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Edited Transcript of TNDM earnings conference call or presentation 27-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Tandem Diabetes Care Inc Earnings Call

San Diego May 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Tandem Diabetes Care Inc earnings conference call or presentation Thursday, April 27, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Cajigas

Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer

* Kim D. Blickenstaff

Tandem Diabetes Care, Inc. - CEO, President and Director

* Susan M. Morrison

Tandem Diabetes Care, Inc. - Chief Administrative Officer

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Conference Call Participants

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* Frederick A. Wise

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Matthew Oliver O'Brien

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Ryan Frederick Blicker

Cowen and Company, LLC, Research Division - Associate

* Tao Leopold Levy

Wedbush Securities Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Susan Morrison, Chief Administrative Officer. Please go ahead.

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Susan M. Morrison, Tandem Diabetes Care, Inc. - Chief Administrative Officer [2]

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Thanks. Good afternoon, everyone, and thank you for joining Tandem's First Quarter 2017 Earnings Conference Call.

Today's discussion may include forward-looking statements. These statements reflect management's expectations about future events, product development time lines 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. Our 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 the press release announcing our first quarter 2017 earnings, which was issued earlier today and under the risk factors portion and elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or other factors. In addition, today's discussion will include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflect our ongoing business operation. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. For additional information about our use of non-GAAP financial measures, please see the information under the heading Use of Non-GAAP Financial Measures in our press release. Kim Blickenstaff, Tandem's President and CEO, will be leading today's call.

At this time, I'll turn it over to Kim.

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - CEO, President and Director [3]

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Thank you, Susan. Hello, everyone, and thank you for joining us on today's call. With me today is John Cajigas, our Chief Financial Officer. We're coming out of our first quarter performance with great confidence about our ability to achieve our key goals for the remainder of the year, both operationally and commercially. Although it remains a highly competitive environment, we showed strength in our sales. We also continue to provide our customers with #1 rated support. And just as importantly, we made meaningful progress on our automated insulin delivery pipeline.

Across the company, we are focused on furthering this momentum in 2017 in closely monitoring our progress toward all of our key goals. The competitive headwinds we expected in the first half of this year are there as anticipated. But the reasons customer choose Tandem over competition is for our best-in-class pump platform and the emphasis our company puts on customer care. And that's where we will continue to focus our time and attention. We understand that our customers have choices and that customers who choose a Tandem product rely on us for their long-term care. And it is a responsibility we do not take lightly. To the contrary, we take great pride in our high customer satisfaction scores and we intend to continue to deliver on our new products in development and validate the great trust that our customers have placed in us.

As a reminder, in September of last year, we launched the t:slim X2 pump, our next-generation flagship product. It's unique. It brings people with diabetes all the features and benefits that made Tandem the fastest-growing pump company while offering the ability like no other pump available today. It's the only insulin pump that can be updated by a customer to add new features using their personal computer. This tool, the Tandem Device Updater, is revolutionary for our industry because as a company that's constantly innovating, it's designed for us to be able to bring new features to our customers as they are approved by the FDA. The purchasing trends we saw in the first quarter suggest that this differentiated product offering is helping us to successfully compete against Medtronic's launch of their 630G and their 670G pumps.

As we've discussed in the past, Medtronic announced the approval of both of their pumps around the same time we were launching our t:slim X2. As a result, we experienced a pause in the market, which is something we've seen historically during competitive launches as customers look to evaluate the new pump offerings prior to making a decision. But even with the absence of a full scale launch of 670G, we found that people with diabetes, particularly people using multiple daily injections, are beginning to move forward with the purchasing decision and that the market has slowly begun to unfreeze. The 630G began shipping in the fourth quarter of last year, and we're increasingly seeing reports and hearing feedback from customers and healthcare providers who were disappointed in Medtronic's new platform.

The weaknesses of the Medtronic product become very real once customers and healthcare providers see and use the product first hand, especially if they have ever seen the Tandem pump. Concerns about the 670G have centered around the new interface being difficult to learn, train and use as well as on the form factor of the pump. Mainly, that it's still antiquated and have increased in size compared to Medtronic's historical platform. This is where the t:slim X2 shines in comparison. The 670G is more than 60% larger than the t:slim X2, or the t:slim X2 offers the same 300 unit capacity, in addition to modern features such as Bluetooth connectivity and rechargeable battery that, in today's world, consumers have come to expect.

Our display, which is 1/3 larger than the 670G screen, provides a convenient and easy-to-use menus of a touch screen similar to today's consumer friendly mobile devices. In addition, we're partnering with Dexcom for the continuous glucose monitoring technology, the most accurate sensor available. The real-world accuracy of Medtronic's new sensor, which is what powers their automated insulin delivery algorithm, remains to be seen. We do know that Dexcom's CGM sensor is superior as the only device that allows a person to make therapy decisions without pricking their finger and requires half the calibrations as Medtronic. Since users of the 670G are not able to make dosing decisions using their sensor, this means the user will likely still need 5 to 7 finger sticks per day to use the pump in a real-world setting. In addition to patient burden, this also adds additional cost of extra meter strips to the rest of the system. We also know that the 670G is not indicated for use by anyone below the age of 14, and that Medtronic determined that it may not be safe for children under 7.

It's not clear to us that Medtronic is going out of the way to make these facts apparent to customers or healthcare providers, and we believe it is essential that the marketplace understands what the 670G is and what it is about. By highlighting the core differentiated features of the t:slim X2, we’re able to capitalize on the shortcomings of competitive products. Suffice it to say that we feel confident in our ability to compete pump platform versus pump platform against Medtronic. And the time when we'll be able to offer superior automated insulin system is fast approaching. Historically, about half of our customers have reported being new to pump therapy, and half reported converting from a competitor's pump. In the first quarter, nearly 60% of our customers reported being new to pump therapy for multiple daily injections. And among customers switching for a competitor's pump, we continue to see the largest percentage converting from Medtronic followed by Animas. This is encouraging because we are demonstrating our ability to continue attracting people from MDI. As people converting from other pump take time to evaluate their decision, we are getting closer to FDA approval of our t:slim X2 with G5 integration, which we believe will strengthen our competitive position even further.

If you look back at our first quarter shipments from 2016, the majority were t:slim G4 Pumps that are integrated with Dexcom's G4 continuous glucose monitoring sensor. This wasn't surprising because independent surveys show that CGM integration has been, and continues to be, the top-feature impacting a customer purchasing decision across all durable insulin pumps. That being said, the majority of our customers do not actively use CGM, but may be considering it or want the optionality to use it in the future. The t:slim X2 is the only pump that provides wrist flexibility without asking customers to make a trade-off such as increasing the pump size and complexity to provide for this feature.

Since we announced the launch of the t:slim X2, it quickly became the vast majority of our pump shipments. This trend was encouraging as it was a recognition from our customers that the power of the Tandem Device Updater is game-changing. We submitted the PMA supplement for the t:slim X2 with G5 integration to the FDA earlier this year and have been very pleased with the interactive nature of our review. While approval is always at the discretion of the FDA, we are preparing to launch this summer.

As a reminder, subject to FDA approval, we expect to offer G5 sensor integration as a software update free of charge for more than 10,000 t:slim X2 customers through the Tandem Device Updater. Our customers won't need to wait months or years to gain access to new features that can benefit the therapy management or pay a several thousand dollar out-of-pocket fee to be first in line to an access to the newest technology. In fact, we are preparing to begin shipping new t:slim X2 pumps with G5 integration within 30 days of FDA approval. And we expect the current t:slim X2 customers will simply be notified about the update via e-mail and will be able to update their pumps to the new software even sooner.

While bringing this pump to market is a top priority for our company, equally, so are our 2 automated insulin delivery products that we also plan to offer customers as an update to their t:slim X2 platform. Since our last call, we've engaged in several productive discussions with the FDA on our first automated insulin delivery pump, the t:slim X2, with Predictive Low Glucose Suspend. We recently filed the IDE for a pivotal study and are preparing to commence the study in the upcoming weeks. As a reminder, we anticipate a 6-month review process for t:slim X2 with PLGS because it will come shortly after the FDA review of the t:slim X2 with G5 integration. The only different feature will be the PLGS algorithm, and so we are preparing for launch in early 2018. Activities also continue to progress surrounding our second-generation automated insulin delivery algorithm, which will include our t:slim X2 platform with treat-to-range technology that we licensed from TypeZero as well as Dexcom's G6 sensor. With TypeZero's technology, our product will deliver automated correction boluses in addition to adjusting basal insulin. As a reminder, we are participating in the NIH-funded International Diabetes Closed Loop Trial alongside TypeZero and Dexcom. We plan to use the data from this trial as our pivotal trial data in a PMA filing with the FDA. Based on traditional review times, we are targeting a launch of the TypeZero algorithm along our t:slim X2 platform by the end of 2018.

As you can see, we're making great progress with our future products in addition to the strength we offer in our t:slim X2 platform today. I think this is recognized by Medtronic as we increasingly hear of their sales efforts focused on discussing our company's stock price or financial condition rather than product offerings and customer support. In addition, they are pressuring customers to make a commitment to purchase the 630G before an artificial deadline, which happens to coincide with Medtronic's fiscal year-end in order to have priority access to the 670G. We see these tactics as bully theatrics intended to redirect the attention of customers and healthcare providers away from the products and sales, promote fear and suppress choice. As I said in my opening remarks, we are firm believers in market choice and the rapid growth we've experienced underscores the demand that the diabetes community for new and innovative products. Our employees are extraordinary. And with their continued support, we will continue to deliver our #1 rated customer service and advance our key programs, even in the face of these negative campaigns. Most importantly, we expect to continue offering the diabetes community a superior product that is always designed with the user in mind and best-in-class customer support.

As for our cash needs, we will always seek to properly capitalize our business. In addition, we are implementing measures that will help reduce our cash burn and remain confident that we will spend less in 2017 compared to last year. We expect that the t:slim X2 with G5 integration will be highly competitive and will drive new pump sales in addition to our pump renewals and increase infusion set sales that will benefit the back half of the year. Our goals for 2017 focus on successfully executing our business plan, supporting our customers and building shareholder value. We remain confident that our differentiated insulin pumps, the power of our Tandem Device Updater and our robust pipeline position us well to compete both in the near-term and the long-term.

I will now turn the call over to John, who will provide further detail on our results for the quarter and our financial guidance.

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [4]

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Thank you, Kim. Good afternoon, everyone. Today, I'll be reviewing our Q1 results for 2017 on both the GAAP and non-GAAP basis. Our non-GAAP results are adjusted from our GAAP results by excluding the impact of our Technology Upgrade Program. We believe that looking at our operating results on the non-GAAP basis provide useful information when comparing to our financial results for periods prior to Q3 2016. So today, I'll be discussing both GAAP and non-GAAP financial metrics.

In Q1, the non-GAAP adjustments primarily included the recognition of revenues and cost of sales previously deferred as a result of the Technology Upgrade Program accounting for upgrades that were fulfilled in Q1. We also recognize incremental upgrade fees and product costs incurred to fulfill the upgrade obligation. Until the program expires in September 2017, we will continue to show similar adjustments in future quarters. A reconciliation of GAAP results to non-GAAP results is included as an exhibit to today's earnings press release.

Also as I've discussed comparative metrics between Q1 and Q1 2016, I want to remind everyone that we launched the t:slim G4 in September 2015. The t:slim G4 product launch created changes in the sales and gross margin patterns for various reasons. For example, we believe there was a significant pent-up of demand and continued post-launch interest in the t:slim G4 as it was our first product integration for Dexcom CGM technology.

Now looking at our sales and product shipments for Q1 2017. Our GAAP sales were $19 million compared to $20.1 million in Q1 2016. We completed nearly 600 pump exchanges under the upgrade program during Q1 and recognized $1.5 million of pump sales for GAAP purposes that were previously deferred in 2016. As well as 92,000 of upgrade fees. This was offset by only 87,000 of additional revenue deferrals for t:slim G4 Pump sales in Q1. Our non-GAAP sales were $17.5 million, excluding these upgrade program adjustments. During Q1, we shipped a total of 2,816 pumps, of which 2,576 were t:slim X2, 195 were t:flex, 45 were t:slim G4s. When we launched the t:slim G4, it quickly became 60% of our pump shipments. Following the launch of t:slim X2, we saw a similar dynamic.

In Q1, t:slim X2 represents 91% of our pump shipments. As of the end of the Q1, our cumulative pump shipments have grown to more than 53,000 pumps. Pump sales accounted for 66% of our Q1 GAAP sales and 64% of our Q1 non-GAAP sales, compared to 81% in Q1 2016. Sales of our pump supplies in Q1 were $6.4 million on both the GAAP and non-GAAP basis compared to $3.9 million in Q1 2016. The 64% increase was attributed to the growth of our installed base as well as an increase in infusion set sales. Sales of our cartridges in Q1 were $2.9 million and increased 22% compared to Q1 2016. Shipments also increased 22%. Sales of our infusion sets in Q1 were $3.4 million, and they increased 136% compared to Q1 2016 and shipments of our infusion sets more than tripled. The ratio, the number of infusion sets that have shipped to the number of cartridges shipped increased to 51% in Q1 from 45% in Q4, and 20% in Q1 2016. Illustrating that we are continuing to capture more infusion set revenues through our distributors.

We are on track to launch our t:lock Connector in Q3. This is a key catalyst to increasing our ratio of infusion sets to cartridges to 100% by year-end and capturing a meaningful source of future sales and gross profits.

Moving on to cost of sales and gross margins. Our GAAP gross margin in Q1 was 36% compared to 35% for Q1 2016. Our GAAP gross profits during Q1 were $6.89 million compared to $6.9 million Q1 2016. Our Q1 2017 gross profit includes $1.1 million of gross profit per GAAP purposes that was deferred in 2016. This was offset by 332,000 of net upgrade fulfillment cost and 82,000 of additional deferrals for t:slim G4 Pump shipments in Q1. The net impact of the upgrade program was a 1-point improvement in the GAAP gross margin. On the non-GAAP basis, our gross margin for Q1 was 35% and our gross profit was $6 million. The GAAP and non-GAAP gross margins were relatively consistent with Q1 2016. We realized improvements in the manufacturing costs associated with our t:slim X2 and our cartridges, driven by lower pump material cost, higher volumes and improved yield for our cartridges as well as improvements in our warranty trends and cost. The benefit from those improvements was offset by the impact of product sales mix, as our pump gross margins are significantly higher than our pump supply gross margins.

Looking at the rest of our P&L, our GAAP operating loss for Q1 was $21.2 million, compared to $19.2 million for Q1 2016. The resulting operating margin was negative 112% for Q1 compared to negative 96% for Q1 2016. On a non-GAAP operating loss for Q1 was $21.9 million, with the resulting negative operating margin of 126%. Our Q1 operating loss included noncash expenses of $3 million for stock-based compensation and $1.4 million for depreciation and amortization. For Q1 2016, our stock-based compensation was $2.8 million, and depreciation and amortization was $1.3 million. During Q1, our operating expenses increased 7% compared to Q1 2016. The primary reasons were a slight increase in headcount to support a growing installed base as well as increases in research and development for the advancements of our product pipeline. With respect to cash, at the end of Q1, our cash and investment balance was approximately $54 million.

During Q1, we completed an equity public offering that resulted in net proceeds for the company of approximately $22 million. As I discussed in our Q4 earnings call, we expected a sequentially higher use of cash in Q1, which is consistent with what we have seen historically due to the seasonality of our business. Excluding net proceeds from the offering, our cash and investments decreased $23.1 million during Q1 compared to $17.7 million in Q1 2016. Contributing to this quarter's use of cash were lower sales and gross profits generated during the quarter, and in late 2016. Sales during the month of December have historically been significantly higher than the other months within the fourth quarter of any year.

In Q4 2016, off sales in December were higher than they were in October and November. The increase was not as significant as in prior years due to the competitive dynamics we’ve discussed. Additionally, working capital changes during Q1 impacted our use of cash. For example, we increased our inventory levels in anticipation of moving to our new manufacturing facility and in response to the growing level of sales of infusion sets. We also invested in Tandem improvements for the new manufacturing facility and paid higher interest after we increased our debt balance in Q4 2016. We continue to expect our cash use for 2017 will be lower than it was in 2016. We believe that the potential launch of our t:slim X2 with G5, the addition to pump renewals and sales of our t:lock infusion sets will have a positive impact on our sales, gross profits and cash flows in the latter part of 2017 and in future years.

Additionally, we are implementing some measures to contain or reduce our cash use for capital expenditures and our discretionary spending. For example, we are targeting to reduce our operating costs for a portion of our corporate facilities as we transition our manufacturing to the new facility. Also as we focus on creating efficiencies in our operations through the use of technology and operational improvements, we expect headcount additions for the remainder of 2017 to be limited. We are also continuing to explore opportunities to enhance our business and strengthen our balance sheet.

We are reaffirming our previous guidance with respect to total sales and operating margin for 2017. We still expect our full year 2017 non-GAAP sales guidance to be in the range of $100 million to $107 million for all products, which excludes the financial and accounting impact of the upgrade program. Sales are anticipated to be heavily back-end-loaded, particularly towards Q4. Our typical seasonality, the timing of our new pump and infusion set offerings and our 2017 renewal opportunity.

As a reminder, 2017 is our first full year with customers eligible for renewal under the typical 4-year insurance reimbursement cycle. Although, it's still too early to quantify any specific trends of the people who are currently eligible, we are pleased with the renewal interest. We also expect the competitive environment we experienced in Q1 and in Q4 2016 will continue to impact us during Q2. However, we believe that the approval of the t:slim X2 with G5 this summer will drive growth in the second half of the year as we'll be offering the features and benefits of the t:slim X2 with the most accurate CGM sensor available.

We also continue to expect our non-GAAP operating margin to be in the range of negative 65% to negative 70% for the full year 2017. This guidance includes noncash operating expenses of approximately $11 million for stock-based compensation and approximately $6 million to $7 million of depreciation and amortization. In conclusion, I would like to echo Kim's earlier comments in that we are focused on continuing to strengthen our business and build shareholder value. We will not hide in the face of competition and will continue bringing our #1 rated products and services to more people with diabetes while improving our product margins and diligently managing our operating expenses as we develop our product pipeline and prepare for our continued growth.

With that, I'll turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Matthew O'Brien from Piper Jaffray.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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Just a few for me. As perfect as the impact of 630 and 670G throughout the quarter, we'd love to hear about the progression of pump sales from January through March. Was there demonstrable improvements that you saw as you exited Q1 as far as pump sales go? Or do the artificial deadline kind of constrain things even still through the end of Q1?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [3]

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Well, I would say typically, in Q1, there is sort of a drop-off in the December highs as deductibles reset. So January is typically very low. And then it progresses throughout that -- through the end of the quarter. We did see increase in sales as we move from month-to-month sequentially, and March was higher than the other previous months. But I wouldn't sort of characterize it just yet without see future months here in the fourth quarter here, whether or not that is something that we're seeing. But we are comfortable that we’re starting to see some impact to our sales trajectory because people are starting to see the benefits of our pumps. They know what the benefits of Tandem Device Updater are as well as the G -- I'm sorry, the X2 platform that we're associating with that Tandem Device Updater. But at this point, I wouldn't characterize it as a significant change at this point, but it is an upward trajectory.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [4]

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Okay. And then sticking with the sales force and just that top line, I guess, are you seeing, given kind for the headwinds competitively, that sales -- is your sales force steady? Or are you seeing higher attrition rates? I'm just wondering if they're willing to kind of work through kind of a Q3 quarter lull before things kind of comeback post some of the Medtronic promotional activities.

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - CEO, President and Director [5]

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No. We're not seeing any attrition due to that. I think the frustration is probably around the fact that the 670G launch keeps getting delayed. When it got approved, it was supposed to come out, I think, in April. Now it's into a limited launch mode. We're hearing that they're only placing the 670G at the clinical trial sites that they had as a part of their study. So it just gets -- continue to be kicked down the road. And we like to compete head-to-head with the features rather than sort of a promise of what the system was going to do. So -- but I don't think there's any disappointment on this -- on the part of the sales force. I think they're anxious to compete.

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [6]

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And I'll just add that the sales force is anxious to see G5 approved with our X2 platform. And I think they're anticipating that when that comes out, that they'll have a distinct competitive advantage that they'll be able to rely on as they go back to the docs and the patients.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [7]

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Got it. And then last one for me, just on the gross margin side. Understanding it was flat compared to this time last year, but it was higher than I was modeling on -- the performance on the top line was a little bit below what you did this time last year. So clearly, you're making progress there. Can you help piece out a little bit the big drivers of that improvement? And then just the durability, because I know you have a number of different moving parts here, be it on the disposable side versus some of the internal things that you're doing, but just how do we think about that metric moving forward?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [8]

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Well, I think some of the things we talked about on the last call are starting to play out here in this year. And those are things like the manufacturing costs, the material costs associated with the X2. It is lower than it was with our predecessor pumps. And so with over 90% of our pump placements being with the X2 platform versus the legacy pumps, I think that is helping sort of the trajectory. We have seen improvements on pump margins outside that associated with pump warranty. I think we’ve talked about that on the last call as well that we're starting to see some activity there that's positive. So those are the key things. And I think with the infusion sets also moving into the mix of being a fast grower in our platform, I think that's helping as well. So those are probably the key things that are driving our trajectory as we move forward, and I think we'll continue to see improvements as we gain volume on the cartridges, infusion sets and t:lock coming to the market, and the pump warranty costs continue to drop as we move forward.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [9]

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Okay. So to be a little bit more clear, though. I mean, just given that the performance here in Q1, do you think we could see gross margin as we exit the year, maybe in the 40% range for maybe Q4?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [10]

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Well, it's going to be highly dependent on what our sales mix is. And so that would be assuming that we have good pump contribution to the overall sales mix as well as the infusion set margins sort of staying up high as we move forward and add that to the mix as we gain volume on the infusion sets. Because as everyone knows, our -- some pump supply margins are lower than our pumps. And so depending on what the mix is on our sales, that could drive the overall gross margin. I would say that if you focus on the gross profits, I definitely believe that our gross profits will increase as we move forward. And that has a positive impact on P&L as well as our cash.

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Operator [11]

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Our next question comes from the line of Tao Levy from Wedbush.

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Tao Leopold Levy, Wedbush Securities Inc., Research Division - MD of Equity Research [12]

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Just a couple of quick ones. On the replacement side, you mentioned that you're currently pleased with the renewal interest. Any way to quantify that for us?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [13]

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I think it's just too early at this point to sort of talk about what the renewal rates are. I think we want to make sure we have a sustainable trend before we start talking about it publicly.

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Tao Leopold Levy, Wedbush Securities Inc., Research Division - MD of Equity Research [14]

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Got you. Okay. And then just -- you mentioned earlier on the -- that you're starting to see the market unfreeze, and you saw some sequential improvement throughout the first quarter. As you think about the second quarter, should we use sort of historical cadences in terms of percentage of revenues that you typically generate in the second quarter versus your full year guidance?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [15]

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Yes. I think in the second quarter, we'll continue to face the same competitive environment we talked about. As Kim mentioned, the delaying of the launch of the 670 is going to sort of continue to force us to be in this environment. Until we get the G5 out -- once G5 is out, I think that will change the trajectory. And that will be particularly helpful in the second half of the year when you layer on our renewal opportunities, which are heavily back-end-loaded as well as the infusion set increases that we expect with the t:lock coming to the market.

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Tao Leopold Levy, Wedbush Securities Inc., Research Division - MD of Equity Research [16]

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Got you. And [just lastly]…

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - CEO, President and Director [17]

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And Tao. This is Kim. I'll make one comment. It is known that the Dexcom G5 CGM is far superior to the -- unlike the powers of 670G. You have to calibrate it less. It has a better accuracy, and you no longer have to do finger stick confirmations at mealtime, which is really going to reduce the burden of using our closed loop system on the X2 platform. So we do know that, and we do know that patients prefer the G5. So I agree with John. I think, we are going to be very competitive with that offering when we get that approved. And we have 10,000 X2s in place, and we can push it out to as many as that want it as quickly as they can get on their computers.

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [18]

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And I think the -- to your question, will be back-end-loaded, I do believe we'll be back-end-loaded. If you go back to when we launched the G4, it was back-end-loaded as well because of the anticipation for that product. And I think there is anticipation for this product, and the opportunities for pump renewals as well as pump organic growth is generally higher in the fourth and late third quarter.

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Tao Leopold Levy, Wedbush Securities Inc., Research Division - MD of Equity Research [19]

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Got you. Okay. And then just lastly, you mentioned that you've had some early discussions with the FDA on the PLGS algorithm and you're going to file the IDE here shortly. Are they -- is the agency giving you that comfort around that relatively quick turnaround post approval of the X2 G5?

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - CEO, President and Director [20]

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I would say the environment has gotten so much better over the last 7 years. If you remember, we weren't public at that time, but back in 2010, there were new guidelines on human -- on user interfaces and medical devices, and the direction was very unclear. And right now, the direction on the whole automated insulin programs, we're getting it far more clear. They give us good guidance, and we’re having good interactions.

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [21]

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And I would say that if you looked at our interactions with the FDA on our t:slim X2 with G5, that has done very well as far as our interactions in moving that product towards the market. So I think that's helpful as we look out what we could expect on the appeals. Yes.

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - CEO, President and Director [22]

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And let me just clarify. We did file the IDE on the PLGS.

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Operator [23]

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Our next question comes from the line of Rick Wise from Stifel.

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Frederick A. Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [24]

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Maybe John or Kim, when we talk a little bit more about the first quarter from another angle, I mean, it seems like it came a little stronger than consensus numbers might have expected and -- what -- I understand from your perspective, was the first quarter in line with what you thought 3 months ago? Was it ahead of your expectations? And if it was a bit better -- obviously, with all the challenges you mentioned, if it was a bit better, why not expect that maybe in a slightly higher range for the year? Just any more color on all that, those thoughts?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [25]

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So what I would say is that we had a range of expectations as we exited 2016. At that point, we knew where we were from a competitive standpoint, what we expected to deal with until we launched G5. And so, are we happy with where we are? I would say we're happy that we're sort of at the high end of our expectations. But there's still not in our expectations, and I think for the full year, I think this is just on par of what we might expect for the full year. And that's why we reiterated our guidance to be the same range as we exited the year.

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - CEO, President and Director [26]

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Yes. And Rick, this launch timing on the 670G is the dynamic that has changed. I don't know whether it'd be resolved by midyear or whether it will even be launched this year. We just don't know. But as you know, what they're doing, they're selling the 630G, and they are doing what's called priority access. So if you want a 670G, you got to buy a 630G now. And that's being viewed as a bit heavy-handed. And -- but anyway, that's the dynamic that was -- it's going to be a little bit different that we thought when we went into the planning for the year.

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [27]

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And then the last thing I will add on this. Our sales guidance 100 to 107. It has a lot of assumptions towards the back end of the year associated with comp renewals, the approval and launch of the G5 product, the X2 as well as the t:lock launching. So I think for us to see that activity start to move forward is probably a thing we want to see before we would adjust and reevaluate our guidance.

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Frederick A. Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [28]

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Right. A couple -- back to a couple of product questions. Let me come at the t:slim X2 G5 approval launch from another angle. You indicate that you're preparing to launch this summer. That's your thought. And you're ready to launch within 30 days of approval. Could you characterize if this launch within 30 days of approval mean full launch as in volume -- in every salespersons' hand? Or just maybe some color there? And from another angle on that, you guys have had a magnificent track record with FDA over the last few years, with talked approvals. We’ve seen them come early. If it's early, if you're fortunate enough that it would -- that G5 would be early, would that same launch within 30 days of approval time line hold? Or no, it would take longer?

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - CEO, President and Director [29]

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No. I would say, the time line would hold. The 1 gating item is -- was the updater. And so updater has been tested for software upgrades to be base t:slims that were out there, to bring them up to where some of the features that the X2 had were available. So that conduit works So as soon as we get approved, we will send out a blast to all those X2 owners out there, and they'll be able to access that website to upgrade their pump as soon as they want to do that.

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [30]

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And then for new placements, the pump hardware is exactly the same as X2, which we're manufacturing today. And it's just a different software load, which is very easy for us to load on. So if we got approval early, we could be potentially ready very quickly.

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Frederick A. Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [31]

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Okay. And then maybe last from me. Actually, I have 2 more. T:lock, you had talked about a gradual second-half rollout implementation, 100% done by year-end. Maybe just update us on that you -- said today, launch in third quarter. Just help us understand the speed as to which you can get it out there, whether your previous comments still hold now?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [32]

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Yes. Our previous comments still hold. Really, the reason there is the transitions. We want to allow our customers the option to potentially bleed down any old product they may have. And so we want to make sure we carry the old product for a period of time to allow them to use any product to have in their hands. And for any new customers, they're able to get the new product, the t:lock, right away.

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Frederick A. Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [33]

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And just last from me, maybe, Kim, just with your a larger perspective, I feel like I want to ask you every time I speak to you. Diabetes industry has a lot of new technology out there, not just the 670G, et cetera but -- and there are a lot of cost currents. I mean, my sense is that some of your other large competitors are maybe even in disarray. But when you think about the environment, do you feel like this makes your job easier or harder as a company looking ahead? The flow of new technology, the time that it's going to take patients to look at every new approach to diabetes management, and again these corporate complexities of assets for sale and operational confusion?

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - CEO, President and Director [34]

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As to the technology sort of improvements, sort of technology crosscurrents you say, those are the companies talking to the investment community and getting a lot of press, and they don't have products available to even be evaluated. So although they may be getting airtime, when it comes down to seeing what products are available at their physician's office and what their nurse can show a patient, there was Roche. There is Animas. There is us. And there is Medtronic. And obviously, Insulet. And as we've said before, generally, MDI patients go on the Insulet first. So it's really back down to the durable pumpers that we compete with on that piece of our business. And I'd say the exit of Roche and whatever is going on at Animas would be helpful for us. We had -- I think we do -- did we disclose how much our sales are from Animas? Okay. But of that 50% that were switchers, it's a nice piece of that. And so they probably have the largest installed base. So this confusion is probably helpful. And I'd say all the noise about new technology is probably more at the investment community level, at places like JDRF, some other organizations. But you know it doesn't -- they're not approved products for patients to look at.

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Operator [35]

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Our next question comes from the line of Ryan Blicker from Cowen and Company.

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Ryan Frederick Blicker, Cowen and Company, LLC, Research Division - Associate [36]

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So you talked about the operational measures you're taking to conserve cash. And I recognize not all of it are in the P&L, but you did reiterate your full year operating margin guidance. Can you comment at all on the magnitude of the expected benefits?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [37]

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On the operational changes that we're making?

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Ryan Frederick Blicker, Cowen and Company, LLC, Research Division - Associate [38]

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Yes.

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [39]

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I think a lot of the guidance in the operating margin is driven by sort of sales performance and gross margin performance. The cost controls and containment is really just trying to manage smart money. And to manage our cash that we have today to create the longest runway that we have possible. But the biggest sort of extension of that runway is going to be driven by sales and gross margin improvements.

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Ryan Frederick Blicker, Cowen and Company, LLC, Research Division - Associate [40]

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Okay. Understood. I guess I was just wondering because you're acknowledging that sales are definitely the biggest driver there, you did reiterate your full year sales guidance. So has anything changed relative to last update? I know you guys have been, obviously, focused on trying to conserve cash prior to this call. But has anything changed relative to the last update on conserving cash? And is there any magnitude you'd be willing to share?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [41]

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What we have done is implemented some formal controls on things like I mentioned on the call, as we transition our manufacturing to the new facility, this facility is there vacating. We're going to look at that facility and try to reduce the operating cost of that, whether it's utility, cleaning cost and so forth. And then look at the campus that we have here today with the 4, 5 buildings, ask ourselves do we need to sort of shift people around to try to optimize how we spend our money on things such as utilities and cleaning costs as an example. The headcount, as we’ve talked about also on the call, we don't expect to have a lot of headcount additions this year because of where we are and what we think we can do from an efficiency standpoint as we move forward here in the next quarter-or-so. So those are just a couple of examples, but those are just really again back to sort of where the cash runway gets extended as mostly about what we think they're going to put in gross margin and gross profit improvements.

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Ryan Frederick Blicker, Cowen and Company, LLC, Research Division - Associate [42]

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Understood. That's helpful. And then you have $10 million on the balance sheet as long-term restricted cash. I imagine we'll get some details from the Q pretty soon. But are there any scenarios under which you would be able to access that cash this year? And if so, what are they?

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John Cajigas, Tandem Diabetes Care, Inc. - CFO, EVP and Treasurer [43]

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Well, currently, we've got the restricted cash, and it's restricted as part of our agreement with CRG. And so to be able to access that cash, we would have to have a discussion with CRG on how to sort of access that cash. We do have a very good relationship with them. But at this point, I do believe we'll be looking to sort of explore opportunities to get additional cash by the end of year without having to tap into that $10 million.

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Operator [44]

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And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to the Kim Blickenstaff for any further remarks.

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - CEO, President and Director [45]

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Well, thanks, everybody, for joining today. We'll be attending the Deutsche Bank Annual Conference next week, and we're going to be making a presentation on the 3rd, and we are having investor meetings at that time. As for industry events, we're going to be attending the ADA Conference in San Diego. That's June 9 to June 13. And then there's the Children with Diabetes Friends for Life conference in Orlando, Florida on July 4 night. So we look forward to keeping you updated as the company continues to progress, and we'll talk to you next quarter. Thank you.

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Operator [46]

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Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.