Tandem Diabetes Care, Inc. (TNDM) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care Q2 2017 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 follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Susan Morrison, Chief Administrative Officer. Ma'am?

Thanks. Good afternoon, everyone, and thank you for joining Tandem's second quarter 2017 earnings conference call. Today's discussions 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. In addition, today's discussion will include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. For additional information about our use of non-GAAP financial measures, please see the information under the heading use of non-GAAP financial measures in our press release. The company also announced in an SEC filing today, the commencement of an ATM or an at-the-market public offering of its common stock. The focus of this call is to discuss the company's financial results for the quarter ended June 30, 2017. In light of that and SEC rules and regulations, the company will not be discussing any ATM offering at any level of detail or answering questions about the offering. Kim Blickenstaff, Tandem's President and CEO will be leading today's call. And at this time, I'll turn it over to Kim.

Thank you, Susan. Hello, everyone, and thank you for joining us on today's second quarter earnings call. With me today is John Cajigas, our Chief Financial Officer. Looking back at the first half of 2017, I was very happy to see the demand for our next-generation t:slim X2 pump remained high. And I'm proud of our employees for the overall strength that we continue to demonstrate both commercially and operationally. We made considerable progress on our gross margin and decreased our quarterly use of cash by more than 30% sequentially, while continuing to provide industry-leading customer support. These accomplishments give us confidence in our ability to achieve our key goals, which focus on continuing to provide our customers with number one rated support, bringing new innovations to the diabetes community and driving the company toward profitability. The t:slim X2 pump is solidifying its position as our next-generation flagship products. It brings people with diabetes all of the features and benefits and highlights Tandem's focus on listening to customer feedback, and is the only insulin pump that can be updated by a customer to add new features using their personal computer. The t:slim X2 represented the vast majority of our pump shipments this quarter and once again, nearly 60% of our customers reported being new to pump therapy for multiple daily injections. Notably among customers switching from the competitors' pump, we continue to see that largest percentage converting from Medtronic, followed by Animas. The continued high demand for the t:slim X2 by people who previously used MDI is confirmation that we are making progress on our long-time strategic goal to bring the benefits of insulin pump therapy to more people with diabetes. We believe that following the FDA's approval of the t:slim X2 with G5 integration we will have an additional benefit to offer the diabetes community and further this mission. Our first insulin pump with Dexcom G5 sensor integration is currently under FDA review. And while approval is at the discretion of the FDA, we are prepared to launch as soon as that's received. We have approximately 12,000 people currently using the t:slim X2 pump and there is great excitement among our employees that work on the Tandem Device Updater for the opportunity to demonstrate the true advantage of updatability. We expect that providing our t:slim X2 customers with G5 integration for no cost will reinforce the power of our modern consumer technology that no other insulin pump offers. It will also be the fulfillment of our vision that we outlined years ago to offer our customers a universal pump platform that can be updated as new innovations are approved by the FDA. We also expect that our launch of the t:slim X2 with G5 integration will give customers the opportunity to weigh their purchasing decision head to head with the latest technology from our competitors. A very significant advantage of the t:slim X2 with G5 integration will be the access that our customers will gain to Dexcom Share feature, which allows a patient to share their CGM data to their Apple or Android phone with up to five loved ones. Anecdotally, we continue to hear mixed reviews of Medtronic's new platform, including feedback from customers and healthcare providers who are disappointed by the 670G. The concerns we hear most often center around the 670G's new interface being difficult to learn, train and use. The pump's substantially larger form-factor, frustration with auto-mode exists and variability in sensor accuracy, particularly when compared to the published accuracy of Dexcom's G5 system, which continues to be the only CGM system approved to allow users to make bolused dosing decisions from CGM values without confirmatory finger stick. In looking at other notable points of comparison, the t:slim X2's form-factor and ease of use shines in comparison to the 670G that is more than 60% larger than the t:slim X2 and has physical button operations. Our display is one-third larger than the 670G screen and it continues to be the only pump to feature a touch screen. The t:slim X2 was approved for people aged six and above, while the 670G is not indicated for use by anyone below the age of 14. The t:slim X2 features Bluetooth connectivity and a rechargeable battery that in today's world consumers have come to expect. And finally, as we discussed, the t:slim X2 is the only updateable pump available. So patients won't have to participate in complicated swap-out programs to access new technology. Going into the third quarter, we believe the t:slim X2 offers meaningful advantages as compared to Medtronic's pumps. And our t:slim X2 with G5 will further strengthen our position in the market. We believe customers who had been on the sidelines waiting to learn more about the 670G are beginning to make purchasing decisions once again. And this trend will benefit us in the reminder of the year. As a reminder, insulin pump sales follows seasonal pattern, which results in the fourth quarter being the strong quarter of the year. We believe there is great excitement in the diabetes community for the t:slim X2 with G5 integration to receive FDA approval. After we're able to demonstrate the Device Updater's ability to deliver a substantial feature benefit to our existing customers in a quick and easy way, we believe there will be even more interest and future potential. I'm pleased to share that we are continuing to make great progress on our two automated insulin delivery products. Both of which are designed to be offering the software updates to our X2 customers after they're approved by the FDA. Automated insulin delivery systems are only as good as the continuous glucose monitoring sensor that drives them. It's well documented that Dexcom's G5 sensor is the most accurate in the market. And the G6 will even have improved accuracy. Adoption of automated insulin delivery systems by patients and healthcare providers will be a function of the burden imposed for the training and use of the system. The G5 sensor has the least calibration to achieve the best accuracy only to a day. The G5 also requires no bolus finger-stick confirmations. All of this reduces patient burden. t:slim with its intuitive touch screen interface is documented to be easy to use and train. This also reduces burden for patients and their providers. We believe the combination of Tandem's t:slim X2, Dexcom sensors and algorithms will provide automated delivery systems that will be reliable, easy to use and provide improved patient care. Blood glucose levels can be affected by many factors, such as the type or quantity of food eaten, illness, stress and exercise. The goal of automated insulin delivery is to enable patients to avoid hypoglycemia or low blood glucose levels. Hyperglycemia, or high blood glucose levels, and improved time in the normal glycemic range of 70 mgs per deciliter to 120 mgs per deciliter. Hypoglycemia can cause a variety of long-term complication, such as damage to various tissues and organs, seizures, coma or tragically even death. Hypoglycemia is especially prevalent in night when people are increased risk of their blood sugar is going lower during sleep. Hypoglycemia is not only associated with considerable costs of individual in terms of well-being, it also represents a substantial costs burden to the healthcare systems. Hyperglycemia can also cause a variety of long-term effects, including cardiovascular disease and damage to various tissues and organs. Our first generation automated insulin delivery system is t:slim X2 with Predictive Low Glucose Suspend or PLGS. This system is designed to prevent hypoglycemia by suspending basal insulin delivery when low blood sugar is predicted based on the Dexcom G5 sensor values. Last month, if the American Diabetes Association Scientific Sessions, Dr. Gregory Forlenza of the Barbara Davis Center for diabetes presented results from our PLGS feasibility study. Results were very encouraging, just those expected no hypoglycemic events were observed during this overnight study. We use the data from the study and the IDE submission for our pivotal study, which was approved by the FDA in May. It's designed as a six week crossover study and our five trial sites are preparing to begin enrollment of the 90 participants. Based on the study timing, we believe, we will conclude before the end of the year and then we'll submit a PMA to the FDA for this product once reports from the sites are finalized. Our market research has shown the hypoglycemic prevention is about 80% of the value, the customers seek an automated insulin delivery algorithm, which are t:slim X2 with PLGS is designed to provide. We continue to anticipate that the review timeline for t:slim X2 with PLGS will benefit from the FDA's current review of the t:slim X2 with G5, as the only different feature will be the PLGS algorithm. Based on where we are in the process and assumed FDA timelines, a launch in summer 2018 is likely a realistic goal. Our second generation automated insulin delivery system is intended to reduce hypo and hyperglycemic events and improve the time of percentage in the normal blood sugar range. This system include t:slim X2 pump with treat-to-range technology that we licensed from TypeZero as well as Dexcom G6 sensor. With TypeZero's technology, our product for both increase and decrease basal insulin based on a person's blood glucose levels, as well as deliver automated correction boluses. As a reminder, we are participating in the NIH funded International Diabetes Closed Loop trial alongside TypeZero and Dexcom. We plan to use the data from a portion of this trial, as our pivotal trial data in a PMA filing with the FDA. Based upon the traditional review times, we are targeting the launch of the TypeZero algorithm on our t:slim X2 platform by the end of 2018. We believe the combination of our easy-to-use pump and superior CGM technology will result in a less burdensome system along more people to successful therapy using automated insulin delivery. As you can see, we are making great progress with our products under development and our working to maintain our solid track record of delivering new innovative products and features to the diabetes community. Historically, Tandem products have only been available in the United States. The International pump market is an opportunity that we've continued to evaluate as demand from potential customers and healthcare providers outside of the United States has been building. Behind the scene, we have been working to ensure our product testing and documentation of our quality systems meet international requirements, and we are pleased to report that we recently completed a successful audit from our Notified Body confirming as much. To that end, I am excited to share the Tandem is preparing to file for CE Mark by the end of this year. And that we are planning to initiate sales of our t:slim X2 insulin pump and a handful of key geographies outside of the United States, including Canada next year. Our management team has experience in this process, and we plan to partner with distributors, who will service and support our customers outside the United States. Overall our expansion into international markets will be a meaningful milestone for Tandem. It's been a longer term goal, to bring the features and benefits of our pumps, the people with diabetes worldwide. We will be providing more detail on our international strategy as the year progresses, but as you look at key growth drivers for our business over the next 18 months. It will be a component alongside the launch of our new products domestically, or scaling of infusion set sales and increasing opportunities from pump renewals. I'd also like to reemphasize that we understand that our customers have choices and that customers who choose Tandem product rely on us for the long-term care. It's a responsibility that we do not take lightly. We take great pride in our high customer satisfaction scores and we intend to continue to deliver on our new products and development and validate the great process that our customers have placed with us. We understand the financial resources this effort requires consistent with what we discussed last quarter we continue to evaluate multiple financing options that plan to provide additional clarity by the end of third quarter. Our priorities have not changed and we remain confident that our differentiated insulin pumps, the power of our Tandem Device Updater and our robust pipeline position as well to compete both in the near and long term. Doing so helps us achieve our broader goals of successfully executing our business plan, supporting our customers and building shareholder value. I'll now turn the call over to John, who will provide further detail on our results for the quarter and our financial guidance.

Thanks, Kim. Good afternoon, everyone. Today, I'll be reviewing our Q2 results on both the GAAP and non-GAAP basis, and provide a color on our commercial and operational accomplishments. As a reminder, are non-GAAP results are adjusted from our GAAP results by excluding the impact of our technology upgrade program, which was initiated in July 2016. We believe that looking at our operating results on the non-GAAP basis provides useful information when comparing to our financial results for periods prior to Q3 2016. In 2017, the non-GAAP adjustments primarily included the recognition of sales and cost of sales previously deferred as a result of technology upgrade program accounting for upgrades that were fulfilled this year. We also recognized incremental upgrade fees and product cost incurred to fulfill the upgrade obligations. The program is scheduled to expire in September 2017. A reconciliation of GAAP results to non-GAAP results is included in today's earnings press release as an exhibit. Now looking at our sales and product shipments for Q2 of 2017, our GAAP sales were $21.3 million compared to $19 million for Q1 2017. Our non-GAAP sales were also $21.3 million compared to $17.5 million in Q1. The strong sequential growth was driven primarily by an increase in pump shipments as well as infusion sets sales. Although it remains competitive market as Kim mentioned, we continue to see signs of the pump market is beginning to unfreeze. And we anticipate this trend will continue throughout remainder of the year. During Q2 our pump GAAP sales were $13.3 million compared to $12.5 million in Q1. Our non-GAAP pump sales were $13.4 million compared to $11.1 million in Q1. We shipped a total 3,427 pumps, a 22% increase from 2,816 pumps we shipped in Q1. Our t:slim X2 represented 94% of pump shipped during the quarter, it was a dominant pump offering. As we believe customers appreciate the t:slim X2's key differentiated features and its capabilities and combination with the Tandem Device Updater. These technologies have potential to offer significant advancements during our customers four year warranty period without clumsy hardware exchanges. As of the end of Q2, our cumulative shipments have grown to approximately 57,000 pumps. This accomplishment provides us a sizable customer base from which we generate ongoing pump supply sales, especially as we increasingly capture infusion sets sales from our distributors. That being said, it is important to remember that our pumps make up the greatest percentage of our overall sales, followed by infusion sets and then cartridges. We often discuss pump supplies in total, which includes both infusion sets and cartridges. However, there is a dramatic difference in the financial contributions of these two products. The customer typically changes their cartridge and infusion sets at the same time. So the use approximately the same number on an annual basis. However, for a single customer using both our infusion sets and cartridges in the same change frequency, the infusion set typically would generate about 60% to 70% of the pump supply sales and the cartridge would provide the remainder. In the past, we typically lost the infusion set sales whenever a customer would service through a distributor, because the infusion sets were not proprietary and were available from multiple suppliers. Distributor sales have historically represented more than 70% of our business. Therefore, for every cartridge sold we typically only sold an infusion set a fraction of the time. Capturing the significant infusion set revenue stream is an important opportunity in our drive towards profitability. As a reminder, when we do not have a direct billing contract with a customers' insurance payer, we partner with the distributor who provides our customers access to our products on the new network basis. Last year, we began executing a two-part strategy that focused on capturing more of the potential infusion set revenue. Part one, was the design and development of our custom t:lock connector which provides benefits to our customers by reducing the cartridge fill time and lowering the amount of wasted insulin, both of which were top request in our 2015 and 2016 customer surveys. The manufacturer who makes our infusion sets is making all of our t:lock compatible sets. And we will offer the same selection of infusion sets as we do today. We remain on track to launch t:lock in the third quarter and expect our ratio of quarterly shipments of infusion sets to cartridges will be nearly 100% by the end of the year. In advance of that, we are already beginning to see a meaningful increase infusion set sales as a result of the second part of our strategy, the renegotiation of our distributor contracts in anticipation of the launch of t:lock connector. In fact, beginning in the fourth quarter of 2016, infusion sets overtook cartridges in sales for the first time. We are very pleased to see that the ratio of the number of infusion sets shipped to the number cartridges shipped increased to 61% in Q2 compared to 51% in Q1 and 28% in Q2 2016. Accordingly, sales of our infusion sets in Q2 increased to 4.6 million compared to 3.4 million in Q1 and 2.1 million in Q2 2016. From a volume perspective, our shipments also have more than doubled compared to last year. Sales of our cartridges in Q2 were 3.3 million compared to 2.9 million in Q1 and 2.8 million in Q2 2016. Overall, our pump supply sales for the last six months are already at two-thirds of our pump supply sales for all of 2016. Notably, this significant progress is in advance for our upcoming custom t:lock connector launch. Clearly, the infusion sets are becoming a larger percentage of our total sales, providing meaningful source of gross profits. The magnitude that each of our product influences our gross profits and overall gross margin is heavily impacted by the relative percentage of total sales that each of our products represent. So pumps have the greatest impact on our gross profits and overall gross margins by far, followed by infusion sets, and to a much lesser extent, cartridges. Also, as we experienced changes in our overall mix of our products sales, our overall gross margin has been impacted. In Q2, pumps represented 62% of our GAAP based sales, infusion sets represented 21% and cartridges represented 16%. By comparison, in Q2 2016, pumps represented 79% of sales, infusion sets represented 9% and cartridges represented 12%. Moving forward, we still expect pumps will continue to beat the majority of our sales mix and a significantly higher percentage of our sales compared to infusion sets or cartridges. Significant shifts in our sales mix combined with the gross margin difference between our pumps and pump supplies have and will continue to impact our overall gross margin. In Q2, our gross profit on a GAAP basis was more than 19% higher than Q1 and was 34% higher on a non-GAAP basis. More specifically, our GAAP based gross profit during Q2 was $8 million compared to $6.8 million in Q1. And our non-GAAP gross profit for Q2 was $8.1 million compared to $6 million in Q1. Our GAAP and non-GAAP overall gross margin for Q2 increased 38%, compared to 36% on a GAAP basis and 35% on a non-GAAP basis for Q1. The increases in our overall gross profits and overall gross margin were largely driven by a 22% sequential increase in pump shipments and increasing infusion set sales. But equally important, we also made meaningful improvements to the manufacturing cost of our products. More specifically on pump improvements, is a reduction in our material cost, with the recent launch of our t:slim X2 as well as increased manufacturing efficiencies, and continued improvement in our warranty results. As we are keenly focused on our pathway to profitability, I've been happy to see that our pump supplies gross margins have been positive now for three consecutive quarters. Capturing infusion sets sales and the gross profit contributions they provide is a great opportunity for our business. I anticipate this trend will continue, particularly as we continue to increase our ratio of infusion sets to cartridges from 61% in Q2 to 100% by year end. We've also continued to make meaningful gross margin improvements on our cartridges. This progress primarily relates to larger production volumes associate with our growing installed base as well as an improved yield in the manufacturing efficiencies. That being said, because cartridges are now such a small percentage of our sales, progress we make in this area helps, but does not benefit our business nearly as much as even a small improvement for our pump gross margin or capturing sales of infusion sets. As you can see, we've made great progress within our manufacturing operations during the last year. We still have a significant opportunity in this area, and the highly anticipated launch of the t:slim X2 with G5. The launch of t:lock at higher pump renewal opportunities in the second half of the year will be key drivers for higher pump sales in overall gross margin. Looking at the rest of our P&L our GAAP operating loss for Q2 was $19 million compared to $21.2 million in Q1. Resulting operating margin was negative 89% in Q2 compared to negative 112% in Q1. Our non-GAAP operating loss and operating margin were consistent with our GAAP results during the quarter. However, I want to call out that our Q2 operating loss included non-cash expense of $5.1 million for stock based compensation, and $1.6 million for depreciation and amortization. For Q1, our stock based compensation was $3 million, and our depreciation and amortization was $1.4 million. There was a meaningful increase in the stock based compensation in Q2, which was associated with $2.4 million acceleration of unamortized stock based compensation related to our employee stock purchase plan. What prompts the acceleration was that we decided to suspend our ESPP in Q2, as we exhausted the shares available under the plan. This was primarily a result of high employee to participate in recent purchased periods, and our lower stock price. To be clear no one is deriving a benefit from this non-cash charge, but nevertheless we reduced our operating margin by approximately 11 points in Q2. Even with this onetime stock based compensation charge in Q2, our operating expenses decreased 4% compared to Q1 and only increase from Q2 2016 by $1.7 million or 7%. As we continue to closely manage our spending. With respect to cash at the end of Q2, our total cash and investment balance sheet was approximately $38 million. Our cash and investments, decreased by $15.8 million in Q2 compared to $23.2 million in Q1 2017, excluding the net proceeds of the equity offering that we completed in Q1. This reduction is in line with our expectations of a sequentially quarterly decline in cash burn over the course of the calendar year due to seasonality of the business. Our GAAP sales increased sequentially 12% and our GAAP gross profit increased 19% compared to 22% and 34% on a non-GAAP basis respectively. Additionally, working capital changes during Q2 impacted our use of cash. Our capital expenditures during the quarter, which were $1.4 million, declined $1.2 million sequentially, as we completed tenant improvements in our new manufacturing facility in Q2 2017. This was offset by $2.1 million increase in our inventory levels in anticipation of moving our manufacturing operations, as well as the anticipated launch of the t:slim X2 with G5 and t:lock. The manufacturing we've commenced during the second quarter, and we successfully completed the first of several regulatory inspections. And expect to transition our operations in a stepwise fashion over the remainder to 2017, pending completion of remaining inspections. With respect to guidance, we are reaffirming our previous total sales and operating margin guidance for 2017. We continue to expect our full year 2017 non-GAAP sales guidance to be in the range of $100 million to $107 million for all products, which excludes the financial and accounting impact of the technology upgrade program. Sales are anticipated to be heavily backend loaded particularly towards Q4 due to our typical seasonality, the launch timing of the t:slim X2 with G5 and t:lock, and our 2017 renewal opportunity. As a reminder 2017 is our first full year with customers eligible for renewal under the typical four year insurance reimbursement cycle. Although we won't likely quantify any specific trends until after Q4, of the people who are currently eligible we are pleased with the renewal interest. We also expect that the approval of the t:slim X2 with G5 will provide us with a competitive boost and will drive growth in the second half of the year. We believe that offering the features benefits of the t:slim X2 with the most accurate CGM sensor available and commercially demonstrating the capabilities of the Tandem Device Updater will be important catalysts to our future growth and drive us towards profitability. We also continue to expect our non-GAAP operating margin to be in the range of negative 65% to negative 70% for the full year 2017. This guidance includes non-cash operating expenses of approximately $11 million in stock-based compensation and approximately $6 million to $7 million of depreciation and amortization. We expect our quarterly cash use will continue to sequentially decrease throughout the remainder of the year with the greatest decline in the fourth quarter, and that the overall cash use for 2017 will be lower than the $68 million we used in 2016. We are highly focused on items that improve competitiveness in the marketplace and improve our gross profits and gross margins. Additionally, we continue to control and even reduce some of our operating expenses and capital expenditures. In a five-year period, we've achieved a market share of approximately 10%. In the past, we've said that, we believe that we can achieve sustained profitability when achieve a market share of 50% percent and gross margin of 55%. We continue to believe this is possible in 2019 and are evaluating opportunities to accelerate that time. Overall, we've been evaluating multiple options to enhance our business and strengthen our balance sheet. And as Kim mentioned, from a timing perspective are working to provide additional clarity by the end of the third quarter. And expect to raise additional capital prior to the end of the year. The performance of the business in the coming months, expectations on probability, timing and levels will be key factors in our evaluation of the financing. Earlier this month, we filed a preliminary proxy with the SEC that includes a reverse split proposal to our shareholders. Today, we filed the associated definitive proxy. Our goal remains to build the value of our stock independent of this transaction. However, we want to be prepared for all options. Along those lines, we also filed a $15 million ATM this afternoon, which is an at-the-market offering as a supplement to our financing plans, is a vehicle that provides with the flexibility to sell shares at market prices and raise cash. Before we wrap up, I want to recognize the successful efforts of all our employees during the first half of 2017. In particular, our sales force has remained competitive in the face of strong external headwinds. Internally, we've been preparing for the launch of t:slim X2 with G2 and t:lock. We made significant operational improvements that reduces manufacturing cost and improve product reliability. Our product development activities have continued to make great progress as to have our core business projects that allow us to improve the leverage of our infrastructure and maintain a high level of customer satisfaction for our products and services. As a result, we believe these catalysts will make for a very promising second half of the year. We very much appreciate everyone's hard work. Thank you, everyone. And with that, I'll turn it over to the operator for questions.

Thank you. [Operator Instructions] Our first question is from Tao Levy of Wedbush. Your line is open.

Great. Thank you. Good afternoon. A couple questions at my end. So first, maybe you could talk about any potential programs that you may have needed to sort of push out or delay as you seek to reduce your operating expenses over the near term?

Well, I'd say, we are not trying to reduce our operating expenses, more control them. And obviously, we do rank our programs in terms of market importance and allocate our research and the manufacture and transfer dollars to those programs. So, now, we have pushed out guidance on G5 integration, PLGS or the TypeZero. Those remain our highest priorities. We'll talk more I think in future calls about some of the other improvements that are coming after those major programs for us as resources do free up.

Okay, great. And then, I don't know if you've ever talked about the sort of the percentage of your pump patients who are Medicare age. And, I guess, what I'm trying to figure out is will these patients be able to now transition to be able to use an integrated Tandem device like, you know, I guess, upgrade to the X2 or something where they can use a CGM if they're going to get reimbursement on G5?

So our Medicare age patients are generally in the 10% to 15% range of our…

The people who are on Medicare, yeah.

Medicare and Medicaid, so that's sort of the population you're dealing with.

And as far as their ability to use the product, so we won't know whether or not Medicare would be covering any of the integrated systems until following FDA approval. And so, unfortunately, we don't have an answer for that at this time. But it's something that we will be pursuing.

Got you. Okay. And then just lastly in terms of the timing, the PLGS I think you're talking about now, summer 2018 is a realistic goal for a launch, I think that's a little bit further behind than early 2018. And is that just being conservative or is that based on your feedback from the FDA? Thanks.

Well, it's just a combination of the reality of the trial initiation, recruitment and that timeline. And then, we're assuming a standard review time for the FDA. So it probably would slipped most of all.

Okay, great. Thanks a lot.

Thanks, Tao.

Thank you. Our next question is from Matt O'Brien of Piper Jaffray. Your line is open.

Hi, good afternoon. This is JP on for Matt. Thanks for taking the question. I just want to touch back with the timeline there. You are saying that it took a little longer to recruit than expected. And the FDA, proving your ability of X2 to talk with G5, that should be in the near future. But that doesn't really - that's not going to have affect the timeline of the low glucose suspend, right?

No, no, that's right. PLGS is independent of the TypeZero program. And they're totally different to investigators that are involved in those, also different size of clinical trial for both.

Okay. So the midsummer launch of PLGS is not going to be the one talking with Dexcom sensor. That's going to be at the end of 2018, which is more of a closed loop.

The G5 will obviously talk with - the Dexcom sensor receives that signal. But we also use their transmission app to the Droid and the Apple platform. So you have that Share feature which others don't have in that marketplace. And what's really unique about that is it if you think about a parent sending children off to school. There is no way to get blood glucose values from them other than pick up the phone and call, call the school nurse. Now, they can actually track their children's control during the day. And we hear a lot about boyfriend, girlfriend or spouses actually looking over the other person's shoulder to see how they're doing, especially at night, because otherwise you have to wake people up and do a finger stick or wake people up and look at their PDA. So that's going to be a big advantage. I think people are really going to enjoy with the G5 in advance of PLGS being the automated hypo minimizer algorithm.

Got you. And then, yours will have - the one at 2018 will actually have an auto bolus correction, that you're probably the person on the market with that, correct? Do you know where Medtronic is in their process there?

Yeah, there is an announced process there. I don't know that I have the dates, but it's farther out than our program.

Got it. And then will you need to do anything once the G6 is out in terms of going back to the FDA or will it just be kind of a software update on your end?

Well, G6 is already being worked on by Dexcom to go the FDA in the same timeframe that we're predicting to be done with our trial and get approval. So that we'll have get approved and our X2 will have been approved with PLGS. Now, we're getting approval for the G6 plus the TypeZero algorithm. So we haven't forecasted any benefit from the FDA having seen these pieces coming sequentially. But that's sort of the order of events for the TypeZero product that is a G6 driven product.

Got you. And then a couple of more, one on t:lock is right now you are at 61% basically capturing and you should get 200% by the end of Q4 this year. What - can we get some dollar amounts of what revenue capture that could be in terms of the $10 million, $15 million?

It's going to be in the tens of millions. The way we sort of look at it is a customer who buys our product on a direct basis somewhere between 1,200 and 1,400 on a total basis for consumables, which includes cartridges and infusion set. And infusion sets are about 60% to 70% of that.

Okay. That's helpful. And then the last one for me on your kind of the pump market. You said - you commented that it's unfreezing a little bit, your feedback on synergies and mix. Have you seen sort of customer maybe trailing it or customers that were on hold come back to you guys thus far?

I would say, they are early in the trial phase still. Our best estimates is about 1,000 people are on the 670G. There is 20,000 in that queue in the priority access program. So I really have to say everything is anecdotal. There maybe a few cases of people coming back to us, but it's nothing we can measure trends on, because the end number of people actually trailing that 670G is pretty small, yeah.

Got it. Thanks for taking the question.

Thank you. Next question is from Ryan Blicker of Cowen and Company. Your line is open.

Hi, thanks for taking my questions. You discussed launching X2 internationally next year and said you plan to use distribution partners. Have distribution partners already been established or is that something you hope to achieve over the next couple of quarters?

We are in the middle of that process now having discussions, but we have not selected partnership.

Okay. And then, maybe another on G5 display integration. You've made very clear from the start that you'll offer that update free of charge to customers. However, why not charge a nominal fee just to help the near-term cash flow?

Well, I think our market standpoint, we really want people to actively do that upgrade, so they get the sense of the power of the Device Updater. I mean, we all are giving updates to our cell phones and giving them latest and greatest improvements, and we used to do it via computer, now we're doing it via our providers. But I really think this is something that we 20,000 of the X2 patients and we really want to push this out there quickly, and help them understand the power of what they're getting. So the healthcare providers really begin to buy into the importance of upgradability during the four year life of a product, because if you look at the next 2, 2.5 years, we're going to have three upgrades here. And so we just want to make sure, we get the broadest experience as we launch this first update.

Okay. That makes sense. And then I guess along those lines, after you've established that as you look forward to future software updates, is that something you'd be consider.

That is something we will consider in the future. I think, this first round, we really want establish the evidence that the way we go about upgrade, it's a simpler and easier process that doesn't involve clumsy hardware exchange programs.

Got it. And then one more quick one for me. Just on the trial timelines for the predictive low glucose suspend product. Can you provide any more details - more granular details and maybe when you expect to start that pivotal trial? Thank you.

Sure, we're preparing for a moment of the participants now, it's just based on the anticipated timing that that's going to be, and then with the crossover nature of the study. We don't expect the trial going to actually wrap up until just before year-end. And just based on the nature of the time it takes for the centers to prepare the reports, and then are filed the submission and then regulatory timeline. That's where you add it up. We also just - previously we've said, we believe that there's going to be a benefit because the FDA will just review t:slim X2 with G5 integration. And the only difference between the PLGS product and that product they're reviewing today is the algorithm. But we really are still assuming that it's going to be at least closer to six month timeline, if you add all these timelines up. And so we're not really expecting any benefit from it, but between now and year-end, really the focus for the pivotal is recruitment of the participants and then completion of the trial itself.

Got it. Thank you.

Thank you. Our next question is from Jeff Johnson of Baird. Your line is open.

Hi, guys. This is Tim in for Jeff this afternoon. Thanks for taking the questions. First on new patient dynamics in the quarter, when looking at the 60% of new patients that came from competitive conversions, I know you called majority of those coming from Medtronic and then J&J. But I'm just wondering if you've seen a shift in that mix. If you're noticing less coming from Medtronic and more from J&J as J&J has recently spell their channel support.

Well, I would say, the trend we've seen is increasing MDI usage. I mean, obviously we were at 50% sort of total in our base and now we're on the margin up in the 60% range. But I don't think there's any other trends that we've seen in the converting of population that we have. I mean, obviously, Roche is essentially out of the market, doesn't count for much. And we traditionally have not converted insulin pump patients, so over to a durable pump they like that patch pump, lack of a catheter feature. So MDI is very promising, the rest of it is just sort of static.

Okay, great. That's very helpful. And then in terms of your international rollout, I know, you call that Canada specifically, but would you be willing to provide any color on other geographies, particularly in Europe that you guys are going to be looking to get into first?

Yes, we've got some time to put that all together, we were looking at them, and there are some countries in Europe that have better reimbursement environment so forth. And obviously some of that reimburse pump. So we're putting that plan together, but Canada definitely is more like the U.S., addition that we can execute fairly easily. But we will give you more on which countries and when as we develop our plans toward the end of the year.

Okay. Great. And then, I guess, one last one. As you move to kind of a more of a recurring revenue stream with t:lock, and is that something that you might think about maybe down the road in terms of your palms? Just recently with the announcement from Abbott and Bigfoot, and what it sounds like a kind of recurring monthly revenue model they'd be going to, is that something that you guys would potentially be looking to explore down the road?

I think at this point, we think our business model is the way to go especially with the current reimbursement dynamics that are out there.

Okay. Great. Thank you.

Thank you. At this time, there are no other questions in the queue. I'll turn it to Mr. Blickenstaff for closing remarks.

Well, thanks everybody for joining our all today. We do have one healthcare conference between now and the next Q3 conference call. And that's the Wedbush conference which is in New York City and we're presenting on August 15. That's just several weeks away. So anyway, just in conclusion I think we have demonstrated strength in the first half of 2017. We have great product potential for the back half of the year with our G5 launch. And then beyond as we bring our PLGS and our TypeZero treatment [ph] range products to the market through our Tandem Updater, without these complex swap up programs. So we look forward to keeping you updated as we continue to make progress on our financial front and on our product rollout front. Talk to you next quarter Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.