Tandem Diabetes Care, Inc. (TNDM) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Tandem Diabetes Care Q1 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Ms. Susan Morrison. Ma’am, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining Tandem’s first quarter and full year 2015 earnings conference call. Today’s discussion may include forward-looking statements. These statements reflect management’s expectations about future events, product development timeline, 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 statement. 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 or elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements whether as a result of new information, future events or other factors. Kim Blickenstaff, 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. 2015 started on a high note for us with the FDA’s clearance of the t:flex pump in early January. It was the first to several highlights during the quarter and including our achievement of 53% year-over-year sales growth, reaching the milestone of having more than 20,000 t:slim customers, our continued progress with new products in development, and more recently our launch of the t:slim with enhanced software. The first quarter is always particularly challenging due to the anticipated seasonal sales drop associated with the timing of insurance deductibles and spending accounts being reset at year-end and the related reduced manufacturing throughput had impacted our gross margins. Overall, I’m extremely pleased with our progress in the first quarter and believe we have strong momentum toward achieving our goals for the year. One our last call, we discussed the company’s focus on key catalysts that will allow us to achieve a sustained above market growth. The three initiatives that we identified were our sales force productivity, our ability to commercialize near-term products and advance our long term pipeline. And I was very pleased that the progress we were able to make in each of these areas during the quarter. Starting with our sales force in early March, we held our national sales meeting. Enthusiasm was high and the team has made great strides since our disruptive expansion that took place last year. As anticipated Q1 productivity was less than Q4 productivity due to seasonality. We averaged 14 pumps shipped per month per territory in the first quarter of this year. By comparison, in 2014, we averaged 12 pumps per territory in Q2, which was our first full quarter with 60 territories. This reinforces our view the sales force is continuing to mature and supports last year’s decision to invest in the expansion of our business. To further support the field’s productivity last week we announced that we begun shipping t:slim with updated software. This new software incorporates the number of changes that are based on customer and healthcare provider feedback to our original t:slim. An example of the new feature included in the updated software is the streamlined cartridge change process. This new process provides users the ability to fill their cartridge with insulin off the pump rather than on the pump and expedites the fill tubing process. We were able to add the new features by modifying the t:slim software without any hardware changes, which truly highlights the benefit of offering a touch-screen insulin pump and a USB access point for software updates. The new features include the t:slim’s updated software were submitted to the FDA as part of the 510(k) filing and received clearance in Q4 of last year. We are excited to offer new customers with the updated t:slim software, but as we enhance our products we also want to be able to offer these new features to our existing customers as quickly as possible. This is why Odyssey is such an exciting project for us. As we discussed on our last call, Odyssey is our PC and Mac compatible web-based system that is being developed to allow users to update their pump’s software at home similar to their smartphone. Development work continues to progress well. And we’re on track to file a 510(k) with the FDA for this product by the end of the year. And looking at additional efforts to support sales productivity, I’m excited to share that we will be pursuing a pediatric indication for the t:slim pump. As a reminder, the t:slim is currently indicated for individuals aged 12 and older. We believe that with an expanded claim and t:slim’s modern look and easy to use interface we’ll be able to introduce the benefits of pump therapy to younger audience. We’ll be conducting human factors study this summer to support our 510(k) filing by year-end in pursuit of a lower age indication. Turning to our launch plans for our near-term pipeline, activities are well underway for both the t:flex and the t:slim G4 insulin pumps. Starting with t:flex, since we received 510(k) clearance in January, we’ve been training our field sales force, ramping up manufacturing and preparing for launch. The t:flex software is very similar to the updated t:slim software and will offer users the same enhanced benefits with largest capacity insulin cartridge available in the market. This is why in structuring our launch plans it was important for us to commence updated t:slim shipments prior to t:flex. It allowed us to leverage training efficiencies, both internally and with healthcare providers, as we first introduced and provided training on the new t:slim features. Then any further trainings for t:flex require minor incremental trend relating to its 480 unit capacity. The official launch of t:flex will be announced in the upcoming weeks and we will begin active marketing at that time. Following the customers insurance verification process, shipments are expected to begin in June. We plan to market t:flex to the same prescribers and bill under the same codes as t:slim. However, pump eligibility criteria for people with type 2 diabetes can be different and often requires additional documentation and lab testing to gain in in-network insurance reimbursement benefits. That being said, we believe that t:flex pump provides us with a significant and unique opportunity as only about 125,000 people using insulin pump of the potential 1.7 million people with type 2 diabetes who are insulin dependent. And in our market research, two-thirds endocrinologists cited limited capacity as the number one barrier to insulin pump adoption in our targeted type 2 market. So we are excited to launch the t:flex pump and bring our second commercial product to market. Our next near-term pipeline product is the t:slim G4, which will offer people the same easy-to-use pump benefits as t:slim with the integrated convenience of DexCom’s G4 platinum sensor for continuous glucose monitoring. As a reminder, we submitted our t:slim G4 PMA in July of 2014 and are preparing for launch in the second-half of this year. We continue to have positive and interactive dialogue with the FDA. And most recently, we heard that any open questions following our site inspection are now considered closed, which is a positive milestone. While the timing of approval was at the discretion of the FDA, we will be prepared to launch the t:slim G4 as quickly as possible after we received the approval. Less than 30% of people with type 1 diabetes used the insulin pump and only about 10% of people with type 1 use CGM. So we think there is a significant opportunity to expand both markets by offering people the convenience of an integrated device. Turning to our longer term products in development, I’m very pleased with the progress we are making on our artificial pancreas efforts. As a reminder, our first AP product we utilized Tandem’s proprietary technology platform and will partially automate insulin delivery based on CGM information and predictive algorithms. We are near completing a pre-investigational device exemption package to submit to the FDA. This is a precursor to our IDE submission later this year to gain insight from the FDA on our product design and clinical trial protocol which will help us supplying our first commercial AP product. Overall, it’s been a busy start to the year and I’m very pleased with the progress we made across all of the company’s initiatives in the first quarter. I’ll now turn the call over to John, who will provide more detail on our first-quarter results.

Thanks, Kim. Good afternoon, everyone. As Kim mentioned, we are very pleased with our performance in the first quarter. I’m happy with the continuing trends of our high year-over-year sales growth and improving operating margins that we saw in 2014 and here in Q1. Looking at some of the details of our sales and product shipments, overall our Q1 sales were $12.3 million, an increase of 53% from 8.1 million in Q1 2014. Sequentially, our Q1 sales were down 31% from $17.9 million in Q4 of 2014. Generally, factors such as insurance out-of-pocket cost and the timing of resets of annual deductibles at the beginning of the year influenced the timing of insulin pump purchase decisions. As such we typically experience a sequential quarterly drop in sales between Q4 and Q1, which we have now seen in each of the last two years. Pump sales accounted for 81% of our total sales in Q1, compared to 86% for both Q1 and Q4 of 2014. With our pump shipments being heavily weighted towards the second-half of the year, we expect that pumps will represent a similar percentage of our quarterly sales for the remainder of the year. t:slim sales in Q1 grew 45% percent year-over-year, while pump supplies grew 100%. In Q1, we shipped 2,487 pumps compared to 1,723 pumps in Q1 2014 and 3,929 pumps in Q4 2014. With a year-over-year growth of 44% in pump shipments, we demonstrated a strong performance in what is typically the lowest pump selling quarter within any given year, while also competing with the launch of a new product offering in the market. As of the end of Q1, our cumulative shipments have grown to more than 20,800 pumps since t:slim launch back in 2012. Sales to distributors represented 76% of our total sales compared to 68% in Q1 2014, and 79% in Q4 2014. The year-over-year increase in Q1 was primarily attributable to a distributor to began servicing UnitedHealthcare members in the middle of the third quarter of 2014. As we’ve discussed during our prior calls, this provides UHC members with greater access to our products on an in-network basis, and we are seeing a meaningful contribution to our overall sales from this opportunity. As Kim mentioned in his remarks, the average productivity of our sales force in Q1 was 14 pumps per month for territory. Based on our current assumptions regarding the organic growth of our business and the uptake of t:flex, we expect quarterly average productivity to increase throughout 2015, and on a year-over-year basis. Moving onto cost of sales and gross margins, our gross profit for Q1 was $2.8 million compared to $900,000 in Q1 2014, and $6.5 million in Q4 2015. Our overall gross margin for Q1 was 23% compared to a 11% in Q1 of 2014 and 37% in Q4 2014. Manufacturing throughput continues to play a major factor in our gross margins. The improvement in our Q1 2015 gross margin year-over-year is primarily due to increased volumes and efficiencies gains in our production processes. The decrease in gross margin sequentially from Q4 was primarily attributed to lower manufacturing output, as well as an increase in the percentage of our sales representing pump supplies. To provide some additional color from Q4 2014 to Q1 2015, we experienced a 37%drop in pump shipped, and our gross margin dropped from 37% to 23% sequentially. We experienced a similar decline from Q4 2013 to Q1 2014 on a relative basis. Keeping in mind the impact of our voluntary cartridge recall last year, pump shipments declined 28% sequentially during that period, while our gross margins dropped from 12% to a 11%sequentially. However, the gross margin in Q4 2013 included a recall cost of approximately 13 percentage points, and the gross margin in Q1 2014 included cartridge recall cost of approximately 4 percentage points. Similar to prior quarters, our Q1 gross margin was also impacted by factors beyond pure manufacturing related items, such as our percent of sales channel to distributors, where we generally do not capture infusion set revenues and their positive gross margin. The percentage of sales representing pump supplies, which have a lower gross margin than t:slim, a changing mix of third-party payors with a varying level of reimbursement, and after shipment cost, such as warranty and training cost. For these reasons, we continue to anticipate variability in our gross margins in future quarters, as we experienced quarterly fluctuations in sales volume, a changing product mix of sales, and as we scale and adjust for manufacturing operations and processes for higher volumes and to include new products and additional automated manufacturing equipment. Looking at the rest of our P&L, our operating loss for Q1 was $20.4 million compared to $20.8 million for Q1 2014 and $17.5 million for Q4 2014. Our operating expenses for Q1 were $23.2 million compared to $21.7 million for Q1 2014 and $24 million for Q4 2014. Our operating loss includes non-cash stock-based compensation. During Q1, we recognized stock-based compensation of $3.8 million compared to $3.8 million in Q1 2014 and $3.9 million in Q4 2014. The increase in our operating expenses on a year-over-year basis was primarily associated with the head count growth in our commercial organization, as we expand it from a 36 territory footprint to a 60 territory one. On a sequential basis, our operating expenses decreased primarily because lower employee-related costs, such as bonuses and sales commissions in Q1 compared to Q4. Our operating expenses in Q1 only increased 7% year-over-year, while our revenues grew 53%. Importantly, this leveraging of our operating expenses has resulted an improvements in our year-over-year operating margin, which we expect to continue to see for the remainder of the year. Our operating margin for Q1 was negative 166% compared to negative 258% for Q1 2014, and negative 98% for Q4 2014. With respect to cash and cash flows, at the end of Q1, our cash and investment balance was approximately $118 million. I’m pleased that during Q1, we were able to successfully raise approximately $65 million in net cash from an equity offering, and we were able to amend our debt agreement with CRG to extend the interest-only period on our debt for March 31, 2018 to December 31, 2019. Our cash and investments during Q1 increased sequentially from Q4 2014 by $49.1 million. Including $65 million in net cash raise from the equity offering compared to decreases of $18.7 million in Q1 2014 and $12.6 million in Q4 2014. Cash utilized in Q1 included the payout of incentive compensation recognized in 2014, such as sales commissions from Q4 2014 and 2014 annual bonuses for our other employees. Moving onto guidance. We are reaffirming our previous guidance with respect to sales and operating margins for 2015. We still expect our full 2015 sales will be in the range of $70 million to $75 million. This represents an annual sales growth of 41% to 51% compared to 2014. We expect our 2015 sales will see a quarterly pattern similar to what we experienced in 2014, with sales being weighted more heavily towards the second-half of the year and in the fourth quarter, in particular. Included in the revenue guidance, our revenues for t:flex sales of $1 million to $3 million, we plan to begin shipping t:flex pumps in June. Our guidance does not include any financial impact of our t:slim G4 product, because that product remains under FDA review and is not yet approved for sale. Moving onto operating margins, we expect to see our operating margins for 2015 to be in the range of negative 100% to negative 110%. This includes non-cash stock-based compensation expense, which we currently estimates could range from $13 million to $14 million. With respect to our cash, we expect our current cash, investments, available debt, and proceeds from the exercise of options and warrants to be sufficient for operating needs for, at least, the next 12 months. Key factors influencing our cash flow expectations and ultimately our profitability timeline and potential capital needs involve territory productivity, our ability to secure regulatory approvals, and successfully commercialize potential new products, and our ability to gain leverage within our operations, as sales expands and new products in currently in development rollout. Our cash burn for the remaining quarters of 2015 will be dependent on such factors as quarterly sales and gross margins; expenditures associated with our commercial activities, such as t:flex launch activities and trade shows; R&D milestone payment; and general head count growth as our operations expand. And with that I’ll turn it back over to Kim.

Thanks, John. I’m very proud that in a relatively short period of time where the 20,000 people have chosen t:slim to manage their insulin therapy, and more than half of those purchased their t:slim in the last 12 months. We continue to ask our customers who purchased t:slim if they were previously managing the insulin therapy with multiple daily injections or pump and very consistently, approximately 50% have reported being new to pump therapy. As we have shared in the past, it’s a strategic goal of our company to expand the insulin pump market has only 27% of people with type 1 diabetes using insulin pump. So we’re very happy to see this trend continue. After 2.5 years of scaling commercial efforts, I believe Tandem has built a strong foundation from which we can continue to grow our business. As John mentioned, we anticipate the year will follow a typical seasonal pattern and we will be back-end loaded with Q4 being the strongest. We’re making great progress with our sales efforts, but we also have tremendous future potential with the launch of our next commercial products. And as we work to develop new products that will further support the diabetes community. With that, I’ll turn it over to the operator for questions.

Thank you. [Operator Instructions] Our first question comes from Bob Hopkins of Bank of America. Your line is open.

Hi, thanks. Can you hear me, okay?

Yes, here we’re fine.

Hi, Bob.

Great. Good afternoon. So I just want to ask a couple of quick questions on t:slim G4. First of all in this quarter, do you get a sense that there is any potential customers that are waiting for that product, do you think that had any impact at all in your Q1 sales, or is that not something you’re seeing?

I would say, there is probably not something that we’re seeing and we certainly can’t quantify it, but not being people who do want that feature may hold off. But we’re certainly being see it within the quarter, we can’t quantify what that would be.

Okay. And then, what’s the earliest you guys would be ready to launch that product?

The earliest date is probably…

It’s probably 30 days following approval would be the earliest.

Okay, but it won’t - okay, but if you got approval at the earlier end of your range, you could be out in a full launch just 30 days post.

Sure, and just as reminder, after we launch we actually have a 30-day period of time typically in which people after they place their order were going through an insurance verification process, and so shipments would follow sometimes shortly thereafter, but for our launch to commence on it is pretty quickly on that vehicle.

And our 18-month mark is what, through the year?

Through the end of the year.

End of the year, yes.

But it sounds like you guys are pretty confident in the regulatory pathway and that all the conversations with FDA have been constructive. I mean do you guys feel a little more positive that it could come a little earlier in the range you projected, just want to get a sense there.

We still were going to stick with that range, because you’ll never know what could come up and so far it’s been positive. And we’ve been very pleased with the progress so far, but just getting it across the finish line, we can’t predict whether that would be early.

Okay. And then lastly just to any comments on the overall market, it’s hard for us to see sometimes, because the competitive data is difficult and obviously some of the bigger players haven’t reported. But just wanted to get your sense on any updates or information you’ve had in terms of market growth. And what you’re seeing there? Thank you.

No, I don’t think we’ve seen the update on market growth as it I think continues at the same pace, those numbers are pretty widely known. I don’t see anything really changing that. And again, I don’t know that the Vibe launch had much of an impact within our range of expectations. And I don’t think they’ve increased their market shares substantially with the integrated Vibe device.

Okay, great. Thank you very much.

Thank you.

Thank you. Our next question comes from Tao Levy of Wedbush. Your line is open.

It’s great.

Hello, Tao.

Hey, how are you doing? So maybe just follow-up to the last question, in front of the t:slim due for launch that it’s going to take maybe a month post-approval your paperwork insurance verifications in place. And how do you keep that final of new patients sort of intact so that, things don’t move around to the following quarter. So - patients who might have ordered the standard t:slim wanting the newer one.

Well, I think they probably would hold off their orders and wait. They have some discretion in whey they can trigger their renewal. Certainly, this all will be happening within the second-half of the year. So I think it will happen within the detectable reset period. So I think people will - if really want that integration they’ll sit on the sidelines till it’s available on the fourth quarter.

Gotcha. And I assume - I mean, will you have some sort of promotions or not - you can’t really market it, but I guess new technology upgrade program when your competitors had run something like that?

We won’t have an upgrade program. We basically have taken the position that you buy what you - what is available at the time and we will not have an upgrade program for those who buy and then want to upgrade to the G4.

Okay. And then just lastly, do you expect your distributor sales as a percent of revenue to kind of stay at these levels sort of like mid-70% range for the rest of the year?

This is John. Hi, Tao. It’s probably going to be sort of in this range. I don’t see it dramatically changing. Nothing is going cause it to do that besides just our brick-and-mortar work and trying to get contracts and then trying to move volume through the contracts that we have today.

Perfect. Thank you.

Thank you. Our next question comes from Kristen Stewart of Deutsche Bank. Your line is open.

Hey, guys. How are you guys doing?

Good.

Hi, Kristen.

So I just want to clarify one, the Simmons - Susan had. So, Susan, with the G4 Pump the revenue recognition followed 30 days after the shipment or at the insurance verification and at shipment, is that correct?

It would be a shipment to a direct patient as well as to distributor. It’s actually upon receipt to the direct patient. But typically to your point we’re going to announce launch and then there will be at least a 30-day period. And then that’s really when the insurance verification process is taking place. So you can imagine from the time we get approval, it’s going to be 30 to 60 days before we have our first commercial sales recognizing revenue.

Okay.

It will be 30 days, and then the sales force would probably be going actively marketing it. And then as orders come in, it’s generally a 30-day process to get through the insurance cycle.

Okay. And with the approval of t:flex, I’m sure while it’s - while the launch is in plan until 2Q, I was just wondering if you can give us some perspectives on anything you heard in the field, I guess, just as your sales people, obviously can note that it has been approved, not launched, or endocrinologists enthusiastic and waiting about it. How do you feel about that products and the confidence in I guess $1 million to $3 million in sales you’re modeling in for the year?

Well, I think we figured out, we have 10% of our current customers who are type 2, so there is a demand on the type 2 side, and we do have a bit of a backlog that’s build up, because people are aware that it’s coming. So I am pretty excited that we can make those numbers and it will contribute that kind of a range for the overall revenues of the year.

Right.

Really, Kristen, we haven’t begun marketing it in any active way. So it’s hard to see whether we’re creating any enthusiasm and endocrinologists are not.

Yes, you could have some demand though in a backlog. And then just lastly, my question on the t:slim G4, what’s really left I guess to do now. You had commented that the FDA came in for the site inspection, all the questions are closed. What’s just sort of the process between now and the FDA granting approval, anything…?

Originally there was a list of questions. And the efficiency is obviously that you got to respond to. So it’s cycling to those - answers to those questions that are really left to do. We made some progress on that, but there are still some questions. And we haven’t really gotten to the specifics of what those questions are, but those are all part of the follow-up of additional information and testing, and information that the FDA requested. And so if we’re satisfying that, that’s the last part of the - sort of the response that we need to get to them.

Okay. But from a manufacturing perspective, it sounds like the FDA is fine with the process and no issues on that end.

That’s correct.

Great. Perfect. Thanks very much. Congratulations on the quarter.

Thank you.

Thank you.

Thanks.

Thank you. Our next question comes from Tom Gunderson of Piper Jaffray. Your line is open.

Hi, Kim, I’m wondering about G4 and your comments on integrated CGM or even using CGM on 30% of people who are on pump. In the past, we’ve talked about there is a certain segment out there that wants integrated CGM. Do you have a sense of what that might be not at the beginning like most of the questions have been here? But if we look into 2016 or a little bit further, what percent of your product do you expect might be integrated CGM?

We really haven’t done any work that would give us a forecast looking out over time, Tom. We think that probably will mirror the market in terms of those that want that integrated feature, but we really haven’t done a forecast. It’s forward-looking that would give you any help on that question.

Do you - any sense of maybe objections you’ve had in the past or issues that the sales force has brought up, that this will help you gain share above and beyond what you’re already gaining by…

Yes, absolutely. People want that integrated system. And that’s been an objection that we’ve been fighting against. So as we compete against MiniMed, obviously, they have the only integrated system to-date. And so that’s the major objection that we fought with maybe 20% to 30% of their customer base that were considering t:slim. And so we would lose customers that would potentially be t:slim customers to that objection. So I think it’s going to be helpful product addition. It’ll make us competitive in that segment which is probably as I said, anywhere from 25% to 30% would be the pumping market.

And then my last question ties into something Bob was asking about on the market. And that is having something that’s easier to use, simpler, intuitive. One of the thoughts was that this was going to increase the penetration into the other 70% plus of T1s to start using pumps. Have you seen any indication that the growth of penetration is accelerating?

Well, I would say our customer base is still on the margin, looking like a 50% of the MDI is the new to pumping experience type patients, which is going to grow that overall market share, although were obviously a small player, with about 60% of the total market out there. But, no, I would agree with you. We continue to see ease-of-use and the ease-of-training especially that first-time training experience makes it - so that it will pull MDI patients over to using a pump.

Yes, thanks. That’s it for me.

Thank you. Our next question comes from Ben Andrew of William Blair. Your line is open.

Good afternoon, guys. Thanks for taking the questions.

Hi, Ben.

Hi, Ben.

Can you guys - John, can you talk a little bit about what you’re seeing in terms of competitive behavior and you’ve given us Simmons says the last couple of quarters about Medtronic and incentives and things of that sort. Is that same, worse, better, this quarter?

I think this quarter it’s pretty much the same story. I think the only sort of new story is the Vibe was launched in this quarter. We’ve seen mixed results on that. I don’t know if it’s just because it’s early and it hasn’t taken full effect. And so we still expect to see some impact probably for another quarter or so till we see a full impact of that. But I think the rest of the competition is pretty much the items that we talked about in the past that we’re used to dealing with.

Okay. And then, John, any perspective about the shift in the distributor mix. You’ve given us a different guidance last quarter, it’s just still there because obviously that was similar this quarter, so it’s not better, worse versus that.

Yes, it’s gotten a little better, went from 79 last quarter to 76 this quarter. Some of that is just timing of when the distributors order their items. But I don’t think it’s going to - as I mentioned earlier, it’s going to markedly change one direction or the other. I think it’s going to be a steady climb towards what our ultimate goal is long-term, which is probably a 50-50 split.

Okay. And then on the AP product, Kim, you were careful to say kind of the first version thereof. Is that first version going to be a single or dual hormone product? And what does that development path look like in terms of kind of timeframe and maybe even project cost? Thank you.

Well, it will be modulation of insulin only, so it will be some of along the spectrum of predictive low glucose suspend all the way to what we call hypo/hyper minimizer where you’re actually attenuating insulin and giving more basal insulin when needed. So it’s going to be within that within that spectrum and our first step really is to work with the FDA to outline what the clinical trial pathway looks like on that spectrum, in which end of the spectrum will lay in that first and that’s really going to determine I think the project length. The clinical trial work is probably the biggest portion of this project in things like software or hardware integration. I think that’s going to be fairly easy once we have the CGM integrated, so I think that’s yet to be determined. I’m not trying to avoid giving you specifics, but really it depends upon that clinical trial timeframe and which end of the spectrum we land out.

Have you identified a vendor for the second hormone kind of a longer-term aspect?

We really are not accentuating a dual hormone product right now. We’re really working on the insulin-only, because these strategies are near-term and are very promising, whereas the second drug for dual hormone products is very problematic. There are stability issues and there are dosing issues with whatever candidates that you look at. So the drug side of it has not kept up with the engineering side of what we can do, and so that’s longer-term project.

Great. Thanks.

Thank you. Our next question come from Richard Wise of Stifel. Your line is open.

Good afternoon, everybody. Let me come back to t:flex again, if I could, Kim. I mean, you’ve made the point several times that especially that the customer think endocrinologists are with same account, same basic approach as of t:slim. But are there - can you give us a little more color? Are there target accounts that you are able to focus on or identify that they have greater concentrations of type 2 or more open to the idea? How do you get after this?

Yes, I think there our practices that have greater concentrations. So we can get after it in that manner and we - again have not started marketing to endocrinologists on the availability of this. But I think that’s going to be a big driver. How do we get after this? Well, we think it’s the same customer base and it’s just another product for expansion, and it’s a matter of education within accounts. So we do think there is going to be a bit of support in terms of the endocrinologists for the type 2s that they’re trying to get better control for when they see the advantages of this larger reservoir and it opens up the possibility of those patients being minimal to pump therapy.

Right, and just on that point and that’s sort of where I was heading, I mean is there an identifiable population and it’s too strong to say failed or poorly controlled type 2s. I mean - and you know that that’s x-percent of the population. I mean is that the right way to think about it or it’s vaguer than that?

The total is about 1.7 million people with type 2-er who are insulin dependent.

Sure.

And it’s only about 10% of those who are probably on pumps right now. So there has been an effort obviously over the years. That’s a big segment when you annualize the dollar value of it. So we will go after that existing population that want that larger reservoir. And then we will try to expand that segment by making it available obviously, because that was number one objection that endocrinologists cited as to why they’re not putting type 1s on the pumps, since that reservoir has been too small. In the past, more convenient use pattern on the part of their patients.

Right. I want to be clear, John, again, it might silly question, but I assume that the t:flex consumable consumption revenue potential is the same as t:slim. It’s not more and just to follow on to that, does the - and thinking about gross margins, does the extra volume of t:flex trump, let’s say, early learning curve, manufacturing maybe lower margins? Did margins go up because of t:flex? Did the same go down?

Sure. So a couple of things, the usage profile that we expect these patients to use is going to be similar to the type 1 patients, that they will be utilizing cartridges and infusion sets at the same rate. The targeted usage is to have three-day therapy for them, so we typically expecting that to change out those supplies on that timing. So those folks are expected to use the same pattern as the type 1s and the t:slim users today. As far as the margin impact or the expected margin impact, we are launching a new product and anytime you launch a new product you will expect to see some hiccups along that process. I do believe as you mentioned that we are pretty much utilizing the same manufacturing. The design is fairly similar, just a larger capacity device. So we should be much further along the development scale of the gross margin that we did with t:slim launching out of the gate. The material costs are going to be slightly higher, because of the slightly bigger device. So that’s going to be slightly higher. I think all set and done, bottom line is probably going to be similar margin profile to what we see today with t:slim and then it is the same pricing. So there isn’t any increased premium pricing because of it, so it’s pretty much the same.

Gotcha. And just last for me, maybe if you all could comment on - you talk about the Vibe a little bit, maybe the Medtronic 640G launch, any impact in the quarter there? But maybe, Kim, you could help us reflect on that Medtronic seems to be pretty active? They have this new partnership with IBM. I’m not sure fully what that’s going to mean, but developing real-time personalized care plans, diabetes management databases. I mean is this - help us - I’d love to hear your thoughts on what this means to the industry, for Tandem going forward? Are these initiatives you need to be involved-in in some way? Thank you.

You know what; we really don’t yet see what the strategic logic is behind these partnerships, so it’s very early. They’re press release oriented than they actually are unmet needs that we see in the marketplace. Certainly, the automation of insulin along the spectrum of 530G, the 640G, the 760G, that’s what we’re really focusing our efforts and where we think the most benefit is going to be, because you’re going to get better tangible clinical outcome from those. We’re trying to monitor where Medtronic really is in a launch of those products. The 640 series depends upon a new platform that has not been approved yet by the FDA here in the States. So we’re continuing to monitor those products and are probably more concerned about that spectrum of clinical impact than we are these other announcements that they’ve been making.

Gotcha. Thank you.

Thank you. Our next question comes from Shaun Rodriguez of Cowen & Company. Your line is open.

Hey, guys, good afternoon. Thanks for taking the question. So first just to clarify, on the t:flex commercial launch, what’s the incremental time you’re seeing between the approval there in January in the start of shipments? And June, I believe I’m just trying to understand how those period compares to the expectations for the G4, which I think you’re saying could be 30 days, not a big difference, I’m just curious about what could drive the G4 timelines beyond the 30 days?

Sure. The t:flex was actually approved in a very short period of time. I think that’s one thing, it was really expedited through agency review process. So it did come in a little sooner than expected, and really just building up our manufacturing and preparing for the launch of that product. We also felt that that was important to launch our updated software for the t:slim first, because there is training efficiencies that we really can recognize, because both the t:flex and the updated t:slim software are really based on that same core software platform. And so we wanted to make sure that we were launching that into the market first, so that we could train healthcare providers and really t:flex in as an incremental difference. So we’re just more on the succession of things that we needed to do within the organization. When we look at the t:slim G4, that’s something that we’re actively prepared to launch and really it’s going to be an additional product offering. And so we think it’s going to be a shorter period of time.

Okay. That’s very helpful. Thank you. And sorry if you discussed this, but on the longer-term pipeline, what’s the update on progress towards securing an algorithm partner? How we should think about timing? And also an update on timing for Bluetooth capabilities, and I suppose somewhat related to wellamed [ph], how should we think about integration with the next generation of Dexcom centers - sensors?

Well, we really have announced our plans on the next generation, Dexcom sensor integration plan, we certainly want to work with them. It’s central to our AP program driving - we need that sensor to drive those algorithms. And we have not given an update on the specificity of what the algorithm partners that we’re using and what the progress is of securing licenses and that sort of thing. So we’ve been pretty vague in the outline of the program.

Okay, thanks. And lastly, quickly, just make sure I got this right. So the pacing of revenue for the year was the commentary there that you expect similar pacing to last year and this is even considering obviously t:flex contributions will be late in the year?

That’s correct. We expect somewhat better.

Thank you.

Thank you. Our next question comes from Erik Shoger of Northcoast Research. Your line is open.

Hi, thanks for the question. First one another kind of question on Vibe. I was just curious you talked about that you didn’t see a ton of impact from it in the quarter and certainly it’s a seasonally slower period of year. But did it give you any read-throughs as you think about launching the G4 product later this year in terms of what animus was able to do with their integrated product?

Well, there is a lot of clarity about what the size of their sales force is and what resources they really brought to bear in that launch. So there are things outside the product feature that really probably impact maybe the lack of impact that we saw during the quarter. So, I don’t know that we can take bunch away from there - from their experience. All I know is that, it’s the single most asked for feature in our market research and we hear it from the field. And we expect it to be a significant incremental benefit to our sales efforts.

And I guess, the reason I ask is, because certainly integration is important and obviously a patient that wants integration could get it with the animus Vibe. But do you think it’s not just integration, but it’s the feature set that t:slim provides plus the integration that people really balance?

Yes, I believe that’s true, because the Vibe really is sort of appealing to a pediatric subset people who are looking for a smaller pump, and it has a lower volume. So it serves as a very limited segment probably only about 30%, 35% of the market and their share reflects that. So I think our wider, broader appeal plus that added feature will have much greater impact in the Vibe house.

Yes. Okay. And then maybe one last one for John. I think you said pump sales were 81% of total sales in the quarter. And then you - I missed the comment you said - you gave about your expectations for that number for the rest of the year. Can you sort of repeat that?

I expect it to be very similar. I think as our installed base grows, I expect revenues that’s contributed by the supplies to grow. But I expect that the pump sales and shipments during the remainder of the year to be a much higher and have a much more greater impact.

For sure, okay. Okay, great. Thank you.

We have another question from Kristen Stewart of Deutsche Bank. Your line is open.

Hey, everybody. Thanks for taking the follow-up. I was just wondering if you could give us an update on some of the managed contract wins. I know last year we talked a lot about Kaiser, and then how that’s I guess been progressing relative to your expectations. And then just thinking ahead to what extent you the t:flex and G4 may help you move some payors across the finish line in terms of getting a coverage? Thanks.

Sure. Hi, Kristen. I think, for us it’s really is just moving along at a steady pace. There is nothing extravagant that’s really happening because of having t:flex out there. It is just another sort of pump offering. I think it does help us having a multi-product, but I don’t think it’s been an incremental sort of big win for us. I think the reason we have seen some progress on it is because some of the contracts that we signed later in the year, last year are signed to pay dividends for us. In that Healthcare is one of those, Kaiser is another. And so that’s helping. And then, we had a contract out there for a very long time Carecentrix, that’s also one of our larger contracts as well.

Okay. Perfect. Thank you.

Sure.

This time I see no other questions in queue. I’d like to turn it back to management for any closing remarks.

Okay. It sounds like questions are over with. So I thank you again for joining us today. We have two upcoming investor conferences that we will be presenting at. The first is the Deutsche Bank Annual Healthcare Conference on May 6, which is in Boston, and then at the Bank of America Merrill Lynch Healthcare Conference on May 13, which is in Las Vegas, so we will be there and we have a hot lineup of conversations already. As for industry events, the company will be attending the ADA conference in Boston on June 5 to June 9, and the Children with Diabetes/Friends for Life Conference in Lake Buena Vista, Florida July 6 through 12, so we’ll have a presence there if you are interested in attending those conferences. So in conclusion, I’m pleased with our early momentum in 2015, and look forward to building upon it throughout the year, and we look forward to keeping you updated as the company continues to progress during our next scheduled conference call. So thank you for joining us today.

Ladies and gentlemen thank you for your participation in today’s conference. This concludes your program. You may all disconnect.