Tandem Diabetes Care, Inc. (TNDM) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care second-quarter 2015 earnings call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Susan Morrison, Chief Administrative Officer.

Thank you. Good afternoon, everyone, and thank you for joining Tandem's second-quarter 2015 earnings conference call. Today's discussion may include forward looking statements. These statements reflect management's expectations about future events, product development timelines, and financial performance and operating plans and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual events to be materially different from those expressed or implied by any of these forward looking statements is highlighted in our press release issued earlier today and under the Risk Factors portion and elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and in our other SEC filings. We assume no obligation to publicly update any forward looking statements, whether as a result of new information, future events or other factors. Kim Blickenstaff, 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 good afternoon, everyone. Joining me on today's call is John Cajigas, our Chief Financial Officer. Looking back at the first half of 2015 and the second quarter in particular, I'm extremely proud of the progress we've continued to demonstrate. A few of the highlights that stand out for Q2 are our achievement of 15.7 million in sales, representing a 53% year-over-year sales growth; our 60-point improvement in our year-over-year operating margin; the successful launch of our second commercial product, the t:flex insulin pump and continued progress with new products in development, including today's announcement of our development agreement with Dexcom for the integration of the future generation t:slim with their next-gen G5 and G6 sensors. The challenges we faced in the quarter were similar to what we experienced in Q1 namely, our high utilization of distributors. Overall, the trends of the business are quite positive and I'm pleased with our momentum as we enter the back half of the year. In particular, we've made meaningful progress in the key growth initiatives we previously discussed, continued improvement of our sales force productivity, our commercialization of near-term products and advancements of our long term product line. Starting with productivity, it's been about a year since our sales force expansion from 36 to 60 territories and we continue to see significant improvement in the second quarter. On average we shipped 19 pumps per month per territory in Q2 an increase from 14 pumps in the first quarter of this year and 12 pumps in Q2 of last year. The sequential improvement is due in part to the continued development and maturity of our sales force, as well as the typical seasonal increase. Further supporting our sales force productivity in Q2 was the strong launch of our t:flex pump. The t:flex is an exciting and unique product, as it offers the largest-capacity insulin reservoir available for people with greater insulin needs. We launched the t:flex in advance of the American Diabetes Association conference in early June, where the product was well received. In Q2 we exceeded our expectation by shipping 374 t:flex pumps. To gain a better understanding of our first t:flex customers we fielded a survey last month and there were some very interesting learnings from the 55 people who responded. A large majority reported having type 1 diabetes. More than half reported that they converted to the t:flex from a competitive brand pump. The average age was people in their 50s to 60s as compared to t:slim that has a wide age distribution. And finally, most respondents said they would have purchased a t:slim if t:flex was not available, suggesting more cannibalization than we originally anticipated. We're encouraged with the initial response to t:flex and are thrilled that it's meeting an unmet need for many people with diabetes. We also continue to believe it provides significant type 2 market growth opportunity as only about 125,000 people use an insulin pump of a potential 1.7 million people with type 2 who use daily rapid-acting insulin. Although it's only been available for a short time, we are already trending to surpass our initial $1 million to $3 million guidance for t:flex pump sales for the year, so we have increased this portion of our guidance to 4 million to 6 million. That being said, it is still very early in launch and we do believe pent-up demand and cannibalization by people who would have otherwise selected t:slim contributed to our strong post-launch sales. So we are reaffirming our total sales guidance of 70 million to 75 million for the year. We are excited about the early adoption of t:flex and believe it will be a favorable short-term and long-term growth catalyst for us among both people with type 1 and people with type 2 diabetes. At the same time we do expect increasing headwinds in the back half of the year as people anticipate the launch of our next pipeline product the t:slim G4. As a reminder, the t:slim G4 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. We submitted our PMA for the t:slim G4 one year ago and we believe we're on track to achieve product approval within our original 12- to 18-month expectations. In anticipation of the t:slim G4 approval, we may begin to see customers who would otherwise choose t:slim delay making a pump purchasing decision. It's something that makes sense intuitively, but we have limited visibility into what level this is happening now, as we are not marketing the product or taking orders for regulatory reasons. Internally, launch preparations are well underway so that we are ready to take t:slim G4 orders, process customer insurance, and commence shipments within 60 days following FDA approval. While the timing of approval is at the discretion of the FDA, we are actively working with them, and our goal is to commence shipments in Q4. The t:slim G4 will be our first integrated pump offering, which will provide the diabetes community a feature they've directly asked for since the launch of t:slim and will allow us to compete in accounts that are strong supporters of integrated pump and CGM technology. It's important to note that even following approval of the t:slim G4, we will continue to actively sell the t:slim pump. The t:flex and the t:slim G4 are exciting branches of our portfolio, but the continued evolution of today's t:slim is fundamental to our flagship product and our artificial pancreas strategy. The t:slim is sleek and small, and with its easy-to-use touch screen, you can see why it continues to be ranked number one in independent surveys for overall customer satisfaction. What isn't evident is that inside both the t:slim and the t:flex is a low-energy Bluetooth radio that holds significant untapped potential. By turning on the Bluetooth radio, we introduce the ability for t:slim or t:flex to communicate with other devices in a secure and efficient way. To do so, we look to Project Odyssey. As a reminder, Odyssey is our Web-based system that's being developed as a tool to allow users to update their pump software at home, similar to the smartphone. We're on track to file a 510(k) for this product and capability by year end. Initially, we intend for Odyssey to be the vehicle for software updates for t:slim and t:flex. In the future, we expect Odyssey to have additional capabilities, such as the ability for a user to turn on the Bluetooth radio within their phone. We are also investigating the potential of using Odyssey to provide a t:slim pump update that would provide a user the ability to integrate with Bluetooth-enabled CGM. Which devices the pump's Bluetooth radio will be able to pair with and the timing are highly dependent on regulatory questions that we are actively pursuing answers for. So as you can see, we are looking to offer our customers longer-term solutions that can change our industry for the better. Our vision differentiates Tandem, as it will allow us to provide customers with a universal pump platform and then software options to provide a customer the right insulin therapy solution for their evolving needs and better keep us aligned with the pace of new technologies coming into the market. A great example of this is the innovations within CGM. As you saw today's press release, we are excited to have expanded our partnership with Dexcom by entering into development agreements that will allow for our pump integration with the Dexcom G5 and G6 CGM systems. The G5 and G6 systems use Bluetooth radio rather than Dexcom's proprietary simplicity radio used in the t:slim G4 and fits well with the natural evolution of today's t:slim as we begin to advance the clinical applications of our technology. As a reminder, our first AP product utilized Tandem's proprietary technology platform and will partially automate insulin delivery based on CGM information and predictive algorithms. In Q2, we submitted a pre-investigational device exemption package to the FDA and will meet with the agency later this quarter to gain insight on our product design and clinical trial protocol. We'll use this information to define our first commercial AP product, but the goal is submitting an IDE to the FDA by the end of this year. In addition to our AP efforts, we also continued to enhance our flagship t:slim product offering by seeking a lower age indication for the pump. Human factor studies are underway, and we are on track to submit a 510(k) to the FDA in the fourth quarter. So overall, I'm extremely excited about the Company's progress in the first half of this year. We've either met, exceeded, or are on track for each of the new product timelines we outlined at the beginning of the year. And I'm proud that we are delivering upon our commitment to bring new and innovative products to the diabetes community, which we expect will drive sustained above-market growth. So I'll now turn the call over to John, who will provide more details on our Q2 results.

Thanks, Kim. Good afternoon, everyone. As Kim mentioned, we are very pleased with our performance in the second quarter. I'm glad to see the continuing positive trends of our sales and operating margins as we look at them on a year-over-year basis and a rolling 12-month basis. Looking at some of the details of our sales and product shipments, overall, our Q2 sales were $15.7 million, a year-over-year increase of 53% from $10.3 million in Q2 2014. This is the eighth consecutive quarter of greater than 40% year-over-year growth. Sequentially, our Q2 sales increased 28%, from $12.3 million in Q1. Our pump sales in Q2 grew 48% year over year, while our pump supplies grew 82%. Recognizing that seasonality has a significant impact on our operating results, looking at longer comparative windows than individual quarters may provide a clearer picture in understanding the progress and trajectory of our business. Our sales for the rolling 12 months ended June 30 were $59.4 million, an increase of 63% from $36.3 million for the previous 12 months. Significant contributors to the rolling 12-month performance included the continued productivity progress of our expanded sales force as well as the initial t:flex contributions. Our sales force is now is now able to capitalize on being able to promote a portfolio of products to address the diverse customer needs within the healthcare practices. As Kim discussed, the average productivity of our sales force in Q2 was 19 pumps per month per territory compared to 14 in Q1 and 12 in Q2 2014. Our average productivity for the rolling 12 months ended June 30 was 18, and year to date it was 16. Based on our current assumptions regarding the organic growth of our business and the uptake of t:flex, we expect the quarterly average productivity of our sales force to continue to increase throughout 2015 compared to last year. Due to seasonality, pump shipments are heavily weighted towards the second half of the year especially towards the fourth quarter. We expect that the full 2015 annual productivity to be at least 20 pumps per month per territory compared to 17 for 2014. Pump sales accounted for 83% of our total sales in Q2, which is in line with what we've experienced historically. With a series of new product launches expected over the next several years we anticipate the percentage of our sales from pumps to remain high. In Q2, we shipped 3,331 pumps compared to 2,235 pumps in Q2 2014. Pumps shipped for the rolling 12 months ended June 30 were 12,682, increasing 54% from the previous 12 months. Adding over 12,000 customers in the last 12 months with primarily a single pump offering was a significant achievement. With t:flex now added to our sales reps' bags, we continue to have confidence in our increasing overall average productivity expectation for our sales force. As of the end of Q2, our cumulative shipments have grown to more than 24,000 pumps since we launched t:slim back in 2012. Sales to distributors represented 78% of our total sales in Q2 compared to 71% in Q2 2014. The year-over-year increase in Q2 was primarily attributed to a distributor who began servicing United Healthcare members in the middle of the third quarter of 2014. As we've discussed in 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. Although our percentage remains relatively consistent to Q1, we continue to sign new contracts and are focusing on creating greater utilization within our existing contracts. Turning to some color on our t:flex launch, we began marketing and shipping the product in late May and t:flex pump sales for Q2 totaled approximately $1.4 million. We shipped 374 t:flex pumps in Q2 and about half of those orders were received prior to our launch. So as Tim mentioned, we do believe some of the early strength can be attributed to pent-up demand. As a reminder, we market t:flex to the same prescribers and bill under the same codes as t:slim. Some of our early conservatism around t:flex launch expectations related to the fact that pump eligibility criteria for people with type 2 diabetes can be different. They often require additional documentation and lab testing to gain in-network insurance reimbursement benefits. This is something we see in processing the insurance for some of our early type 2 customers. But as the survey that Kim mentioned showed early indications are that a significant portion of our t:flex customers are people with type 1. So we'll need more time and experience in processing t:flex pumps for people with type 2 to gain better understanding of the impact on our reimbursement expectations. Moving on to cost of sales and gross margins, our gross profit for Q2 was $4.8 million compared to $2.8 million in Q1 and $3.4 million in Q2 2014. Our overall gross margin for Q2 was 31% compared to 23% in Q1 and 34% in Q2 2014. Similar to sales, seasonality and the varying mix of products sold are some of the key factors that create quarterly variability in our overall gross margins, so looking at larger comparative windows provides a clearer view to the progress and trajectory of the contributions of our products to our overall operating margin improvements. Our gross margin for the rolling 12 months ended June 30 was 31% compared to 22% for the previous 12 months. We made meaningful improvements in our overall gross margin during that time. Volume played a significant role in this progress allowing us to leverage our fixed manufacturing costs over a larger production base. As mentioned earlier, our pumps shipped increased to more than 12,000 during the rolling 12 months ended June 30 compared to about 8,000 for the previous 12 months. Our cartridge sold more than doubled during these same time periods. Similar to prior quarters, our Q2 gross margin was also impacted by factors beyond pure manufacturing-related items, such as the percentage of our sales representing pump supplies, which have a lower gross margin than pumps, a percentage of our sales channeled to distributors, where we generally do not capture the infusion set revenues in our positive gross margin, a changing mix of third-party payers with a varying level of reimbursement and after-shipment costs such as warranty and training costs. For these reasons, we continue to anticipate variability in our quarterly gross margins in the future as we experience quarterly fluctuations in sales volumes and a changing product mix of sales and as we scale and adjust our manufacturing operations and processes for higher volumes, new products and additional automated manufacturing equipment. Looking at the rest of our P&L, our operating loss for Q2 was $18.7 million compared to $20.4 million in Q1 and $18.3 million for Q2 2014. Our operating expenses for Q2 were 23.5 million compared to 23.2 million in Q1 and 21.8 million in Q2 2014. Our operating loss included non-cash stock-based compensation. During Q2, we recognized stock-based compensation of $3.3 million compared to $3.8 million in Q1 and $3.5 million in Q2 2014. The increase in our operating expenses on a year-over-year basis was primarily associated with the headcount growth in our commercial organization as we expanded from 36 territories to 60 territories, which we completed in the first half of last year. On a sequential basis, our operating expenses were relatively flat despite an increase in certain variable costs such as commissions associated with an increase in our sales. Our operating expenses in Q2 only increased 8% year-over-year, while our revenues grew 53%. Importantly, this leveraging of our operating expenses has resulted in improvements in our year-over-year operating margin, which we expect to continue to see for the remainder of this year. Our operating margin for Q2 was negative 119% compared to negative 166% for Q1 and negative 179% for Q2 2014. On a rolling 12-month basis, our operating margin was negative 127% compared to negative 186% for the previous 12 months. The improvement in our operating margin was primarily associated with the growth in sales, improvement in our gross margin, and our operating expenses growing at a much slower rate compared to our sales growth. With respect to cash and cash flows, at the end of Q2 our cash and investment balance was approximately $100 million. Our cash and investments during Q2 decreased sequentially from Q1 by $18.6 million. The cash utilized in Q2 was higher than previous quarters, primarily due to the timing of sales and collections within Q2. During Q2 our sales were heavily distributed towards the latter part of May and June. Factors contributing to this distribution included the launch of our updated software in April as well as the launch of our t:flex in May and the impact these product launch announcements had on the timing of purchase decisions by potential customers. Moving on to guidance, we are reaffirming our previous guidance with respect to total sales and operating margin for 2015. We still expect our full-year 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. Included in the guidance now are t:flex pump sales of $4 million to $6 million, which is an increase from the $1 million to $3 million previously provided. This increase in our sales expectation is primarily associated with the early success we've seen with t:flex among people with type one diabetes, while still recognizing there is a potential reimbursement challenge for people with type two. Our guidance does not include any financial impact for the t:slim G4 because that product remains under FDA review and is not yet approved for sale. We expect our 2015 sales will see a pattern similar to what we experienced in 2014, with the remaining sales being weighted more heavily towards the fourth quarter in particular. However, as Kim mentioned, we recognize that potential customers may be anticipating the approval of our t:slim G4 product, and that could affect the timing of their pump purchasing decision and our revenue distribution across the last two quarters of the year. For instance, after we receive FDA approval, there is likely to be a short-term disruption in our typical pump order to shipment process. With the availability of t:slim G4, potential customers in the queue to receive t:slim or t:flex pumps may reconsider which Tandem pump is the best fit for their needs and include t:slim G4 among their choices. This reconsideration may include additional discussions with their physicians, nurse educators, and may involve the need to obtain a different prescription, delaying the timing of their purchase. Moving on, we expect to see operating margin for 2015 to be in the range of negative 100% to negative 110%. This includes non-cash stock-based compensation expense, which we currently estimate 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 will continue to be sufficient for our 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 approval and successfully commercialize potential new products, and our ability to gain leverage within our operations as sales expands and new products currently in development roll out. We do expect to gain leverage from having multiple insulin pump offerings that primarily target different demographics within the diabetes community and healthcare practices. Especially in 2016, when our sales force will have t:slim, t:flex, and, hopefully, t:slim G4 to provide healthcare providers with a diverse product choice that shares a common, easy-to-use interface. We also expect to see our gross margin trajectory increase as sales increases, and that we'll reach our long-term goal of 60% gross margins in three to five years. Where we fall within this range is highly dependent on the key factors I just outlined that impact cash flow expectations. As much of our manufacturing infrastructure is designed to service t:slim, t:flex, and t:slim G4, increasing manufacturing volumes through organic growth and through incremental sales volume supplied by new products should have a positive impact on our overall gross margin. Additionally, we intend to continue managing our operating expenses to leverage our early infrastructure investments. Our cash burn for the remaining quarters of 2015 will be dependent on such factors as quarterly sales and gross margin, expenditures associated with commercial activities, including the possible product launch activities and trade shows, a R&D milestone payment, and general headcount growth as our operations expand. With that, I'll turn it back over to Kim.

Thanks, John. The momentum we've demonstrated in the first half of the year is encouraging as we continue to see strong adoption of the t:slim pump and are seeing strong early adoption of the t:flex pump. As John mentioned, we anticipate the year will be back-end loaded with Q4 being the strongest but also recognizing the potential for variability in our results, depending on the specific timing of the t:slim G4's anticipated regulatory approval later this year. A strategic goal of the Company has always been to offer a portfolio of products to address different needs of the diabetes community. It started with the t:slim pump, which continues to expand the insulin pump market, with approximately half of new customers reporting being new to pump therapy. Today the launch of the t:flex pump offers a unique solution to people's greater insulin needs and marks our transition from a single product to a multi-product company. As we are halfway through our third full commercial year as a Company, I look back and am very proud of all that our employees have accomplished in a relatively short amount of time. In addition to strong sales growth and significant organization expansion, we have also made tremendous progress operationally and in developing, manufacturing, and introducing new products to the market and providing number-one customer-rated support. All of these achievements not only reaffirm Tandem's position for sustainable long-term growth as a business but also our commitment to improving the lives of people with diabetes. With that, I will turn it over to the operator for questions.

Thank you. [Operator Instructions] Thom Gunderson from Piper Jaffray.

Hi, good afternoon everybody. So, Kim I want to focus on sales productivity. It keeps going up, as you predicted and you forecast for the end of the year. I'm curious, as you have your second product now and you're getting ready for your third product, where do you see productivity topping out? In other words, when do you think you might have to or at what level would you have to add more salespeople to keep that growth going?

Well, we suspect it's probably going to top out in the 20s. Low to mid 20s would probably be a good estimate of where that's going to top out. And obviously, we don't have the experience yet but we are seeing improvement and movement in that direction. We are taking a look at under-served territories right now territories where we believe there's more potential than we're currently addressing with the headcount available. And we'll keep you posted on when we think that we need to make another expansion. It won't be as grand as the last expansion but I think it will contribute additional acceleration of sales when we do make those headcount additions. So we're beginning to think about that. You're looking for some timing on that, but we're just beginning to think about that and look at where those territories might be.

Got it. And then, just so we have a sense of where you are now that average of 19, what's the range? Is it a two-unit range, a 10-unit range? What are the top guys doing?

Well, it is a large range and the top guys are doing extremely well. That said, I'm not going to give you a quantified breakout on it but there is an extreme range and we have some people that are doing extremely well.

Okay. And then I'll finish up. You've got AADE next week. Your product is arguably and by the surveys the easiest to use, which is something that the diabetes educators, I'm sure appreciate. Are there any papers planned or any training sessions planned that would increase the knowledge that these diabetes educators have of the product and how easy it is to use?

Sure. We're actually hosting a large event, Thom, on Wednesday, August 5. At that event, basically, we go through the t:slim as well as the t:flex. We have a number of training sessions that are also set up to help focus and to take people through what you were mentioning the ease of use of our pump, because it is something that we really focus on at the trade show because it differentiates us.

Got it. Thanks, Susan. I'll go back in queue. Thank you, guys.

Thanks Thom.

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

So I was just wondering if you could maybe provide, I guess your best guess at this point, since I guess it's sort of be as to your thoughts on how much variability there might be on people waiting maybe just in terms of thoughts on combined usage with pumps with glucose monitoring just in terms of the sensitivity you're thinking about in terms of how many people may be delaying as they're thinking through, what variability there might be around that $70 million to $75 million estimate that you see for the full year or how much room you think maybe t:flex may give you, whether or not the full raise is all cannibalistic or whether you think there might be some incremental upside in that number there, too, that gives you a little bit of cushion.

Well, I think the t:flex does give us upside. Again, this who is waiting for the product and who could cannibalize this switch-over from t:flex, we know that there was a significant amount of that. And always, when you have these new product transitions, there is a little bit of choppiness because people are waiting, and we have a lot of people in the queue that are waiting for the integrated CGM. So we don't have a good quantification, good hold on it. We'll know when our results come in what did happen. But we definitely know that people are sitting on the sidelines, waiting for the G4 and waiting for that product before they pull the trigger.

And Kristen, it really depends on when we would get the approval of G4, what the timing of it would do and what it would impact on a quarterly basis. If we happen to get that approval sometime early on in the year, I think before the remainder of this year, I think its impact on the year and the $70 million to $75 million will be minimal as far as people waiting, because we will be able to service those customers within 60 days of approval. So we do intend to begin shipping product within 60 days. So if anybody's holding back, 60 days after approval, we expect to have their order fulfilled.

Okay. Can you maybe just remind us the process between where you are now -- I think last quarter you had said you were inspected by the FDA. That all went well, and then I know you can maybe ship within 60 days, but I guess you can't necessarily recognize revenue within 60 days. I think you have to wait until another 30 passes. Is that right?

At first, we could recognize revenue that is at the 60-day mark.

You're right.

The fact that we would take orders in advance of that. So if you look at the process, 30 days after we receive approval, we anticipate taking customer orders and beginning to process their insurance. That's typically a 30-day process, which puts us to the 60 days when we'd actually ship the product, and that's when you get that revenue recognition piece of it. As far as where we are with interactions with the FDA, it continues to be positive and we continue to be in the Q&A portion of it. It's hard to tell, though, where you are in that process. But to your point, the manufacturing portion really was wrapped up. We did have our site inspection. It went well, and all the questions associated with it are closed. So we're just in the remaining question portion, and we don't know the remaining timeline.

Yes, I've said we feel like we're grinding towards an endpoint, as we have with other filings that we've had. So we feel like we're in the neighborhood of getting across the line.

Okay. Hopefully, you'll cross that line soon, so push forward. I'll get back in the queue. No deflate-gate.

It would be peachy if we got it.

It most definitely would. Thanks, guys.

Our next question comes from Bob Hopkins from Bank of America. Your line is open.

Hey, guys, this is actually Kevin Strange in for Bob can you hear me okay.

Maybe just to start with your announcement this afternoon of the Dexcom agreement. Can you just put that in perspective for us a little bit? Does this agreement just give you access to future generation sensors made by Dexcom? Or should we think about this as a deeper relationship with Dexcom to develop future products?

Well, yes, it does give us access to future generations, which we're trying to stay up with their latest generations, obviously, as they make improvements and improve sensitivity and interferences and so forth, which does make it a better product. It also makes it a better product for our AP program, so those generations are going to be a part of what we do with our artificial pancreas program. So that is a deeper relationship, because we both want to get to that automated insulin delivery, both the shutoff aspect and then turning on. A two-step process, probably, in terms of how we develop those products. But I think it's signaling a deeper relationship, getting just beyond the display factor into the control factor.

Okay, that's helpful. And then on the competitive front, one of your competitors made some positive comments earlier this quarter about the performance of their Vibe sales in the quarter. I'd just love to get your perspective on what impact, if any, the launch of that product is having on your business, and maybe even more importantly, if there's any impact from that product on the overall pump market that you're seeing in those far.

Well, within our range of expectations as to how we thought it would do, I don't know that I've heard that they've quantified how well it's doing. But it is serving a niche, and it is serving a patient population that does want that feature, which is why we're in that race to be the second to market with an integrated product with Dexcom. So I think the Vibe is doing, from what we can tell and what we hear from them, it's doing well. But it hasn't hurt our numbers.

Okay, thanks for that. And then lastly, just on the contracting front, are there any direct contracts, meaningful direct contracts, that are in the pipeline that are being worked on that we could possibly expect here in the next 12 to 18 months that might meaningfully move the needle?

The larger plans that we've talked about out there are Anthem and Aetna, and you might know they're all involved in merger mania. So I think for us, it's really just business course as usual. We are signing other contracts as we move along, but the two major players are still moving along at a pace that I don't see that happening any time while they're in these merger discussions.

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

Hi everybody good afternoon. Maybe we could start off with guidance. John just you had a $70 million to $75 million range that included one to three of t:flex. You've obviously upped that. By definition that would seem to suggest a slightly more cautious-- still wonderful, but slightly more cautious outlook for t:slim. Can you help us understand the moving pieces there and why the guidance range has basically stayed stable despite, clearly, a stronger out-of-the-gate performance from t:flex?

I think it's primarily because the t:flex has addressed a higher proportion of the type 1 population than we had assumed. So really, it's as if a t:slim was sold to these customers but it's a different product, so some of the early success has been on the type 1 side. I do believe that the type 2 has gone a little bit better. I think we're probably more comfortable to the point that we've raised the overall estimate of it. But at this point, it's still early and with our expectations on what we think are going to be challenges on the reimbursement side, I think it was one month worth of sales, of June shipments. I think it's still a little too early for us to commit to a higher expectation for t:flex and a higher overall expectation. But we'll play it out and see how the rest of the year goes. And as we move along, if we feel that we're comfortable raising expectations, we'll do it at that time.

All right. And I wanted to continue on with t:flex. Again early, but very successful start, just a few questions, if you could just give us a little more color just talking about the early experience. Are you seeing the same mix of distributor direct here? And you talked about the insurance hurdles. I wanted to ask about that. And are they just in these early weeks less, more than expected, as expected? And maybe just-- I'll just ask a couple of these. Are you opening new accounts with t:flex, or no, the majority's in existing accounts?

Let's start with just the success of t:flex as far as the reimbursement process. I think it is moving as we expected. I think some of it moves faster but it is really plan-specific and so some patients move into the queue quicker and get through it quicker. Others are in the process long and they do go through distributors. There's still an equal proportion to a distributor mix as our t:slim. So I think it's still a little early and we're talking only about 300 customers at this point and our survey data was on the first maybe 100 to 150, so it's a small portion that we're making our assessments on at this point. So again, it's still too early for that.

Yes. And the distributor direct mix and the new account, old account thing?

I think it's a variety. Obviously, having two products in the bags of our sales reps has helped them open some doors. I've heard of one specific circumstance where someone has called back and asked them to, to talk to us about it. And so that has helped open the door and that opens the door not just for t:flex, but also t:slim and that's part of our overall strategy is having multiple products being able to access patients with diverse needs. So that really is what we're trying to do here and I think it is helping. It's hard to quantify; it's hard for me to say it's 10% of our business or 50% of our business. It's just too difficult at this point, too early.

Right. And gross margins on t:flex, I think you've said are the same as t:slim, basically?

The price points on the ASP are exactly the same. The codes that we utilize are the same. As far as the gross margin, I haven't gotten to that level of detail but the manufacturing is generally the same, the pumps are generally the same, the cartridges are slightly different. I think I mentioned on the last call we do expect some early noise as we scale up that product, and we did have that happen here in the second quarter to a little extent-- not meaningful to the overall piece because of the small volumes. But for the most part, it's expected to be in the same range as t:slim.

Got you. And just one last one for me, obviously a great job controlling OpEx this quarter. But just thinking about gross margin and I appreciate your perspective in talking about the rolling 12 months; I think it's very helpful as a reminder. But I think you've made the point many times that 2016 is where we're likely to see more gross margin expansion. As the new products are all launching, you get the extra productivity, etc. But so scale, volume-- but I think you mentioned something-- at least I don't recall hearing the new automated equipment. Can you just remind me what that's about and what impact that could have on gross margin and when? You've called that out. Thanks so much.

Sure. Realize that we've launched our products in 2012 so it's roughly three years. So during the last year or so, we've been scaling up as we move along. We're making improvements in the manufacturing that have increased our efficiencies and have contributed to the gross margin improvements. I think we are now moving towards having three products. We are preparing to launch G4 here in the fourth quarter. And that is three products that need to be addressed, one of which is a PMA product which has slightly tighter controls on being able to make changes to the manufacturing line as we move along. So we are moving towards increasing our capabilities to deal with two products, one of which is a -- three products, sorry -- one of which is a PMA product and two of which are 510(k) products. And so we're just trying to create some flexibility and create some advanced preparation to the volumes we expect to see going into 2016.

Got you. Thanks very much.

Our next question comes from the line of Jeff Johnson from Robert W. Baird. Your line is open.

Thank you good afternoon Kim, I just want to start with you. I don't think I heard timing on G5. Any mile markers you can give us over the next 12 or 18 months? I don't know what we should be thinking about progress there on the new agreement.

No, we haven't given any timing. That's really highly dependent upon what's going on in our AP program. We really haven't laid out milestones and timing for that, other than our pre-IDE that I mentioned. So no, we don't have any timelines laid out.

All right. And with t:flex and t:slim both with the BLE, would it be fair to think both would be game for potential integration with G5 in any future iterations from there? And does it make sense, as you're starting to see maybe some skew towards T1 with t:flex, to try to integrate that with G4? or is that just going to be too old a technology by the time you'd get through that kind of approval process?

Well, technically it's possible what you're describing, so I mean, we are thinking about that. That's in our development plans, and it's very technically possible. As far as t:flex goes, it's probably going to be an orphan in terms of CGM integration.

Yes, and to Kim's point, G4 is a separate radio, so there isn't a pathway for t:slim or t:flex to have that integration capability. Where there's the potential is utilizing that Bluetooth radio, which is really more in alignment with the future generation Dexcom products. So that's the pathway there.

Yes, understood. And then the last question I had, I just didn't hear a number, maybe, on -- and maybe you don't update it quarterly; sorry if you don't -- percentage MDI versus competitive conversions?

It's still about 50-50. We haven't seen much of a change there, yes.

All right, very helpful. Thanks, guys.

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

So a couple of questions on my end. If you get the lower age for the t:slim -- when you filed, I assume you will get that -- will you seek for younger age for the integrated product when you eventually get that?

At this time we don't have plans for a lower age indication for the t:slim G4 or for t:flex.

Any reason why not?

No, at this point, we really think there's significant opportunity with t:slim, and we're looking to really evolve our product pipeline based on that evolution of t:slim.

And if you think about the U.S insulin pump market, it's in the latest market research data. Do you think that started to grow a little bit faster, or penetration has finally moved beyond that 30% that we're always quoting?

Well, we don't have really good data that we get. But just from the industry information that we see, that Insulet and we are growing that portion of the type one market that are not currently on pumps. So we're doing that. It may be at fairly small scale to have, considering the base of users and non-users out there. But I think overall, the market continues to grow and continues to grow at a pretty healthy pace.

The question will become what does t:flex do on the type two side? Does it open up people to the pumping technology that previously didn't look at it?

And a lot of that will depend on insurance? Is that your learning so far?

Correct economics insurance is going to be a big portion of whether or not people decide to go on the pump technology.

Okay. And then just lastly, just strategically, why aren't you offering some sort of upgrade, rebate type incentive so that you don't run into some of these potential headwinds in the second half ahead of your G4 launch?

Well, upgrades are something that we actually put a lot of thought into. And as a young company without other business units, we had to make a decision on how to best manage the business and not offer upgrades. We're trying through the Odyssey program to make the software upgradeable on t:slim in the future, which should answer and help that sort of product life cycle. But at this point, we're not offering the G4 upgrade from the basic t:slim.

Okay, great. Thank you.

Our next question comes from the Ben Andrew from William Blair. Your line is open.

Good afternoon John, just a question on gross margin for you. Can you help us think about what either the gross margin might have been, or maybe impacted revenue if that distributor percentage had stayed the same or trended lower in the quarter, because that continues to climb. And obviously, there's a lot of positives to that, but there's some negatives that go along with it.

It really would be on the ASP side of things, and as an example, a pump for a distributor is roughly $4,000 as a charge ASP and for a direct, it's anywhere from $4,000 to $5,000 so it's really going to be whatever pickup that is. Obviously, most of our business that's on the larger volume is closer to the-- is the $4,000 to $4,500 range on the direct business. So there's going to be that pickup and that's what the pickup would be.

Yes. And part of what I'm getting at is obviously, the infusion sets and the extra revenue there. And do you make any money at all on those infusion sets when you do get them?

We do. There are positive gross margins for the infusion sets and currently there is negative gross margins for the cartridges.

Okay, right, okay. That's all the same. And then switching gears on the AP product, Kim, I don't know if you've talked about it. Is it going to be a one- or two-hormone product?

It's going to be a one-hormone product. It will be regulating the administration of insulin. Shutting it off would be the first step, then turning it on if you're going low.

Okay. And how far along are you? I know the software's probably written but how far along are you with the ability to convince FDA from a clinical perspective that that product is ready? And I know you're trying to define that path now but is that a two-year process? Because I know Medtronics has been working at this, the different projects, for 15 years so, is this a two- or three-year clinical program?

They seem to be more amenable to algorithms that do these kinds of changes both increasing insulin and decreasing insulin. The pathway isn't going to be defined until we get in front of them and begin to talk to them. I think the more problematic piece of this is actually turning on insulin. That has-- would be the second step, so we don't have a timeline at this time. And we-- I'm optimistic, though, that the climate has changed and there is amenability to looking at these algorithms for both these pieces of automated insulin that we're looking at.

Okay, great. And what do you think the timeframe is after the G5 is approved when you would be in a position to bring forward a G5-integrated t:slim?

We haven't given that guidance.

It's too early to work on that.

Okay. And then last question for me. Obviously, you talked a little bit about the potential disruption in patient decisions and maybe even a pause after the G4 integrated product gets approved. Your guidance does it reflect that fully in terms of if it happens at a certain point in time and kind of what's the-- ? I guess you don't have any direct experience but what's the range of outcomes if you see that happen at the perfectly wrong time in the quarter, if you will, or in the year? Thanks.

For the year, I don't think it will have an impact on the year unless that approval comes right towards the end of the year within that 60-day period within the year, so if it comes in say, mid-November, then again it will be 60 days after that by the time we fulfill that, so it could impact the year. So we're hopeful that it will come sooner than that and the impact to the remainder of the year and the full-year guidance is not going to have any impact. With respect to Q3 and Q4 it really is dependent on when it might come on, come through the approval and then how long it would take us to actually begin shipping, so the 70 million to 75 million does not include any G4 revenue, so just to be clear on that. So once we do get approval for that we're likely then to update our guidance and probably give some color on how we would expect that to impact the quarters.

Just to be clear, the $70 million to $75 million does include some potential disruption within the quarters but not on the full year?

Correct.

Okay, thank you. That's very helpful.

Yes and it only includes-- the impact is what it would do to the timing of decisions of people who signed up for t:slim or t:flex and now want to change their mind.

Of course, perfect. Thank you.

Our next question comes from Ben Haynor from Feltl and Company. Your line is open.

Good afternoon everyone, thanks for taking my question. Just a couple of quick ones here for you, I think you said last quarter about 10% of your customers being type 2 under the t:slim. Did you see a significant percentage of those people upgrade to the t:flex during the quarter at all?

We don't actually have an upgrade program in place and so people who previously chose the t:slim, they continue to be t:slim customers and then these are really people as John had mentioned, about half of our orders for t:flex actually came in prior to our official launch announcement. And so I think those are people who are that pent-up demand who were a lot of type 1 who were waiting for that product to become available so that they could have access to the larger volume.

Sure, but I guess my question is if someone already had a t:slim and they paid out of pocket or were able to get the insurance somehow to allow them to go onto t:flex, that that didn't really happen, is what you're saying?

Correct. These are primarily new customers.

Okay. And then with Asante Solutions closing down midway through the quarter, did you see any benefit from their prior customers? I know they had a small base of customers but did you see any coming over to you guys?

It was marginal. I mean we really-- it was not something that we really noticed that had an impact on the quarter.

Okay and then if I could just squeeze in one last financial one. John, I'm sorry if I missed this but what was depreciation and amortization, either for the half-year or the quarter?

I think it was about $1.3 million.

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

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

Okay, thank you very much. Thanks again, everyone, for joining us today. There's a little bit of industry activity and investor conference activity I just wanted to cover really quickly so you had times and dates. So for next week, we'll be at the American Association of Diabetes Educators conference, August 5 through 8 in New Orleans. This is a vital part of our diabetes community that we serve, so this is an important meeting for us, and we have a lot of activities going on there and a lot of educational activities, so that's an important meeting. We're also going to be attending a number of upcoming investor conferences. On August 11, we're presenting at the annual Wedbush Conference in New York City. Then on September 10, we're going to be at the Baird Healthcare Conference. And then September 17, we'll be at the Morgan Stanley Healthcare Conference. Both of those are going to be in New York City, so that's our schedule for the next couple of months in terms of investor activities. So in conclusion, we've got a strong first half of 2015, off to a great start with great potential for the back half of the year, both in terms of sales as well as R&D milestones. So we look forward to keeping you updated as the Company continues to progress and updating you on our next earnings conference call in the third quarter. So I'll close by saying thanks for attending and have a good day.

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