Tandem Diabetes Care, Inc. (TNDM) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for your patience. Welcome to Tandem Diabetes Care First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call maybe being recorded. I would now like to turn the conference over to your host, Chief Administrative Officer, Ms. Susan Morrison. Ma'am, you may begin.

Thank you. Good afternoon, everyone and thank you for joining Tandem's first quarter 2016 earnings conference call. Today's discussion may include forward-looking statements. These statements reflect management’s expectations about future events, product development timelines and financial performance and operating plans and speak only as of today’s date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the Risk Factors portion and elsewhere in our most recent Annual Report on Form 10-K, Quarterly Report on Form 10-Q and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements, whether as a 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. 2016 is off to a strong start and I'm very pleased with our first quarter accomplishments. Our early momentum is very encouraging and gives us confidence in our ability to exceed our original guidance and continue managing the business toward profitability. Some of the highlights of the quarter include our achievement of 63% year-over-year sales growth, our 12 point year-over-year gross margin improvement, continuing strong demand for our t:slim G4 integrated CGM product. Our 70 percentage point improvement in year-over-year operating margin. Our continuing number one customer service rating and progress with our new product in development. Our Q1 sales of more than $20 million was our second highest quarterly sales performance ever topped only by the fourth quarter of last year. As a reminder we expanded from 60 to 72 territories in the first quarter, maintaining our one-to-one sales rep to diabetes educator ratio in each territory. As anticipated, there was minimal disruption from this expansion, thanks to our swift and successful hiring efforts. We were very pleased with the performance of both of our new territory and existing territories in Q1. Notably, our average territory productivity divided over 72 territories in Q1 was the same as our average productivity in the second quarter of last year which is only divided over 60 territories. In late February, we held our national sales meeting where there was an all-round high level of enthusiasm. With our strong recruiting beginning in and late Q4, we were especially pleased that the majority of the new sales in clinical employees were onboard in time for the meeting. Selling a family three different insulin pumps that address different needs of the diabetes community distinguishes us from our competitors. As a reminder, the t:slim is our flagship pump as small sleek and features an easy to use touchscreen. Leveraging the same platform is our t:slim G4 pump which offers same benefits as t:slim with the added integration of Dexcom G4, continuous glucose monitoring sensor. And finally our t:flex pump which also shares the same insulin pump platform but its character retails the largest insulin capacity available, and was designed for people with greater insulin needs. We experienced a similar mix to product sales in Q1 to what we saw in the fourth quarter of last year with the t:slim G4 representing approximately 60% of pump shipments followed by t:slim representing 31%, and t:flex representing 9%. While the uptake of the t:slim G4 may still reflect some pen-up demand, we believe that the t:slim G4 will continue to hold a prominent share of our sales mix for the remainder of 2016. I've been very pleased that so many people feel that t:slim G4 is the best fit to manage their therapy needs. Customer feedback is a centered around the sentiment that people enjoy, the convenience of having their CGM information displayed directly on an easy view pump with a large color touchscreen. So it's simple to see trends and make more informed decisions. We are encouraged by the continued positive response from customers as the t:slim G4 was designed to help simplify diabetes management. And looking at the breakout between our customers with type 1 or type 2 diabetes, it's being consistent in that more than 90% of our t:slim and t:slim G4 customers report having type 1 diabetes. For t:flex it a different mix and approximately 60% of people report having type 1 and 40% report having type 2. Two main takeaways for t:flex are that it's great to see that a larger volume cartridge helps fulfil the need of the type 1 community. And it's very encouraging that we are bringing the benefit of pump therapy to so many people with type 2 diabetes. As traditional marketing effort is to focus primarily on people with type 1 diabetes, the benefits of an insulin pump therapy are considered to be less widely known for type 2 community. As a result, we believe that momentum for this product will build overtime as our sales and marketing efforts take hold. Also with the launching t:flex and the t:slim G4, about four months apart from one another, much of the sales forces attention was focused on t:slim G4 immediately post launch but now it is increasingly being spent educating people on the features and benefits for our family or products. The overall profile of our customers continues to have a wide age distribution that averages in the young 30s and is close to an equal mix between men and women. More than half of our customers report to use multiple daily injections prior to selecting one of her pumps. And this is a consistent trend between products. More than 38,000 people have now chosen to tandem pump to manage their insulin therapy. And feedback on all of our products continues to be very strong. I'm also very proud that for the third consecutive year we were ranked number one for customers of support by pump users in an independent survey by DQ&A, a leading diabetes research firm. This is particularly meaningful following the year when we launched two new products. In that same survey during the fourth quarter of 2015, more users reported choosing a new pump from Tandem compared to all other pump companies combined. This is quite an accomplishment and one that I credit to the hard work, passion and dedication of our employees. Overall, it's been a busy start to the year. And I'm very pleased with the progress that we've made across all the company's initiatives in the first quarter. I'll now turn call over to John who will provide more details on our first quarter results.

Thanks, Kim. Good afternoon, everyone. Overall I'm very happy with our strong first quarter sales that we achieved while incorporating 12 new territories into our commercial organization. Our performance over the last twelve months and the year-over-year advances in our operating margin, in particular continue to give us confidence as we manage the business towards profitability. Looking after sales and product shipments, first I'll discuss our rolling twelve months metrics which we continue to view as a better indicator of our progress, followed by some particulars for Q1. Our sales to the rolling twelve months ended March 31 were $80.6 million, an increase of 49% from $54 million for the previous twelve month. This was mainly driven by the increase in productivity and recent expansion of our salesforce, as well as the contributions of the t:flex and t:slim G4 pumps that we launched in May and September 2015 respectively. Pump shift for the rolling twelve months ended March 31 were 17,038, an increase of 47% from the previous twelve months. As of the end of Q1, our cumulative shipments have grown to approximately 38,000 pumps. Our average productivity per territory over the rolling twelve months ended March 31 was 22 pumps per month per territory compared to 16 for the previous twelve months. Looking at some of the details of our Q1 sales and pump shipments, overall our Q1 sales were $20.1 million, up 63% from $12.3 million in Q1 2015. Pump sales accounted for 81% of our total sales in Q1 which is in line with what we experienced in 2015. In Q1 we shipped a total of 4,042 pumps of which 1,255 were t:slim, 2,416 were t:slim G4 and 371 were t:flex. The average productivity of our salesforce in Q1 was 19 pumps per month per territory compared to 14 in Q1 2015. Moving on to cost of sales and gross margins. Our gross margin for the rolling twelve months ended March 31 with 38%, up from 32% for the previous twelve months. Our gross profits during those periods increased 79% from $30.7 million to $70.2 million. Manufacturing volumes continue to play a significant role in our gross margin progress with pump shipments increasing 47% and our cartridge shipments increasing 70% during the last twelve months compared to the previous twelve months. Our overall gross margin for Q1 was 35% compared to 23% Q1 2015. Our gross profit for Q1 was $6.9 million compared to $2.8 million in Q1 2015. The 12 percentage point improvement in our gross margin in Q1 compared to 2015 was primarily related to the increased production volumes and manufacturing efficiencies from leveraging three pump products and cartridges that utilize much of the same core manufacturing and operational infrastructure. Looking at the rest order P&L, our operating loss for the rolling twelve months ended March 31 decreased to $67.8 million from $75.2 million for the previous twelve month period. Our rolling twelve month operating loss includes non-cash expenses, $12.1 million for stock-based compensation expense and $5 million for depreciation and amortization. For the previous rolling twelve months our stock-based compensation was $15 million and our depreciation and amortization was $4.7 million. Our operating margin for the twelve months ended March 31 improved considerably to negative 84% from negative 139% for the previous twelve months. This 55 percentage point improvement was primarily due to the sales growth, improvement in the gross margins and our ability to leverage our operating cost over the sales, manufacturing and customer support requirements with multiple products. During the last twelve months, our operating expenses increased only 7% year-over-year while our revenues grew 49%. Just leveraging our operating expenses along with our gross profits increasing 79% as continued our history of year-over-year improvement in our operating margins, and we expect to continue to see as we progress towards profitability. Our operating loss for Q1 was $19.2 million results in an operating margin of negative 96% compared to an operating loss of $20.4 million and an operating margin of negative 166% for Q1 2015. The 70 percentage point improvement was driven by 63% increase in our sales and our 12 percentage point improvement in our gross margins. Additionally, our operating expenses grew at a much slower rate of 13% year-over-year despite our increasing the number of sales territories by 20% and continue to make investments in our commercial organizations to support the growing customer base and higher sales expectations. Our operating expenses for Q1 were $26.2 million compared to $23.2 million for Q1 2015. During Q1 we recognize non-cash stock-based compensation expense of $2.8 million compared to $3.8 million for Q1 2015. Our depreciation and amortization expense for Q1 was $1.3 million compared to $1.2 million in Q1 2015. With respect to cash, at the end of Q1 our cash and investment balance was $70.4 million. In January, we announced the amendment of our term loan facility with CRG which provided us access to an additional $50 million beyond the $30 million we borrowed from CRG in January 2013. Either the terms of the amended agreement we drew fifteen million in January and we have a one-time option until the end of this year to access up to an additional $35 million. Our cash and investment decreased sequentially by $17.7 million during Q1. Excluding the $15 million debt drawn in January. As is typical with the seasonality of our business, there was a sequential decrease in our quarterly sales and a corresponding increase in our quarterly cash. Also contributed to the Q1 cash change or incremental costs associated with our salesforce expansion, the $6.3 million payout of 2015 annual bonus and sales commissions, and $2.5 million increase in inventory in anticipation of growing sales volumes. Moving on to our 2016 guidance, this year is for a strong start and we're increasing our sales and operating margin guidance range. We now expect our full year 2016 sales to be in the range of $108 million to $115 million for all product which is an increase from our previous guidance of $105 million to $112 million. This represents an annual sales growth of 48% ti 58% compared to 2015. This would be the fourth consecutive year of greater than 45% annual sales growth. Shipping more than 4,000 pumps in the first quarter which is typically our most challenging quarter within any given year has provided a confidence to increase our sales guidance. Our new range assumes our sales for the year or similar distribution between quarters as we've seen historically. For context over the past three years our Q2 percentage of sales was approximately 20% and the second half of the year was heavily backend loaded with the largest increase in territory productivity occurring between the third and fourth quarters. Factors contributing to the quarterly sales distribution include the rising awareness of our family of three pumps with a common core platform, increasing productivity or existing territories, as well as our new territories that on average we anticipate will take nine to twelve months to be fully productive. New product enhancements have become available, as well as the contribution of our early pump renewal opportunities that are likely to be realized beginning fourth quarter. We continue to expect our average 2016 productivity to be between 24 and 26 pumps per months across 72 territories compared to our 2015 average of 21 pumps which was across 60 territories. We are also increasing our operating margin guidance range to negative 52% to negative 62% for the full year 2016. Previously the guidance was negative 55% to negative 65%. This updated guidance includes approximately $13 million to $14 million in non-cash stock-based compensation expense and approximately $5 million to $6 million for depreciation and amortization. We do believe our quarterly sales will continue to increase throughout 2016, our overall gross margins will increase and our operating expenses will increase at a much slower rate than our sales growth. The fourth quarter of each year has historically delivered strongest performance on its sales gross margins and operating margin basis. We are actively working to achieve a positive EBITDA quarter which would be a milestone for our business. And a first step towards profitability on a sustained basis. Our strong first quarter provides us the confidence that we are moving towards this goal and that on EBITDA positive fourth quarter is a possibility this year. With respect to our cash, we believe there our scenarios in which we can achieve cash flow breakeven with our current cash investments, cash available under our debt arrangement and proceeds from our employee stock plans and the exercise warrants. At a minimum we continue to expect these resources will be sufficient for operating needs for at least the next twelve months. Key factors influencing our operating margin and cash flow expectations and ultimately our profitability timeline and potential capital needs involve territory productivity, our ability to develop, submit and successfully secure regulatory approvals and commercialize new products. And our ability to leverage our operations as a sales expand and our product gain market acceptance. Our cash burn for the remaining quarters of 2016 will be dependent on such factors as the level and timing of quarterly sales and gross margin. Expenditures associated with product launch activities and trade shows, R&D and clinical trial progress, manufacturing facility requirements, and general headcount growth as our operations expand. With that, I'll turn it back over to Kim.

Thanks, John. I'm happy to share that we've continued to progress on our new products and development. We recently provided a full update on our 2016 product enhancement and development efforts on our last call but to recap these initiatives. First, we have a 510(k) on file with the FDA to lower t:slim's age indication from age 12 to age 6. We are in the active review process now and are seeking clarification from FDA on recent feedback. That remains our goal to received clearance in the second quarter but that will depend in large part on the outcome of our ongoing discussions with the agency. Next, we have a 510(k) on file for the Tandem device updater. This tool was designed to give users the ability to update their pump software at home, similar to a smartphone. This is also in the active review process and it remains our goal to receive clearance in the second quarter. Our next product enhancements is t:connect HTP which simplifies the ability of patients to share their data with their health care providers. The data launch from t:connect HTP recently commenced and we are working to offer an expanded launch mid-year. Then we have significant efforts going towards our artificial pancreas initiatives, the first generation of which will be a CGM integrated t:slim pump that will automate basal insulin delivery based on a predictive hypoglycemia algorithm. We recently filed our IBE with the FDA and are on-track to begin an in-clinic feasibility trial in Q2 and commence a pivotal trial by the year end. It remains our goal to commercially launch this product by the end of 2017. Finally, we have t:sport which is a wearable pump but half the size of t:slim, for people who seek even greater discretion and flexibility. It's an active development which includes a regulatory analysis to determine if the pulp will be controlled through a separate device or a mobile application. As you can see 2016 is off to a very busy start. Our performance over the last twelve months in the first quarter in particular demonstrates that we are well positioned to meet our 2016 goals by offering our family of insulin pumps through our expanded sales and clinical team, through our commitment to improving margins and creating a sustainable business and by progressing our product development initiatives. By doing so it allows us to further our company's mission of improving the lives of people with diabetes. With that, I will turn it over to the operator for questions.

Thank you, sir. [Operator Instructions] Our first question comes from the line of Kristen Stewart of Deutsche Bank. Your line is open.

Good afternoon, everybody.

Hey Kristen, how are you?

Hi, I am PT as always. I was wondering -- congratulations on a good quarter. So I was just wondering, just in terms of -- it is pretty impressive that the productivity in the reps was pretty much the same as the second quarter. So I guess how should we just think about that productivity as it goes to the year because I mean 19 for the first quarter, especially against a rolling twelve months of 22, pretty good. So I mean what do you see as the upper limit? I guess any comments there?

We're still sort of estimating that we will do somewhere between 24 and 25, sorry, 20.26 pumps per month per territory over the full year. So you'll see it progress from 19 as we move towards the fourth quarter you will see productivity be well above that number but I think overall we expect the average to still be somewhere in the 24 to 26 range through the full year.

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

The mix is the same, so I think get that point, throughout the 60% of our shipments for both quarters. We don't have a good view to whether this is still pen-up demand or there is something very unique about the product. Just background, our own internal work sort of gave us the takeaway that the Dexcom CGM has perceived the best out there and our pump was perceived the best out there. There was some surveys last year where it compared us to the Medtronic product and the J&J product; and we won on ease of use, the touch screen, and the slick consumer look but we lost on lack of CGM. So we knew that it was a very important competitive feature that we're operating with all of last year. And again, the uptake of 60% of our mix is just sort of beyond what the industry averages have been forecasted for the use of CGM with pumps. It was something like 25% or 25% to 30% of all pumpers were thought to be using CGM. So we're going at a higher rate than what we're seeing as the industry average is and we think it's our product features coupled with the Dexcom product. Again, we're going to keep our forecast for the balance of the year as the same mix but we're off to a great start. It's a bit surprising to us but we're very pleased that we're getting chosen over all other products at a higher rate.

Okay, perfect. I'll get back in queue but congratulations on a good quarter.

Thank you.

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

Great, thank you. Hey guys, thank you for taking my questions. Congrats on a great quarter. And I apologize if I'm redundant here, I was jumping around to another caller earlier. So I guess my first one was for John, on your comments on EBITDA profitability, I'm wondering obviously because of the seasonality in your business, that we would look at Q4 for that potential. John, street estimates are for $5 million EBITDA loss. I'm just kind of hoping you could maybe give us some comments and bridge that for us?

Well, I think we typically have seen a seasonally backend loaded year and I think we don't see anything being different this year. In fact there are some things come into play this year that we haven't seen in the past. One is the renewal cycle, partly renewals in the fourth quarter. We do expect to see some product enhancements, potentially be approved by the FDA here throughout this year that we will see a full impact in the fourth quarter, hopefully. And so that's what's going to backend loaded with that. And then the other thing that sort of happened is just the steady progress as we mentioned to Kristen, the salesforce expanding their productivity, both the existing territories that we had in place before the year started as well as the new territories that come on board during the first quarter. So that's going to drive the sales line, I think we'll continue to see margin improvement as sales sort of increase and we are obviously continue to manage our expenses quite proactively.

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

Well, this year we have sort of a conservative modest expectation. There was about 1,000 pumps that we sold in 2012, most of that was in the fourth quarter and most of that primarily was in the month of December. So as I mentioned in the prior call, the challenges whether or not those that were new in December of 2016 will actually go through the renewal cycle and valuation process, the sales cycle quickly enough as well as the insurance verification process quickly enough, it becomes sales within the fourth quarter. If not, then they become a potential for us in 2018 when along with probably 6,000 are also going to be available. And then the following after that is over 10,000. So it becomes a bigger and bigger portion for us to be able to try to recapture. I think when we launched in 2012, we now have three pump offerings that potentially are better fits for them individually, that we can go to as well as the things that Kim has talked about in the past, potentially offering an AP product in future years.

Thank you very much.

Thank you. Our next question comes from Rick Wise of Stifel. Your question, please.

Thank you. Hey Kim, truly congrats on the terrific quarter. I think -- maybe I'll start with the t:flex. Where are we in the launch? I mean you're thinking like a momentum is going to build overtime. Are you -- were you are expected to be, it sounds like you're not. What's -- what is the right mix? How do we think about ultimately the contribution of t:flex? I think you said, you've given some numbers in the past, I just appreciate your updated thinking there.

We just comment that. You know that market is smaller than the type 1 side of the business. So we're going to always expect that it's going to be a sort of a fraction of our type 1 users of the t:slim, the t:slim G4. So it's -- we're in that 9% range this quarter. I don't remember what it was last quarter but it's basically the third quarter of its launch. So it is probably going to remain 10% to 20% of our sales, something like that. Again, it's really hard to predict what the CGM product, the G4 product will continue to do. So mix is probably one of the hardest things for us to forecast but just remember that the -- all the pumps sell for the same price, so getting mixed wrong doesn't affect our revenue numbers but that's where we sort of expected to settle out.

Right. Turning to your comments about profitability, you stressed repeatedly your accelerating path to profitability and give us updated operating margin guidance, you know maybe John, a question for you. Helps us think through, is the improvement balance between better gross margins and lower OpEx or tilted to better gross margins? And maybe just reflecting that you know OpEx as you probably correctly stated it's up 13% is that’s the kind of -- should we think in terms of growth rate is that a growth rate we should be modeling that kind of range going forward?

I would say you know obviously sales is going to be the key drivers of that profitability and I think for us it's always story about being able to offer multiple products and I don't think that story has change. I think as we look at Q1 and we look at Q4 having three products helps our sales force knock on doors and get people's mind share instead looking at Tandem as a company and then looking at which product fits for them because as Tim mentioned it doesn't matter which product we sell them because basically they are built at the same cost price. So for us it's really the sales uptake that we expect to see, the productivity gains we expect to see in the sales force as well as the margin improvement that we expect to see from a volume standpoint both on the pumps as well as the supplies and as a reminder you know the pump margin is much higher than the supplies. So for us to be able to recapture renewals as well as organic growth within the sell side on the pump side is very important for us and I think seeing that happen in the first quarter. I think it's something we will continue to see throughout this year as well as next year. And on the expense side the growth as I mentioned last year at the earnings call, the Q4 earnings call I mentioned that our expenses had grown a roughly 5% to 7%, I don't see that changing. I think there's some incremental cost that we had talked about such as the clinical trial cost which we still estimate to be about a $1 million this year and then the additional costs associated with the sales force expansion which was 12 territories and generally when we see a territory added its roughly 700,000 to 800,000 in cost all-in beyond just the rep and CVD it's also the people in-house as well. So I don't really see any real changes on that?

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

You're correct we'd like to see potentially that that [indiscernible] the updated product will allow us to update software's in the field in the current existing install base and what that does is that there are fixes just like software fixes you see in the consumer world we can address those potentially reduce our warranty costs and replacement cost. So there is a potential for that, it's highly driven by each individual update that we do as well as what the FDA or regulatory path that's required for each of those. So until we get one out there. I think it's going to depend on which one that each one individually. I think we talked about in the past. First thing we would like to do is update the software for existing install base to the latest software that being shipped with the current pumps today.

And just one last one for me if I could, a bigger picture question, there seem to be an increasing number of pump companies startups not for profit, new product offerings. Big new products coming obvious some of the major competitors in the field, Kim just maybe reflect on do you’ve have any incremental competitive concerns out there, you got a great product but does the sale get more complicated with all this innovation and news. How do you see the pump market evolving over the next years and how do you expect to compete in that environment? When you know I think there's a lot

I think there is a lot of noise and then there is reality out there. So a lot of these well things that you're hearing about you know big foot for instance them I don’t know all the other ones, what was the other one, biometrics or bio something. Anyway you know they have to build the company. They have to raise the capital, they have to get some product approved and so they've got a long way to go to be competitive on the near term horizon, probably the biggest competitive thrust that is going on is the automation of insulin delivery and so Medtronic is playing that game, there is 670G [ph] reported to be approvable or going to be approved late 17 isn't that what we have heard? Mid-17 to late-17 and so that product is going to have sort of the first treat to range or treat to point kind of a controlled algorithm. So competing with that will be an interesting challenge. Obviously we have our own products we think we're going to be launching them within a competitive timeline, we also know that our product with CGM on it is very competitive to the 670G because in the early phases only your power users are really going to want to adopt something like that, the guinea pig you know try to see whether that's going to improve control and we sort of saw that with the 530G which was the threshold shut off product. So you know that's where I see it going and we have programs to be competitive, with that I think we will be competitive as Medtronic leads the way and bring the products out into the marketplace but the others I just don't think have the marketing muscle to do much with the ideas that are getting a lot of press out there so that's sort of my take on it.

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

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

How many of t:slim G4?

Yes are actually using the CGM part of, I don’t know if there is software data read that you get or?

No we don't have an answer to that one. We don't have the data to tell you whether they're buying in and sort of shutting it off and not using it or whether they are actually using that feature. You know one of the things I can tell you is that 50% of the G4 users so far are Former MDI patients and I can't imagine that they're taking on both pump therapy and CGM therapy unless they are using the two in combination. I mean that's a shocking number to me because generally patients start with other CGM or a pump but not both because CGM, the pump is hard as [indiscernible] and CGM is a little bit more intuitive learning to use those numbers the manager therapy is not quite so intuitive but it's a great tool for controlling your HbA1c in longer term but pump also is a huge part of that, so to have MDI users, you know switching to both those tools you’re telling me that they're probably using them synergistically.

And the only reason I was asking you hear a lot of the Medtronic users who use the pump but don’t use the CGM part of it and so that’s why I just didn’t know if you were seeing any of that with your embodiment [ph]?

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

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

Well we don't have a good assessment of how many you know under 12s that we're missing by not having that indication. So I can't quantify it for you but I can tell you that you know we have carefully avoided off label marketing and that means we have to avoid a lot of these summer camps where you have kids of all ages you know down below our indicated approved age. So we've been very careful not to market aggressively at those and so with that indication we think we're going to be more aggressive get to broader adolescent group and be less tentative along that age group but we really don't have numbers on how many 12 over 6 patients there are out there.

And then just question form John, the cartridge -- in the past you talked about as being negative margin product for you guys. Is that still the case or you have enough volume now that that’s turned positive?

It's still the case but the margin has improved dramatically over the last twelve months.

Your next question comes from the line of [indiscernible]. Your line is open.

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

I think for us we want to see how 2016 plays out having three products going through the single reps, whether that helps improve the productivity or is there still a ceiling because there's only so many days in a month that operates [indiscernible] accounts. So I think for us it's sort of watching where we go, I think our goal this year is to move on average from 24 to 26. I will say last year I saw many reps well above that number so there is a potential for a rep productivity fee north of that number. But on average that's where we're sitting today. I think we will look at sort of the productivity, we'll look at the reach, we will look at whether or not we are seeing calls or complains that we're not able to visit accounts of visitation and look at that as other factors that we will use to decide when and where, where we will add territory. I think as we add territories in the future we will do something very similar to what we did this year which will be very targeted and very limited in to specific situations that make sense for us and we will typically do those in the early part of the year when it's least disruptive and most beneficial for them to be up to speed by the time they get to high pump selling season which is the third quarter and fourth quarter.

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

Well on the Type 2 side there's definitely we believe a much greater educational effort that we have to go through, not just with the patient but also with the offices so that process we think is going to be slow, the reimbursement side of the equation is also something that can be challenging if there are people who are primarily on Medicare which makes very difficult for us to gain the reimbursements. So that's a fact of the mix slower and sometimes those can be overcome through appeals and so forth that just makes the process longer.

I was to mention the other thing is whether there are current pump wear and there are switcher that’s probably an easier sell than trying to go with somebody that injection insulin and you’re trying to get them on to pump, I don't think we have any visibility to what our mix is so far in a hope of t:flex. But that’s a good point, I mean we started our initial marketing -- we believe roughly 125,000 out here that we can potentially go after, 125,000 that we potentially after that that aren't pumps today as convention those likely have less barriers on the reimbursement side switch to Tandem company we can get in front of them. So those are going to be primary targets.

And then last thing for me on you mentioned switching and I think it was also in response to Mr. Levy's question. In terms of switching from existing pump CGM. Combos, I mean we've seen quite -- I wouldn’t say quite a few but a number of who have switched from the Medtronic device but quite a bit fewer from the animus device and obviously the relative market share places a factor into that. But are you seeing a lot of switching from the existing pumps CGM products that are out there?

Yes about 50% are switchers. So there's probably switching as you said along the lines of market share that’s out there right now with those that have integrated CGM with is Medtronic and J&J. I know you’ve done some work and that’s may be consistent with what we’re saying. I think it is.

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

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

No, we haven't. I mean that’s pretty much our base, that's pretty much what it is on the margin as we go through every quarter. You know it's what we're seeing with the with the G4 which is sort of surprising for the reasons I've already mentioned so. We're not seeing much of the difference there, I mean I think we're doing in terms of new pump stars better than anybody in the industry and there's some data out there to support that. So I think that's back to the ease of use, the ease of getting somebody started on the t:slim pump versus a traditional palm. You know software education burden is very high with a with a traditional pump and so I think we've brought down the barriers to adoption. So you know our mix remains the same very and remains the same on the margin.

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

Well you know I’ve never seen any data that breaks out pumpers versus and MDI by age groups. So I mean I really don't have a good answer for you on that. You know just anecdotally. It is really probably those that are very aggressive and the parents are a vital involved in the switch to the pump and so you know I don't know what that percentage is but it takes a real sort of power user, a family that's really trying to get the pest control early on. So they get the a long term results and I just don't have a good breakout on what that might be.

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

That's correct.

And then maybe lastly just on the on the new territories, do you have any sort of breakout you talked about sort of a 9 to 12 months ramp in terms of the new territories I mean, what sort of difference were you seeing in the new territories in terms of pumps per day versus maybe your existing ones in the first quarter here if you have color there?

For just the mix I think the pleasant thing that we saw in Q1 is I think we did a very good job and our hiring did a very good job and our training upfront as well as the hand-offs within the territories as well as well what territories we are picking to make sure that those transitions were going to be as least disruptive as we thought that we should be. So I think that's where we saw the benefit. I think most of those folks are moving up to scale. Some of them have inherited territories where business was already booming and the existing rep moved into the new sort of call it Greenfield and some of them took over Greenfield. So it's a mixed bag. So it's hard to give you a sort of flavor that’s generic across the whole new territories but I would say people who cared very but I would say would quite happy that they're on board doing well. I think they will move and be very effective here in the third and fourth quarter.

Our next question comes from Doug Schenkel of Cowen & Co. Your question, please.

This is Ryan Bikerin [ph] for Doug. A couple of pipeline ones, on the first gen AP product, is there any chance that that could incorporate the G6 sensor, is it pretty safe to say that will definitely be G5? At this point?

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

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

It will be G5, no possibility it's going to be G6, it's not approved. I don't know what the approval timeline is on it, their call was today or yesterday so I don't know what the update was maybe you do better but. G5 we can count on, G5, something we can count on to get in our timelines.

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

Well that's something that is really under sort of hot thing right now, the FDA has issued guidelines and they consider this whole concept of controlling from phone to be a Class 3 device and so it's going to have more scrutiny obviously then you know Class 1s or Class 2s and the whole question is the operating system of the phone is considered or the phone is considered to be part of the product and so it has to be verified and validated just like any internal component that we put on the phone and as you probably know every phone out there has its own version of an operating system. So the universal coverage of phones operating pumps today would be impossible to have that kind of wide choice among droids and then Apple products. This may be changing over time. There the thinking is probably on a two to four year horizon but that’s the guidance document that we have today so you know we're planning on a dedicated controller and hoping that perhaps someday there is going to be a possibility for us.

And last one for me, you've talked about you're being number one in customer support and that's obviously a key differentiator for Tandem. As the install base continues to grow how do you guys maintain that number one customer support rating and how should we think about that from an investment perspective? What is the risk that OpEx core growth where you talked about earlier in the call meaning to increase a bit to maintain that rating? Thank you.

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

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

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

So just three quick one here for me so first, John or Kim I guess on the device updater in the 12 year old or the six year old indication, I'm sorry for t:slim, if you would get 2Q approval would you consider that then a catalyst or numbers relative to where guidance is today is that is that a potential upside driver are you already kind of assuming that in the updated guidance?

We are sending in the guidance.

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

Yes. Sorry yes.

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

That would be the second step, that’s the advice that we have gotten from the FDA. So I think predictive low glucose was spent from all research that we have done indicates that is really probably the major concern is going low having a hypo event, obviously you wake up and you have a very bad day. I mean obviously it's like having the worst hangover you ever had and it sends you into a sort of rollercoaster, of not being in control during the day. So avoiding hypoglycemia is probably the number one thing that patients want to get out of an automated insulin delivery products. So we think that PLGS will be very competitive and then the second focus is keeping going high in the range. Those are going to give you better term, long term control on your HbA1c and we will be in feasibility throughout 2016 on that product.

Okay, will the FDA do know at this point like you start a pivotal on that before the pivotal and approval comes on the low glucose spend?

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

[Operator Instructions]. Our next question comes from the line of Ben Andrew of William Blair. Your question, please.

Two questions I guess for me, what is your market research suggests as the number of patients who are starting pump therapy or whether it's MDIs or new diagnosis kind of a total not just you all.

How many are starting? 45,000 a year is probably what we have as a number kind of a guess but that’s probably [Technical Difficulty] in the range. Are you talking about the G6 product? That’s no long adjunctive, that’s what you’re talking?

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

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

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

Thanks again everyone for joining us today. There's a couple of conferences that we're going to be attending here within the next couple of weeks. The Deutsche Bank Annual Healthcare Conference on May 4th, and we’re taking Investor meetings at that conference as well as presenting and we're also at the Bank of America Merrill Lynch Healthcare Conference on May 10th and we’re taking investor meetings also on that day. As for industry of events the company is also going to be attending the 88 Conference in New Orleans on June 10 through June 14, the hottest time of the year and the Children With Diabetes Friends for Life Conference in Orlando, Florida on July 5th and 10th. So in conclusion you know I'm extremely pleased with our early momentum in 2016 and we look forward to building upon it throughout the year and we look forward to keeping you updated as the company continues to progress. So we will talk to on our next conference call for the second quarter. So thanks for being on the call today.

Thank you, sir. Ladies and gentlemen that does conclude your program. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.