Tandem Diabetes Care, Inc. (TNDM) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You've joined Tandem's Fourth Quarter and Full Year 2017 Earnings Conference Call. 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 may be recorded. I'd now like to turn the call over to your host, Chief Administrative Officer, Ms. Susan Morrison. Ma'am, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining Tandem's fourth quarter and full year 2017 earnings conference call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, product development 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, and our other SEC filings. We assume no obligation to publicly update any forward-looking statements whether as a result of new information, future events or other factors. In addition, today's discussion will include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods we will discussing during today's call. For additional information about our use of non-GAAP financial measures, please see the information under the heading Use of Non-GAAP Financial Measures in our press release. Kim Blickenstaff, Tandem's President and CEO, will be leading today's call. And at this time, I'll turn it over to Kim.

Thanks Susan, and welcome everyone to today's call. Also joining me today is Leigh Vosseller, our Chief Financial Officer. For anyone who has not have had the opportunity to meet Leigh, she assumed our CFO position at the first of the year and is already off to a strong start bringing in passion for Leigh's teams and delivering results. And looking back in 2017, it was a unique year, I am very proud of our ending results and the fourth quarter particularly. We demonstrated our more successful quarter to date with the greatest number of pump shipments and the highest sales in the history of our business, as well as continued gross margin in progress. We also successfully exited with several initiatives such as the launch of the t:slim X2 with Dexcom G5 integration in the third quarter. The launch of our custom t:lock infusion sets also in Q3. The transition of manufacturing to our new facility. And the advancement of our pumps with automated insulin delivery algorithms in the clinical trials. These addition to making meaningful operational progress and process improvements to improve our leverage allowed us to close the year very strong. Our positive momentum from the fourth quarter has continued in the first quarter of 2018. Last month, we successfully completed a $69 million financing which was beyond our original expectations and we anticipate will support our goal on reaching cash flow breakeven in the second half of 2019. Demand for the t:slim X2 remains strong and we anticipate demonstrating robust growth this quarter compared to the first quarter of 2017. We also reported outstanding results from a pivotal trial for t:slim X2 with Basal-IQ, which features a predictive low glucose suspend algorithm and recently submitted a PMA application for the FDA's review, which keeps us on track for a target to commercial launch the product this summer. We are also making meaningful progress in setting the foundation for sales outside of the United States beginning the second half of 2018. These achievements were make possible things for the resilience, perseverance of hard work of our employees especially over the past year. Thanks everyone including our distributors, suppliers, clinical partners for your continued dedication and efforts that contribute to building our business and improving the lives of people with diabetes. And taking a deeper look at Q4, the high demand for the t:slim X2 which driven by our successful launch of integration with Dexcom G5 Mobile CGM. The X2 is the smallest durable pump in the market and offers big features like color touch screen and Bluetooth radio. When we launched G5 integration in September, we set a new standards in the industry by simultaneously offering the feature of the both current and new t:slim X2 customers. We're able to do so through our revolutionary tool, the Tandem device updater which provides customers the ability to remotely update their pump software using a personal computer. Offering customers this capability underscores our goal to simplify the lives of people with diabetes by using software updates rather than hardware replacements to provide rapid access to new innovations. In a recently report from BQ&A [ph] a leading market research group dedicated the diabetes the ability to remotely upgrade pump software with among the top three reasons survey participants sides for choosing our pump along with good design, the style and the CGM integration. As the only pump company offering this feature, we believe it is a meaningful differentiating factor that tests apart today and for the foreseeable future. As we look to our new customers in the fourth quarter came from, it was great to see that more than half continued to report being new to pump therapy. It's a particular note as suggestion Tandem is continuing to expand the insulin pump market and bring the benefits of pump therapy to more people with diabetes. Of the customers who report converting from another manufacturer, we are glad to continue to see a high number of former Medtronic customers shows the fees for next year and we saw market increase from the former Animas customers following Johnson & Johnson announcement that they have decided to exit Animas from the insulin pump market. Historically, our shipments to former Animas, our customers who are in the low-teens, in December, we estimated grew more than 20%. As a reminder, Animas shows Medtronic to aid their customers and their transition to another pump. However, our inbound calls and subsequent orders substantially increasing the days following their announcement and they remain high. Early evidence suggest that the t:slim X2 will continue to be highly attractive to Animas users particularly because many Animas customers already use Dexcom CGM and we now offer the only Dexcom integrated insulin pump because Animas customers have a history of selecting an alternative pump to Medtronic. That being said, it's difficult to quantify the long term impact of Animas' decision on our business. Current prospective Animas customers had different options based on where they are within their pumps warranty period. Medtronic is in control the country list which puts us at a disadvantage. However, we believe that t:slim X2 is better aligned with the preferences of Animas users and we will be working hard to communicate the features and benefits of the t:slim X2 and to demonstrate our number one rated customer service the people using an Animas pump as they look to make their new pump purchasing decisions over the upcoming quarters. Overall, we're encouraged by the early interest from Animas' customers and we view this as a potential tailwind through most of 2019. As we look to what is going to help to continue to expand the insulin pump market and attract a high number current pumpers, our efforts to develop new and exciting innovation fall in the three main initiatives. First, automated insulin delivery or AID, which are algorithms for t:slim X2 platform. Two, our next generation hardware platform. And three, connected help. In 2017, the bulk of our R&D resources were focused on advancing our near term automated insulin delivery efforts which are Basal-IQ which we previously referred to is predictive low glucose suspender or PLGS and Control IQ, which is a hybrid closed loop algorithm using TypeZero's technology. Starting with Basal-IQ, this system utilizes Dexcom G5 center values to suspend insulin when low glucose is predicted and automatically resumes insulin delivery when glucose levels begin to rise. Our market research has shown that reducing the risk of hypoglycemia is the number one feature people with diabetes want in an algorithm, particularly at night due to the severity of the complications when left untreated. In January, we wrapped up the clinical trial of this product and support of our PMA, which we recently submitted to the FDA. The results were outstanding and showed that the system achieved the primary outcome of reducing time spent in hypoglycemia by 31% compared to sensor augmented pump therapy alone. These results are especially impressive given mystery participants started out very well controlled with meeting of A1C of 7.3%. Importantly this reduction of time spent in hypoglycemia was accomplished without any increasing the rate of hyperglycemia. We were thrilled to see these clinical results and equally important to us was the feedback and study participants, the system is easy to use and they had a high level of confidence using it without a significant training burden to get started. This support the usability data we presented at the Diabetes Technology Meeting in the fourth quarter, which demonstrated a 99% success rate among study participants who performed a series of critical past using the Basal-IQ system after initial computer based training. We believe the ease of use of our system will give us a competitive advantage compared to the other systems that are currently available and we are preparing to launch the t:slim X2 with Basal-IQ this summer subject to FDA approval. In the fourth quarter, we announced that all new features approved with the t:slim X2 by the FDA in 2018 including our Basal-IQ software will be made available to users for no cost. The tool is necessary for diabetes management can be expensive and this decision support our vision to new technology to reduce barriers that may delay access to ways available feature. Tandem has always been a leader on the consumer technology front, but I believe the launch of Basal-IQ will allow us to compete more effectively on the clinical and therapeutic front. Following the completion of the Basal-IQ trial, I received multiple letters from study participants as well as parents whose elementary school children participated telling their personal story about the system improved the quality of their lives. These letters provide continued motivation throughout our organization to bring this product to market as quickly as possible. We are also making great progress on our second generation automated insulin delivery system the t:slim X2 with Control IQ. Also designed as a software uptake for t:slim X2 users, this system utilizes Dexcom's G6 sensor values and automated insulin delivery technology that we got from the TypeZero. The system increases or decreases Basal insulin to minimize hypoglycemia and hyperglycemia and improve the user's time spent within a targeted glycemic range. The hybrid close look products has all been designed for competing products by providing automated correction analysis which we believe will bring additional benefits to our customers. And our market research people reported a strong preference for t:slim X2 with Control IQ as compared to the competitive system. Our participation in the International Diabetes Closed Loop Trial continues to progress. The trial was started in late 2016, is expected to include up to 360 adults with type 1 diabetes across all of its studies. Early phases of the stay use the Tandem insulin pump and Dexcom G5 sensor as a part of a blood glucose control system that combined these devices with a smartphone running TypeZero's in Control Closed Loop algorithms. The latest series of studies including the first pilot study was completed earlier this year used the fully integrated system. The pivotal trial is plan to commence in the second quarter. Accordingly we believe we are on an attractive file by rolling PMA submission to the FDA in the second half of this year and our goal is to launch t:slim X2 with Control IQ in the first half of 2019 following FDA review and approval. Our R&D efforts over the past year have prioritized bringing our automated insulin delivery products to market. However, we also continue make progress on our next generation hardware platform which we call t:sport. When we first launched the t:slim back in 2012, we were already planning and thinking about what our next generation hardware platform would offer. t:sport is a result of that effort and significant market research, prototyping and a second generation pumping hardware development and testing is already complete. t:sport is about half a size of t:slim and is being designed for people who seek even greater discretion and flexibility with the use of their insulin pump. We anticipate that t:sport will feature a low cost 200 unit cartridge and on pump is a rechargeable battery or a Control IQ algorithm and a Bluetooth radio. It's being designed for years with leading U100 insulin and this year, we plan to conduct research on the use of insulin concentrate as a potential alternative to t:flex for people with greater insulin needs. We're also evaluating offering a 300 unit cartridge alternative as Well. We anticipated clinical trial for t:sport in 2019 and our goal is to launch this product in 2020 or 2021 timeframe. Our third major R&D initiative which we refer to is Connected Health, really touches all of our current and future insulin pumps. Our Connected Health comprised of our t:connect data management application that is currently available by uploading data via USB to display pumping blood glucose and CGM information and has been the number one rated consumer's software since 2013. t:connect ACP which is a version of the data management application for healthcare providers will streamline use for multiple patients and office efficiency. The t:connect mobile application will utilize the capability a t:slim X2's Bluetooth radio to wirelessly upload pump data to t:connect for the first time and receive notification of pump alert forms, integrated other health related information from third party sources and support future pump control capabilities for t:sport. We intend to launch the first generation of our mobile application in the second half of 2018 with a subset of these features. Turning to a different type of growth initiative, we are actively preparing to commence sales outside the United States in the second half of 2018. We recently announced the filing of our medical device application in Canada and anticipate receiving CE mark in late Q1 or early Q2 this year. We expect to operate direct sales and clinical operation in Canada but primarily leverage our other domestic customer support resources. For other geographies, we plan to utilize distributors with mostly existing infrastructure and resources. As you can see 2018 will be another bust year for us. At the heart of our company is a passion to improve the lives of people with diabetes. Our product offerings and development efforts are in support of this mission as our sales and customers service initiatives. In the process, we are committed to building a sustainable business with improving margins and moving toward cash flow breakeven. In combination, these are challenged top priorities for 2018 and over the upcoming quarters, I look forward to sharing our future achievements. I will now turn the call over to Leigh to further discuss our results for the quarter and our financial guidance.

Thank you, Kim, and good afternoon, everyone. Closing the year with such a strong fourth quarter gives us great confidence moving forward. As the factors that positively influenced our results are not onetime event. We expect these same factors will be continue drivers of growth in 2018 and beyond and now we have had an inflection point where we can focus on leveraging our infrastructure investments while we return to strong sales growth. Our fourth quarter sales were approximately $40 million which with an increase of 39% compared to the fourth quarter of 2016 on a GAAP basis and an even more remarkable 62% when you exclude the impact of a technology upgrade program we launched in May, 2016. As Kim mentioned, sales in the fourth quarter were impacted by a number of positive factors, beginning in August with the FDA approval of the t:slim X2 with Dexcom G5 integration. We experienced an 80% sequential increase in pump shipments in the fourth quarter nearing 7,000 pumps in total. This with the largest sequential increase in pump shipment since the fourth quarter of 2015, when we similarly received the approval for and launched t:slim G4. This year also provided us the first full-year of renewal opportunities from customers who originally purchased the t:slim in 2013. It important to keep in mind that renewals do not automatically occur at the end of the four year warranty period. It can take time for the patient to fully evaluate the market options and connect to processing decision, as well as the time spend in the insurance verification and ordering process. Fourth quarter shipments including approximately 900 pump renewals bringing us to approximately 2,000 renewals for the year, but the vast majority of our customers continue to be new to our products. Pump sales comprise the majority of our fourth quarter sales at 67%. The price revenue also grew substantially due to the gradual rollout of our t:lock infusion set connector beginning in the third quarter. Over the course of 2017, we saw a steady increase in the ratio of infusion set sold as a percent of cartridges beginning at 51% in the first quarter to 88% in the fourth quarter. In fact, we reached a ratio of 99% in December. As a result, our infusion set sales were 8.4 million in the fourth quarter, growing to more than 20% of total sales. We expect these sales to increase to the mid-20% level in 2018 and beyond. Overall, our sales for the full year were 107.6 million on a GAAP basis or 102.6 million on a non-GAAP basis, excluding the impact of the technology upgrade program. Pump shipment for the full year 2017 were approximately 17,000 being at to nearly 68,000 since inception and just over 60,000 in the last four years, which we believe is a good way to look at our active install base. We expect to continue this momentum into 2018 and beyond based on five key growth drivers. First, as Kim discussed, we are on track to launch Basal-IQ and Control IQ in 2018 and 2019 respectively. Second, we will continue to execute on our renewal strategy. Our ultimate goal is to retain at least 70% of our existing customers with these new product offerings and a high level of customer survey. The renewal process is only for us and well our most tenure customers are at that retention rate, our steady state expectation is to scale their overtime. We originally shipped approximately 6,500 pumps in 2103 and 10,800 pumps in 2014 of which a significant portion provide near term opportunities. Third, the successful launch of our t:lock connector provides us the ability to capture 100% of infusion set sales for our installed base for all of 2018 and beyond. Fourth, we see a continued opportunity provided by Animas' exit from the market. And fifth, we are preparing for entry into international markets anticipated for the second half of 2018. We only expect modest benefit from our efforts outside the U.S. in 2018. We believe it positions us well for a long term growth. These factors give us confidence in our 2018 sales guidance of 132 million to 140 million representing a return to strong double-digit growth. We expect the pumps will continue to represent the majority of sales and the distributer mix domestically remained relatively unchanged from the mid-70% range we had historically experienced. Gross margin in the fourth quarter was 43% and just over 40% on the full year basis with no material impact from the technology upgrade program. By comparison, our full year GAAP gross margin for 2016 was 28%, also 80% on a non-GAAP basis. Since inception, we have focused on reductions and the cost of materials, labor and product warranty as well as the improvement of yields we process efficiencies. Volume is now the biggest factor and our ability to improve gross margins going forward as they will allow us to spread fixed overhead costs across increased production volume. We transitioned our manufacturing operations in recent months to our facility which doubles our manufacturing capacity at only a nominal increase in overall costs. The supply's gross margin although positive continues to fall below the overall average. This margin is expected to continue to progress as volumes increase, particularly as infusion sets become a greater percentage of overall sales. While our gross margin may fluctuate in a given quarter for variety of reasons particularly seasonality. We are on track to achieve our long term gross margin goal of 55% at our cash breakeven point which is anticipated in the second half of 2019. Operating expenses in the fourth quarter were approximately $27 million and $107 million on a full year basis. This represents of an increase of only 5% for 2017 which is the third year in a row of operating expense growth of less than 10%, while sales are going at much higher rates. We have focused on dollars in efforts on supporting the R&D product pipeline, driving growth without increasing our sales territories and maintaining our number customer service ranking. All of which are key drive to our long term success. We expect the operating expenses will again grow at a rate of less than 10% in 2018 as we gain additional leverage in the operating structure in which we made early investments. This includes spending necessary to successfully launch in international market. Overall, we expect our operating margin for 2018 to fall within the range of negative 40% and negative 35% of sales. This includes non-cash stock-based compensation and appreciation of approximately $12 million to $13 million. Beyond these operational goals, our major priority for 2018 is to continue properly capitalizing the company. We began last month by up-siding our public financing to $69 million in gross proceeds, which we believe it's sufficient to reach our cash flow breakeven target in the second half of 2019. We also have the opportunity to raise up to additional $32 million through the exercise of outstanding warrant from the equity offering we completed last October, half of which expire in April. Our recent financing eliminates one of the main point, our competition used to sell against us, as they choose the market against our financial condition rather than our product features where we tend to excel. Our sales force did an incredible job is growing growth to our top line despite the competitive headwinds and proceed financial uncertainty over the last 12 to 18 months. Our next area focus is evaluating our current debt level and how best to address it. To finalize our 2018 outlook, our financial guidance is for sales of $132 million to $140 million with an operating margin range of negative 40% to negative 35%. Historically, due to seasonality, we seen about 17% of our sales in the first quarter with the increased contribution from infusion sets and supplies from growing installed base, this is slightly to increase slightly to between 18% and 19% for the first quarter of 2018. We except to reach cash flow breakeven in the back half of 2019 at which timely anticipate having an installed base of at least 80,000 customers ordering supplies on a consistence bases. We believe the cash that we recently raised with the $24 million on hand at the end of 2017 provide sufficient funding to allow us to reach this cash flow breakeven point. Overall, the strength we saw in the fourth quarter of 2017 was highly encouraged, giving us great confidence and I believe that with was a turning point for the business. We continue to have big aspirations for Tandem and our confident in our ability to reach our long term goals and further our company's mission of improving the lives of people with diabetes. With that, I'll turn it over to the operator for questions.

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

Hi. Good afternoon, everybody.

Hi, Kristen.

I just wanted to go over again the renewal assumption that you had stated, sorry I missed those numbers, what you were assuming in the model?

Sure, it's no problem. Just to give a little bit of a high level on how renewals work, and generally there about a four year period and one important thing to remember is that renewals stop automatically at the end of the four year period. And so it could take some time after that in order to secure the sale. The industry generally on average experience about a 60% to 70% of renewal rate. Our goal is to hit the 70% rate but it will take some time for us to scale there. As I said, we shipped about 2,000 renewals in the 2017 which represents if you look back to 2013 about a 30% rate and still again, we expect to scale over the next year or two to the 70%. One important point to note as well as if you look back, to our most ten year customer both from late 2012 early 2013, we are hitting that 70% rate on those older pumps that we shipped.

Okay, so you're at the 70% renewal rate as it is stands today?

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

Okay perfect. And then just with respect to your assumptions around the breakeven and being cash flow sufficient, are you assuming exercising that warrants with the additional 32 two million or are you just assuming that the cash that you raise from the 69 million is sufficient enough and what kind of I guess other assumptions are you making that gives you the confidence to kind of get to that breakeven out and try to maintain, maybe just give us a little bit of additional color to get us comfortable that that's possible? Thank you

Yeah sure. As we went for the public financing, we had told everyone that we believe to they took 50 million to 60 million for us to get to that cash flow breakeven point. And we think that's really raise as you know $69 million. And so that is sufficient for us to get there. If the warrants are exercised that's just additional cushion for us to use our operating benefit. And when you think about that breakeven point, so we are looking to that to be in the second half of 2019. And what it really takes us to have about 80,000 customers are little more than that how are consistently ordering supplies. So it's going possible that we could pass that 80,000 points earlier in the year but it will be hitting that seasonal third and fourth quarter and those folks consistently ordering supplies will get us to that point.

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

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

Okay, perfect, I'll let others for some questions. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Rick Wise of Stifel. Your line is open.

Good afternoon, Kim and Leigh. Let me start with a couple of things here. I am just trying to separating questions. Maybe I'll start with the gross margin as well. You used to phrase leveraging the infrastructure, just help us think through and maybe could frame out you know the big steps, the big drivers of - what that means to you and who we would you think about leveraging the infrastructure, obviously volume is a part of that, capturing some sales in the infusion that's part of that mix. But help us think through that and just as part of answering that, as you march towards your mid-50 gross margin goal, where would you hope to exit this year, I know you only got operating margin but where to hope to exit this year based on some of these infrastructure leveraging initiatives that you're talking about as well?

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

And again thinking about aspirational gross margin exiting 2018 trends own direction?

Yeah, I would expect it, so for the fourth quarter in particular of 2017, our gross margin was - it was actually 44% on a non-GAAP basis and we think about hitting that 55% point at the end of 2019. So I would expect it to scale somewhat as we move across the years. So just keep in mind that the gross margin can be pressured early in the year because of the seasonality and outcome of the pump sale across the year. So pumps being the greater contributor to the margin. We will actually see a bigger improvement in the gross margin at the end of any giving year and it might reduce again at the begging of the year because of the seasonality.

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

You know as a group, a huge jump all for Animas business doing a really, Animas patients will tend to choose another durable pump and that's go to Animas, but the majority will either go to us or Medtronic. Probably the biggest competitive question last year when I talked in conference was you know our natural condition, I mean that what we were being sold against by our competition, now we are well financed, we have a good probability. That takes the headwind off the table. So it truly is just us and Medtronic and I think pace of our innovation has picked up here. If you go back two years ago, we were well behind in automated insulin delivery programs, well in the meantime the last year or so with the role out of the 670G and our own you know successful internal development, we're catching up, we're catching up quick and so that dynamic is going to be important this year because we got approval for PLGS before the second half of the year that's from the majority of sales happened. The GG approval last year, second half of the year was a big dynamic for us. So the innovation in the fact that it's a two horse race, we have your only Dexcom integrated alternative right now. So I think both are well for us.

Makes sense. Turning to Medtronic specifically, you know one dynamic that we've seen over the last whatever six, nine, twelve months is the - their sensor supply is use of the 670G. They seem to believe that that issue will be largely resolved in coming months for selling to their existing customers and fully resolved as the coming months unfold. How do we - you know as you look ahead of the next 12 months for Tandem, what well does that resolution their supply play in the debate and I wouldn't expect given everything on Tandem but should we be concerned at all that that might slow your momentum in any way say perform or change the debate on Animas conversion et cetera?

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

Just last one for me, Kim. This week we learned that Dexcom had participated in your offering and took a small stake and obviously it seems to be a smart thing to do and one of their most important customers, but how would you have us think about that, how are you thinking about it, what it mean, how do we reflect on it and again they have been asked publically, I am bit curious to hear your thoughts about it as well? Thanks so much.

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

Yeah, congrats on the strong quarter. Thanks Kim.

Thanks.

Thank you.

Thank you. Our next question comes from the line of Steven Lichtman of Oppenheimer & Co. Your line is open.

Thank you. Hi, guys. Kim, when could we see the pivotal hybrid closed loop data with ADA be a possibility and what other data in general should we look forward to this year?

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

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

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

But we do have programs in place for CE mark and multiple languages quite a long list. As we begin the look at these different opportunities, understand more about the peer environment, the overall size, that sort of thing, we'll have more concrete plan to give it later in the year.

Got it. And just last…

I has to be sales manager in both door and that gives a clue.

Good idea. And lastly, Leigh, you mentioned that infusion set revenue will increase to so closer to mid-20%, I think in cartridge sales still stay in a sort of low double digit 10%, 12% range?

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

Got it. Thanks guys.

Thank you.

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

Hi, thanks for taking the question. I wanted to first start out on the international to see this year you're going to have an offer for Animas patient similar to what you did here in U.S. to attract those over more rapidly?

Yeah. I think we're still early in expiration phase that what we're doing internationally right now and major focus is getting the pump the CE market for the pump and the products. And we will be thinking and talking about that more lately in the year.

Okay. And then Kim, I was wondering if you could maybe just help us conceptually understand the main differences between your Hybrid Closed Loop system and the competitor, I mean obviously you got Dexcom G5 sensor which is more accurate and uses touchscreen, but can you sort of help us get to the key differentiator of the algorithm why that's still important and where you think that's going to be the real advantage when you compare the two and when the data does come out?

Right, well there is two dosing decisions, one is bolus doses and the other is basal rates. And so automating the basal part it takes static setting and make it responds to actual circulating glucose levels. So we both have that. The other piece probably the bigger piece is bolus calculation. That is the manual input by the patient. They do card counting based upon learning from the dietitian, what they are going to eat in meals, they enter those carbs. There is an insulin the carb ratio that's also an estimate and then you need your current blood glucose value to adjust that. That can be very error so what the system will do is look at the response to that dosing and make correction boluses if the patient has made an error. So it's really reduce both pieces of dosing error that takes place around the clock.

That's helpful. And then last one from me. Just given all the data we've seen on your side and then to see innovation you have got in the new product launches over the next several years, is there any change you go back and you can reengage with some, one of the large commercial payers here in the U.S. and maybe get back on their covers list?

Yeah, I have said repeatedly we have had never done a clinical trial before to get approval of products. We didn't have to, there are over 5, 10-K or there are PMA with no patient clinical trial so we have no prospected data. Now we have a very robust well controlled clinical trial, I have two arms to it and we showed significant reduction in hypoglycemia without increasing hyperglycemia. So I think we've finally what we need to begin to have those conversations again and we will.

Got it. Thanks for answering the questions.

Thank you. Our next question comes from the line of Doug Schenkel of Cowen. Your line is open.

Great. Good afternoon and thank you for taking my questions. Starting on PLGS, it seems like Dexcom will G6 approved in the U.S. around the time you launch PLGS. Is there any way to incorporate G6 into your PLGS quickly after its approval or will patients not be able to get to use G6 integrate with Tandem until the launch of your Hybrid Closed Loop?

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

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

Exactly.

Okay. Pivoting over to I guess just thinking about Hybrid Closed Loop and in TypeZero, you've committed to not charging customers for any devise update or upgrades in 2018, however you know it's a huge step forward with your Hybrid Closed Loop product and given TypeZero is likely going to have a financial interest in sales associated with that effort. Is it further assume that you're going to charge at least some nominal fee at least for existing customers to upgrade to that product in 2019?

We haven't made that decision yet. We think the more appropriate router is to go to CMS and demonstrate that were actually cutting healthcare cost off and this significant new technologies that was developed that's unique and will they get reimbursement for greater safety and efficacy. So that's the approach that you know we will be taking. And I think that's probably the most prudent approach.

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

That's correct.

Okay. Alright, that's really helpful. Thanks for both.

Thank you.

Thank you. Our next question comes from the line of Jeff Johnson of Baird. Your question, please.

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

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

Yeah, alright, fair enough. And then Kim, you know when I look at your development on the HCL, I had two questions, I guess the first one is you've come up with a way to have some of that funded by external sources which is you know obviously a helpful thing. When you get to a mid-2019 launch or first half 2019 launch, you know some of this cash that you raised will have been kind of burned away. So I guess my question is how big do you think your launch cost might be at that point, is that something where you could track down some external financing there or external help there as well, do you think you'll have enough cash flow to really go hard and heavy on a launch relative to what Medtronic been doing, just trying to understand kind of what happens as we get closer that HCL launch next year?

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

Okay, yeah and I would think more on the marketing side whether it's DTC reach out to docs things like that, it sounds like you don't think those costs will be significant anyway?

No, not incrementally higher than what we spend now. I mean ultimately we'll have to make a decision about when we expand a field sales force and we'll analyze that as we go along. Big component of that is our sales people now have set sales and renewal before saw just you know new organic growth. So as they become more productive, they may reach a saturation point and you know will increase territories when that makes sense, but right now it doesn't.

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

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

And the trouble be worth noting to support the Kim's comments that we have been doing that IDE process as well for each phase. You know the international IDEs Closed Loop trial has broken into many different segments and we've just been able to move I think very efficiently through that process. I mean a big part of it is because we have the same exact hardware platform that is updatable. But we have had ongoing discussions with the FDA and so we are doing those stock in between.

Understood. Thanks guys.

Thank you.

Thank you.

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

Yeah, this is Kim. Thanks for joining us today. Just an update, next month we'll be attending two investor conferences, the first one is on March 14th, Healthcare Conference in Boston and then on March 21st, we'll be at the Oppenheimer Healthcare Conference in New York. So thanks for listening to us today and asking great questions. And we look forward to keeping you updated as the year progresses. Thanks.

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