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Edited Transcript of TNDM earnings conference call or presentation 4-Nov-19 9:30pm GMT

Q3 2019 Tandem Diabetes Care Inc Earnings Call

San Diego Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Tandem Diabetes Care Inc earnings conference call or presentation Monday, November 4, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John F. Sheridan

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

* Kim D. Blickenstaff

Tandem Diabetes Care, Inc. - Executive Chairman of the Board

* Leigh A. Vosseller

Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer

* Susan M. Morrison

Tandem Diabetes Care, Inc. - Executive VP & Chief Administrative Officer

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Conference Call Participants

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* Alexander David Nowak

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Danielle Joy Antalffy

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst

* Jeffrey D. Johnson

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mathew Justin Blackman

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

* Matthew Oliver O'Brien

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

* Ravi Misra

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Ryan Blicker

Cowen and Company, LLC, Research Division - VP of Healthcare

* Steven Michael Lichtman

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Travis Lee Steed

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Tandem Diabetes Care Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Ms. Susan Morrison, Executive Vice President and Chief Administrative Officer. Thank you. Please go ahead, ma'am.

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

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Thank you. Good afternoon, everyone, and thanks for joining Tandem's Third Quarter 2019 Earnings Call. Today's discussion will 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. 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 of our website for further information. Today's call participants include Kim Blickenstaff, our Executive Chairman; John Sheridan, President and CEO; and Leigh Vosseller, Executive Vice President and Chief Financial Officer.

Following our prepared remarks, we'll open the call up for questions. (Operator Instructions) I'll now turn the call over to Kim.

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - Executive Chairman of the Board [3]

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Thanks, Susan, and welcome, everyone, to today's call. Our third quarter results once again demonstrate that when technology reduces the burden of diabetes, it drives customer adoption. This concept is why have a meaningful long-term opportunity to continue bringing the benefits of insulin pump therapy to people with diabetes worldwide. As we've discussed historically, insulin pump penetration does not exceed 30% in any of the countries we are in, with the greatest penetration being here in the United States.

It's because of this large opportunity that at the start of 2019, we had expectations of at least 40% year-over-year sales growth, which was well above most of our high growth medtech peers. We thought this year's growth would primarily be driven by capturing a portion of both the people adopting pump therapy for the first time as well as a portion of the current pump users eligible for reimbursement, which would benefit from the Animas conversion opportunity. In addition, we anticipated additional momentum from our international launch of t:slim X2 and the domestic launch of the Basal-IQ technology.

Looking back over the year, we've experienced strength in each of these key areas, while achieving nearly 100% growth based on our 2019 sales guidance. We also continue to benefit from multiple tailwinds at our back. The number of people choosing pump therapy for the first time for multiple daily injections continues to be strong and represented about half of our new customers in the quarter. Conversions from other pump manufacturers remain similar to what we saw last quarter as far as the breakout of which manufacturers our customers came from. Renewals for our scaling will be a continued tailwind as our install base grows. International is a large underpenetrated market, and we are just in the very early stages of bringing the benefits of Basal-IQ technology to these markets.

And finally, our new product pipeline is deep with innovation and we have planned for steady cadence of new offerings in the upcoming quarters and years. To that end, we are actively preparing for our domestic launch of the t:slim X2 with Control-IQ technology. Following FDA approval, we expect this to be the 7th insulin pump we launch within the last 7 years, demonstrating that we are delivering upon our commitment to rapid innovation.

It will be the fourth insulin delivery system that we've successfully integrated with the Dexcom CGM sensor. Historically, each of our product launches have been a sales catalyst for the company and following Control-IQ approval, we will be launching the most advanced insulin delivery system available in the world. This is a remarkable accomplishment for any company and particularly for one of our size and history.

Further contributing to our excitement and anticipation of the approval of Control-IQ is last month's publication of the pivotal clinical trial data for the Control-IQ system in The New England Journal of Medicine, widely believed to the most prestigious peer-reviewed medical journal, this publication underscores the meaningful improvement in clinical outcomes demonstrated through the use of our Control-IQ system in the study.

An opportunity remains for additional publications that speak the positive psychosocial benefits that people have reported from using the system, including desire to continue to use the system, ease of use, usefulness and trust. We believe The New England Journal publication and the corresponding editorial will be invaluable in our conversations with clinicians as well as payers following FDA approval. I've seen the New England Journal publication serve as an inflection point for companies and transform their business by establishing their product as the new standard of care. This is our vision for our automated insulin delivery systems and the goal of -- for our Control-IQ technology.

Strategically, we are maintaining our focus on key elements of the business that will position us for longer-term success. This, combined with the continued strength of the catalyst that have driven our growth in 2019, gives us confidence in our ability to continue delivering meaningful long-term growth that outpaces other typical high-growth medtech companies.

With that, I'll now turn the call over to John.

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [4]

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Thank you, Kim. The third quarter was a solid demonstration of the steadfast execution on the part of our employees. Commercially, our focus was on continuing to share the features and benefits of our t:slim X2 platform, while internally, we were optimizing our scalability efforts and preparing for the launch of Control-IQ. Excitement is obviously high around Tandem as well as across the diabetes community for our Control-IQ approval. There are no concerning issues that we are working through with the FDA, and at this time, we are engaged with them in a routine Interactive Review process for the approval of the system for people age 14 and above. Our pediatric trial that's intended to lower the age indication for Control-IQ to people age 6 and above is now fully enrolled, and we are on track for filing our supporting regulatory submission in the first quarter of next year. It's important to note that we cannot market Control-IQ until following FDA approval. Nonetheless, awareness of the system has been building since the initial presentation of the data at ADA in June among the thought leaders, healthcare providers and people with diabetes. Because of this, we have increasingly heard from the top prescribers that people are waiting until Control-IQ is approved to purchase a new pump. Despite our offering of no-cost software updates to the Tandem Device Updater, this pausing was a real dynamic that we experienced beginning in the third quarter and has continued into the fourth quarter.

Following approval, we'll be ready to take Control-IQ orders and begin working with customers through the insurance and prescription verification process. Our launch plans include taking a few weeks following approval to educate healthcare providers on the features and functionality of Control-IQ before shipping new pumps with Control-IQ and with the unique features of the Tandem Device Updater offering this new software to our existing t:slim X2 customers.

We recently pulled together our field sales and clinical teams to provide training on Control-IQ and the excitement of these sessions was incredible. We started 2019 with approximately 70 territories in the United States and, based on demand, have increased our scaling efforts to have 90 territories by early next year. In the past, we've discussed Tandem's commitment to relentless innovation as being first, fast, smart and customer-focused. With Control-IQ, I believe we are well positioned to deliver on each of these initiatives.

Concurrent with the launch of Control-IQ will also be the launch of our new mobile application, which is particularly exciting as it's the foundation of our digital health strategy. The first generation of the app will benefit patients by allowing our t:slim X2 to wirelessly upload data from their pump and CGM into our t:connect data management application. This is a significant feature as it takes away a manual step for our customers and their healthcare providers of having to upload pumps through USB in order to track and see trending information.

In the past, we've discussed how, in addition to the customers, Tandem is also focused on ways to improve the full diabetes ecosystem. This app will be evidence of that effort as the wireless upload feature is a significant benefit for healthcare providers by helping to improve their office efficiency and streamlining visits.

HCPs commonly share that they waste meaningful office time accessing data from the different insulin pumps each day. With this launch of our new app, we will be offering the first wireless solution to address this issue. While our focus domestically is on the pending approval and launch of Control-IQ, internationally, excitement is building for Basal-IQ, which is now available in half of the countries that we are in outside of the United States. In addition to selling new pumps with Basal-IQ included, we are also offering Basal-IQ to existing customers following our recent international launch of the Tandem Device Updater, which is another Tandem first. Not surprisingly, we're already hearing the same overwhelmingly positive feedback from people using Basal-IQ outside of the United States, as we do in the States, as the early feedback begins to spread to existing geographies and as we launch in additional countries, we anticipate that strong adoption of Basal-IQ will be a catalyst for our international business in 2020.

Further contributing to our future international growth is the expansion into 3 new geographies: Germany, France and the Benelux countries. We've recently signed agreements with experienced distributors who service these regions and look forward to bringing the benefits of the t:slim X2 to more people around the world beginning in early 2020.

What adds to our confidence and excitement at Tandem is that right behind the domestic launch of Control-IQ and our new app and the international launch of Basal-IQ is a rich pipeline of even more innovation that are being designed to further reduce the burden and improve the lives of people living with diabetes. Our next-generation automated insulin delivery algorithms are in active development and focus on customization and even greater ease of use to continue progressing towards our ultimate goal of offering a fully closed-loop system. Dexcom continues to be a trusted partner in our automated insulin delivery efforts, and we look forward to bringing new innovations to market with them by integrating future technologies. We recently announced that we intend to develop and commercialize integrated diabetes solutions that combine average next-generation glucose-sensing technology with our insulin delivery systems to provide more options for people in managing their diabetes. There are a number of steps in finalizing this agreement. We look forward to doing so in advancing the product integration activities.

As we look to the nearer term, our efforts in 2020 will focus on t:sport and new meaningful features for our mobile app. We aren't sharing a timeline for the different features we plan to roll out through our mobile application for competitive reasons, but we intend to offer a steady cadence of new features and enhancements which -- with new feature rollouts slated for the second half of next year.

This leads to our next main pipeline initiatives in 2020, our t:sport insulin delivery system. A hardware designed for this pump is now final, and we are currently in active software development. We intend to submit the pump, which is about half of size of the t:slim, for 510(k) clearance as an ultimate controller-enabled pump in the summer of 2020. We continue to develop the software to control t:sport in 2 parallel pads. The first will allow full t:sport control through a mobile application and the second is via a dedicated device for people who want the size and discretion and benefits of t:sport, but prefer to keep their therapy management device separate from their mobile app -- their mobile device. We are in the process of understanding from a development, commercial and regulatory perspective the timing of the offerings of both options and will keep you posted as decisions are made.

From a manufacturing perspective, our first t:sport cartridge line is on order and what's particularly exciting is that we also expect that our new t:slim automated cartridge manufacturing lines will be capable of being converted to manufactured t:sport cartridges. This opportunity for incremental benefit from the uptake of t:sport and potential cannibalization of t:slim X2 by t:sport is difficult to predict. But this is the type of creative solutions that provide us the flexibility as we grow and scale our business.

In the past, we've discussed our manufacturing capacity as a key scalability initiative for the company. Earlier this year, we ordered 3 new automated cartridge lines and have been evaluating housing them near our corporate headquarters in San Diego or outsourcing elsewhere to a third party. Recently, after completing thorough diligence efforts, we have made the decision to utilize a highly experienced manufacturer for the latter. We're currently in the late stage of negotiations with this firm and expect to have more to share on this in the near future. While cartridge manufacturing only makes up a small portion of our revenue, utilizing a contract manufacturer is an opportunity to gain leverage in this area of our operations and provide flexibility for future growth. Planning this expansion of our manufacturing capacity has been ongoing for the better part of this year, and we expect this additional capacity to come online in Q1 of 2020. We'll continue to run our manufacturing operations concurrent in San Diego, and we expect this arrangement, combined with the new manufacturing equipment, will double our existing manufacturing capacity and provide us flexibility to scale the business as it grows.

Equal to our dedication to relentless innovation is our commitment to revolutionary customer service. As we discussed in our last call, internal sales support and customer support teams have needed to increase to support our growing install base. As a reminder, we directly support our U.S. and Canadian customers, while our international distribution partners support our customers in other countries. The ease of use of our technology has been a big factor in allowing us to manage growth in these organizations, and we've also been investing in the solutions that will allow us to grow our sales faster than the support resources. That being said, we have invested and will continue to invest in these groups as part of our mission to deliver world-class customer service.

Our temporary office in Boise, Idaho is dedicated to supporting many of the physicians that scale with our customer base such as customer technical support in insurance verification, and this office is now fully operational. The speed and efficiency at which we are able to identify the location, hire and train talented individuals and operationalize the facility is unheard of in our industry. It also confirmed that we picked the right location to build these operations, and we are in the final stages of identifying a more permanent facility in Boise that will further allow us to leverage the business and provide flexible and continued growth in 2020 and beyond.

Our ability to quickly operationalize the Boise facility is really a testament to the hard work and perseverance of our employees and their commitment to providing world-class service to our customers. We have begun to see certain call metrics such as customer wait time increase and now with Boise online, we have already begun to see meaningful positive improvements.

Overall, the third quarter was straightforward in that we met or exceeded our goals across the organization. With Control-IQ approval pending, it's out to to be exciting end to what was already been an incredible year. As we look to 2020, we expect the benefit of having Control-IQ on the market domestically and Basal-IQ on the market internationally for the full year. Diabetes is large and growing market, and we fully intend to continue building our market share by bringing people new and innovative products that reduce the burden of diabetes by implementing solutions that benefit the healthcare providers who care for our customers and by demonstrating the value of our offerings to payers who support them.

I'd now like to turn the call over to Leigh for an additional color on the quarter as well as guidance for the rest of the year.

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [5]

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Thank you, John, good afternoon, everyone. At $95 million in worldwide sales, Q3 marks the 3rd quarter in a row with greater than 100% sales growth year-over-year. This is primarily driven by pump shipments which exceeded 17,800 in the third quarter. Based on continued strength in the business, we are narrowing our guidance range for worldwide sales to be $358 million to $365 million, which, on the high end, is nearly double our 2018 sales of $184 million. The U.S. market remained strong with a total of 13,800 pump shipments in the quarter. This is an impressive 87% increase of our 2018, resulting in $79 million in total domestic sales.

Also included in the quarterly pump shipments were approximately 2,000 renewals, which continued to scale at a steady pace. We have now cumulatively renewed more than 12,000 customers out of approximately 24,000 opportunities in total. Of those opportunities, warranties for nearly 15% did not expire until third quarter of this year. Keep in mind that there is often a lag from the actual date of warranty expiration to the timing which a customer chooses to make their next purchase. We are still seeing renewals from 2016 and 2017 warranty expirations in recent quarters.

Overall, we estimate our domestic in-warranty install base has grown to nearly 107,000 people. On a sequential basis, our U.S. pump shipments grew 8%. We are highly confident that the approval of Control-IQ will be an inflection point in our sales once available, similar to what we've experienced with new pump launches in the past. As this relates to the guidance, our philosophy is unchanged. We only factor in the things we can control and so we do not factor in new product benefit prior to approval.

Based on the strength in our sales to date and factoring in continued pausing pending the availability of Control-IQ, we are confident in our domestic sales expectations and are narrowing our guidance to a range of $300 million to $305 million, which represents approximately 75% year-over-year growth on the high end. Our international sales in the third quarter were $16 million, driven by 4,000 pump shipments. We were very happy with the strength demonstrated in our OUS sales as this was the first quarter that our distributors' attention was not primarily centered on the conversion of Animas customers.

As a reminder, we also experienced an outside performance in the second quarter due to the $8 million fulfillment of backlog from 2018. We now have an international install base of nearly 22,000 people. We are proud of achieving this level of presence while scaling rapidly over the past year. By comparison, it took nearly 3 years to reach a similar-sized install base in the much larger U.S. market. The Animas opportunity provided a valuable kickstart to this business and word of mouth is beginning to spread about the features and benefits of the t:slim X2 among the diabetes community.

In addition, our distributors' focus has turned to the launches of both Basal-IQ and the Tandem Device Updater. These new product launches, plus the underpenetrated nature of the countries we are currently in, gives us great confidence in our international sales expectation. However, not unlike the U.S., this new product launch may cause a temporary impact on sales patterns in Q4. The expectation of this impact is reflected in our guidance for the year, which we have narrowed to $58 million to $60 million. We believe there is a meaningful longer-term opportunity outside the U.S. when you combine the opportunities today with the 3 new geographies where we are preparing to launch in early 2020.

We now have approximately 129,000 customers in our worldwide install base based on the number of customers who have purchased the pump in the past 4 years. We experienced a 105% year-over-year increase in supply sales in the third quarter based on this continually increasing install base.

Overall, pump sales represented 67% of total sales, followed by infusion set at 22% and cartridges at 11%. Gross margin remained strong at 54% in the third quarter compared to 47% in the prior year as we continue to benefit from increasing sales and higher manufacturing volume. This is consistent with our gross margin performance in the second quarter with similar sales levels. As John discussed, we continue to focus on and invest in the expansion of our manufacturing capacity to meet the rapid uptake in demand. We are maintaining our 54% gross margin expectation for the full year, keeping in mind that we may experience pressure from other factors such as geographical mix, variability in noncash stock-based compensation and the royalty associated with the launch of Control-IQ.

Cost of sales also include noncash stock-based compensation expense at a rate of 2% of sales. Similar to gross margin, adjusted EBITDA remain consistent with the second quarter at 13% despite continued investment to scale the business. This is a significant improvement over the negative 10% adjusted EBITDA in the third quarter of 2018, which was the last negative quarter we reported.

Operating expenses were $57 million in the quarter, including $15 million in noncash stock-based compensation, which compared to operating expenses of $38 million in the prior year, including only $9 million in stock compensation. The growth year-over-year aside from stock compensation was primarily associated with investments in our operating structure, including advancement of R&D initiatives, increased number of customer support personnel and facilities expansion. As a result of the focus on leverage of our operating structure, we are increasing our adjusted EBITDA outlook for 2019 to a range of 7% to 12% of sales.

Our total cash and investments balance increased by $28 million this year to $157 million at the end of the third quarter. This includes $18 million benefit from employee stock planned. We had previously guided to the fact that we would begin generating cash from operations in the second half of 2019. Our strong sales growth, combined with our measured investments in the business, allowed us to already achieve that goal on a year-to-date basis.

To summarize our 2019 outlook, our worldwide sales are estimated to be in the range of $358 million to $365 million, including international sales of $58 million to $60 million. We expect gross margin for the year to average 54%, and we now expect adjusted EBITDA in the range of 7% to 12%. Our noncash charges for stock compensation and depreciation and amortization are expected to be approximately $60 million, included as components of both cost of sales and operating expense.

2019 has been an incredible year so far as we anticipate nearly doubling sales compared to 2018 based on the performance of Basal-IQ and our international expansion effort. Today we are focused on closing the year strong while we prepare for another exciting year in 2020 as the many growth catalyst we discussed today, including the large and underpenetrated insulin pump market, our scaling renewals, the international opportunity and our much-anticipated Control-IQ launch, have us on track to continue fulfilling our mission to improve the lives of people with diabetes worldwide.

With that, I will 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 Brooks O'Neil with Lake Street.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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Congratulations on the terrific results. I'm just curious, maybe John, you mentioned pause during the quarter in the context of what I think was continued very strong sales growth. So could you just describe how you see that manifesting itself in the marketplace? And perhaps could you talk a little bit about the response you're seeing from endocrinologists around, primarily the U.S., in response to your product developments?

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [3]

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Sure. I guess the first thing I'd say is that we interact with physicians quite often in our office place and so do our sales organizations. And in the last couple of months, we have heard from them that the HCPs are basically pausing and waiting for Control-IQ to be available and on the market. I would say that there's a couple of things that have happened here.

First of all, I think more so than any product we've introduced, the level of awareness for Control-IQ has just been off the charts with the data presented at ADA and of the New England Journal article, too. Really big publications. And I think that the people are just talking about it, and so there's just a lot of awareness out there. We can't market it right now. We basically can't do anything to market the product. And so I think that we're in a situation we just have to wait until we get approval.

I would say that HCPs are probably waiting because if they were to prescribe Basal-IQ, they would have to come back and shortly prescribe the Control-IQ as well. So there's probably some pausing just to reduce that burden. I think we remain very confident that, that technology is going to be approved by the FDA this quarter, and we're looking forward to a very strong 2020.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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Great. All of that is extremely helpful. I just want to ask Leigh one little detail question, I guess. It looks to me, Leigh, if I am looking at your tables on your website correctly, like you did not add back the positive stock warrant benefit this quarter. In the past, in Q1 and Q2, there was a large expense, noncash-related towards. How did you treat that at the time?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [5]

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Thank you, Brooks. So actually we did include in our nonoperating expenses, there was a benefit this quarter of about $2 million for the change in the fair value of those warrants that are still outstanding, which is consistent with the way we've treated it in the past. The difference this time is that it was a benefit as opposed into the other period it has been an expense most of the time. So this year that brings us to about $11 million noncash expense associated with the warrants.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

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Okay. So the -- as you guys saw, $17 million -- no, adjusted EBITDA $12.7 million, that does include $2 million benefit from the warrants, is that right?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [7]

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That's been excluded from the net loss to reconcile to the EBITDA number.

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Operator [8]

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Our next question comes from Alex Nowak with Craig-Hallum.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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Leigh, I just wanted to touch on the guidance first. So I mean this is kind of a continuation of the last question here, but the guidance is implying Q4 sales of about $104 million to $111 million. That's roughly 30% of full year sales. Last year, in Q4, it was about 41 -- Q4 was about 41% of sales; in 2017, it was 37%. So I guess, I'm just trying to understand why are you assuming a much more muted Q4 here. I understand there's some pausing with Control-IQ launching in the near term, but it looks like you're assuming a pretty big pause, in my opinion.

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [10]

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Thank for the question. So I'll start with -- what you need to do is -- or we need to dissect up the year between international and domestic. That's the major difference between the comparisons for 2017 and 2018. If you recall, this year in particular, we had a heavier first half performance from international. So if you're looking at on a worldwide basis, it would look as if the percent of sales in the fourth quarter is lower than in the past. So if you pull that out and you look at just the domestic business, you'll see that it's more in line with the normal seasonality curves that we've seen in the past.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Okay. Understood. Got it. And then just staying on that 1 piece with Control-IQ and the pause there. If you had to take guidance and back out and say what that actual pause is, what would the guidance look like, excluding that pause with Control-IQ?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [12]

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Good question. Unfortunately, we're not able to quantify it at this time. The real answer will come when we see the approval come through, we're able to start marketing it. We're very confident, though, that it is related to pausing. As we looked at Q3, we still had a very strong quarter and all of the normal dynamics were in place. We still saw the name -- same split of MDI versus conversions, and we saw Animas was in line pretty much with what we've seen in the last 2 years. And so it's very clear, especially from these, the feedback that it is due to this pausing. And as John said, we're very excited when it does come about what this looks like for 2020.

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Operator [13]

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Our next question comes from Travis Steed with Bank of America.

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Travis Lee Steed, BofA Merrill Lynch, Research Division - VP [14]

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There's a study in The New England Journal of Medicine, it seems like very unlikely United could continue denying coverage, at least in my view. If you can talk about how many patients United have and kind of your confidence in getting that approval in 2020.

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [15]

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Sure, Travis. This is John. I think that as we've talked about in the past, our number 1 priority when it comes to the payer organizations is really to try to get as many contracts as we can. And so we're moving aggressively to try to get our goals from -- our goal of 50% up from 25%.

I think that the other thing that we're really interested in doing is basically getting additional reimbursement for our advanced algorithms. And so I would say that right now, we have -- we are having great meetings with the senior levels of these payer organizations and there's a lot of favorable interaction. So we're excited about moving forward with these organizations, and we feel positive going forward.

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [16]

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And I will add to it a little bit of color to the number. You asked about the number of United patients. So today our estimation is there are about 50 million covered lives under United and based on the prevalence of type 1 in the U.S., we think that there probably are about 250,000 people in their population with type 1. So we're looking at those as an opportunity for us when we do -- are able to secure that agreement in the future. And based on that it would appear that about roughly 80,000 people, if you use the penetration rate across the U.S., would have pumps today. So we have the same opportunities where we can convert more people from MDI as well as convert people from their existing pump over to our -- over to us. And so at the end of the day, we're looking at backup lift to be somewhere in the mid-single digits if and when we are able to secure that contract.

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Travis Lee Steed, BofA Merrill Lynch, Research Division - VP [17]

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All right. That's helpful color. And one other question, you ended up having a really good year this year with taking share from competitors of kind of the perfect storm, Basal-IQ versus 670G. Medtronic's making (inaudible) changes or likely launching new products. So just would love to hear what you think about the competitive landscape moving forward. And do you think competitive wins can continue to grow in 2020 or was 2019 just an exceptional year for you?

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [18]

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I think with the introduction and launch of Control-IQ, I think we expect that we'll have the same sort of momentum in 2020 that we did in 2019. We'll be competing against the -- Medtronic's new product, which I think is intended to be introduced in the mid-year time frame, and I think that we'll have momentum already built up on Control-IQ by that point in time. And I think that the ease of use and the simplicity of our device is going to continue to differentiate us when you do compare us with those devices.

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Operator [19]

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Our next question comes from Danielle Antalffy with SVB Leerink.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [20]

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Congrats on another good quarter. Just to follow up on this pause situation or issue or what have you. I guess I was hoping maybe you could talk a little bit more about why you think, given the fact that it's a free software upgrade, you're seeing this pause. Is it misinformation amongst patients around the free software upgrade or what's going on there? Because it does seem a little unusual. And are you confident that it's around Control-IQ and not potentially patients waiting for the next Medtronic product cycle or something like that? Maybe give a little bit more detail to give us comfort there.

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [21]

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Sure. I mean I think we absolutely think it's around the availability of Control-IQ. And as I said, I think that -- while I think it's a logical question to ask whether or not the free software would be a differentiator, I think what we see happening is the decision really comes down to the interaction with the physician and the person who wants to acquire the new technology. And I think that the physician is just recommending that they wait until Control-IQ is available. It's just -- it's easier for them. They don't have to go through the download process. Now we would argue that the downloading process is very simple, and it's not that big of a deal, but I think that's just what it was coming down to. And as I mentioned earlier, in the case of the physicians, if they were to prescribe the pump today as a Basal-IQ, they will have to come by -- come back again and prescribe it as a Control-IQ (inaudible) here is just a matter of -- or a short period of time. So I think it's a combination of those issues that I think are really affecting that decision process.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [22]

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Okay. That actually makes a lot of sense. And 1 quick follow-up on Libre. You guys announced a few weeks ago a partnership with Abbott and ultimately the Libre 2.0. Can you talk a little bit about -- or what you get -- tell us around timing for potential integrated product and what you now know about Libre 2.0 that, in the past, I think your commentary was sort of like we don't know about the product is. So it sounds like you must have gotten some level of comfort around what Libre 2.0 will look like and whether or not it will have iCGM? Can you talk a little bit about that?

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [23]

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Sure. Well, I don't think we've actually indicated which product we're going to work on at this point in time. I think we've indicated that we're going to work with Abbott on integrating the next-generation technology. So I think it's important that we start off of that.

The next thing that we're doing right now as we're working with them on the agreement, we're really trying to get the agreement done here. And I think that once that's in place, we can start to work aggressively on implementing the technology in the system. I would say that we're probably looking at -- it's going to at least take us year, so in terms of having a meaningful impact on revenue or growth, it's probably something that we wouldn't anticipate seeing until 2021.

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Operator [24]

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Our next question comes from Mathew Blackman with Stifel.

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Mathew Justin Blackman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [25]

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Just actually a couple questions for Leigh. Leigh, could you just remind us how back-end loaded the fourth quarter typically is in terms of pump shipments? In other words, if you got Control-IQ approval next week in the middle of the quarter, I'm guessing you'd still be able to capture more than half of a typical fourth quarter opportunity.

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [26]

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Sure. So a typical fourth quarter for us from the domestic side is that about 35% to 40% of the pump shipments occur in that quarter. And you're correct, it's even more back-end loaded to the end of that quarter. When we benefit the 40% range, that's when we've had a product launch in the third quarter. So that gave us plenty of time to execute on the launch, get pumps in people's hands. And so at this point, as we said earlier, we have not factored in any trajectory change for Control-IQ in the fourth quarter. And so we do expect there to be a difference, but when that time comes is when we will start to factor that in.

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Mathew Justin Blackman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [27]

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Okay. I appreciate that. And the next question, should we use the $15.8 million in international revenues this quarter as a, call it, a reasonable normalized launching point to think about 2020 growth off of?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [28]

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Yes, I think it's a good launching point. As we mentioned in the prepared remarks that we do think there might be a little bit of a blip here in the fourth quarter as we're rolling out Basal-IQ, just like we see in the U.S. when we have a new product launch. But third quarter was the start of a good baseline.

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Operator [29]

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Our next question comes from JP McKim with Piper Jaffray.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [30]

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This is actually Matt in for JP. Was hoping to talk a little about next year. There's just a lot of moving parts right now with the business, and I know you probably don't want to get into guidance too much for next year, but John, you said that you're expecting a really strong year. So can you just talk a little bit about the puts and takes as we think about 2020 with this slowdown with Control-IQ and international growth and any other tailwinds that we may see on the renewal side? How do we think about the trajectory of the business into 2020?

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [31]

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Well, I mean the slowdown on Control-IQ is only because it's not available at this point in time. I mean as soon as it's available, we expect to see similar momentum as we did with Basal-IQ last year. So we expect that Control-IQ is going to have a meaningful impact on our revenue growth in 2020.

I would also say that when you look OUS, we also think that Basal-IQ and these new locations will also have a meaningful impact on the growth we see OUS. And so those are big factors for us. As I said a moment ago when I was talking about sort of the competitive situation with Control-IQ, we think that the ease of use is going to continue to drive competitive conversions. So we expect to see more of that. And we also -- renewals are continuing to grow. So I think that we see the same factors and the same issues that created the momentum in 2019 are available in 2020. And then in addition to that, we've also got t:sport coming to market. And so we're looking forward to completing the development and the approval process for that, but we see that as having an impact at a minimum in 2021.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [32]

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Okay. But obviously not expecting a doubling of the business again next year, but something and the market growth rate is healthy, but should we think about you guys doubling or even tripling the market growth rate as we think about 2020?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [33]

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Well, as Kim mentioned in the opening, we look to the other medtech companies for what is a good strong growth rate. And of course, when you're at $365 million and you doubled your business year-over-year, it does get harder to do 100% again. But we expect to continue to outpace, as we have in the past, the medtech community.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [34]

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Okay. And last real quick 1 for me is just on the Animas side of things. You lapped the supply stop there. How do we think about the number of patients that are still out there in the universe that are Animas users?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [35]

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Yes. Unfortunately, that's a number that we've never had really in our hands, although we really wish we would. We do think the number has dropped quite significantly from where things started. But having said that, we think it won't be a complete drop-off for us in terms of opportunity going into fourth quarter, and even into 2020, we think it will [paper] over time. There's still that pocket of people who hold on to their pumps, stock up on their supplies and just keep using it as long as they possibly can. There may be other people who have even taken advantage of conversion programs to the Medtronic pump and they might become opportunities for us as their warranties expire as well.

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Operator [36]

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Our next question comes from Jeff Johnson with Baird.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37]

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Leigh, could I follow up on that point then around Animas? And I guess in the third quarter itself, it sounds like about 50% again was MDI and the other 50% x the turnover patients of your own or the renewals of your own, where either Medtronic or probably Animas conversions. In the last couple of quarters, it seems like that Medtronic to Animas split has been about 2/3, 1/3 on the competitive converts and very little insulate. Is that kind of where we were in the third quarter as well or any update you can provide there would be helpful?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [38]

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Yes, that's a great approximation, and the third quarter was very consistent with what we've been seeing for the last 2 years basically.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [39]

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Okay. And it sounds like you expect some of that to continue into the fourth quarter and beyond. Just want to confirm that's what you meant by your last answer. But John, I was hoping for my follow-up question then, I could also ask you on t:sport. You're talking about this parallel pathway now to phone control versus the controller unit. I think it makes sense from a risk mitigation standpoint. But my question, I guess, is are you hearing anything from the FDA that maybe they're getting a little hedgy on phone control? Is the -- or is the FDA concerned about anything with your ability to phone control versus a broader ability to control with insulin pump in general with the phone? We'd just love any color you're hearing from the FDA or talking with the FDA about on phone control.

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [40]

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No, I think that the FDA remains very bullish on using phone control for insulin devices. I think we're seeing that across the board when we have conversations with them. So we still think that that's going to be a real exciting new product for us and it's something that we're spending a lot of effort to get to market here quickly.

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Operator [41]

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Our next question comes from Steven Lichtman with Oppenheimer & Co.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [42]

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So first, thanks for the visibility on some of the new country opportunities next year. Obviously, without expecting you to give us guidance, can you talk generally about the opportunity you see, anything on regard the distributors you signed up or the relative market opportunity in the countries you'll be entering versus the countries you're currently in?

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [43]

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Well, I think you can look at Germany. It's probably the second largest market. We have a great distributor there and they're investing in the sales force. And so I mean obviously, initially, it's going to be just getting started and getting the ball rolling. But we expect that when that organization is in place and staffed and trained, that it's going to be a meaningful driver for our OUS growth. Similar to France, I think France also has a meaningful marketplace, and we're excited about getting into that location also.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [44]

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Okay. Great. And then secondly, just the pace of renewal capture seems to be picking up. What's driving that vividly, in your view? And can you remind us of what your goals are on renewal capture?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [45]

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Sure. Our long-term goal is to achieve a 70% retention rate of our customers. And so part of it is not only, I guess, I would say we're getting better as we continue to progress and learn from the renewal process, but we're still renewing people from those older cohorts. So people from 2016 and 2017 still renewed this quarter. And I think there's enthusiasm around our products themselves and just the diabetes technology, so that's really helping to move our renewals in the right direction.

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Operator [46]

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Our next question comes from Ryan Blicker with Cowen.

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Ryan Blicker, Cowen and Company, LLC, Research Division - VP of Healthcare [47]

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I apologize if I missed this, but can you provide a bit more color on the rationale behind your international guidance for Q4, which appears to imply that new patient shipments decline pretty much early really versus Q3? What were Animas contributions to international of new patient shipments in Q3? And why wouldn't the launch of Basal-IQ allow for a bit better of a new patient number in Q4 for the international business?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [48]

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Sure. Thanks, Ryan, for the questions. Just a reminder, from an international perspective, the majority of the Animas business we were able to convert by the end of the second quarter. So I would say, prior to that point, you would think of as mostly Animas and modestly new market growth. In the third quarter's when that transition occurred and so it became mostly new market growth and less about the Animas conversion opportunity.

We did begin to roll out Basal-IQ at the very end of the second quarter on and during the third quarter, so we're going country by country. But one factor is that of our Tandem Device Updater wasn't available really till the end of the third quarter, actually on September 30. And so that's one of the factors the distributors taking into mind whenever they're thinking about their rollout strategy for Basal-IQ. So not unlike the U.S., we are anticipating that there could be a small pausing or a transition period as the new product comes to market and that it feels what our guide is for the fourth quarter.

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Ryan Blicker, Cowen and Company, LLC, Research Division - VP of Healthcare [49]

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Okay. And then do you expect to launch Control-IQ internationally in 2020?

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [50]

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I don't think we've stated that yet. So we'll probably discuss that on the fourth quarter call next year.

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Ryan Blicker, Cowen and Company, LLC, Research Division - VP of Healthcare [51]

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Okay. And if I can just take another shot at a 2020 question. So I know you're not providing guidance, but looking at 2020 consensus revenue expectations, it appears to imply the new patient additions are around flat year-over-year versus 2019. So there are headwinds to reduce Animas opportunity in competitive launches, but you've also talked pretty confidently about Control-IQ, both in the U.S. and maybe internationally we'll see and then t:sport obviously can't hurt. There's another quarter to go, but looking -- as we sit here today, do you expect to add more patients in 2020 than you will in 2019?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [52]

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We do expect to continue to see strong growth. Control-IQ is really going to be the major driver next year. As we look at how the market breaks down, and as John mentioned, we go through the different pieces of it. We have the MDI opportunity, which this year, seems to have accelerated quite significantly. So if you had seen that even the same next year, we would expect 50,000 to 60,000 new people coming to market from the MDI population, of which we feel confident we'll take our fair share of. If you think about the people who just come up for renewal, whether it's from our own pump or from other pump companies, that's easily more than 125,000 pumps coming to market next year. And again, with the leading technology, with Control-IQ out there, we think that we have a really strong chance of attracting those customers at a very high rate.

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Operator [53]

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Our next question comes from Ravi Misra with Berenberg.

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Ravi Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [54]

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So just a question on t:sport here coming through. Appreciate the incremental detail that you provided. Just how do we think about this in terms of what the offering is to patients? I mean is this going after a potential new segment that may not be amenable to slim? Or do you think that this could open up a different slice of the market for you guys?

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [55]

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We did a lot of research on this, Ravi, early on. And what we found is that the people that were most interested in t:slim -- excuse me, t:sport, were MDIs and pediatrics. And so I think we expect to see meaningful growth in those 2 markets once this device is on the marketplace.

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Ravi Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [56]

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Great. And then just one more going back to the questions, I think, Steven had asked on renewals. You're getting -- by my math, you're kind of in the mid-60s based on that cohort. I mean should we expect -- I think we were previously thinking that this would be like a multiyear plan to get to 70. But is this something now you can get to in 2020 maybe or should we kind of re bias our numbers even higher?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [57]

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I really think it's a longer-term trajectory to get to that sustained 70% rate. If you think about it, the base of opportunities that we're adding every year is increasing so substantially when you look back to our growth from 2013 to 2016. And that it doesn't lend itself with the renewals taking such a lag, it should actually be processed. It doesn't lend itself to getting to 70% that quickly. But we still feel very good about achieving that goal. We just think about it more as cohort by cohort rather than at the highest business level.

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Ravi Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [58]

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Okay. Great. And then if I can just ask one last one. If you could just help us understand the impact where the flow-through of the economics of the European fourth quarter kind of step down as they focus on that training through your OpEx. Is there any kind of different seasonality or cash usage that may have been overstated or understated in the quarter that may not be recurring in the fourth quarter?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [59]

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Right. So when it comes to the international teams, the distributors there are very different from the U.S. They handle all the customer support activities. So there's really no more expense for us whenever there's a new product rollout there, other than the support that we provide them on a regular basis. But the majority of that burden and cost, honestly, falls on to them.

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Operator [60]

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Our next question comes from Alex Nowak with Craig-Hallum.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [61]

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Just a quick follow-up here to kind of the pausing piece that we've all been talking about in the call here. Many people, when they buy their pump, they buy it in Q4, but before their deductibles reset. With Control-IQ launching likely too late here for people to, call it, un-pause and get their pump purchase in before the year-end of 2019, do these patients then wait until Q4 2020 instead of immediately buying their pump in Q1 '20 when Control-IQ will likely become available?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [62]

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It's really hard to say what that behavior will actually be. But I do expect that seasonality might impact when they decide to make that purchasing decision. Because for so many people, until their deductible has been met, it's a very costly decision for them to make. But having said that, we have a very firm launch strategy in place so that the moment we get approval, we will be pushing very hard to try to get as many people through the pipeline as possible before end of the year.

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Operator [63]

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I am not showing any further questions at this time. I would now like to turn the call back over to John Sheridan for any closing remarks.

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John F. Sheridan, Tandem Diabetes Care, Inc. - President, CEO & Director [64]

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Well, thanks, everybody, for joining us today. We look forward to seeing you soon. We're going to be at Credit Suisse Conference in Scottsdale on November 12, the Stifel Healthcare Conference in New York on the 19th of November and the Piper Jaffray Conference on December 4, also in New York City. Thanks, again, for joining us. We look forward to keeping you updated on the company as we continue to make progress.

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Operator [65]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.