionary tool, the Tandem Device Updater, which provides customers the ability to remotely update their pump software using a personal computer. Offering customers this capability underscores our goal to simplify the lives of people with diabetes by using software updates rather than hardware replacements to provide rapid access to new innovations.

In a recent report from dQ&A, a leading market research group dedicated to diabetes, the ability to remotely upgrade pump software was among the top-3 reasons survey participants cited for choosing our pump, along with good design, the style and the CGM integration. As the only pump company offering this feature, we believe it is a meaningful differentiating factor that sets us apart today and for the foreseeable future.

As we look to where our new customers in the fourth quarter came from, it was great to see that more than half continue to report being new to pump therapy. It's of particular note as it suggests Tandem is continuing to expand the insulin pump market and bring the benefits of pump therapy to more people with diabetes. Of the customers who report converting from another manufacturer, we're glad to continue to see a high number of former Medtronic customers chose the t:slim X2, and we saw a marked increase from the former Animas customers following Johnson & Johnson's October announcement that they've decided to exit Animas from the insulin pump market. Historically, our shipments to former Animas customers were in the low teens. And in December, we estimate it grew more than 20%.

As a reminder, Animas chose Medtronic to aid their customers in their transition to another pump. However, our inbound calls and subsequent orders substantially increased in the days following their announcement and have remained high. Early evidence suggests that the t:slim X2 will continue to be highly attractive to Animas users, particularly because many Animas customers already use Dexcom CGM, and we now offer the only Dexcom-integrated insulin pump, and because Animas customers have a history of selecting an alternative pump to Medtronic.

That being said, it's difficult to quantify the long-term impact of Animas' decision on our business. Current prospective Animas customers have different options based on where they are within their pump's warranty period. Medtronic is in control of the customer list, which puts us at a disadvantage. However, we believe the t:slim X2 is better aligned with the preferences of Animas users, and we will be working hard to communicate the features and benefits of the t:slim X2 and to demonstrate our #1-rated customer service to people using an Animas pump as they look to make their new pump-purchasing decisions over the upcoming quarters. Overall, we're encouraged by the early interest from Animas customers, and we view this as a potential tailwind through most of 2019.

As we look to what is going to help to continue to expand the insulin pump market and attract a high number of current pumpers, our efforts to develop new and exciting innovations fall into 3 main initiatives: first, Automated Insulin Delivery, or AID, which are algorithms for our t:slim X2 platform; two, our next-generation hardware platform; and three, connected health. In 2017, the bulk of our R&D resources were focused on advancing our near-term Automated Insulin Delivery efforts, which are Basal IQ, which we previously referred to as predictive low glucose suspend, or PLGS; and Control-IQ, which is a hybrid closed-loop algorithm using TypeZero's technology.

Starting with Basal-IQ. This system utilizes Dexcom's G5 sensor values to suspend insulin when low blood glucose is predicted and automatically resumes insulin delivery when glucose levels begin to rise. Our market research has shown that reducing the risk of hypoglycemia is the #1 feature people with diabetes want in an algorithm, particularly at night due to the severity of the complications when left untreated.

In January, we wrapped up the clinical trial for this product in support of our PMA, which we recently submitted to the FDA. The results were outstanding and showed that the system achieved the primary outcome of reducing time spent in hypoglycemia by 31% compared to sensor-augmented pump therapy alone. These results are especially impressive, given the study participants started out very well controlled with a mean hemoglobin A1c of 7.3%. Importantly, this reduction of time spent in hypoglycemia was accomplished without any increase in the rate of hyperglycemia.

We were thrilled to see these clinical results, and equally important to us was the feedback from study participants. The system is easy to use, and they had a high level of confidence using it without a significant training burden to get started. This supports the usability data we presented at the Diabetes Technology Meeting in the fourth quarter, which demonstrated a 99% success rate among study participants, who performed a series of critical tasks using the Basal-IQ system after initial computer-based training. We believe the ease of use of our system will give us a competitive advantage compared to other systems that are currently available, and we are preparing to launch the t:slim X2 with Basal-IQ this summer, subject to FDA approval.

In the fourth quarter, we announced that all new features approved for the t:slim X2 by the FDA in 2018, including our Basal-IQ software, will be made available to users for no cost. The tools necessary for diabetes management can be expensive, and this decision supports our vision to use technology to reduce barriers that may delay access to the latest available features.

Tandem's always been a leader in the consumer technology front, but I believe the launch of Basal-IQ will allow us to compete more effectively on the clinical and therapeutic front. Following the completion of the Basal-IQ trial, I received multiple letters from study participants as well as parents, whose elementary school children participated, telling their personal stories of how the system improved the quality of their lives. These letters provide continued motivation throughout our organization to bring this product to market as quickly as possible.

We're also making great progress on our second-generation Automated Insulin Delivery system, the t:slim X2 with Control-IQ. Also designed as a software update for t:slim X2 users, the system utilizes Dexcom's G6 sensor values and Automated Insulin Delivery technology that we licensed from TypeZero. The system increases or decreases basal insulin to minimize hyperglycemia, hypoglycemia and improving user's time spent within the targeted glycemic grade.

This hybrid, closed-loop product has also been designed to leapfrog competing products by providing automated correction boluses, which we believe will bring additional benefits to our customers. In our market research, people reported a strong preference for t:slim X2 with Control-IQ as compared to the competitive system.

Our participation in the International Diabetes Close Loop trial continues to progress. The trial was started in late 2016 and is expected to include up to 360 adults with type 1 diabetes across all of its studies. Early phases of the study use Tandem insulin pump and Dexcom G5 sensor as a part of a blood glucose control system that combine these devices with a smartphone running TypeZero's inControl closed-loop algorithms. The latest series of studies, including the first pilot study was completed earlier this year, use the fully integrated system. The pivotal trial was planned to commence in the second quarter. Accordingly, we believe we are on track to file a rolling PMA submission to the FDA in the second half of this year, and our goal is to launch the t:slim X2 with Control-IQ in the first half of 2019 following FDA review and approval.

Our R&D efforts over the past year have prioritized bringing our Automated Insulin Delivery products to market. However, we also continue to make progress on our next generation hardware platform, which we call t:sport. When we first launched the t:slim back in 2012, we were already planning of thinking about what our next-generation hardware platform would offer. t:sport is the result of that effort in significant market research, prototyping, and the second-generation pumping hardware development and testing is already complete. t:sport is about half the size of t:slim and is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump. We anticipate that t:sport will feature a low-cost, 200-unit cartridge, an on-pump bolus button, a rechargeable battery or a Control-IQ algorithm and a Bluetooth radio. It's being designed for use with leading -- with the leading U-100 insulins. And this year, we plan to conduct research on the use of insulin concentrates as a potential alternative to t:flex for people with greater insulin needs. We are also evaluating offering a 300-unit cartridge alternative as well. We anticipate commencing clinical trials for t:sport in 2019, and our goal is to launch this product in the 2020 or 2021 time frame.

Our third major R&D initiative, which we refer to as connected health, really touches all of our current and future insulin pumps. Our connected health efforts are comprised of our t:connect data management application that is currently available by uploading data via USB to display pumping blood glucose and CGM information and has been the #1-rated consumer software since 2013; t:connect HCP, which is a version of the data management application for health care providers, will streamline use for multiple patients and office efficiency. The t:connect mobile application will utilize the capability of t:slim X2's Bluetooth radio to wirelessly upload pump data to t:connect for the first time and receive notification of pump alert forms, integrated other health-related information from third-party sources and support future pump control capabilities for t:sport. We intend to launch the first generation of our mobile application in the second half of 2018 with a subset of these features.

Turning to a different type of growth initiative. We're actively preparing to commence sales outside the United States in the second half of 2018. We recently announced the filing of our medical device application in Canada and anticipate we'll be receiving CE Mark in late Q1 or early Q2 of this year. We expect to operate direct sales and clinical operations in Canada, but primarily leverage our other domestic customers' support resources. For other geographies, we plan to utilize distributors with mostly existing infrastructure and resources.

As you can see, 2018 will be another busy year for us. At the heart of our company is a passion to improve the lives of people with diabetes. Our product offerings and development efforts are in support of this mission as are our sales and customer service initiatives.

In the process, we are committed to building a sustainable business with improving margins and moving toward cash flow breakeven. In combination, these are Tandem's top priorities for 2018. And over the upcoming quarters, I look forward to sharing our future achievements.

I'll now turn the call over to Leigh to further discuss our results for the quarter and our financial guidance.

Thank you, Ken, and good afternoon, everyone. Closing the year with such a strong fourth quarter gives us great confidence moving forward as the factors that positively influence our results are not onetime events. We expect these same factors will be continued drivers of growth in 2018 and beyond, and that we have hit an inflection point where we can focus on leveraging our infrastructure investment, while we return to strong sales growth.

Our fourth quarter sales were approximately $40 million, which was an increase of 39% compared to the fourth quarter of 2016 on a GAAP basis and an even more remarkable 62% when you exclude the impact of the Technology Upgrade Program we launched in late 2016. As Kim mentioned, sales in the fourth quarter were impacted by a number of positive factors, beginning in August with the FDA approval of the t:slim X2 with Dexcom G5 integration. We experienced an 80% sequential increase in pump shipments in the fourth quarter, nearing 7,000 pumps in total. This was the largest sequential increase in pump shipments since the fourth quarter of 2015, when we similarly received approval for and launched t:slim G4.

This year also provided us the first full year of renewal opportunities from customers who originally purchased the t:slim in 2013. It is important to keep in mind that renewals do not automatically occur at the end of the 4-year warranty period. It can take time for the patient to fully evaluate the market options and commit to the purchasing decision as well as the time spent in the insurance verification and ordering process.

Fourth quarter shipments included approximately 900 pump renewals, bringing us to approximately 2,000 renewals for the year, with the vast majority of our customers continuing to be new to our products. Pump sales comprise the majority of our fourth quarter sales at 67%. Supplies revenue also grew substantially due to the gradual rollout of our t:lock infusion set connector beginning in the third quarter. Over the course of 2017, we saw a steady increase in the ratio of infusion sets sold as a percent of cartridges beginning at 51% in the first quarter to 88% in the fourth quarter. In fact, we reached a ratio of 99% in December. As a result, our infusion set sales were $8.4 million in the fourth quarter, growing to more than 20% of total sales. We expect these sales to increase to the mid-20% level in 2018 and beyond.

Overall, our sales for the full year were $107.6 million on a GAAP basis or $102.6 million on a non-GAAP basis, excluding the impact of the Technology Upgrade Program. Pump shipments for the full year of 2017 were approximately 17,000, bringing us to nearly 68,000 since inception and just over 60,000 in the last 4 years, which we believe is a good way to look at our active installed base.

We expect to continue this momentum into 2018 and beyond based on 5 key growth drivers: First, as Kim discussed, we are on track to launch Basal-IQ and Control-IQ in 2018 and 2019, respectively. Second, we will continue to execute on our renewal strategy. Our ultimate goal is to retain at least 70% of our existing customers with these new product offerings and our high level of customer service. The renewal process is still new for us, and while our most-tenured customers are at that retention rate, our steady-state expectation is to scale there over time. We originally shipped approximately 6,500 pumps in 2013 and 10,800 pumps in 2014, of which a significant portion provide near-term opportunity. Third, the successful launch of our t:lock Connector provides us the ability to capture 100% of the infusion set sales for our installed base for all of 2018 and beyond. Fourth, we see a continued opportunity provided by Animas' exit from the market. And fifth, we are preparing for our entry into international markets, anticipated for the second half of 2018. We only expect modest benefit from our efforts outside the U.S. in 2018, but believe it positions us well for long-term growth.

In all, these factors give us confidence in our 2018 sales guidance at $132 million to $140 million, representing a return to strong double-digit growth. We expect that pumps will continue to represent the majority of sales, and the distributor mix domestically will remain relatively unchanged from the mid-70% range we have historically experienced.

Gross margin in the fourth quarter was 43% and just over 40% on a full year basis with no material impact from the Technology Upgrade Program. By comparison, our full year GAAP gross margin for 2016 was 28% or 32% on a non-GAAP basis. Since inception, we have focused on reductions in the cost of materials, labor and product warranty as well as the improvement of yields through process efficiencies. Volume is now the biggest factor in our ability to improve gross margins going forward as it will allow us to spread fixed overhead costs across increased production volumes. We transitioned our manufacturing operations in recent months to a facility, which doubles our manufacturing capacity at only a nominal increase in overall cost.

The supplies gross margin, although positive, continues to follow the overall average. This margin is expected to continue to progress as volumes increase, particularly as infusion sets become a greater percentage of overall sales. While our gross margin may fluctuate in a given quarter for a variety of reasons, particularly seasonality, we are on track to achieve our long-term gross margin goal of 55% at our cash breakeven point, which is anticipated in the second half of 2019.

Operating expenses in the fourth quarter were approximately $27 million and $107 million on a full year basis. This represents an increase of only 5% for 2017, which is the third year in a row of operating expense growth of less than 10%, while sales have grown at much higher rates. We have focused our dollars and efforts on supporting the R&D product pipeline, driving growth without increasing our sales territories and maintaining our #1 customer service ranking, all of which are key to our long-term success. We expect that operating expenses will again grow at a rate of less than 10% in 2018 as we gain additional leverage in the operating structure in which we made early investments. This includes spending necessary to successfully launch in international markets. Overall, we expect our operating margin for 2018 to fall within the range of negative 40% and negative 35% of sales. This includes noncash, stock-based compensation and depreciation of approximately $12 million to $13 million.

Beyond these operational goals, our major priority for 2018 is to continue properly capitalizing the company. We began last month by upsizing our public financing to $69 million in gross proceeds, which we believe is sufficient to reach our cash flow breakeven target in the second half of 2019. We also have the opportunity to raise up to an additional $32 million through the exercise of outstanding warrants from the equity offering we completed last October, half of which expire in April.

Our recent financing eliminates one of the main points our competition used to sell against us as they chose to market against our financial condition rather than our product features, where we tend to excel. Our sales force did an incredible job restoring growth to our top line despite the competitive headwinds and perceived financial uncertainty over the last 12 to 18 months. Our next area of focus is evaluating our current debt level and how best to address it.

To summarize our 2018 outlook, our financial guidance is for sales of $132 million to $140 million with an operating margin range of negative 40% to negative 35%. Historically, due to seasonality, we've seen about 17% of our sales in the first quarter. With the increased contribution from infusion sets and supplies from our growing installed base, this is likely to increase slightly to between 18% and 19% for the first quarter of 2018. We expect to reach cash flow breakeven in the back half of 2019. And with timing, anticipate having an installed base of at least 80,000 customers ordering supplies on a consistent basis. We believe the cash that we recently raised, with the $24 million on hand at the end of 2017, provides sufficient funding to allow us to reach this cash flow breakeven point.

Overall, the strength we saw in the fourth quarter of 2017 was highly encouraging, giving us great confidence in our belief that it was a turning point for the business. We continue to have big aspirations for Tandem and are confident in our ability to reach our long-term goals and 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) And our first question comes from the line of Kristen Stewart of Deutsche Bank.

I just wanted to go over again the renewal assumptions that you have stated. I'm sorry, I missed those numbers. What were you assuming in the model?

Sure. It's no problem. Just to give a little bit of a high level on how renewals work, generally, they're about a 4-year period. And one important thing to remember is that renewals don't automatically occur at the end of the 4-year period. And so it could take some time after that in order to secure the sale. The industry generally, on average, experience about a 60% to 70% renewal rate. Our goal is to hit the 70% rate, but it will take some time for us to scale there. As I said, we shipped about 2,000 renewals in 2017, which represents, if you look back to 2013, about a 30% rate. And so again, we expect to scale over the next year or 2 to the 70%. One important point to note as well is if you look back to our most tenured customers, those from late 2012, early 2013, we are hitting that 70% rate on those older pumps that we shipped.

Okay. So you're at the 70% renewal rate as it is -- stands today?

On some of the oldest customers. But again, we're still working -- what we saw this year was that we think that the competitive environment also impacted people's decision-making process, so it's just taking a little longer than just that straight 4-year cycle that you might expect.

Okay. Perfect. And then just with respect to your assumptions around the breakeven and being cash flow sufficient, does -- are you assuming exercising the warrants with the additional $32 million? Or are you just assuming that the cash that you raised from the $69 million is sufficient enough? And what kind of, I guess, other assumptions are you making that gives you the confidence to kind of get to that breakeven out in 2019? Maybe just give us a little bit of additional color to get us comfortable that that's possible.

Yes, sure. So as we -- when we went out for the public financing, we had told everyone that we believed it took $50 million to $60 million for us to get to that cash flow breakeven point. And we successfully raised, as you know, $69 million. And so that is sufficient for us to get there. If the warrants are exercised, that's just additional cushion for us to use for operating -- our operating benefit. And when you think about that breakeven point -- so we are looking to that to be in the second half of 2019. And what it really takes is to have about 80,000 customers, or a little more than that, who are consistently ordering supplies. So it's quite possible that we could surpass that 80,000 point earlier in the year. But it will be hitting that seasonal third and fourth quarter and those folks consistently ordering supplies, which will get us to that point.

And do you feel confident enough getting the supply margin up high enough over this period as well?

Absolutely. When we're at that point, we expect to be at a 55% gross margin. And that's the combination of the pump and some of the benefits that we've put into the pump in the last year to where we reduced the materials cost, and we've improved the warranty experience as well as the addition of the infusion sets to the supply margin. And then now really, it just becomes a volume story as we leverage our fixed overhead.

Our next question comes from the line of Rick Wise of Stifel.

Let me start off with a couple of things here. The -- I'm just trying to [separate the] questions. Maybe I'll start with the gross margin as well. And Leigh, you used the phrase leveraging the infrastructure. Just help us think through and maybe you could frame out the big steps, the big drivers of what that means to you and how we should think about leveraging the infrastructure. Obviously, volume is a part of that, capturing some sales in infusion sets, a part of that mix. But help us think through that. And just as part of answering that, as you march towards your mid-50s gross margin goal, where would you hope to exit this year? I know you only got the operating margin. But where would you hope to exit this year based on some of these infrastructure leveraging initiatives that you're talking about as well?

Sure, sure, Rick. So really, I mean, as you already said, the gross margin really is a volume story at this point. I'll point out that from 2016 to the 2017, we actually improved our gross margin by 8 points. And a lot of that came from the fact that we have really focused in the last few years on stripping down our materials costs. And we've actually just had a lot of learnings from having the product in our facility and improving efficiencies and yields. And so one of the big investments we made this year was that we moved to our new manufacturing facility in 2017. In fact, we officially started manufacturing it here in the early part of 2018. And with that, we increased our capacity. We doubled it, though we hardly increased the cost of facilities. So we can expect to see that same fixed overhead that we've seen in previous years, but now we have the capacity to grow and appreciate increased volumes and not have to invest again through at least that cash flow breakeven point. And so really, now that we have stripped down some of our materials cost, we've really improved our direct labor and our yields and efficiencies. We do look now to just appreciate the increase in volume to help drive the gross margin improvement going forward. And I'll just add one other point. Our warranty experience has improved significantly with the t:slim X2. And as we continue to put more of those pumps in the field, that will also help warranty improvements as we move forward.

And again, thinking about aspirational gross margin exiting '18, trends, realm, direction.

Yes. I would expect it -- so for the fourth quarter, in particular, of 2017, our gross margin was -- it was actually 44% on a non-GAAP basis. And we're thinking about hitting that 55% point at the end of 2019. So I would expect it to scale somewhat as we move across the years. But just keep in mind that the gross margin can be pressured early in the year because of the seasonality and then how pumps -- how the pumps scale across the year. So pumps being the greatest contributor to the margin, we will naturally see a bigger improvement in the gross margin at the end of any given year, or it might reduce again at the beginning of the year because of seasonality.

Right. And Kim, maybe you want to talk a little bit about market dynamics. I mean, I keep reflecting and musing on the fact that there are really sort of 2 games in town, you and Medtronic. And you're highlighting the acceleration in Animas customer capture here. But is the 2-horse race, if you will, a factor? How are you seeing that in your conversations with doctors and diabetes nurse practitioners, et cetera? How is that changing, if at all, the dynamic as your pipeline builds and your offerings expand? Just maybe, just in general, talk about that?

Well, it's a huge jump off for that Animas business. Really, Animas patients will tend to choose another durable pump and not go to OmniPods. Some will, but the majority will either go to us or Medtronic. Probably the biggest competitive question last year, when I talked via conference, was our financial condition. I mean, that was what we were being sold against by our competition. Now we're well financed. We have a good plan to get to profitability. That takes that headwind off the table. So it truly is just us and Medtronic. And I think the pace of our innovation has picked up here. If you go back 2 years ago, we were well behind in Automated Insulin Delivery programs. Well, in the meantime, last year or so, with the rollout of the 670G and our own successful internal development, we're catching up, and we're catching up quick. And so that dynamic is going to be important this year. Because if we get approval for PLGS before the second half of the year, that's when the majority of sales happen. The G5 approval last year, second half of the year, was a big dynamic for us. So the innovations and the fact that it's a 2-horse race, we have the only Dexcom-integrated alternative right now, so I think it bodes well for us.

Makes sense. Turning to Medtronic specifically. One dynamic that we've seen over the last, whatever, 6, 9, 12 months, is the -- there are sensors supply issues for the 670G. Basing the belief that, that issue will be largely resolved in coming months for selling to their existing customers and fully resolved as the coming months unfold, how do we -- as you look ahead at the next 12 months for Tandem, what role does that -- does a resolution in their supply play in the debate? And I wouldn't expect, given everything's going on at Tandem, but should we be concerned all that, that might slow your momentum in any way shape or form? Or change the debate on the Animas conversion, et cetera?

Well, our problem last year and the first half of last year and the year before was the fact that the 670G wasn't available. And so you couldn't put our product against their product. We put our product against their promise. And so now with the availability of the sensors for the 670G, patients can experience both products and make a choice. Which ones has a better CGM? Which CGM has the least calibration and no finger sticks? Which pump is the easiest to learn? Which has trainability that's a fraction of the other? Its ability to stay in the automated mode and control your nighttime hypoglycemia, all that stuff can now be tested head to head with real products. So we've been saying all along, we just -- we wanted to be -- have them be in the market so we can compete.

And just last one for me, Kim. This week, we learned that Dexcom had participated in your offering and took a small stake. And obviously, it seems to me a smart thing to do and one of their most important customers. But how would you have us think about that? How are you thinking about it? What's it mean? How do we reflect on it? And again, they had -- they've been asked publicly. I'd be curious to hear your thoughts about it as well.

Sure. So I think the major question about this last couple of financings was it didn't get us very far. And when we came into this financing, the goal was to take the financing question off the table. So we were pegging a $40 million offering. And Dexcom came to us and said, if that gets you through to the point where you get your innovation in the marketplace, that's good for us and we'll invest. And it helped us raise $69 million and have a successful offer. They publicly stated yesterday they don't intend to get into the pump business, but I would say Automated Insulin Delivery requires a very good sensor, and the system requires a very good pump and great algorithms. And so it's a natural marriage of technology and innovation in my mind, which will expand the market for both of us. So it's -- it was a wise thing to do, and we appreciate it.

Our next question comes from the line of Steven Lichtman of Oppenheimer & Co.

Kim, when could we see the pivotal hybrid closed-loop data? Would ADA be a possibility? And what other data in general should we look forward to this year?

Sure. And so we always look to the major conferences. It's Susan. We always look to the major conferences for opportunities to be able to share data. I'd say overall for our pivotal study, for the hybrid closed-loop product, that'll be commencing here in the second quarter with the goal to really be able to submit a rolling PMA in the second half of this year, a modular PMA in the second half of this year, and the goal to launch in the first half of 2019. So we'll look for opportunities along the way in which we can give people a peek at the data.

Okay. And then on international, could you give us a sense of how big the opportunity you think there is in Canada? And then where should we be thinking about you guys expanding over the next 12 to 24 months? I know there was the release about Scandinavia. Can you maybe just walk us through your thought process of international expansion?

Yes. So I'll just start by saying what we know about the Animas business is they have 90,000 people in their installed base worldwide, and we believe 50% of those are in the U.S. So as you can imagine, the remaining 45,000 is pretty spread across the world. We see Canada as a really good opportunity just -- mostly because of proximity, and we have developed some relationships there. So it's a really good start for us because it's a way where we can leverage our infrastructure here in the U.S. to support that business. So it's a natural starting point for us. As well as we're looking at, I would say, particular opportunities OUS or rest of the world, I would say, where there might be opening -- again, where Animas leaving the market has opened the door for us to some extent. But I would say for 2018, that it's really only expected to be a modest benefit to the business as we work on getting in the door and just building the relationship.

But we do have programs in place for CE Mark and multiple languages, quite a long list. As we begin to look at these different opportunities, understand more of the payer environment, the overall size, that sort of thing, we'll have a more concrete plan to give you later in the year. I asked to be the sales manager in Bordeaux, if that gives you a clue.

Good idea. And then lastly, Leigh, you mentioned that infusion set revenue will increase to sort of closer to mid-20s as a percent. Should we be thinking cartridge sales still stay in this sort of low double-digit 10%, 12% range?

Yes, that's fair. And one thing I'll just mention about supplies. We mostly talk about the seasonality of the business in terms of pump. We do tend to see a little bit of seasonality with supplies as well. So just like the pumps, we tend to see a dip in the first quarter and a slight increase in the fourth quarter as people use up whatever insurance benefits they might have left.

Our next question comes from the line of JP McKim of Piper Jaffray.

I wanted to first start out on the international, and to see if you're going to have an offer for Animas patients similar to what you did here in the U.S. to attract those over more rapidly.

Yes. I think we're still early in the exploration phase of what we're doing internationally right now. The major focus is getting the pump -- the CE Mark for the pump and the product. And we'll be thinking and talking about that more later in the year.

Okay. And then, Kim, I was wondering if you could maybe just help us conceptually to understand the main differences between your hybrid closed-loop system and the competitor. I mean, obviously, you have the G5 sensor, which is more accurate, and uses touchscreen. But could you just really help us get to the key differentiator of the algorithm and why that's so important? And where you think that's going to be the real advantage when you compare the 2 when the data does come out?

Right. Well, there's 2 dosing decisions: One is bolus doses, and the other one is basal rates. And so automating the basal part of it takes static settings and make it respond to actual circulating glucose levels. So we both have that. The other piece, probably the bigger piece, is the bolus calculation. That is a manual input by the patient. They do carb counting based upon learning from their dietitian what they're going to eat at their meal. They enter those carbs. There's an insulin-to-carb ratio that's also an estimate, and then you need your current blood glucose value to address that. That can be very error prone. And so what the system will do is look at the response to that dosing and make correction boluses if the patient has made an error. So it's really reducing both pieces of dosing error that takes place around the clock.

That's helpful. And then last one for me. Just given all the data we've seen on your side and then just the innovation you have going with all the new product launches over the last couple of years, is there any chance to go back and you can reengage with some -- one of the large commercial payers here in the U.S. and maybe get back on their coverage list?

Yes. And as I've said repeatedly, we haven't had -- never done a clinical trial before to get approval of products. We didn't have to. They're either 510(k) or they're PMA with no patient clinical trials, so we had no prospective data. Now we have a very robust, well-controlled clinical trial that had 2 arms to it, and we showed significant reduction in hypoglycemia without increasing hyperglycemia. So I think we have, finally, what we need to begin to have those conversations again, and we will.

Our next question comes from the line of Doug Schenkel of Cowen.

Starting on PLGS. It seems like Dexcom will have G6 approved in the U.S. around the time you launch PLGS. Is there any way to incorporate G6 into your PLGS quickly after its approval? Or will patients not able to get to use G6 integrated with Tandem until the launch of your hybrid closed loop?

Sure. That's going to be a question that we'll be exploring. It's really a regulatory question. The trials for our PLGS product were done using the G5 sensor. And so obviously, we're going to be looking at that, and then also the difference between that and the G6 approval timing to see time to actually bring the product to market for patients, also relative to the time to bring to market our Control-IQ product. So those are all the different dynamics that we're looking at. But again, it's really more of a regulatory question than anything else, and so something that we'll continue to explore as we move closer to both pieces being approved by the FDA.

Okay. Yes, I'm with you. I guess that's kind of the point, is from a regulatory standpoint should -- based on what you just described, I think that was Susan, the assumption should be you're going to launch with G5 and then you'll see what pathway is open to you to move forward with G6.

Exactly.

Okay. Pivoting over to, I guess, just thinking about hybrid closed-loop and TypeZero. You've committed to not charging customers for any device update or upgrades in 2018. However, it's a huge step forward with your hybrid closed-loop product. And given TypeZero's likely going to have a financial interest in sales associated with that effort, is it fair to assume that you're going to charge at least some nominal fee, at least for existing customers, to upgrade to that product in 2019?

We haven't made that decision yet. We think the more appropriate route is to go to CMS and demonstrate that we're actually cutting health care costs out. And this significant new technology that was developed, that's unique, and will they give greater reimbursement for greater safety and efficacy. So that's the approach that we will be taking, and I think that's probably the most prudent approach.

So in an ideal world, that puts you in a better position, both -- not just from a marketing standpoint, but potentially from a payer economic standpoint. And maybe that gets you to a point where you don't need to change your approach in terms of software upgrades.

That's correct.

Our next question comes from the line of Jeff Johnson of Baird.

So first question, you've given enough numbers. I think we can back into it, but can you talk at all about how you think pump versus supply growth will look in 2018, just to level set us all on those 2 factors?

Sure. So pump revenue had tended to be the majority of revenue. In fact, in 2017, it was about 65% to 67% of revenue. And we expect it will still be the majority going forward. And again, if you take that information, along with the fact that infusion sets will be in the mid-20% range, I think that will help you get to where you're trying to get.

Yes. All right. Fair enough. And then, Kim, when I look at your development on the HCL side, 2 questions, I guess. The first question is, you've come up with a way to have some of that funded by external sources, which is, obviously, a helpful thing. When you get to a mid-'19 launch or a first half '19 launch, some of this cash that you raised will have been kind of burned away. So I guess my question is, how big do you think your launch cost might be at that point? Is that something where you could track down some external financing or external help there as well? Do you think you'll have enough cash flow to really go hard and heavy on a launch relative to what Medtronic's been doing? Just trying to understand kind of what happens as we get closer to that HCL launch next year.

Well, as you know, we just upgraded the software, so we won't have a hardware replacement cost like our competitors. In terms of our marketing reach, for now, we believe our current sales force and support team in the field is adequate to cover the launch of both products. We'll play that by ear. But I don't think there's much incremental cost to launch it. What you really need on a launch like this is a strong clinical prospective study that you can demonstrate to physicians and educate them. We're already trying to do them -- that about the benefits of t:slim. So now we'll have a new therapeutic improvement to sell, so I don't anticipate this is going to be like a drug launch.

Okay. Yes. And I was thinking more on the marketing side, whether it's DTC, reach out to docs, things like that. It sounds like you don't think those costs will be significant anyway.

No. Not incrementally higher than what we spend now. I mean, ultimately, we'll have to make the decision about when we expand the field sales force, and we'll analyze that as we go along. A big component of that is sales people now have set sales and renewals. Before, it was all just new organic growth. So as they become more productive, they may reach a saturation point, and we'll increase territories when that makes sense. But right now, it doesn't.

All right. And then last question for me. Just when I think about kind of the pathway you guys are taking to the HCL, obviously, it's moving very quickly. This time next year, could potentially have one there or close for you. When I think of one of your competitors, who's going through several IDEs at this point and may or may not hit pivotals later this year, they seem to be taking a much more kind of piece-by-piece approach. You guys moving quickly. What are the risks and the opportunities in doing that? And I think I know the answer to this, but just kind of remind me what allows you to move so much quicker maybe than others as they develop these HCL systems?

There's probably 2 parts to that. We're really becoming a software company, and software is quicker to develop than hardware, as you know. Also, with the update, we can push that out to patients very quickly. Also, in our algorithm software development team, the majority of them are from aerospace and designed the control systems that are used on the autopilots on a commercial aircraft. So there's no more sophisticated closed-loop systems in use than those. And so those folks really know what they're doing. They have a lot of experience in aerospace, which is far more regulated than the FDA medical device world. So I believe those are 2 of our major advantages.

And it's probably worth noting, in support of Kim comments, that we have been doing that IDE process as well for each phase. The International Diabetes Closed Loop Trial is broken into many different segments, and we've just been able to move, we think, very efficiently through that process. I mean, a big part of it is because we have the same, exact hardware platform that is updatable. But we have had ongoing discussions with the FDA, and so we are doing those [talks as] -- in between.

At this time, I'd like to turn the call back over for any closing remarks.

This is Kim. Thanks for joining us today. Just a little update. Next month, we'll be attending 2 investor conferences. The first one is on March 14. We'll be at the Cowen Healthcare Conference in Boston. And then on March 21, we'll be at the Oppenheimer healthcare conference in New York. So thanks for listening to us today and asking great questions. And we look forward to keeping you updated as the year progresses. Thanks.

Thank you, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.