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Edited Transcript of TNDM earnings conference call or presentation 26-Feb-19 9:30pm GMT

Q4 2018 Tandem Diabetes Care Inc Earnings Call

San Diego Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Tandem Diabetes Care Inc earnings conference call or presentation Tuesday, February 26, 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. - Executive VP & COO

* Kim D. Blickenstaff

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

* 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

* Jeffrey D. Johnson

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

* Kevin Michael Farshchi

Piper Jaffray Companies, Research Division - Research Analyst

* Kyle Royal Bauser

Dougherty & Company LLC, Research Division - Senior Research Analyst

* Matthew Charles Taylor

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

* Ravi Misra

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

* Ryan Frederick Blicker

Cowen and Company, LLC, Research Division - Associate

* 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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Good day, ladies and gentlemen, and thank you for your patience. You've joined Tandem's Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Chief Administrative Officer, Susan Morrison. Ma'am, you may begin.

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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, and thanks, everyone, for joining Tandem's Fourth Quarter 2018 Earnings Conference Call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, product development timelines and financial performance and operating plans and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the Risk Factors portion and elsewhere in our most recent annual report on Form 10-K and 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 to the allocation of capital. Please refer to the Investor Center portion of our website for further information.

Also released today was our succession plan announcement, which included changes for 2 of today's call participants, Kim Blickenstaff, who has been Tandem's President and CEO for more than 12 years will be assuming the newly created position of Executive Chairman.

John Sheridan, who has been our Executive Vice President and Chief Operating Officer since early 2013, will succeed Kim as President and CEO effective this Friday, March 1. These gentlemen have worked extraordinarily hard in their roles for Tandem through the year and have been fundamental to its success.

We're excited for them to continue serving our company in their new role. Kim will be opening up today's call, followed by a business overview and product development update from John. And then, we'll have a financial review and outlook from Leigh Vosseller, our Executive Vice President and Chief Financial Officer.

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

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

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Thanks, Susan, and welcome, everyone, to today's call. Firstly, to comment that when we hired John 6 years ago, it was with the thought that one day he would be my successor. I had met him prior to Tandem and knew of his successful career from Digirad to CardioNet and Volcano. In his role as EVP and COO for Tandem, he's exceeded my expectations. Our company's positive momentum is continuing to build and the board now are confident in John's ability to drive Tandem to its next phase of success.

In my new role as Executive Chairman, I'll be focusing on our external and corporate strategy efforts and then continuing to build Tandem's board for the future, while John advances the organization's day-to-day activities.

This time last year, when we started to see the positive momentum shift in our commercial business, my attention and that of our other directors began to have a greater focus on the company's longer-term strategy as well as our board composition. Our goal was to transition from a domestic venture-backed insulin pump start-up to a self-sustained global diabetes technology company. We were looking to expand our vision that inspire the diabetes care portion of our name.

To do so, we knew that the addition of skills and expertise in wireless consumer technology, connected health and from global organizations would be important at both the board and management level, to help lead us through this transition.

Last year, when Rick Valencia, the President of Qualcomm Life, joined our board, it was the first step in this direction. In just a short time, Rick already has proven to be instrumental on our board.

More recently, in the first quarter this year, we welcomed Beckie Robertson to our board. I've known Beckie for more than 20 years, and we served together on the board of ProDuct Health. She has an impressive track record of helping medical device companies scale in her roles as an engineer, entrepreneur, corporate executive and board member. Her experience with a diverse range of technology and business models, combined with her strategic vision, further strengthens our board as we prepare for the company's next phase of growth.

We're also further strengthening our management team with new areas of expertise. As you saw last week, we hired Manuel Jaime as our Senior Vice President, Technology and Digital Health. Manuel did some consulting work with us a few years back when we were just starting to explore mobile strategy. From that experience and with his more than 20 years of experience in mobile connectivity and cloud technology, we knew he was the right fit to lead us in the development of our connected health solutions and the globalization of our data management applications, along with working to ensure the security of customer-accompanied data.

We'll be investing in each of these areas in 2019 in addition to our automated insulin delivery programs and t:sport, as we believe they are the key in our ability to enhance our customer offerings, improve internal efficiencies and help further establish our position as a leader in digital health in the diabetes community.

Tandem has had its share of challenges and triumphs through the years, and I believe we are at the strongest point of our organization's history. I look forward to continue contributing to Tandem's success at shaping its future as Executive Chairman.

Looking back at the year, 2018 was both extraordinary and transformative for our company. We began the year jocking for position to compete in our industry, and today, we are a leading insulin delivery and diabetes technology company.

Earlier this month, we added another first to our list of accomplishments when the FDA classified our t:slim X2 as the first in a new device category called Alternate Controller Enabled Infusion Pumps. This category, refeed to as ACE pumps for short, relates to the FDA's interoperability initiative, which we previously referred to as an iPump.

Being the first to achieve this designation further establishes the role we've taken as a key innovator in the insulin pump industry, having launched the first touch screen pump in the United States, the first pump capable of remote feature updates, the first pump approved that's iCGM compatible, and now the first in this new interoperable pump category.

The t:slim X2 truly is the next-generation insulin pump. Demand for t:slim X2 mounted throughout 2018, driven domestically by the ease of use and form factor of our platform, its software updatability from a home computer, the FDA approval of Basal-IQ technology, our first automated insulin delivery algorithm, and our implementation of a simple online tutorial for this new feature, and the integration of Dexcom's best-in-class G6 CGM sensor.

Then to further this momentum, in the second half of the year, we launched our t:slim X2 pump outside the United States. Ultimately, these factors are what drove our remarkable achievement of more than 100% growth in shipments for the year.

Our sales success also allowed us to clean up our balance sheet during the year. Today, we have no debt. In the fourth quarter, we even generated cash from operations for the first time, which was ahead of our expectations.

I'd like to take a moment to acknowledge and thank our employees for these tremendous achievements. Their hard work and fortitude are what made these results possible. And I'm very proud of the impact you've had on the lives of nearly 85,000 people using a Tandem pump today. Thank you, again, for all that you do as we work to further our mission to improve the lives of people with diabetes.

With that, I'll now turn the call over to John for a further discussion of our performance and plans for 2019.

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [4]

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Thanks, Kim. I would like to start out by thanking you for all your mentorship over the last 6 years. And on behalf of myself and all the Tandem employees, thank you for the great contribution and leadership you've given to Tandem. We clearly would not be here without you, and you've created a great culture here at Tandem that's enabled us to attract amazing employees, retain them during difficult times. And now that things are moving in the right direction, it's enabled us to innovate quickly and gain competitive advantage in this market.

I look forward to carrying the torch forward in this new role and continuing your vision to improve the lives of people with diabetes through relentless innovation and revolutionary customer experience.

As we look ahead, 2019 is positioned to be another year of tremendous opportunity for Tandem. Incredibly, the strength that drove our growth in 2018 are still in place today. These include our differentiated pump platform, our highly rated customer service, our automated insulin delivery programs and our international expansion.

Starting with the t:slim X2 platform, independent survey showed tandem customers have the highest satisfactions compared to other insulin pump manufacturers. People who reported that they have switched from a different insulin pump manufacturer made up about 1/2 of our business in the fourth quarter, which demonstrates that the t:slim X2 can successfully compete head to head with competitive insulin pump offerings. But it also means that we are continuing to make progress towards our longer-term goal to expand the diabetes market as more than 1/2 of our new customers in the U.S. still report being new to pump therapy from multiple daily injections.

Of customers that are switching from another pump, we continue to make progress with Animas' customers following Johnson & Johnson's late 2017 decision to exit the business. As a reminder, Johnson & Johnson has stated that supplies will no longer be available to Animas' customers as of September of this year. A recent independent survey suggest that approximately 15,000 or an estimated 1/3 of Animas' customers in the United States remain. While some of those will convert to a new pump before September. For a number of reasons, we also believe that many of Animas' customers will wait until September to make that decision.

Internationally, the story is slightly different, and outside the United States, we anticipate that there will be an increased number of Animas' customers making decisions in the first half of this year. We are working closely with our distributors to support these customers, and it is clearly an operational priority for us. The international dynamic with Animas' customers began at the end of 2018. And with the domestic sales at an all-time high, our supply chain infrastructure was stressed to keep up with demand.

This resulted in some international distributors not receiving all the pumps that they have requested. We are continuing to work with our supply partners to identify scalable solutions to resolve our new pump raw materials issues and anticipate being fully caught up with demand in the near term. Just to be clear, the challenges relate to how fast our suppliers are able to support our increased purchase request for pump raw materials to meet the demand rather than a capacity concern. In our current facility, we have capacity to build 110,000 pumps annually using 2 lines, which we have in place.

The dynamic growth we experienced domestically in the second half of 2018 was driven in part by our launch of t:slim X2 with Basal-IQ technology. In 2017, we made the strategic decision to be -- to bring Basal-IQ to market as our first automated insulin delivery algorithm rather than wait for Control-IQ. The decision was based on market research in which the diabetes community shared that prevention of hypoglycemia or low blood sugar was the most important feature of an algorithm. Although our decision was controversial at that time, it is now clear we pursued the correct strategy both for our business and our customers.

From our clinical trial, we knew the Basal-IQ algorithm worked well in helping reduce the frequency and duration of unexpected lows. But people also reported that they were avoiding the high blood sugars that people with diabetes often experience when they're forced to treat hyperglycemia. The real-life feedback from our customers using Basal-IQ technology post-launch has been incredible, as we've shared previously, many described it as life-changing.

Having Basal-IQ technology available for the full year of 2019 is a catalyst for our continued growth domestically. And this year, we plan to launch this important technology outside the United States as well. The timing of our international launches will be a decision we make in consultation with our distribution partners, and will also depend on different regulatory and reimbursement requirements. For those reasons, the timing is likely to vary geography to geography.

As we look forward to other catalysts for the year, I'm especially looking forward to the anticipated launch of the t:slim X2 with Control-IQ technology. As a reminder, Control-IQ is designed to increase and decrease basal insulin to help minimize hyper and hypoglycemia and improve a user's time spent within the targeted glycemic range. It's also been designed to leapfrog competing products by providing automated correction boluses, which we will be -- believe will be another first for Tandem and our industry and bring additional benefits to our customers.

In our last call, I outlined the regulatory path for Control-IQ, which included the FDA's new concept of interoperability. Earlier this month, we successfully completed the first step of the regulatory pathway for Control-IQ when, as Kim mentioned, the FDA classified the t:slim X2 as the first ACE pump. In the words of the FDA, the pump is able to reliably and securely communicate with compatible, digitally connected devices, including automated insulin dosing software.

Along with this authorization, the FDA established criteria called special controls to outline requirements for ensuring the accuracy, reliability, cybersecurity and clinical relevance of ACE pumps as well as describe the type of studies and data requirements to demonstrate acceptable pump performance.

Unlike iCGM, the published special controls for the ACE pump are not specific metrics, but rather a summary of implementation requirements that are then subject to FDA interpretation. While there is nothing listed in the special requirements that we feel are technically insurmountable, for another pump manufacturer accomplishing this requires a substantial amount of work, and work takes time. Further, Tandem enjoys the advantage of being the first pump with a touchscreen-operated system. Not only do we benefit from the years of early development and human factors research with touchscreen devices, but we are also -- we also continue to protect our intellectual property in this field. Meanwhile our pace of invention is accelerating and we are continuing to advance our interoperable product development efforts.

Now having received the ACE pump designation, the next step in bringing Control-IQ to market is a completion of the pivotal clinical trial. As a reminder, we implemented the type 0 algorithm on the t:slim X pump, which was integrated with the Dexcom G6 iCGM sensor. This system is being used in the DCLP3 portion of the International Diabetes Closed Loop Trial. The DCLP3 is a 6-month study with 168 participants aged 14 and above. The final participants were enrolled in October, suggesting that the study will complete around April and the data is anticipated to be presented at the American Diabetes Association in June.

Since our last call, Tandem initiated work on a new pediatric study, DCLP5. It is designed as a 4-month crossover study with approximately 100 pediatric participants, and it's intended to provide additional data to support lowering the Control-IQ age indication to 6 years old. We are currently in discussions with the FDA regarding a preferred regulatory path for the Control-IQ submission. The key question of all is the timing of data availability for the pediatric study. If the pediatric clinical data is available close in time to the adult data, it may make more sense to wait for the pediatric data, submit both, and seek an initial approval for an indication of 6 years old and up.

The FDA has been supportive on this initiative and continues to provide us with constructive feedback. As we work through the process, we'll keep you posted. And either way, we continue to plan for a Control-IQ launch sometime between summer and the end of the third quarter.

In addition to the pivotal studies for Control-IQ, data is also being generated by UVA using our t:slim X2 pump with Control-IQ technology through an NIH study called Nightlight. The Control-IQ algorithm was specifically engineered to adapt its mode of operation during sleep, and so the study is focused on the efficacy of the system in the evening and at night compared to 24 hours a day.

The home-use study is a randomized 8-week crossover design with 45 adults and is nearing completion. Just last week at the Advanced Technologies and Treatments for Diabetes conference in Berlin, earlier data was presented from the study. While Nightlight is not one of our pivotal studies, we are encouraged by the unblinded results, and we continue to believe this technology has the potential to set a new standard for care in diabetes management.

The ACE classification for the t:slim X2 will be an important part of our artificial pancreas offerings as well. Combined with its ability for remote software updates, it will enable more efficient and predictable development of new systems with current and future technology partners and allow faster delivery of these new innovations to our customers.

As we look to what lies beyond for Control-IQ, we are focused on creating offerings that ease the burden and reduce the interaction. In an advanced hybrid-closed loop system, this may include features such as no carb setting per meals and personalized settings.

Then ultimately we seek to offer a fully-closed loop system capable of complete bolus and basal automation. We are in the process of defining which of these features will be in our next commercial AID offering. But for competitive reasons, we may not detail the exact features of our next-generation system until later in the development process.

In addition to these efforts, we believe the ACE designation gives us greater confidence in the timelines and goals for the t:sport insulin pump. As a reminder, the t:sport pump is about half the size of the t:slim and will feature mobile control. This year, we'll be completing the majority of the t:sport design testing, and we plan to begin ordering production tooling and automation by the year end. We will be working to receive ACE pump classification for the t:sport in the second half of next year and plan to submit for CE Mark in 2020.

As a first step towards mobile control, we plan to launch a mobile application in the first half of this year that will ultimately have this capability and will be offered on both Apple and Android platforms. The first generation of this app will allow for wireless uploads from the t:slim X2 pump, which is designed to provide our customers and their healthcare providers with easier and more regular access to pump and blood glucose information. We have a list of features and capabilities that we plan to roll out for this app in stages on our way to the ultimate goal of full control for this device.

Walking around the halls of Tandem, there's an overwhelming excitement surrounding so many different aspects of our business. We recently held our National Sales Meeting, and the enthusiasm amongst our sales and clinical team members is at an all-time high. Overall, it's an incredible time to be part of Tandem, and I look forward to helping lead our company to the next phase of success.

With that, I'll now turn the call over to Leigh for comments on quarter and financial guidance.

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

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Thank you, John, and good afternoon, everyone. We began the year with enthusiasm about the changing market dynamics and what it could mean for our business. It turned out to be a year of record that surpassed all expectations. Our success is evident, not only in our strong sales growth, but also in our gross margin performance, fourth quarter profitability and dramatic reduction in use of cash.

Beginning with sales, in early 2018, we laid out 5 key growth drivers for the year and capitalized on each of them. They were: the successful launch of Basal-IQ, scaling our renewals, capturing 100% of our infusion set sales, providing an attractive solution for former Animas customers and our entry into international markets.

These factors drove our full year 2018 sales to $184 million, which exceeded 70% sales growth year-over-year. This is the highest annual growth rate in our history, stemming from a doubling of pump shipments to approximately 34,500 for the full year of 2018.

Our fourth quarter sales were $76 million, including $7 million from our recent international expansion. This brings us to $10 million in international sales for the full year of 2018, which still exceeded our expectations even though we were unable to fulfill the entire international demand for the quarter.

In the quarter, pump sales continued to be the most significant driver of our growth at 72% of total sales. Our total pump shipments were 16,200, of which 3,200 were shipped into international markets. This brings us to 80,000 pumps shipped in the U.S. in the last 4 years, which we consider a reasonable estimate of our in-warranty installed base.

Our renewal opportunities and renewal sales continue to scale rapidly. Through the end of 2018, warranties for over 16,000 customers have expired in total and more than 20% of those just expired in the fourth quarter of 2018. Cumulatively, we have now recognized approximately 7,500 renewal sales since inception. In the fourth quarter alone, we shipped 1,800 renewal pumps, which is double the number we shipped in the fourth quarter of the prior year. While the majority of renewals are now generated from shipments originating in 2014, we continue to see renewals from as far back as 2012.

The late 2017 commercialization of our t:lock infusion set also drove significant year-over-year sales growth from supplies both in the quarter and for the full year. We are now fully capturing the infusion set opportunity from our domestic installed base. In the fourth quarter, supply sales grew 64%, resulting in infusion set sales at 20% of total sales followed by cartridges at only 8%.

As we look forward to 2019, we are anticipating another strong performance, while we continue to take advantage of many of the same opportunities that were our catalysts in 2018. As John discussed, we expect the launch of our Basal-IQ technology in international markets and Control-IQ technology domestically to fuel continued growth from both the new and renewal markets.

Our sales for 2019 are expected to be in the range of $255 million to $270 million, or 39% to 47% growth year-over-year. This includes an international sales estimate of $45 million to $50 million. Our guidance contemplates that our mix of domestic distributor versus direct sales will be relatively consistent with 2018 levels. Additionally, we continue to evaluate our Control-IQ pricing strategy, with a primary goal is to secure incremental reimbursement from insurance payers based on the savings we can demonstrate for their network. Since this is still under evaluation, we have not factored an incremental reimbursement relating to Control-IQ into our guidance.

We continue to expect seasonality in our domestic sales, historically, we had experienced an average of 17% of pump shipments in the first quarter based on insurance deductible resets. The rate may be higher in the first quarter of 2019 though, based on the timing of the remaining Animas opportunities. In contrast, our international visits does not have the same reimbursement dynamic. Although it may vary by geography, we generally do not expect strong seasonality other than potential fluctuations around holidays and summer vacations. Having said that, the timing of the Animas opportunity may also more heavily influence pump sales in the first 3 quarters of 2019. And we may see some early benefit from the carryover of 2018 unfulfilled international demand.

In addition to our strong sales growth, we also made tremendous progress in scaling gross margin in 2018. We successfully reached our gross margin target 1 year earlier than anticipated. In the fourth quarter, gross margin was an all-time high of 55%. This brings us to a 2018 full year gross margin of 49%, which is an 8-point improvement over 2017.

The key drivers of gross margin continued to be increased production volumes creating leverage of fixed overhead costs, manufacturing efficiencies gained in our new facility, the high percentage of pump sales in our product mix and the increased percentage of infusion set sales following the launch of our t:lock Connector.

Gross margin was again slightly pressured by a higher level of noncash stock-based compensation that we have seen historically. In the fourth quarter of 2018, gross margin included a charge of nearly $2 million, or 2 margin points, compared to $300,000, or 1 margin point, in the prior year.

Other factors that have and will continue to impact gross margin are the percent of sales that comes from the international business and the mix of direct versus distributor sales. With international sales at only 5% of total 2018 sales, the impact to gross margin this year was nominal.

We anticipate gross margin will be approximately 52% on a full year basis in 2019, with the typical impact of seasonality across the quarters. This year-over-year improvement continues to reflect benefit from increased volumes but with pressure from higher levels of both international sales and stock compensation.

Similar to our gross margin improvement, we also manage growth in our operating expenses to gain further P&L leverage. Operating expenses were $41 million in the fourth quarter, including $9 million in noncash stock-based compensation expense. On a full year basis, operating expenses were $134 million, including $21 million in stock-based compensation. By comparison, operating expenses were $107 million in the prior year with only $11 million in similar noncash charges. Other increases in our operating expenses included costs associated with advancing our product pipeline and higher incentive-based compensation based on our sales results.

We had taken a significant step towards meeting our long-term profitability targets. For the first time ever, we experienced a positive operating margin of 1% in the fourth quarter, despite the increasing impact of significant noncash charges. On an adjusted EBITDA basis, which excludes the impact of noncash stock-based compensation, this translates into a positive 16% margin for the quarter, bringing us to only negative 8% for the full year.

In 2019, we plan to invest in our infrastructure and areas such as sales territory optimization, the purchase of additional manufacturing equipment and expansion into additional facilities to support both administrative and manufacturing warehouse operations. In addition, we plan to invest in technology solutions for our customer support functions and increase R&D spending to support t:sport development. Even with these investments, we anticipate reaching positive adjusted EBITDA on a full year basis.

We ended the year with $129 million in total cash and investments, which means the cash balance increased by $15 million since the end of the third quarter. On a full year basis, if you exclude the $117 million and net cash we received from financing activities, our net cash burn of $12 million was dramatically lower than in prior years. This was primarily driven by the fact that we generated cash from operations for the first time in the fourth quarter, which also benefited from it being our first full quarter with no debt service obligation.

Additionally, we received approximately $2 million in proceeds from employee stock plan. We do not anticipate being cash flow positive in the first half of 2019 though, due to anticipated capital expenditures for our facility and manufacturing equipment in preparation for additional growth, in addition to domestic seasonality and the upcoming payout of our annual incentive compensation awards.

To summarize our 2019 outlook, our financial guidance is for sales in the range of $255 million to $270 million, including international sales of $45 million to $50 million. We expect an approximate gross margin of 52%, and breakeven-to-positive adjusted EBITDA. Our noncash charges for stock compensation depreciation and amortization are expected to be approximately $55 million, included as components of both cost of sales and operating expense.

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 the line of Travis Steed of Bank of America.

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Travis Lee Steed, BofA Merrill Lynch, Research Division - VP [2]

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Wanted to get a sense for what you're seeing in the international business that gives you confidence in the big acceleration in 2019? How much of this is really adding new countries? And how much of it is dependent on the Basal-IQ launch internationally?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [3]

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This is John, and thanks for the question. I would say that the distributors have pent-up demand for -- at the Animas business since we have been a little bit late getting to the marketplace. So I mean, there's just -- it seems like overwhelming demand for the product in the -- in OUS, particularly in Europe. In addition to that, we do plan to launch a couple of additional countries this year. But I think the real issue is just being able to have a full year of revenue for the OUS business.

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Travis Lee Steed, BofA Merrill Lynch, Research Division - VP [4]

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Okay. And then maybe if you can comment on what kind acceleration you're assuming in the business late in 2019 after Control-IQ launches? And also, it sounds like your conversation with payers have been positive on getting more value for Control-IQ. Any sense you have for how much this could be? And would it be an upfront charge or would it be something more along the lines of cost sharing?

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

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Travis, thanks for the questions. First, I'll talk a little about Control-IQ and our strategy there. And right now, at this point, we're still evaluating what we want to do with that. Our primary goal though is to work with the payers to get that incremental reimbursement. So we'll be laying out more in the future as we have more clarity. But I will say that yes, we've had very positive conversations with payers just as we talk about the savings that they can see in the system from our Basal-IQ product today.

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Operator [6]

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

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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John, congrats on the promotion and Tim, all the best to you as you move to the Executive Chairman role.

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - President, CEO & Director [8]

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Thank you very much.

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

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Leigh, so the guidance beat, I think, everyone's expectations here. But you know, as I just had to put everything into the model, is it fair to say I think you're still being a little bit conservative just given the growth rate in U.S. pumps you saw this quarter, despite a really tough comp. Should we come away on the guidance that you're still set up for something you feel comfortable to hit but you ultimately intend to show some upside at the end of the day?

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

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I think the way I would frame it is much like I discussed our guidance last year, is that when we set the guidance range, we focus on what we think we have most within our control. So like last year when we laid out 5 growth drivers, we really said that we expected the majority of the growth to come from renewals. And the other elements of it would be upside opportunities because we just didn't have the kind of visibility into what they could range to us, for instance, how many Animas patients would choose us or how successful the would Basal-IQ be. Looking forward into 2019, it's the same philosophy. I think our #1 that we can count on is the renewals, we're very confident in how that's been progressing and our ability to predict it. We think Basal-IQ has been very helpful in starting off the year. We still have very strong enthusiasm for that product. But I think as we look to the back half of the year, we have less clarity. And with the timing of Control-IQ and what that can bring to the table, that's a little bit more cautious about how much to put into the plan.

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

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Okay, understood. And then John or Kim, any update on conversations with UnitedHealthcare? We saw recently they updated their policy to include pediatrics in the document. So should we read into that, that maybe it's going to take some more time here before Tandem is reintroduced with United?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [12]

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I wouldn't say so. I think it's probably going to be the experience with Basal-IQ and then Control-IQ that'll probably give us the most opportunity to get back into that plan. But -- and we have published data on Basal-IQ, not yet on Control-IQ. I don't know whether they'll tip their hand and do Basal-IQ or have to wait until Control-IQ, so we just don't have any more clarity on it.

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Operator [13]

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Our next question comes from Matt Taylor of UBS.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [14]

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I was hoping you could go into a little bit more depth in explaining your excitement around Control-IQ. We've seen some positive feedback out there in the market from people who have been using it. Obviously, you're getting a lot of uptake from Basal. So how are you going to measure success for Control-IQ both in terms of when we see the data, and then in terms of the uptake that we can see through the year, and? How much of that's baked in?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [15]

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Well, I can just say that from an anecdotal point of view, I mean, you've probably seen the blog reports. The people who are in the study today are just overwhelmed with it. It's overwhelmingly positive. We just get tremendous positive feedback from people to the extent that they don't want to give it back, and it's an issue that we're going to have to deal with right now. I think that the -- we though that Basal-IQ is going to be a step in 2019. It was going to be incremental improvement, and that was going to allow us to compete effectively against Medtronic. But it's absolutely turned out to be a leap. And the interesting thing is when you talk to people who are using Control-IQ, they believe that it's going to be another leap. So I mean, I think we're optimistic that the -- that, that product is going to really have significant uptake when it gets to the market.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [16]

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And just specifically in the guide, have you assumed any kind of a ramp when you do get Control-IQ? Our how much has been the guidance range for the year?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [17]

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As I said earlier, when I think about Control-IQ, when we think about new product launches overall, we're a little bit more cautious just based on anticipation of when the timing comes of when we get approval and can actually launch it. But I would say that people already, because of the updatability of our pumps, aren't necessarily holding back and waiting for that next product. And so I think as there's more enthusiasm, it could push more orders, but at the same time, I think just the hype we have around our product today is driving people to the table.

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Operator [18]

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Our next question comes from Brooks O'Neil of Lake Street.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [19]

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So I was curious if you could just help us all understand just a little bit more about the ACE designation. I think I was listening carefully to your comments, Kim, about that and I'm not sure you had any specific comments about the opportunity to integrate with other CGMs. I'm just curious if you see some possibilities there? And if so, if you want to talk about any of them?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [20]

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Sure, Brooks, this is John. I -- when we -- we talked about our regulatory strategy for Control-IQ, and formerly, we basically referred to it as an iPump, an interoperable pump. The FDA changed that, the name to ACE, which is an Alternate Controlled Enabled insulin pump, and it's essentially the same thing though, it's intended to be used interoperability, automated insulin delivery system. So the benefit is that we are going to be able to implement the ACE pump into a system interchangeably, without any regulatory requirement. In the short term, it's not going to benefit us that much. But I think where we do see the value is when we come forward with the t:sport product next year. And because of the ACE designation, we'll, of course, submit the t:sport pump as an ACE pump. But when we get the ACE pump designation, it's going to allow us to use it in our automated insulin delivery systems with no regulatory filing. So it's a -- basically, it makes our t:sport timeline much more predictable and gives us a lot more confidence in it.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [21]

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That's helpful. And then I'm just curious, obviously, you guys are in the marketplace. You have perhaps better use of the ground than anyone. I continue to sense that there are real issues with Medtronic sensor, in particular, perhaps the entire 670G system. What do you guys hear and what do you think is going on out there?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [22]

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I guess, what I'll say about that is this past week in Berlin, I think one of the big differences from past conferences was that physicians who actually have used the 670G were able to present real world data on how it's actually performing in their clinics. And I would say that one of the issues that was apparent was that the time in closed-loop was a -- it was a smaller number than you would expect. I think that it was typically in the 60% to 70% range in closed-loop. And I assume that's largely based on the sensor, there's probably other things that are contributing to it, but I think there's a number of papers that presented data on the 670G where that was an issue.

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Operator [23]

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Our next question comes from Kyle Bauser of Dougherty & Company.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [24]

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My question's around Control-IQ. For the primary endpoint in the clinical trial, can you remind me of the goal for percent of time and range? And how high you think that could reasonably go in the next couple of years?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [25]

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There isn't a specific goal for that. It's basically, just, we're going to measure time and range. I can tell you that when you look at the clinical data that's been generated by Boris Kovatchev in type 0 in the past, it's typically been in the mid- to high-70s time and rage, which is defined between 70 and 180. So I think we would expect to see similar to that -- similar performance to that as we bring the device to market.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [26]

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Great. And we heard from your largest competitor last week that they'll be developing a personalized closed-loop system. They mentioned algorithms today, in their opinion, behave the exact same way for every single patient. But correct me if I'm wrong, Control-IQ will be highly personalized and adaptable. You probably don't comment too much on these competing devices, much less 1 that's in its concept phase, but can you perhaps speak to type 0's Control-IQ algorithm, how that may or may not have a level of personalization already built into it?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [27]

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You have to put in your own data on insulin estimate factors and things like that. But it manages your diabetes within a range. I wouldn't say it's necessarily personalized, it's definitely something that we're considering. And I think in the next generation algorithm, we will be looking at personalization as well as just trying to make the algorithm easier to work with, for instance, potentially reducing the need for meal boluses or making the boluses small, medium or large and something like that. But right now, I wouldn't say it's personalized. I will say though that when you look at the Medtronic pipeline, I think the next generation device that they've got beyond 670 is equivalent to what our device is going to be when we bring it to market here this year. So it's also to say, bringing the number of products that they have on that list to market in a timeframe they've defined is very aggressive.

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Operator [28]

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Our next question comes from Doug Schenkel of Cowen.

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Ryan Frederick Blicker, Cowen and Company, LLC, Research Division - Associate [29]

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This is Ryan on for Doug. One on gross margin. You're targeting 52% for the year. Can you talk about how we should think about the international business within guidance? Presumably, it's lower than the corporate average like you talked about, which implies some really impressive progress on an underlying basis. Can you talk us through that math, and what's driving the really strong results?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [30]

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Sure. So just overall in terms of the strong results, it really comes from how much the pump sales are as a percent of revenue. So the pump having the highest gross margin as well as then just the increasing volumes, providing leverage in our manufacturing cost. When it comes to international this year, there was very little pressure on the gross margins, so it was pretty much what you would expect from the domestic business. But as we look to next year, the 52% on a full year basis. Two major pressures are there, one, is the international with it going to be a much more significant piece of the business as well as that noncash stock-based compensation. In the latter part of 2018, that was running about 2% of sales and I expect it to be somewhere 2% to even 3% of sales next year. But otherwise, we expect to see the same continued performance on improvement in gross margins just from scale and efficiencies from our new manufacturing facility.

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Ryan Frederick Blicker, Cowen and Company, LLC, Research Division - Associate [31]

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Got it. That's very helpful. And then maybe just going back to international revenue for 2019. How are you guys thinking about the Animas opportunity within your guidance? Are there any specific countries that are really popping out? Or is it hard for you guys to see that data at this point given it's mostly through distributors?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [32]

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Right. So really a big portion of the guidance for next year is based on the Animas opportunity through the conversations that we have had with the distributors that are already in place, which we've announced to various countries that we're in, that's where we expect to see the majority of the growth. It's the back part of the year where we are considering launching into other countries that really, the most -- for the most part, it will come from the Animas opportunity.

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Operator [33]

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Our next question comes from JP McKim of Piper Jaffray.

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Kevin Michael Farshchi, Piper Jaffray Companies, Research Division - Research Analyst [34]

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This is Kevin on for JP today. So my first one is clearly, there's an inflection point playing out over the last 6 months. Just wanted to frame up what's really behind that. Specifically in the quarter, how many of the 16,000 shipments took advantage of the special $9.99 offer? And thinking about that, is there risk to some of those sales being pulled forward as a result and -- or was the uptake in line with what you expected for that deal?

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

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Sure. And for that program that we offered, we -- it's very small as a percent of our business. What we've experienced with upgrade programs is that patients really aren't interested in paying out-of-pocket in warranty. We don't expect it to affect the warranty renewal cycles because it is only for in-warranty patients. And so then when their warranties expire, they can go ahead and renew on a regular-sale basis. But the inflection point, back to that, in the last part of the year, I would say, really points a lot to the Basal-IQ launch. And as John said earlier, we expected it to be a small step for the business, but it really ended up being a large leap. And I think as more and more people became acquainted with the system and heard about the performance, that's what really help us to drive in the back half of the year.

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [36]

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I'd say that it also helped that we took the debt way. We took that whole financial issue away, that was one of the major selling issues that our competition had last year, and frankly, physicians who are investors, believed it. And I think when they saw that debt go away, then started seeing the stock price go up, they became very interested in the company. And the products spoke for themselves in terms of ease of use, for the G6, no fingerstick and high -- available all the time. So I think that was sort of the cadence of the year, just felt like every step was a positive one.

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [37]

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Right.

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - President, CEO & Director [38]

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Speaking of happiness, I was talking to the sales force last week in our National Sales Meeting and what they're pointing out is that, the physicians would put several patients on Basal-IQ and would wait a few months, and then they were to come back in and they were really surprised in a very positive way about their performance. And as a result of seeing that, they actually put on more of the patient base onto the Basal-IQ. So I think there's this geometric process that's going on in these healthcare practices that are -- that's just going to help us -- that's going to continue to help us over time.

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [39]

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Yes, and it was also the unexpected finding that if you prevent hypoglycemia, you minimize rebound hyperglycemia. And that wasn't well understood by anybody that we're working with, not even our investigators. And I think physicians are sort of stunned to see that that's the case. If you think about it, you use too much insulin and you get a low, you're going to ingest glucose in some form and that's totally unregulated ingestion, and you go skyrocketing high and then you're on this curve of lack of control. So it's performing far better for that reason because I don't think the medical community really understood that aspect of what was going on. We didn't, right?

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Kevin Michael Farshchi, Piper Jaffray Companies, Research Division - Research Analyst [40]

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Yes, for sure. That's extremely helpful answer. I just have one last one on Control-IQ upcoming. I think that's another key investor question. We assume it's going to be better than 670G on time and range, and you mentioned kind of the higher range that you expect. I know, obviously, you're not going to say what the time and range is from the trial, but my question is, trimming up how physicians are choosing Tandem today, even from a directional perspective, is it the time and range or the ease of use that those physicians and customers care about Tandem? If your ease of use is better, why is that?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [41]

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I think if you look at the research that's done on the -- on technology adoption, there's 2 really important factors. The first is that the technology has to work and provide the outcomes that you anticipate. So that being you need to get the time and range when you have the new device, and that I think that the reality is that we expect that to happen with Control-IQ and I think the same thing is the case with 670G. I mean, I think when it works properly, it does get pretty good time and range. The other factor that people often ignore though, is it has to be easy to use. It can't cause any friction in the process. It has to basically -- it has to be very easy to use and simple. And that's, I think, the real advantage that we've got, both the Basal-IQ and I think the same thing will exist with Control-IQ. The other aspect of that is it has to be easy to train. I mean, I think that we've proven already that Basal-IQ is very simple to train. And again, I don't think that Control-IQ is going to be much more difficult. And what that does is, not only does it make it easier for the person who's using the pump, it also makes it easier for the healthcare provider, which is a big important thing. I think improving the efficiency of healthcare providers is a big deal. And I think if our pump helps them become more efficient, that their patients will be happy and so will they.

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Operator [42]

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Our next question comes from the line of Steven Lichtman of Oppenheimer.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [43]

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Leigh, as you pointed out, we saw a really big jump in renewals this quarter. Anything you can point to specifically, why that spike in 4Q? Was it just seasonality or did the Basal-IQ really begin to catalyze that?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [44]

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Sure. So I think it starts with just the typical seasonality. It's a little early for us to tell how much of it may have been motivated by Basal-IQ, but my gut says that, that's a factor as well. And so also, if you look back 4 years ago, the number of opportunities keep increasing. And so we would expect to see increasing renewals as we move forward just for that reason alone.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [45]

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Got it. And then secondly just on the international opportunity ahead. Are you willing to share what new countries you see as the next opportunities for you guys? And if not, any other broad comments you can provide on what you see in terms of additional expansion beyond the country that you're currently in?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [46]

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We'll probably not going to mention any of the countries. But I will say that last week at ATTD, Brian Hansen and his team had some great meetings with most of our OUS distributors. They went very well in those meetings. He was able to talk about the performance in 2018, help them understand what's going on in 2019 and literally explain out the year with them. The other thing that Brian and his team have been doing is they've been working closely with Dexcom, and with Dexcom, they've been targeting the important locations that Dexcom is at and where there's reimbursement and pertaining -- the former Animas business as well. So I think the combination of working with Dexcom also is important in selecting those countries.

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Operator [47]

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Our next question comes from Jeff Johnson of Baird.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [48]

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John, I was wondering if you could help break out, you made some comments early in the call that the Animas opportunity in the U.S., the rest of it, the other 15,000 are probably are going to be more weighted towards September. But in the OUS market, it's going to be earlier this year. Just some color, if you could help flesh out kind of the timing differential there and how we should think about the opportunity flow-through to Tandem specifically from both those opportunities?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [49]

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Right, I think in the OUS -- the opportunity, I think what's happening is the distributors are driving the demand there. I mean, they have till September. There's a significant incentive on their part to make that happen. So I think OUS, people are driving it. Inside the States, I think it's that there are people -- it's insurance-based, first of all, and so people are, they like their pump and they're going to stick with it, and they're going to probably stick with it as long as they can. And I think they're going to push that. So we do anticipate that near the end of this year that we'll see a higher demand for Animas customers, but I think that's primarily driven by insurance.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [50]

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All right, fair enough. And then Leigh, I mean, the U.S. side, outside of the renewals, the other 11,000 pump sales in the fourth quarter or so, could you just help us split kind of MDI versus competitive share gains in those 11,000. And any color you can provide on how many of those might have come from Animas versus other pumps?

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [51]

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Sure, and it's been very consistent. We haven't seen much of a change there, which is exciting because you might think that with Animas opportunity we'd start to see more weight towards Animas. But we're still seeing about 50% coming from MDI and then the other half is the majority Medtronic and the smallest piece, Animas.

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Operator [52]

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Our next question comes from Ravi Misra of Berenberg Capital Management.

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Ravi Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [53]

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My first question was, just a little bit on the patient dynamics, if I can circle back on that a little bit. Can you talk about the kind of -- the approval process on the pediatric for sport a little bit? And could you just tease out a little bit what your comments in the prepared section were about how you would kind of bring that to market? And what kind of patient bolus or new patient additions you think that could represent?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [54]

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Well, I think that we -- of course, the current DCLP3 study that is nearing its completion is basically going to be indicated for patients 14 years and older. And so there is a big opportunity, I think, to use the device on younger pediatric children. When -- our original strategy was to basically work on a study in France that's currently going on. That's not going to be complete until the November timeframe. And so we found this opportunity late last year to initiate a new study, which is the DCLP5 study, which is going to be 4 sites with 100 pediatric children and is going to enable us to get the indication down to 6. So the -- I mean, the opportunity here is to move fast and to hopefully have the data available sometime this summer. What I was saying in the prepared remarks was that, if, in fact, we have that we are able to move fast, enroll and complete the study in a timeframe that makes that data available close to when the DCLP3 study is available, we would probably wait and submit the 2 together. If on the other hand the pediatric study takes a longer time than we want, we definitely want to get the DCLP3 data in as quick as we can so we get approval for Control-IQ, at least for that population, and then we would submit the pediatric data later.

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - President, CEO & Director [55]

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I just want to make 1 comment. We've heard continually that the pediatric population is most at risk. From lack of control, causes great angst and I'm worried for the parents. It's time consuming, especially when children are at school. And John, you just heard some comments in -- about folks in NASS, right, their pain?

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John F. Sheridan, Tandem Diabetes Care, Inc. - Executive VP & COO [56]

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Yes. I mean, it was very interesting. We actually -- we have over 100 kids now enrolled in the French study and one of the things that Eric Renard, who's the PI, told me this past week was that in France, there's a process where parents basically are really -- they really have to support the children. And they do things that -- they would stay awake all night, for instance. They do things that are very demanding on them. And as a result of these pumps, the demands have significantly improved and the children and their parents, for instance, have been able to sleep all the way through the night. So it's had a very, very positive effect on their lives in a very short period of time, and he was just communicating to me how meaningful that was to them in a very positive way.

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Ravi Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [57]

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Great. And then just one question, Leigh, on the balance sheet, if I may. Days inventory kind of declined pretty significantly. I'm assuming that just has to do with some of the supply constraints and you're getting product out into the field as fast you can.

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Leigh A. Vosseller, Tandem Diabetes Care, Inc. - Executive VP, CFO & Treasurer [58]

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That's correct. In any given year, we typically exit with lower inventory levels just because of the Q4 seasonality. But you're absolutely right, because of that shortage of raw materials for the pumps, we did see lower inventory levels than we had seen in the past. But as John indicated, we look to have that cleared up in the near term.

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Operator [59]

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At this time, I'd like to turn the call back over to Kim Blickenstaff for any closing remarks. Kim?

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Kim D. Blickenstaff, Tandem Diabetes Care, Inc. - President, CEO & Director [60]

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Thanks, [Pratik], you seem to be our lucky charm. Thanks, again, to everybody for joining us today. In March, we're going to welcoming a number of bus tours here to our facilities in San Diego. And then we'll be attending the Cowen Health Care Conference in Boston on March 12. We have the Barclays Health Care Conference in Miami on March 14, and the Oppenheimer Health Care Conference in New York on March 19. So it's a very busy month for us. Thanks so much, again, everyone, for joining us today and we look forward to keeping you updated as the company continues to progress.

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Operator [61]

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Thank you, Kim. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.