Tandem Diabetes Care, Inc. (TNDM) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You've joined Tandem's First Quarter 2019 Earnings Conference Call. [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. Good afternoon, everyone, and thanks for joining Tandem's First Quarter 2019 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, quarterly report on Form 10-Q, and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or other factors. In addition, today's discussion will include references to adjusted EBITDA, which is a non-GAAP financial measure. Adjusted EBITDA is a key measure used by us to evaluate operating performance, generate future operating plans and make strategic decisions for the allocation of capital. Please refer to the Investor Center portion of our website for further information. Kim Blickenstaff, our Executive Chairman, will kick off today's call followed by a business overview and product development update from John Sheridan, our President and CEO. Then Leigh Vosseller, our EVP and Chief Financial Officer, will conclude our prepared remarks with a financial review before we open up the call for questions. With that, I'll turn the call over to Kim.

Thanks, Susan, and welcome, everyone, to today's call. As you see in today's results, it's been an incredible start to the year. In fact, the past 6 quarters have been outstanding and our positive momentum is continuing to build. Our recent success is the result of efforts initiated years ago. At the time, we defined three broad goals for our portfolio that are still in place today. The first, we continue to offer easy to use products to bring the benefits of pump therapy to more people with diabetes. We are continuing to demonstrate success on this initiative as approximately half of our customers report being new to pump therapy from multiple daily injections. Next, we continue to draw inspiration from consumer technology to bring modern features to insulin pump therapy. A great example of this is our revolutionary Tandem device Updater, which has now been used more than 20,000 times by our customers to remotely update their pump software. And finally, we strive to reduce the burden and complications of diabetes management through innovation. The most recent example of this is our automated insulin delivery efforts and the overwhelmingly positive feedback we hear about our Basal-IQ technology. As we look to the future, these three tenets will remain. We're also focusing on longer term strategic planning for our company. Our top priority for continued growth is to establish our position as a leader in innovation while maintaining the highest levels of quality throughout our business. Part of this strategic planning process has been analyzing our offerings not only to the people using our pump and their caregivers, but to the healthcare providers and payors as well. Tandem has been rated number one by customers for our support and services since the t:slim first launched in 2012, which is an honor we do not take lightly. In 2019, we are continuing to add to our customer support teams, but we're also investing in technology solutions that will help these individuals become more productive and further enhance every customer's interaction with the company. As our business grows, we are also giving even greater attention to these pump care providers. Instead of just adding additional sales territory or dedicating personnel to individual offices, we're asking healthcare providers how our products and processes can help all of their clinics become more efficient. Solutions like new t:connect reports, access to information, streamlined prescribing and training processes, are all areas we are investing in to help healthcare providers be able to focus more on their patients and less on administration. Now that we have nearly 100,000 customers using a Tandem pump, our discussions with payors are also increasing and beginning to evolve. As part of our managed care strategy, we are working to demonstrated the value of our products to payors by providing compelling clinical outcomes data and evidence of cost savings our products generate for their systems. In time, we believe this will allow us to get more direct contracts and to aid in our pricing discussions. In the near term, we are carefully analyzing the scalability of our business to prepare for continued growth, particularly in our manufacturing operations and other groups that will need to expand with the growth of our installed base. We have a strong leadership team in place and following John's transition to CEO, are now adding senior management with complementary skill sets and experience in key areas of the business such as digital health, marketing and supply chain. Our team has done an amazing job in responding to meet the greater than anticipated demand for t:slim X2. Pump and cartridge production are at an all-time high and we are making investments and preparing for this momentum to continue. All the while, we are committed to building a profitable organization that maintains the highest levels of customer support and product quality. Entering 2019, we were optimistic that the same catalysts that drove our growth last year would all be in place once again. While it's still early in the year, the evidence that we are seeing, combined with our operational execution and pipeline advancements that John will discuss, gives us even greater confidence in our ability to execute the goals we set at the beginning of the year, as well as the longer-term strategies for the company. With that, I'll now turn the call over to John.

Thanks, Kim. I'll echo that it's been an amazing start to 2019, but would also like to take a moment to thank our employees, as today's results are the product of everyone's hard work. It's really a special group of individuals who are highly motivated, customer minded, and creative problem solvers. We've set big goals for our company and what we accomplished in the first quarter furthers my confidence that we will be able to deliver upon our commitments. As you can see from our press release, our strength in Q1 sales was primarily driven by the continued domestic demand for the t:slim X2 insulin pump. And frankly, it exceeded even the high end of our expectations. Our worldwide shipments in Q1 tripled compared to our shipments during the same period last year. Domestically alone, our pump shipments more than doubled. The feedback on Basal-IQ also continues to exceed our expectations. A recent third-party study by the dQ&A of more than 600 pumpers showed that Tandem's customers have the highest degree of customer satisfaction compared to other insulin pump manufacturers. In addition to overall satisfaction, our Basal-IQ customers report the best AID system outcomes for ease of use and better glucose control and trust. Our international launch of the t:slim X2 is also progressing well. We are now shipping in Canada and recently obtained registration as an approved vendor under the assistive device program in Ontario. This registration is meaningful as approximately 40% of the people living with Type 1 Diabetes in Canada reside in Ontario and are now able to obtain reimbursement for the t:slim X2 insulin pump. We are continuing to pursue reimbursement in additional provinces as we expect to see additional coverage over the course of the year. At the end of last year, we shared with you that we were not able to fulfill all of our pump demand for international distributors. By working closely with one of our supply partners, we were able to identify a scalable solution that resolved our pump raw materials issues and we expect to be fully caught up with demand at the end of this quarter. At the same time, we are also taking actions to further expand our supply chain and pump manufacturing capacity for the remainder of the year and for the long term. We are also working to enhance our international offerings with the launch of Basal-IQ technology and the use of the Tandem device Updater in the second half of this year. The timing of our international launches will be a decision that we make in consultation with our distribution partners and will also depend on different regulatory and reimbursement requirements. For those reasons, the timing is likely to vary by geography. Between the high demand for the new t:slim X2 pumps, supporting our customers with supplies, and preparing new manufacturing lines for the future launch of t:sport, there are a lot of moving parts for our operations group. We recently leased additional warehouse space that will enable more manufacturing capacity for our current facility in San Diego. We are also making some improvements to our cartridge automation that we believe will improve the capacity of our future lines. For the long term, we are carefully weighing the choice of expanding our own manufacturing operations further or outsourcing certain aspects to experienced third parties. These are the types of improvements we look to continue putting in place as we grow the business, further leverage our infrastructure, and work to achieve sustained profitability. In addition to the record-breaking sales and tremendous operational success, we are also making meaningful progress on advancing our product pipeline. Domestically, our product development efforts are focused on bringing Control-IQ to market. We believe t:slim X2 with Control-IQ technology will be the first advanced hybrid closed loop system available. It's advanced because in addition to adjusting Basal insulin to minimize hyper and hypoglycemia, and improving on user time spent in a targeted glycemic range, it also is designed to automate correction boluses. As a reminder, this system utilizes the t:slim X2 pump that embeds the algorithm technology we license from TypeZero and uses glucose values from the Dexcom G6 CGM sensor. Earlier this year, the t:slim X2 was approved through a do novo application as the industry's first alternate controller-enabled insulin pump. The final regulatory piece for this system will be our submission and the FDA's review of our algorithm or the AID controller. We appreciate the FDA's efforts to improve and innovate the regulatory process, enabling us to bring new technology to people with diabetes more quickly. The NIH-funded IDCLP3 study, which is the Control-IQ pivotal clinical trial to support our regulatory filing, is now complete. Following the primary 6-month trial period, participants began a 3-month extension phase of the study. More recently, Tandem initiated and is funding a further continued access extension so that all trial participants can continue receiving the benefits of this technology even prior to commercial launch. As previously announced, near the end of the pivotal study, an anomaly was found in the software that while rare and unlikely to occur, could result in increased risk of hypoglycemia. Our team did a great job and we were able to rollout a software updated by the end of March. Our ability to quickly provide to our participants a remote software update to resolve this anomaly is another example of the revolutionary power of our Tandem device Updater, and our company's nimble research and development capabilities. Importantly, being able to address this now helps us offer a more robust product for the customers at launch. Data from the study is now being compiled and a summary will be presented at the American Diabetes Association's Scientific Sessions in San Francisco on June 9th. As this study was blinded, we have not seen the results. However, we are encouraged but the anecdotal feedback. While the primary endpoint of this study is time in range, I would like to encourage people to also focus on timing in closed loop and quality of life metrics when they are reported. Time in range is quickly becoming a key metric in analyzing a person's glycemic control, even over A1c. In February, a panel of diabetes experts gathered for an international consensus meeting to discuss what percent of the time in range is clinically beneficial. While we still have to finalize their recommendations, their initial findings determined that time in range of greater than 70% is considered clinically beneficial. Since the Type 2 algorithm has been well studied with nearly 400,000 patient use hours, the time in ranges we've typically seen with the use of the algorithm is in the mid to high 70s. In our small, formative study for Control-IQ, we saw a time in range of approximately 85%. But for a larger study, such as the one we just completed, we anticipate that the results will align with the previously reported outcomes in the mid-70s. Importantly, we anticipate that the t:slim X2 with Control-IQ's percent of time in closed loop will be at least 90%. This is a very important metric as the algorithm won't provide the user any benefit when it's not active. Various studies report these measures differently, so for anyone reviewing outcomes of any of the automated insulin delivery trials, it's important to be mindful of how time in range is being calculated and whether it's time in range of time in range when it's in closed loop, or during periods when the CGM is connected. For example, if time in range is only reported based on the time a person is in closed loop, then you don't necessarily have an accurate picture of the time in range over a 24-hour period. Quality of life improvements are also very important as this is a good indicator of market acceptance and how well we are fulfilling our mission to improve the lives of people with diabetes. Also being presented at the ADA is data from the FreeLife pediatric study in France using the Control-IQ system. This data will be particularly interesting as it's looking at the difference between nocturnal and 24-hour use of the system. The FreeLife study is separate from the Tandem-funded DCLP5 study which is the pivotal pediatric study for kids of age 6 and above that's just getting started. So as this relates to our regulatory filing for Control-IQ, we look forward to seeing the summary data from the DCLP3 study presented at the ADA and anticipate receiving a full data set shortly after that. Based on this timing, we plan to submit a regulatory filing to the FDA for Control-IQ for people 14 and above in July and are preparing to launch in the fourth quarter. We plan to submit a separate regulatory filing for the pediatric data with the DCLP5 study when the data is available. Whether or not there will be any additional cost for the Control-IQ system is still under evaluation. As we previously shared, we are working to understand if there is an opportunity to secure incremental reimbursement for insurance payors on the savings we can demonstrate for their network. That being said, we are very sensitive to the fact that overall diabetes management is costly for people. For this reason, the opportunities we're evaluating consider that we do not want people to have to absorb a substantial expense to have access to Control-IQ. We anticipate providing everyone with an update on our decision in the upcoming months. While Control-IQ is in the spotlight of our new product offerings, our development teams are also making progress on our connected healthy initiatives in t:sport. t:sport will ultimately be controlled by a mobile device, but there will be several steps benefiting our t:slim X2 customers from a connected health perspective leading up to the launch of t:sport. For example, this summer we plan to launch a mobile app to patients that will allow for wireless uploads from a t:slim X2 pump to t:connect, pending FDA review of the associated pump software. This feature is meaningful to our customers and their healthcare providers as it provides easier and more regular access to pump and glucose information. This software will also allow for our customers to use their mobile phone as a secondary display which will provide them access to their pump information, including alerts, without having to directly access their pump. We will have a list of additional features and capabilities that we plan to rollout for this app in stages over time with our ultimate goal of implementing full control for t:sport. As you can see, these are very busy times at Tandem as evidenced by the first quarter results, operational activities, and product development progress. 2019 continues to be positioned as another year of tremendous opportunity for Tandem. With that, I'll now turn the call over to Leigh for her comments on the quarter and financial guidance.

Thank you, John, and good afternoon, everyone. While we had high expectations entering 2019, the explosive start in the first quarter significantly exceeded our estimates. In the first quarter we shipped 14,700 pumps which is a 232% year-over-year increase resulting in $66 million in worldwide sales. This sales growth of 142% reflects benefit from all of the growth opportunities we previously outlined which include renewals of our own installed base, new pump sales from MDI users and competitor conversions, as well as the early stages of our international expansion. In the US Alone, our sales were $55 million or double our 2018 first quarter sales with pump sales still representing the majority at 68%. We shipped approximately 9,700 pumps. This is only a 25% sequential reduction in domestic pump shipments compared to our historical seasonality drop of 35% from the fourth to the first quarter. We estimate that our domestic in-warranty installed base is approximately 87,000 based on the cumulative number of pumps shipped in the last 4 years. The US pumps shipments included renewals doubling year-over-year to approximately 1,200. To date, we have renewed about half of the available opportunities from warranties expiring in 2016 and 2017 and continue to see a small percentage of renewals from that timeframe. While we expect that rate will continue to improve, we do not anticipate we will reach our original goal of 70% for those particular periods. The primary limiting factor is the state of the competitive environment when those warranties originally expired, including the inability to access the majority of UHC customers. We continue to be confident in our ability to reach the 70% goal for subsequent years. We also saw increased interest in the 999 upgrade program we currently offer to in-warranty customers who want accelerated access to our Basal-IQ product for the remainder of the warranty period of their existing pump. This program was primarily established to benefit Animas customers for whom support will end in September, 2019. These upgrades represented approximately 5% of domestic pump shipments resulting in slight downward pressure on pump average selling process and modest increase in the percent of direct sales. Outside the US, we shipped 5,100 pumps, bringing us to 9,000 cumulatively. Our international sales in the first quarter were $11 million, reflecting fulfillment of the remaining international commitments from 2018 and additional orders demonstrating market acceptance of t:slim X2 in the markets where we are present. We still anticipate that international shipments will be more heavily influenced by the Animas opportunity in the next two quarters. Worldwide, our supply sales nearly doubled compared to 2018 due to our growing installed base. This resulted in infusion set sales at 20% of total sales followed by cartridge sales at only 10%. Since the beginning of 2018, market dynamics have changed dramatically, making it increasingly difficult to estimate how much benefit we could capture from all of our sales opportunities. Our original guidance of $255 million to $270 million was predicated mostly on renewals and a baseline of conversions from our best estimate of the remaining Animas customers as well as modest market expansion. It is important to note that the seasonality in our business is not just a quarterly phenomenon, but also builds monthly across the year with January being by far the lowest sales month. In fact, January represented only 25% of the total shipments for the quarter. The escalation that we saw in the first 3 months of the year has continued into the second quarter. It was well beyond our expectations that we would continue to see such unprecedented growth in both MDI and competitor conversions. Because of this strong momentum, we are increasing our full year expectations to a range of $300 million to $315 million which translates into 63% to 71% growth over 2018. This includes an international sales estimate of $45 million to $50 million which is unchanged. We continue to anticipate seasonality in domestic sales across the quarters due to insurance deductible resets, although the impact might be slightly mitigated by the timing of the remaining Animas opportunity. While we feel that we have been highly successful in attracting Animas customers at double our historical volumes, it is a finite opportunity and we do not have visibility into the number of Animas customers who have yet to make a decision. Our higher level of domestic pump sales this quarter also favorably impacted our gross margin which was 51%. This compared to 42% in the first quarter of 2018. We expect to see modest continued improvement across the year in gross margin as we increase our manufacturing volumes to support greater sales demand but continue to experience pressure from other factors such as geographical mix and variability in noncash stock-based compensation associated with fluctuations in our stock price. We remain confident in the 52% gross margin guidance we provided at the beginning of the year, but with our increased sales expectations for 2019, we now believe it would be modestly higher. Our higher sales levels combined with continued expense management also resulted in achieving our second quarter in a row of positive adjusted EBITDA which excludes the impact of noncash stock-based compensation. Although we did see growth in our operating expenses to support our rapidly growing installed base and continued execution of R&D objectives, the growth rate was far less than the 142% growth in sales year-over-year. Operating expenses were $44 million in the quarter, including $9 million in stock-based compensation. By comparison, operating expenses were $27 million in the prior year with only $1 million in similar noncash charges. We closed the quarter with $126 million in total cash and investments which is a decline of only $3 million in our lowest seasonal quarter of the year, despite the payouts of our annual incentive compensation awards for 2018. Our cash balance benefited from $2 million in proceeds from the exercise of employee stock options. Our shipping growth in 2019 is particularly focused on scalability initiatives to support and continue to drive high sales growth. These initiatives include infrastructure investments to improve productivity of our customer support function, drive R&D initiatives, increase manufacturing capacity and expand our facilities for administrative and warehouse operations. To summarize our revised 2019 outlook, our financial guidance is for sales in the range of $300 million to $315 million, including international sales of $45 million to $50 million. We expect gross margin for the year to be at least 52%, and we expect positive adjusted EBITDA. Our noncash charges for stock compensation, depreciation and amortization are expected to be approximately $55 million, included as components of both cost of sales and operating expense, keeping in mind that our stock-based comp may be highly variable based on fluctuations in our stock price. With that, I will turn it over to the Operator for questions.

[Operator Instructions]. Our first question comes from the line of Matthew Blackman of Stifel. Your line is open.

Good afternoon, everyone, and congratulations on a truly tremendous quarter. Just a couple of questions. I know you don't give quarterly guidance, but is there any reason why we should expect a difference of quarterly cadence that we've seen in prior years?

Hi, Mat, it's Leigh. Thank you. As we think about the quarters for the rest of this year, we still think about domestic as being somewhat like the regular seasonality patterns that we have seen. But I will say that because of the Animas opportunity ending in the third quarter, we think it could be, the regular seasonality, could be mitigated slightly. So that's one thing that we're keeping in mind as we look ahead to the next quarters. Then I'll add for the international business, we have talked about the fact that that one is more evenly spread across the year but the same Animas dynamic is there. And also because of the fact that we were fulfilling some of our backorder from 2018, we may see a bit higher trend in the second quarter than the rest of the year.

Okay, I appreciate that, Leigh. And then I was just hoping to get some of your updated thoughts on the pharmacy channel. I know you said in the past that you are not optimistic that it would be an opportunity, at least in the near term. But the market does seem to be shifting that way broadly for diabetes technology. So I'd appreciate any thoughts on the importance of pharmacy access from your point of view and any initiatives you may be working on for your current or future portfolio. Thanks. Appreciate it.

Sure. So the pharmacy channel is something that we look at. It's not one of our highest priorities right now. I think there's a difference between us and what some of the other companies look to the pharmacy channel to provide for them. In other areas, the nature, like I said for us, the nature of our pump being such a high capital-intensive upfront payment, doesn't necessarily fit the pharmacy channel. And others go into the pharmacy because it can help increase their volumes. But because you have to buy the pump first, we can't necessarily increase our supplies volume without having the pump sale upfront. So it's just a different dynamic, but we are looking to it for down the road and it might give us possibilities for supply.

I'll make another comment. Dexcom went to pharmacy when they got self-training and they eliminated that field training component. So we're always going to have to support the customers in training.

Thank you. Our next question comes from the line of Travis Steed of Bank of America. Your question, please.

Hi, congratulations again on another great quarter. I wanted to touch on the increase in the full year guidance. It looks like you're adding an extra 12,000 patients this year than you expected just 2 months ago. So maybe expand a little bit on kind of what surprised in the last couple of months and how much of that momentum is going to continue, particularly as you move past the Animas bolus and you offset that with the Control-IQ launch later this year.

Sure. It's really just such a different time right now in the market than we've ever seen in the past. 2018 surpassed all expectations and as we came into 2019, we looked at it similar to what we had before. I think one important point is, we typically have a seasonality drop from the fourth quarter to the first quarter on the domestic business. It's been very traditionally for the shipments to have a 35% drop. But we saw a much softer landing. Once we entered later in the first quarter, we saw that that was continuing and it's hard to say just from January alone if that was a real different dynamic. But each month of the first quarter and as we're moving into the second, we're seeing this same momentum continue. And so that's why we feel confident for making the guide for the rest of the year. As we look forward to -- so I can say basically what's included in the guidance is some of that momentum that we've seen, the typical renewals that we expect, as well as these Animas conversions. I think the piece that is still a little bit of an unknown for us is what Control-IQ might do for us later in the year. We don't type build into the guidance something that requires an FDA approval just because there's uncertainty around it. And we're also not sure if the momentum we're seeing today is just enthusiasm for our updatability capabilities of our pump which would imply it's ahead of Control-IQ. So we'll be watching that as we get closer to the end of the year and be thoughtful about how we include that.

Great. Then as a follow-up, any sense for how many Animas patients came in this quarter? And then on the international business, just expand a little bit on the progression of the year. I guess at $11 million this quarter, your kind of run rating at the low end of your full year guidance. How much opportunity is there for Q2 and Q3 to accelerate sequentially? And then with the Animas patients needing to decide by September, is Q4 lower than Q2, Q3 on a dollar standpoint on international business?

Sure. So I'll start with the Animas question in the US. The first quarter looked much like it has since the day they announced their exit in that we continue to see double the volume that we were seeing in the past. Historically before they left the market, Animas represented something in the low teens percent of our new pump shipments. So same trend that we've been seeing all throughout 2018. September 19, 2019 is an interesting date. That's the date that there will no longer be supplies or support for the Animas patients. It doesn't mean that those patients won't have stocked up on supplies and will continue to use their pump beyond that. So I'm not exactly sure how to think about what will happen in Q4, but just right now, we're being more thoughtful about assuming we're more frontend loaded this year as we think about the Animas opportunity. And that's really for both domestic and international. From the international perspective, again, just to remind you that because of the backorder situation when we exited 2018 and some of the catchup that happened in first quarter, we're still going to be doing that catchup in the second quarter. But we'll be back to even. So second quarter could be a bit higher and then we could go back to a more normal expectation for the rest of the year. But international we expect to be pretty even across the year otherwise.

Thank you. Our next question comes from the line of Alex Nowak of Craig-Hallum Capital. Your question, please.

Great. Good afternoon, everyone. Congrats on the great start to the year. John, I just want to ask a question here. There's been a lot of noise out there about your partner Dexcom around Abbott's upcoming Libre II. Now we all know you're not directly impacted with this, but it's kind of a 3-part question here. One, could you integrate another CGM like Libre II to work with your pump? Two, would you actually want to do that or are you happy here remaining a Dexcom only closed loop system for the next couple of years? And then three, what would be the lead time here to actually go out, develop a new algorithm, integrate a new CGM and get it FDA approved?

Well, good question. First of all, I just want to start off by saying that Dexcom is a great partner of ours and we really appreciate the relationship we have with them. We've integrated three generations of their device and I think that the benefits that we get from Dexcom really have to do with the close relationship our engineering teams have which brings sort of enhanced speed to market, time to market. As well as just a best in class system. That being said, we do have a nonexclusive relationship with Dexcom and I have said in the past that if there are other iCGM systems in the market and they have appreciable market share, we would definitely consider implementing them on the system. So the things that -- we've talked a bit about interoperability in the past, and the things that you have to consider in doing that are the technology and does the technology actually integrate? And you also need to have business relationships in place as well. I would say at this point in time, we do not know enough about the technology that Abbott is bringing forward with their Libre II so that's still an open question. I think the same thing goes as far as the business relationships as well. The lead time, I think the lead time is probably on the order of a year for us to get that done.

Understood. Thank you for the answer there. Just another question, just on the timelines here, I don't believe you mentioned this and if you did, I missed it. But just current thoughts on the submission and the approval timelines here for t:sport. And just remind us again the gross margin benefit versus the t:slim X2.

The t:sport hasn't changed and so we anticipate submission sometime in mid-2020 with approval before the end of the year. And then as far as gross margins go, I think that the gross margin that we report up until this point in time are close to what t:slim is with the opportunities for improvement in the future.

Thank you. Our next question comes from Ravi Misra of Berenberg Capital Markets. Your line is open.

Good afternoon. Thank you for taking the questions. So just a question on the gross margin. Given the revenue guidance, pretty substantial revenue raise. Sounded like, Leigh, you were saying a little bit, maybe a little bit of upside to that 52%. I'm just curious, what would be the constraints there? I mean I would assume that given a higher dollar amount, there could potentially be a higher dollar amount on the gross profit line as well. Then my second, just a quick follow-up on that, on the international opportunity, is you reiterated that guidance in that segment. I'm just curious, is that still a function of that visibility you have in front of you given the supplier constraints there? Thank you.

Sure. So starting with the gross margin, and thanks for your questions, yes, we kept the guidance at about 52%. But we do expect it could be 1 to 2 points higher. And really, what we're being cautious about is just the fact that stock-based compensation has been so volatile based on the fluctuations in our stock price. That's one of the pressures that could I guess be a little bit of a surprise factor as we move through the back part of the year. And also, it will come down to mix. So we did raise the domestic piece, which is a bigger contribution to the margin, but we have to be thoughtful about international, how that plays into it. When it comes to the international guidance for sales, yes, we left that unchanged and we're still very confident in those numbers. And really that was based on the fact that we have close relationships with those distributors outside the US. And they know what their Animas population is and so the guidance is mostly based on converting those patients. With some modest uptake later in the year as they're able to focus on new business. But right now, those distributors have small shops, so they have limited capacity to some extent and they really need to make sure they get people converted by the end of September.

Our next question comes from the line of Joanne Wuensch of BMO. Your line is open.

Good afternoon and thank you for taking the question. And nice quarter. Two questions really. What does it take internationally to transition from an Animas focus to a more broad-based focus in getting patients onto the Tandem device?

I would say that at this point, our teams over there, we're working with distributors, distributors have been really focused on their core Animas business which is really the basis of their business up until this point. I think that going forward, once we have satisfied that upfront demand that's really going to be the first 3 quarters of the year, those organizations are then going to transition to looking at more organic growth. The other thing that's going to be happening in that same timeframe is we do plan to introduce Basal-IQ to our OUS partners and that's going to be geographically sort of dispersed as there is different reimbursement and regulatory requirements in each of these local distribution organizations. So we'll have to figure that out over time.

Thank you. Then my second question has to do with gross margins. You've got so much moving here between new products and geographic expansion. Can you give us an idea of what you think peak gross margins are and what the pathway is to achieving those? Thanks.

Sure. Thanks again for the question. So with relationship to gross margin in the long term, we haven't really given a figure beyond this year. And we had at one point, actually we got there faster than we anticipated, was depending on the level of sales getting to 55% margin in the fourth quarter. And so I think that's realistic again for this year just based on seasonality. But then beyond that, gross margin opportunities come from whether or not we can get additional reimbursement for our pump and hopefully for Control-IQ itself. As well as we look forward to t:sport. t:sport is a product that will be interesting as I think a lot of you have seen and heard about it, it's a much smaller pump. The big question mark on that is whether or not we will offer or have to offer the controller that goes with it. So that will make the difference in how much contribution t:sport can make to the long term gross margin. And then when you add any new product, you always have scalability and where you have to first get over the smaller volume until you're producing a much higher volume.

Thank you. Our next question comes from Brooks O'Neil of Lake Street Capital. Your line is open.

Good afternoon. I'm guessing that if there was a fire out there, you guys put it out this afternoon, so congratulations. I was hoping you might talk a little bit about manufacturing. Scale up obviously with the incredible results you reported today and what you're contemplating going forward. Just talk about your ability to make enough pumps efficiently to satisfy the demand that's out there and how you're approaching that opportunity going forward.

Sure. We've got a lot going on there first of all, Brooks. It's a significant focus of the entire organization. I think the first thing I'd just like to say is that we did have this issue with one of the suppliers, a supplier in the fourth quarter that impacted our ability to ship all of the international demand. And that has been taken care of now. That supplier has added additional equipment and they're beginning to produce at the levels that we expect and need them to produce at. So that appears to be behind us and we expect that we'll have addressed all of the international demand needs here in the second quarter. So I think that we're continuing to add additional pump capacity. I think in the script we basically indicated that we're buying, or actually leasing additional warehouse space. That's going to allow us to transition some of the equipment that's in the Barnes Canyon facility, give us additional warehouse space and make room for additional lines for pump manufacturing. So we're definitely looking at broadening the current capacity at that building to build additional pumps. And it's a major focus of the whole organization. On the cartridge side, we're also basically focusing on the existing processes, focusing on the efficiency of these processes and really working to improve the productivity and increase the output and build for here in the short term. We are also going to add 3 t:slim cartridge lines here, we've actually purchased them already. Those lines are actually more efficient than the lines that we currently have in Barnes Canyon. The current lines produce about 3 million units a year. These new lines will produce about 5 million. So with the addition of these 5 lines, we'll have incremental capacity to support an additional 125,000 patients. So that's quite a bit. And I think that the third thing we're doing right now is we're looking at partnering with very experienced third-party manufacturers so that they've got a lot more flexibility in terms of adding space and direct labor over time. And that's something that we're going to be probably moving forward on here before the end of the year.

Great. So a second question, obviously I'm guessing there's no significant update related to your discussions with United Healthcare. But I think that's still a significant opportunity. Is there anything you can report at this time?

No. I'd just say, Brooks, that we're in a better position to have those conversations with our clinical outcome data and the clinical trials that we've done and are doing. And we're improving our relationships with a lot of other larger players. But that is as an area of focus for us for this year.

Sure, absolutely. Then the last thing, I noticed the comment on Briefing that suggested at least Briefing thought you missed the EPS number that was reported. I see all that noncash stock comp in your numbers. But Leigh, maybe you could break it out for us so we're just 100% sure. The gross margin less the noncash stock comp and other line items down the line so we're sure we have the right numbers.

Absolutely. And there's another element that impacted the net loss line as well that I'll speak to. But first, just to be clear, in our P&L there is about $10 million of stock-based comp in this first quarter. And about $1 million of that sits in cost of sales and the remainder sits in operating expenses. So that's one of the biggest drivers. If you compare that to last year, we only had $1 million of stock comp in total at Q1 of last year. And the other element is that we have this valuation that we have to perform on the warrants that were issued in our October 2017 financing. And when the stock price moves, we record expense for that. So because of the uptick in the stock price over the quarter, we booked another $12 million associated with the value of those warrants. And that falls into the non-operating expense category. So that also had a significant impact on EPS and really that's just not forecastable from our perspective.

Thank you. Our next question comes from Kyle Bauser of Dougherty & Company. Your line is open.

Hi, good afternoon. Great quarter here. Looking towards t:sport, in your market research, do you have a sense for the type of patient that might prefer this device that maybe you are not tapping into currently with X2?

I think that we've done quite a bit of market research on this device and what we saw was a significant improvement in preference share with the MDI population and also with pediatrics. I think that clearly we have a substantial portion of MDI use today with the t:slim pump. So I'd say the pediatric population is probably something that hasn't been as widely addressed that the t:sport pump will.

Okay. Sorry if I missed this, but can you provide any updates on Canada? Specifically, headcount and reimbursement. The last update was that you had already secured coverage for nearly half of all Canadians with Type 1 Diabetes, so any color on progress here would be great.

Sure, just to give you a little bit of qualitative information, we did start shipping pumps to Canada this quarter and we started placing them on patients closer to the end of the quarter. And those registrations for reimbursement are really the gating factor for getting to start the business there. We still are looking to get registrations in the other half of Canada, so right now it's a good strong start and we look forward to seeing that growth across the year.

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

Hi, this is Ryan on for Doug. Thanks for taking my questions. Looking at your updated 2019 revenue guidance, it appears to assume that overall pump shipments are essentially flat with Q1 levels throughout the remainder of the year. That's despite as you mentioned Q1 typically being your seasonally weakest quarter. Can you talk to why that makes sense? I understand the Animas dynamic, but the competitive environment remains favorable, you mentioned the strong start to Q2, and the upcoming Control-IQ launch should keep new and potential renewal patients excited. Why wouldn't overall shipments increase from Q1 levels?

Actually, it's not as steep of an increase as you may have seen in the past based on seasonality. But there is an expected uptick across the year and really you just named the factors that are there. Number one is the Animas timing. The biggest piece of that is that we just have no idea how many of those patients might be left out there to make that decision. And we're not sure of the timing of when they will do that. So we're being a little bit cautious about how that will play out. Our only source that we look to is after the beginning of the year we saw an independent survey that said they had about 15,000 patients left and I would expect that that continues to drop as we move forward. So that's not a very big number for us to attack here. And then really, in the fourth quarter is when we expect to launch Control-IQ, and in fact to some of my earlier comments, we haven't necessarily built in any inflection for Control-IQ at this point because we first need to make sure that we get it launched timely. And then we want to see if any of the momentum we're seeing right now is ahead of that launch just because of the known updatability of the pump.

Okay. Then if I could just sneak two more in, you mentioned strong MDI growth. Did MDI patients still represent about half of new patient shipments? And then one more on the Control-IQ extension study. What proportion of trial participants using Control-IQ asked to continue to have access to the technology? Or is that data not really representative? I guess I'm just trying to get a sense of how many patients dropped out and whether the vast majority of those patients expressed the desire to continue using Control-IQ. Thank you.

I'll quickly take the first one. Yes, to your question, we're still seeing about half of our new pump business in the US coming from MDI.

And regarding the Control-IQ extension, I would say that on the RCT phase of the trial, nobody dropped out. All 168 patients remained in. And there's a second extension for three months and then after that is when the continued access extension begins. And so there are people now enrolling in that. We would anticipate that just based on the anecdotal feedback we've heard that the vast majority of the people that are participating in the study want to continue to operate using the pump. So that's what we're planning on happening.

Thank you. Our next question comes from the line of Matt Taylor of UBS. Your line is open.

Hi. Thank you for taking the question. The first question I wanted to ask was I hoping that you might be able to comment a little bit more on market and competitive dynamics. You mentioned it a couple of times in passing, but maybe if you could just offer any views on the overall health of the pump in the advanced device market. And then when you're thinking about competitive dynamics, has anything changed? Are you able to take more share? I mean you're certainly growing well above market. Any color on that would be helpful.

I think that what we've seen is the market is still growing at roughly mid-single digits, maybe a little higher than that. And so there really hasn't been a lot of change in that. One thing that we have seen though is the recent data from Kelly Close of the dQ&A, it does show that on the share of recently acquired pumps, that statistic, the last 2 quarters that Tandem really has dominated in that area, purely as a result of the Basal-IQ product. But we're there at like 45%. And I think that's roughly a reflection of what we're seeing. So there's been a significant uptake and it has been, it does appear to be taking share from our other competitors in that market.

On the goal or expectation that you might get some additional reimbursement for Control-IQ, can you give us any thoughts on the likelihood of that happening and how it would work? And in what forum would you provide us this update that you talked about in Q1?

Sure. Anytime you're working with payors and trying to change what the system is used to, it's going to be a long process. So a lot of it is about the conversations that we're having with payors today. What we can say so far is that generally for the first-time payors are more open to just talking to us because of our clinical differentiation when in the past they had little interest in talking to us. So the first step is just being able to get in the door. And then the second piece of that, we are laying out for them what cost savings we think that they can recognize in their network because of the use of our product. So those conversations are underway. It's very important that we keep these up and we'll be able to give you more color as we get closer to the launch of Control-IQ of how these progress.

Another comment I would make is CMS is evaluating enhanced reimbursement for breakthrough medical devices. It's the first time we've seen that I think and if something happens there, that could be very helpful on the private side. Published guidelines haven't been issued yet but it's a topic in Washington right now.

Thank you, our next question comes from the line of J.P. McKim of Piper Jaffrey. Your line is open.

Thanks for taking the question. John, I wanted to ask you on Control-IQ, I thought, for some reason I thought last quarter was going to be this summer or end of Q3. And now you're saying it's Q4, so I'm trying to reconcile maybe what shifted that timeline or am I just wrong in my thinking?

Sure. I think that the difference really is in the availability of the data. The study finished on time in April as we indicated. What has happened in the meantime has been this is an NIH-funded study, it's a scientific study, there's procedures and process around who has access to the data and when. And I think that we thought it would actually happen faster than it's actually going to. I mean the study data is going to be made available to the PI here in a few weeks. And we're not going to see it really in its entirety until sometime in mid to late June. And so because of that, we're not going to be able to make a submission until the June or July timeframe and that's been the big change. It's really just been the availability of the data and the fact that this is not our trial.

Okay, that's helpful. Then I wanted to ask a question on Medicare. I mean could you clarify, does 670G have Medicare approval? Can it be used on Medicare patients? And then what about your Basal and Control-IQ when they do come?

Yes, so I don't know that I can speak specifically to the 670G, but I know that Medicare has routinely covered pumps regardless of what software was on them. So we don't believe that we need to get any further approvals to launch Control-IQ or Basal-IQ. There was, and you might be thinking back to last year, there was a time when I guess the right way to describe it is that Medicare would only approve one device as a receiver. And so we had to get approval to be the receiver for the Dexcom sensors which we now have. So at this point we don't anticipate any issues with Medicare approval for our pump.

Okay, no, it was just more their CGM doesn't have a non-NDA claim yet, so I just didn't know if your systems, since you're with Dexcom, you'll be the first time the Medicare patients can really get a closed loop system. Then another question just broadly to moving to the cloud, Kim, maybe you can answer how that's important for your business just in terms of how it's going to benefit your physician partners and your patients. And I think it's this summer that it will happen?

Yeah, my perspective on it is that we have cloud-based data that can be shared with caregivers. You now have remote care for diabetes which you haven't had in the past. You had to go into the practice, physically connect your pump, download the data, wait for somebody to analyze it and make a treatment decision. So the way I view it is that caregivers can actually watch their patient, it's almost like an air traffic control, see everything is in control. As we continue to improve control with Control-IQ and other enhancements beyond that, I think we're going to be looking at an exception only basis for intervening with patients. The system, as John said, is up and you should be in control in the future and you can verify that and see that via the t:connect on the cloud. Another issue is rural America is underserved because physicians are reluctant to put patients on a pump when they live 3 hours away. So there is a huge underserved component because these people can't make it into the office. So I think remote care is going to continue to help us stay on the market. And I think it will allow physicians to treat more patients more efficiently than they ever could in the past.

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

Thank you. Good afternoon, guys. Just two clarifying questions, I guess. Leigh, first, you're talking about the Animas opportunity here being a little more frontend loaded. Last quarter it sounded like you were thinking more that was going to be late in September. Just wondering what's changed your view on why you think some of that is getting pulled forward at least relative to your view last quarter?

I guess I don't know that my view has significantly changed other than it's just an area of uncertainty. Yes, I do believe that there are people who might wait until the bitter end in order to make the decision, but we've seen such strength early in the year, it's hard to say with the population that is believed to be out there that there are that many left to make the decision. So just being cautious about how much more can come and the timing is all that we're doing.

All right, fair enough. And John, in the Kelly Close increased share that you were talking about, was that specifically in MDI? Was that overall? And I guess what I'm trying to understand is, we know the MDI market has accelerated some here, but it would seem even in the MDI numbers that you guys give that your share within that MDI market has gone up faster than the MDI market is accelerating, if that makes sense. So if more MDI patients are coming in, do you feel like you're taking even a bigger share of those MDI patients here just in the last few quarters?

Just back to the Kelly Close data, she has approximately 1,500 people that she routinely surveys and really what she's looking at is what's happening to that population? In this particular case here, people who purchased new pumps in this last two quarter period, most of them purchased the Tandem pump. So that's kind of how that works. I think that since our whole volume of shipments is increasing and MDIs are basically staying about half the number, so as the result overall, we're definitely increasing the number of people that are MDI seasoned pumps.

And you feel like your share though within that MDI, so if last year there were 100 MDI, this year there's 115 MDI, you're taking more, significantly more share this year than last year of those MDI patients?

It's hard for us to say. I don't think I can say accurately.

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

Thank you. Congrats, guys. Just first internationally, given the early success, as you build capacity, what are some of the larger geographic opportunities you see that you could expand into maybe over the next couple of years beyond the ones you're currently in?

We haven't necessarily laid out the plan for the other countries that we might go into. But there are a number of factors that we look to and we'll be evaluating. The number one factor is, is reimbursement established and is it favorable? A second one that's important to know is if Dexcom has a presence there. Because with the rollout of our Basal-IQ product and Control-IQ following that, we need their sensor to be available for people to get the real benefit of our technology. So we will be looking at the landscape and making decisions later in the year which countries are the right ones for us.

I would say certainly Germany is a large market for us to consider. I think, as Leigh indicated, those conditions have to be in place first.

Got it. Then Leigh, on the renewals here, just clarifying, so you think you'll level off in maybe the 50% conversion rate or so for those 2012, 2013 new pumps. But as we get into the 2014, 2015 class, you see that bumping up nicely to that 70% range. Is that right?

Yes. It's still going to take time though. We're not necessarily seeing an acceleration in the time from people's warranty expiration to their renewal date. So we're able to contact and reach out to more of those customers. And so after that, those classes of 2016 and 2017, in 2016 we were above that 50% level and 2017 is just under it. So the point is that we're getting to 50% on average. We think that will still grow. But 70% is likely unreachable. But going forward, just with the enthusiasm around our product, the health of the market, the new technology dropping, I don't see any reason why we won't reach that 70% rate.

Thank you. We reached the end of our time and I'd like to turn the call back over to Executive Chairman Kim Blickenstaff for closing remarks. Sir?

Thanks, L.T. Thanks again, everyone, for joining us today. We have a pretty busy May in terms of investor conferences that I want to go through here shortly. On May 15th we have the Bank of America Merrill Lynch Healthcare Conference in Las Vegas. The UBS Global Healthcare Conference is in New York on May 20th. The Berenberg Conference in Tarrytown, New York is on May 21st. The Craig-Hallum Healthcare Conference in Minneapolis on May 29th and then finally Oppenheimer is having a med pep day in San Francisco also on May 29th. So it sounds like we're going to have to divide and conquer here. In addition, we'll be attending the American Diabetes Association Conference in June. We'll be giving the first peek at the Control-IQ data. So thanks so much everyone again for joining us today. We look forward to keeping you updated as the company continues to progress. Speak with you next quarter.

Ladies and gentlemen, that does conclude your program. You may disconnect your lines at this time. Have a wonderful day.