Tandem Diabetes Care, Inc. (TNDM) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You have joined Tandem's Third Quarter 2018 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 would now like to turn the call over to your host, Chief Administrative Officer, Susan Morrison. Ma'am, you may begin.

Thank you, Latif. Good afternoon and thanks everyone for joining Tandem's third quarter 2018 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 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 and our most recent Annual Report and 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. I'll now turn the call over to Kim Blickenstaff, Tandem's President and CEO who will be leading today's call. Kim?

Thanks Susan and welcome everyone to today's call. Also joining me today are Leigh Vosseller, our Chief Financial Officer; and John Sheridan, our Chief Operating Officer. 2018 has been incredible. We delivered a record setting quarter in terms of robust sales, improving gross margin, and modest use of cash. We started the year with a list of potential growth drivers including the launch of the t:slim X2 with Basal-IQ technology, strengthening our core business through scaling supply and renewal sales, our opportunities from the analyst exit from the market, and our international launch. Each of these factors independently have the potential to drive the business and our more than 70% year-over-year growth this quarter is evidence of our success across each of these initiatives. The demand of t:slim X2 worldwide is strong and our positive momentum continues to build. In the United States, our launch of Basal-IQ technology in all August aligned perfectly with the Annual Diabetes Educators Conference. It was an ideal opportunity to showcase our new product and educate this important group of clinicians about its features and benefits. People were amazed by the simple-to-use automated insulin delivery feature and to learn that there is only one new screen to run the Basal-IQ technology. This enthusiasm is translated into a nearly 120% increase in year-over-year pump shipments this quarter and we are seeing more new routine prescribers who were previously Tandem advocates beginning to recommend the t:slim X2 pump. This supports our strategic vision that ease-of-use is more than convenience. It drives technology acceptance by both users and healthcare providers. The feedback from users is also overwhelmingly positive. Customers are reporting that it's helping prevent lows and also avoid the rebound high-blood glucose that people of diabetes often experienced when they're forced to treat unexpected lows. Many described the product as life-changing. We set out to change the standard-of-care in insulin delivery and I believe that Basal-IQ was an important step in our doing so. As you know, we offer Basal-IQ technology to more than 30,000 t:slim X2 customers for no cost. Already, approximately 6,500 of these customers have obtained a new prescription, completed our online training module, and updated our X2 software to include the Basal-IQ feature. As you can see, overall, we've been extremely happy with the product launch and an early feedback from both our customers and healthcare providers. We also continue to see strength in the overall market, with about half of our new customers reporting being new to pump therapy and continued growth from Medtronic and anonymous conversions. Our renewals are also getting momentum with an 83% increase in year-over-year renewal shipments for the quarter. Another driver for us is our international launch of the t:slim X2 with G5 integration. We've been working through various prelaunch activities in select geographies and anticipate that these will continue to scale in the fourth quarter next year. Overall, we're already seeing early indications of high demand. Off note [ph] is our most recent approval in t:slim X2 by Health Canada. Our direct sales in clinical organizations in Canada are staff and trained, and we're thrilled to have this great group of individual join our Tandem family. As a reminder, in other geographies internationally, we have partnered with experienced distributors for a customer sales and support. Undertaking, our international expansion this year has required a tremendous amount of work across our organization, but the team has done amazingly well and bringing to fruition our dream of offering the t:slim X2 to people worldwide. The thing that makes where we stand today the most exciting is that, the same catalyst we identified a year ago are still in place and present us with a tremendous opportunity for the year ahead. As we look forward, we'll be working to build upon our momentum by continue in the scale our business into a leading global diabetes management organization, while advancing our product pipeline and furthering our mission to improve the lives of people with diabetes. Over seeing our product development effort is John Sheridan, who may have the opportunity to meet at our recent Institutional Investor and Analyst Day. John has been with Tandem for more than five years focusing on the operations of our business. In addition to R&D and regulatory, his responsibilities also include quality, manufacturing, and program management. John and his team have been in close contact with the FDA on a establishing our iPump strategy on the agencies interoperability initiative, which I've asked him to review with us here today, along with providing an update on Control-IQ. John?

Thanks Kim and good afternoon everyone. The FDA's new concept of interoperability presents an exciting opportunity for Tandem. It is intended to reduce the regulatory burden for both the agency and manufacturers as well as accelerate innovation in our market. As a reminder, the concept of interoperability applies to an automated insulin delivery system, which contains three key elements; the insulin pump; the CGM; and an algorithm. The FDA has already introduced the interoperability CGM or iCGM classification with the fine regulations and required specifications referred to as Special Controls. Dexcom's G6 was a first CGM approved with iCGM designation and an initiatives are now underway to determine the Special Controls for the iPump classification. Similar to Dexcom's efforts this year to help us establish a new device class for iCGM, we're working with the FDA to establish a new regulations in Special Controls for an iPump device class. iCGM significantly reduced the regulatory process for our Basal-IQ system and brought great benefit to our X2 customers as it allows faster access to the benefits of Dexcom's G6 sensors. This newly defined process for interoperability is important to our regulatory strategy for our new products in development. For instance, for Control-IQ, instead of filing a modular PMA for the entire system as we originally planned, we are now pursuing a de novo process for our t:slim X2 pump platform, which we filed in October. We expect to file for regulatory approval of the Control-IQ algorithm, once the clinical data is available next year. Like iCGM, once approved, we expect the iPump regulation will allow approved Insulin Pumps to be incorporated into automated insulin delivery systems reducing the regulatory burden and as a result, potentially accelerating commercial timelines. The clinical study for Control-IQ is now fully enrolled and we remain confident that it will be complete this coming spring. We plan to submit the application to the FDA as soon as a clinical data is available and we continue to work towards our goal of launching Control-IQ next summer. To be clear, Tandem will be PMA holder for the algorithm as integrated in our Control-IQ system. UVA and TypeZero developed the core technology underlined our Control-IQ algorithm. However, the PMA approval will be based on our specific implementation of those formulas and will rely on our technical files and our clinical data. As a result, any other company with the TypeZero license would still be required to create the specifications and implement the algorithm into their own system, which is a substantial task. In addition, other licenses will be required to complete one of our clinical studies in order to gain approval for their device from FDA. It's also worth noting that the i-designation does not mean elements of an interoperability AID system, automatically integrated with companies from other organizations. The involved organizations must have formal agreements in place to define how the interoperability components must be integrated from both R&D and business perspective. These relationships, such as the one we have with Dexcom, are defining agreement that outlined how we work together to develop products, support our customers, investigate, resolve, and report complaints, and address financial terms. Overall, the FDA's interoperability initiative is evidence that the agency recognizes that the pace of technology is accelerating and they support bringing new products to market in a more rapid pace. At Tandem, we are committed to our goal of launching new products each year and furthering our efforts to improve the lives of people with diabetes. And with that, I'll now turn it over to Leigh for her comments on the quarter and financial guidance.

Thank you, John and good afternoon everyone. Our third quarter results once again reflected strong growth for our business and what continues to be a robust Insulin Pump market overall. It represents our highest sales quarter in history at $46 million and include for the first time nearly $3 million in sales from our recent international expansion. Pump sales continue to be the most significant driver of our growth at 67% of total sale, followed by infusion sets at 23%, and cartridges at 10%. This brings us on a year-to-date basis to $108 million in sales, an incredible 60% growth year-over-year considering that the prior year also included a $5 million benefit from the Technology Upgrade Program in place at that time. We shipped approximately 8,400 pumps in Q3, including 1,100 pumps shipped into international market. On a year-to-date basis, we have shipped more than 18,300 pumps which is already 7% higher than what we shipped in the full year of 2017. In the U.S., this brings us to over 70,000 pumps shipped in the last four years, which we considered a reasonable estimate of our in-warranty installed base. Our pump sales also included approximately 1,100 renewals this quarter compared to 600 renewals in the third quarter of last year. Approximately 20% of the renewal sales this quarter still came from customers who bought their original pump in 2012 or 2013. And the renewal opportunities continue to build with the ongoing expiration of warranties from the nearly 11,000 customers who purchased pump in 2014. Sales of supplies again increased significantly to $15 million this quarter compared to only $9 million in the same quarter of 2017. This was the result of a general increase in ordering customers combined with the capture of infusion set sales to our entire install base in all of 2018. From an overall sales perspective, our guidance philosophy is to set expectations, we feel confident in achieving based on factors that are within our control, such as capitalizing on our renewal opportunities and the success of our infusion set strategy. When we first set expectations at the beginning of this year, we were optimistic about many opportunities including our ability to benefit from Animas' exit and our international expansion plan. But it was extremely difficult to predict how much benefit they would provide to our growth this year. With each passing quarter, we have continue to see extraordinary strength in all of these areas and therefore, continued to raise our annual guidance expectations accordingly. Now, with better than expected results from the recent launch of our Basel-IQ technology and our continued [audio gap] into October, we are again raising our 2018 sales guidance to a range of $160 million to $165 million from the previous range of $150 million to $158 million. This includes estimated international sales of $7 million to $8 million. Gross margin in the third quarter set another record for us. We continued the pattern of a sequential increase to 47%, continuing to scale up from 42% in Q1 of this year. We also demonstrated significant improvement compared to the prior year gross margin of 44%, which included a non-recurring benefit of five margin points from the Technology Upgrade Program in place at that time. These improvements reflect leverage gained from higher production volumes to meet increased demand and a significant contribution from sales of pumps, which have the highest growth margin of our products. We also continue to benefit from incremental gross profits associated with the 65% year-over-year increase in infusion set sales. Gross margin was slightly pressured by a higher level of non-cash stock-based compensation than we have seen historically. In the third quarter of 2018, gross margin included a charge of $800,000 or two margin points compared to $300,000 or one margin point in the prior year. Other factors that have and will continue to impact gross margin are seasonality, product mix, direct versus distributor mix, and the percent of sales that comes from the international business. We continue to drive towards our goal of a 55% gross margin by the fourth quarter of 2019. Operating expenses were $38 million in the quarter including a significantly higher level of non-cash stock-based compensation of $9 million. By comparison, our operating expenses were $29 million in the second quarter of this year with $2 million in similar non-cash charges. The increase for this non-cash charge both in operating expenses and gross margin, reflects the valuation of employee stock option grant impacted by significant appreciation in our stock price in the first half of this year. Other increases in our operating expenses include cost associated with advancing our product pipeline and higher incentive-based compensation based on our sales results. Overall, our strong sales growth and growth margin progression continue to drive improvement in our operating margin both on a year-over-year basis and sequentially to negative 34% of sales. We now expect our 2018 operating margin to be in a range of negative 37% to negative 32% of sales. Adjusted EBITDA which excludes the impact of non-cash stock-based compensation with negative 10% or only negative $5 million this quarter. Considering our anticipated sales growth, we are well-positioned to reach our breakeven target for adjusted EBITDA in Q4 of this year. We ended the quarter with $114 million in total cash and investment and are now completely debt-free. The cash balance has increased by $17 million from the end of Q2. This includes $21 million of net benefit from an equity financing completed in early August that we used to pay-off our term loan debt. Excluding these net proceeds, we substantially reduced our cash used to under $5 million for the quarter, even with the ongoing investments to support our R&D indeed pipeline and commercial team, as well as early investments made in our international infrastructure. In summary, we are increasing our annual sales guidance to a range of $160 million to $165 million with an operating margin range of negative 37% to negative 32%. This includes approximately $27 million in non-cash expenses for both stock-based compensation and depreciation and amortization. We expect to reach cash flow breakeven by the fourth quarter of 2019. With that, I will turn it over to the operator for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Travis Steed with Bank of America. Your line is now open.

Thanks for taking the questions. First, I wanted to touch on the international business. I think you said, Q4 you could do $5 million to $6 million there. Is there a reason why there won’t be a run rate for 2019 on a quarterly basis or potentially growth sequentially through 2019, so revenue could be north of 20 million to 25 million next year?

Hi Travis, this is Leigh. Thanks for calling in. Regarding our international business for next year, of course, we haven't given a lot of color on that, but what I'll say is that we're just getting started there and so it's hard to say at the moment where that will go. I'll just remind you that we do have a significant opportunity in the very near-term because of the Animas customers who will be trying to come up with their pump in the next nine to 12 months and then we see that’s the real opportunity for us. But no specific guidance in terms of the dollars.

Okay, that’s fair. And previously you commented on being around 80,000 patients in the U.S. in the second half of 2019. Looks like you're going to be there a little earlier than that maybe potentially even this year. Just curious if you could give an update on kind of where you expect patients in the U.S. to be kind of the second half of 2019 or end of 2019. And also if you can maybe comment another LRP just around mid-20% revenue growth over the next five years. Just curious if you could maybe comment on a good starting point for a revenue growth in 2019, given the momentum that you have a low 30% growth a fairly good starting point?

So, again, we're not giving any color yet on 2019 and where we expect to be. Keeping in mind, particularly, because as we're heading into the fourth quarter, it's really our highest seasonal quarter and it's the base sign as we think about where 2019 will go. But I will remind you that 2019 is another real opportunity for us. Just like OUS and U.S., we still have the of Animas opportunity in the first nine months. We don't know if any competitor product introductions that we expect next year, so we still feel like there's this void or this window of opportunity for us to continue to grow the business at relatively high rate. So, we look forward to giving you more color around that. We typically give our 2019 guidance at our Q1 earnings call.

Okay. And just one quick follow-up. I know at the Analyst Day, I think you mentioned having a conversation with [Indiscernible] in the fourth quarter this year. Just curious of the conversation happened or if it's on the calendar at this point?

We have not yet had a conversation, but we do look forward to the opportunity to speak with them. And as we've mentioned in the past accumulating the Basel-IQ data was the first real step in order to get us in front of them. And we believe that that coupled with the Control-IQ data to come next year that will have a real opportunity to try to get back into that network. But just a reminder, we don't ever -- we have not factored in that the UHC opportunity is in our in our guidance and so really its upside to the business if that were to come about.

Okay. Thanks for taking the question.

Thank you. And our next question comes from the line of Brooks O’Neil with Lake Street Capital. Your line is now open.

Thank you and congratulations on a terrific quarter. I have a couple questions. First off, I know you're probably reluctant to talk about Dexcom very much but could you just give us any sense for how the integration with the G6 has proceeded and what you're seeing in the field in relation to uptake of the combined G6 with your Basal-IQ?

Hi, Brooks. It's John Sheridan.

Hi, John.

I'll just say we had a great relationship with Dexcom and with TypeZero for that matter. We worked very closely with them. We have frequent management meetings and the engineers also work very closely with the teams. We believe they've got best-in-class technology and you know and we look forward to a long relationship with Dexcom. I would say that you know from what we've seen so far the integration with the G6 is going extremely well. And when you look at the anecdotal feedback we're getting from the field people really appreciate the fact that there's no fingersticks and the integration of the technology is working the way we would expected to.

I would also add, Brooks. It's a least burdensome system out there because we eliminated the fingersticks with the G6. That's a big advance to get Basel-IQ through the ICGMO ruling. So, that's another big aspect of this. Also, the simple training there's only one screen and people will accomplish the training very quickly and successfully without having to see a caregiver. So there's a lot of pieces to the demand for it.

Yes, that's great. I think it's a huge step forward for diabetics. I'm excited for you and I'm excited for that. So it's a big deal. I'm curious just a little bit here. You commented in the press release 1,055 pumps sold internationally and I think you commented $2.5 million revenue. That left me with 7,379 homes for the OUS market and $43.8 million of revenue. Can you just help me to get a better sense for what's going on there and if my math is right how should I think about that?

I'm sure. So you do have the numbers right. And you aspect 2.5 million was primarily comprised of pump sales and just a reminder when you compared to US business from an average selling price to the OUS business that we see a significant hair cut to the selling price there, so well on OUS the realized reimbursement on the pump is around $4,000 for us, OUS it's about half of that. So, in the $2,000 range, slightly above. And so then from a U.S. perspective if you think about the business the pump sales overall were about 67% of the business followed by infusion sets for cartridge being the smallest piece of that.

Okay, that's very helpful. Thank you very much. I know its early days, but do you have any comments on Canada and what's happening up there?

Only that we're super excited about getting started there with great to get that approval because it meant that we could start marketing and so our sales force is in place and they are actively speaking with physicians. And the next big step for us is to get the approval in each province for reimbursement. And so once we have that we'll be able to start shifting the pump and we expect to do that by the end of this year.

Great. And then my last question I really appreciate the commentary is can you give us any update on manufacturing and how the scale up is going. I know we all had a chance to see your manufacturing facility at Investor meeting but is the scale up going as planned and do you think that can continue as you move into 2019?

Yes. And Brooks, we've definitely seen an uptick in demand. I think -- to a certain extent we anticipated that and we are planning ahead. But all of the organizations that are customer facing as well as manufacturing have been scaling appropriately. It's been a lot of work. But I'll tell you that the organization is extremely enthusiastic about this and we're motivated it's great to see the uptake of our new products. And it's kind of a real -- it's a good problem for the organization to have. And I think we're responding appropriately.

That's great. I lied. One more question.

Actually Brooks, I got to ask you to jump back in queue.

That's fine.

Thank you.

Sorry about that Brooks.

Thank you. And our next question comes from the line of Alex Nowak with Craig-Hallum. Your line is now open.

Great. Good afternoon everyone. I just want to touch on the implied Q4 guidance. I think the move up in the guide makes sense for everyone but is it safe to say we could see actual Q4 results much higher even from here. I mean you grew the first nine months of 2018 by 60%. But your guidance is implying about 36% growth for Q4. So I know Q4 is a tougher comp but I guess why should we experience the material slowdown or do you think there's just some level of conservatism is still in the guidance.

Sure. I would just say that I'm always -- there's always some level of conservatism or caution for things that we can't anticipate namely one would be the competition, but we have seen great benefit this year which we expect to continue into the fourth quarter with a little bit different this year that we haven't seen in the past that typically we see about 35% to 40% of our sales fall into the fourth quarter and to what we refer to as the pump season. But with the introduction of Basel-IQ with that approval in June and the sales beginning in the third quarter, we saw a sequential decline from Q2 to Q3 that we haven't seen in the past. And so I think that the pump season may have started a little bit early this year. So, we're still optimistic about the fourth quarter and what it can bring. But it's early in the quarter. So, good news so far though.

Okay, that's helpful. And it looks like Medtronic might be delaying the clinical trial for the 690G. Now I understand you're not Medtronic but I'm just curious what are you hearing about that? And do you know is it fair to say if a 690G delay would that I assume that would only just benefit tenants market share in the 2019 to 2020.

We've heard is that the -- their study has been delayed to beyond April of 2019 and that was very recent, the commercial launch, yes.

Got it. And then just one last one. You know I think there's often some discussion out there about several issues with the Medtronic 670G. It sounds like regulators might be taking a look there. So just curious are you hearing any issues on 670G?

Well, I think you're probably referring to MDRs and I think that you know as a medical device company we all have MDRs. And you know it's the mechanism that the FDA uses to you know to just keep track of safety issues and keep the general public aware of what's going on. You know I would say that relative to Medtronic is probably something that's best conversation with you and the FDA and not us.

Okay. Fair enough. Great quarter guys. Thank you.

Thank you.

Thank you. And our next question comes from the line of Matthew Blackman with Stifel. Your line is now open.

Hello everyone. Thanks for taking my questions. So couple of questions on international that'll just one together if okay and then one quick follow up. So to start on International, now that you're more firmly planted in several OUS geographies do you have any better sense of the remaining Animas conversion opportunity? And then the second part of that question is as you think through each of these new OUS geographies and above beyond the Animas conversion cycle which of these reasons would you expect to have the largest long-term opportunity?

So, at this point we still don't have a great sense for what's left in terms of Animas customers. I will say that our distributors are you know served that business before and we think that as many people that could waited for us to come. But again, we'll have to see how that pans out here in the next few quarters.

And then the. And then as we think about the you know these launches in multiple geographies outside the U.S. is there anyone in particular or several in particular. And I'm thinking above and beyond that the shorter-term Animas conversion opportunity that are notable in terms of the size of the opportunities over the longer term?

Yes, we haven't really given any color as to the size of the market in the different geographies other than I would think Canada in particular. They have about 300,000 pumpers there. And so that's one of the larger opportunities. But beyond the Animas opportunity we're launching with t:slim X2 with the G5 integration and so growth opportunities beyond next year really come from our ability to launch the Basel-IQ and the Control-IQ algorithms there down the road.

Okay. Thanks. And then my follow-up on Animas in the U.S. I'm not sure if you're willing to disclose the mix of Animas conversions and your pump number this quarter is so great. But if not, can you at least give us some directional sense of how that number compared to the last quarter or the last several quarters.

Sure. So historically before JNJ announced the exit in Animas from the market. Animas had represented in the low teens as a percent of our pump shipments. And so we're very excited about what we're seeing the pump shipments now in the last three and four quarters. We still managed to convert over 50% from MDI but Animas and Medtronic both have also double compared to what we are seeing in the past. So we're keeping that healthy balance of attracting new pumpers but also converting from the other companies. So same trends have continued for Animas we've seen since they announced their exit.

All right, thanks so much. Thanks everyone.

Thanks Matt.

Thank you. And our next question comes from the line of Ravi Misra with Berenberg Capital. Your line is now open.

Hi, everyone. Thank you for taking the questions. So just one on guidance and I have a couple of follow ups. The up guidance -- when we had the Analyst Day Canada had not really been improved. The guidance that was given at the time inclusive of sales in Canada or you know now that you have approval is that upside. And then secondly, the second part of it I mean you kind of left that alone which suggests a stronger U.S. market. Is that being informed by a higher price or just kind of greater demand and any clarity there. And then a couple of follow ups. Thanks.

Right. From the Canada perspective that with factored into our international guidance already and we really expected to be modest this year mostly because of the timings from when we got approval and having to get the reimbursement set up in each of the provinces so Canada is just getting started and factored into that original expectation. And then in terms of the U.S. we are enthusiastic about the fourth quarter again it's that Basel-IQ launch the timing that it came about and then great enthusiasm that we're seeing over the product that is really driving the movement into the fourth quarter and the excitement over the domestic revenues as well.

Great. And then just on that that I think you suggested Kim about 6,500 people have upgraded to Basel-IQ is my back of the napkin kind of attachment rate to your installed base, your t:slim installed based are on 22% to 23%. And would you see these guys as you're kind of initial market for Control-IQ when that eventually comes out how are you kind of doing that adoption cycle in-house?

Well, obviously, there are the early adopters obviously they were like were using the integrated Dexcom G5 product and we expect that to accelerate. CG of about 35 40% of our installed base. So we hope to see that kind of an adoption level and perhaps even higher as the word spreads about what it does for giving control. And certainly, we're seeing know both reductions and hypoglycemia and re-round hyper. And I think the improvement in the Control-IQ will be something that people will even want to have as additional control measure.

Great. Thanks. And then maybe one last one just on kind of TypeZero, your competitor today announced that they have a relationship with Tidepool. Can walk us through kind of how you think about working through or partnering with some of the companies that are out there providing algorithms for ID devices. Thank you.

Well, we are working on improving the Control-IQ algorithm ourselves. We have resources internally that are focused on that and we continue to make that a priority for the time going forward. I would say that we also collaborate quite a bit with universities that do research in this area. And we have while they're not defined partnerships we do provide pumps and we're closely with these organizations to understand what's going on out there. So we didn't hear about a partnership with INCLET and TICO and I think that you know there's not a whole lot of information regarding the timing and the clinical studies and those sorts of things and I guess we'll just have to wait and see when that information is available. And we've always said this we're not really competitive with insulin. You know if MDI patients coming onto a system for the first time and we get a very large share of that. And that's where their patients come. And we don't see much switching back and forth between the two systems. So I don't really use the word competitor when I talk about insulin, so another good option.

Great. Thank you.

Thank you. And our next question comes from the line of Kyle Bauser with Dougherty & Co. Your line is now open.

Hi, guys. Good afternoon. Following up from a previous question you mentioned that conversions from Animas immediately following their exit was about evenly distributed a third across you and the other two competitors. I mean given the last enhancements in the latest systems and you know your traction I imagine your conversions are a lot higher than now. Do you have any sense for what the latest conversion rate is compared to your competitors?

Unfortunately, information we would love to have but we don't have that available to us. There are a number of factors. One is that a lot of those patients are being serviced by Medtronic today. Our distributors have access to a certain portion of those but we unfortunately don't know but we do believe a third a third they'll probably seems like a reasonable.

Okay. And gross margin in the quarter 47% a nice jump from the last quarter and inching closer to the breakeven benchmark 55% by late next year. What quarterly sales number gets you to 55% gross margin as you talked about other efficiencies you expect to achieve to help meet that goal?

It really comes back to increasing the production volume that's one going to be the biggest driver between now and next year. We've already seen a lot of the efficiencies in the processes by putting our new manufacturing facility into place. And so in terms of a run rate the way we think about it some of that earlier we had communicated 80,000 customers on our installed base. And so while we might hit that milestone earlier than the back half of next year it's important to have that many customers at least in the first half that are consistently ordering supplies in the back half. So that's the milestone that really gets a fair and it's difficult to give a run rate since the business of seasonal.

Great. Thanks so much.

Thank you. And our next question comes from the line of J.P. McKim with Piper Jaffray. Your line is now open.

Hi, good afternoon. Thanks for taking my question. I wanted to follow up on John's comments about I mean he really kind of feel at home that you guys have TypeZero and others could get up but it wouldn't be quick, right. So it seems like when you launch to show like to feel like you you're really going to have at least a year maybe a year and a half head start on anybody else in terms of having the most robust system out there. So, as a company strategically what can you do next year or even now to accelerate kind of competitive wins it's you know offering some discounting to Medtronic users or Animas users or accelerating the sales force additions under the 19 and I'm just trying to see how you should think about next year to take advantage of this kind of gap where you've got the latest integrated system out there.

J.P. it's John. And good talking to you. I'll just focus on the product part of the question and I would say that as I said just a moment ago we're definitely continuing to work on improving the algorithm and we're working with TypeZero and others. When we implemented the algorithm we didn't do anything to it. We made it we actually implemented it identically to the way that TypeZero had just so that we could accelerate our process through clinical trials and the regulatory approval. But now we're looking at it carefully and we believe we're going to make improvements that and those are going to be available in time. We haven't put together a specific schedule for that yet or the timelines. I'm sure we will in the near future and communicate that to you. And the other big thing that's happening obviously is as sport sports the internal name for our t:sport pump you know we are very excited about that product. Our team is fully staffed and we're really working aggressively to get that from market. We believe that the iPump designation is going to pull in our timeline for it. And I think that we still feel comfortable that we'll get approval in the 2020 timeframe and maintain our cadence of one significant new product annually.

Okay, but is there anything strategically that you're going to offer out there or are you going to hire additional reps to accelerate share taking next year.

Hi, J.P., it's Leigh. Thanks for calling. In reference to that, so we've talked about before about first of all just the size of our sales force and we believe based on the way the competitive environment looks in the next year that we don't need to do any dramatic expansion in order to see the growth that would come. There's room for our existing reps to be more productive. Having said that we are looking at a modest expansion which would be looking or finding pockets of opportunities to maybe split a territory here or there or add more strength to a single territory where we see higher volumes coming through. So in that regard we expect to see the growth with pretty much with the sales force that we have in place today. And then in terms of programs you know we still expect that we're going to be billing the pairs at the same rate that we have today so we're not doing anything in particular because again I think the product pretty much is a driver for bringing people over to us.

That's helpful. And then last one for me is on gross margin in this quarter. There was I think there's two kind of headwinds on and stock comp and then obviously international got lower ISP. So can you kind of help quantify those in terms of as you reported to 47 if you backed out those kind of headwind where were you at?

Right, so the stock comp we've always had a baseline of stock comp in the gross margin and historically it's been about 1% of revenues this quarter in particular because of all the changes that the options that we granted it jumped to about 2% so that was a 1% drag on the margin this quarter in particular. And then international although we do expect to see pressure from a going forward the level of sales this quarter wasn't significant enough to have a real impact at this time.

Okay, that's helpful. Thank you very much and congrats on the quarter. Thank you.

Thank you.

Thank you. And our next question comes from the line of Jeff Johnson with Baird. Your line is now open.

Thank you. Good afternoon all. John maybe a couple of follow up questions for you I guess. You talked about maybe making some changes to Control-IQ but I think the timeline is unchanged on that. So you know if you hit that mid 2019 launch timeline is the understanding that there may be some algorithm changes after that but you'd still be very comfortable I mean that data looks so good already in what we've seen in some of the early trials that I would think you'd still be comfortable launching. No in the mid-2019 time period on that right.

Yes, that's exactly right. I mean we fully enroll the study. It's going very well. We expect it to be completed in the spring timeframe and we still are on track to get approval in the summer of 2019. What I was referring to in the past comment was that we're now looking at the Control-IQ algorithm and we're going to improve it so that at some point in the future we'll be providing updates to it you know using the updater and making it available to our customer base. So, it's nothing that we're going to be working on overtime and I would expect that we would have you know multiple updates and improvements to the algorithms as we you know as we make progress in developing them.

Okay. That's great. And then I think at the Analyst Day you talked about phone control potentially coming as part of t:sport although I'm not quite remembered if I'm right on that. Just your latest thoughts on phone control especially with one of your competitors making some comments tonight about getting that on their next gen product. And then Leigh I just want to make sure I understand your UNH comments or united comment. You mentioned having data for both Basel-IQ and Control-IQ. Do you feel like you need Control-IQ data to go back to them or do you think the Basal IQ like you could be enough to at least reengage there? Thanks.

Thanks. So regarding phone control at Analyst Day we indicated that you know we're working our phone app and that's going to be available in early 2019 and that's our first priority. But we are definitely going to immediately jump from that into Control-IQ and I don't think we haven't really indicated exactly what the next steps are but we think when we're when we are introducing the t:sport in the 2020 timeframe we will have phone control in place on that device. And something that we've talked to the FDA about and they've been very encouraging in terms of working that matter.

Hi. And then to your question on United Healthcare, Basel-IQ I think is the first major step and so we'll just have to see what is interesting enough for them what they want to see in order to make a decision. I could see them looking at Control-IQ as the product that's more competitive with the 670G considering it manages both the highs and the lows. And so it's really going to be up to them but we're excited to present the Basel-IQ data and to continue and enter a conversation with them and moving forward hopefully to getting some access to those people.

And we have never received a standard proposal or suggestion on what they do need to make a definitive agreement. So we're guessing that it could be Basel-IQ it may not maybe have to be Control-IQ. So we just don't know is that the point.

Yes, got it. Thanks guys.

Thank you. And our next question comes from the line of Steven Lichtman with Oppenheimer. Your line is now open.

Thank you. Hi guys. On the replacement cycle it seems like it's continuing to build here. Give us your latest comments on how the process is working in terms of you tracking down these patients and bringing them on board are you seeing any acceleration there and of course Basel-IQ helping that as well.

Yes. So we have we do have team we've talked about this in the past I believe what we call our renewals and retention team and it two-fold. First making sure we're involved with the customers of the patient before they get to the end of their renewal cycle to build that relationship and then it's continuing to work with them after their warranty expires in order to talk to them about the latest and greatest products. And so we believe that Basel-IQ you can be a real differentiator in that regard but it's so new still that I don't really have any information to give you in terms of what it's done for the renewal opportunities. But to your point we have seen it grow quarter-over-quarter. We were up to 1,100 patient renewals this quarter which was sequentially up from 800 in the second quarter. So as the opportunities continue to grow we expect to see that number grow in the future.

Got it. Thankfully. And then on the pipeline obviously Basel-IQ now and the Control-IQ in 2019 are the big focuses. Couple other milestones just wanted to touch on when we hear from FDA do you think on the special controls around pump. And then in 2019 what should we be thinking about milestone wise relative to t:sport in terms of when you'll begin a clinical trial etcetera. Thanks.

Well, I think on the first question we have submitted the renewal application. The timeline that the FDA has committed to is 150 days for review and approval. It took Dexcom approximately 108 days. We would anticipate that we'll begin interacting with the FDA here in the very near future, probably takes them a month or so to get the data to understand it and to start asking questions. So, I would say in the near future we would expect that we will have the interactions with them.

Also the clinical trial part of the iPump, I mentioned they have--

So on the -- as far as the clinical trial goes for t:sport, since we're going to submit that device as iPump now, we're not going to actually need to do a clinical study. And in fact, that's the reason we're pull the -- this commercial timeline, is because the regulatory path is going to simplify and it will not require clinical study, but simply integrated with the Control-IQ system at that point in time as an iPump and once we get approval for it. So, it's going to significantly shorten the timeframe for that device, but it will be available in 2020 time as we talked about.

Yes, great. Thanks guys.

Thank you. And our next question comes from the line of Doug Schenkel with Cowen. Your line is now open.

Hi, this is Ryan on for Doug. Thanks for taking my questions. So two P&L questions. Gross margin increased nearly 300 basis points sequentially in Q3, despite the stock comp headwind you noted, should we expect, at least, as much of the [Indiscernible] given typical seasonal strength and does that stock comp reverse in Q4?

With regards to the stock comp, we expect that level to still continue for the next six to eight quarters as most of the grant that we're reported that were 24-month grant. So, that will play just a little bit of time. In terms of the fourth quarter, I'm not going to give any specific number, but we do expect to see a nice increase with Q4 generally being the highest pump sales in the year. You've see what we have done so far this year, and we've had nice growth as two to three points each quarter. So, we hope to continue to move into that direction.

Got it. And then just to confirm that you said you expect to be adjusted EBITDA positive in Q4? Does that exclude non-cash charges? And then that would soon to imply pretty minimal quarter-over-quarter, were there any timing dynamics in OpEx this quarter? Thank you.

So, yes, we do -- still expect to be EBITDA positive in the fourth quarter. And when we talk about adjusted EBITDA, it's excluding depreciation and amortization as well as non-cash stock-based comp. And so over-time, the third quarter intended to be our highest quarter of spend, generally, if you take out stock-based comps piece of it. That's when a lot of the trade shows occur and other activities, and so as we move into the fourth quarter, we generally see flat going into the end of the year.

Thank you. And that concludes today's question-and-answer session. So, with that, I'd like to turn the call over to back over to President and CEO, Mr. Kim Blickenstaff for closing remarks.

Well, thanks, again to everybody for joining us today. We're going to have a busy falls here and we have a number of investor conferences here in November. And we welcome seeing you, if you'd like to come to these various conferences. We'll be in New York for Stifel Healthcare Conference on November 13th, followed by the Canaccord Conference on 15th and then the Piper Jaffray Healthcare Conference on 28th. We'll also be attending the Credit Suisse Conference in Scottsdale, Arizona on November 14th. We also expect to have several bus tours in the December timeframe. We'll keep you posted on those. So, thanks so much again for everyone joining us today. We look forward to keeping you updated as the company continues to progress. Thank you very much.

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