Tandem reported blowout 2Q19 sales of $93 million, nearly tripling (+173%) YOY on a tough comparison to 60% YOY growth in 2Q18. Sequentially, the record sales rose a beyond-impressive 41% from $66 million in 1Q19. Tandem has now seen seven straight quarters of >50% YOY growth, four quarters of >70% growth, and two straight quarters where sales more than doubled. US sales totaled $70 million, rising 106% YOY; international sales of $23 million doubled sequentially in the fourth quarter of OUS launch, already carrying an impressive 39% of the quarter’s total growth.
Tandem shipped an incredible 21,258 pumps in 2Q19, nearly quadrupling (+290%) YOY and rising 44% sequentially. US pump shipments totaled 12,799, just short of the record 12,935 in 4Q18. International shipments jumped 67% sequentially, totaling 8,459 in 2Q19. Tandem’s global installed base is now estimated at 114,000 customers. Shipments included 1,600 existing customer renewals.
“About half” of new Tandem customers continue to come from MDI. In 2Q19, Tandem shipped ~5,500 pumps to MDI users, an excellent sign of market expansion. Tandem is benefiting, of course, not only from having one of the best pumps on the market, but also from an expanding market itself, where the closed loop experience is driving lots of purchases. We’ve said for years that the closed loop would be the “killer app” for pumps … CGM does not need a killer app, because it’s become Standard of Care (see update on the most recent additions to Standard of Care, including lots of momentum for CGM and Time in Range).
With the record-breaking quarter, Tandem raised 2019 guidance by a striking $50 million to $350-$365 million (+90%-99% YOY). This follows a $45 million guidance raise in 1Q19 – wow! Management emphasized the success of Basal-IQ and Dexcom’s G6, the excitement for Control-IQ, and some remaining Animas opportunity in the US.
Following positive pivotal data at ADA, the Control-IQ hybrid closed loop algorithm has been submitted to the FDA; a US launch for 14+ years is still expected in 4Q19. Tandem confirmed today that Control-IQ will be offered as a free home software update for: (i) in-warranty t:slim X2 pump users in the US; and (ii) those who purchase a Tandem pump in the US before December 31, 2020. This is fantastic news to enable continued access to innovation. The separate Control-IQ pediatric trial (n=150, 6+ years, four-month study) is “halfway” enrolled; an FDA filing is expected in early 2020, and the goal is to obtain pediatric approval before summer 2020.
Tandem reported record 2Q19 financial results this afternoon in a call led by CEO John Sheridan, CFO Leigh Vosseller, Chief Commercial Officer Brian Hansen, and Executive Chairman Kim Blickenstaff. See our top highlights below!
- Financial and Business Highlights
- 1. Global Revenue Jumps 173% YOY to Record $93 Million; International Sales of $23 Million Double Sequentially; US Sales Increase to $70 Million
- 2. Pump Shipments of 21,258 Up 290% YOY! In-Warranty US Installed Base Estimated at 96,000; ~114,000 Tandem Customers Worldwide
- 3. Gross Profit of $50 million (+231% YOY); Gross Margin of 54%; $131 Million in Cash; Adjusted EBITDA +$12 Million; Net Loss of $1.5 Million
- 4. 2019 Guidance Raised by a Whopping $50 Million – $350-$365 Million (+90%-99% YOY)
- Pipeline Highlights
- Questions and Answers
Financial and Business Highlights
1. Global Revenue Jumps 173% YOY to Record $93 Million; International Sales of $23 Million Double Sequentially; US Sales Increase to $70 Million
Tandem reported record worldwide sales of $93 million in 2Q19, rising an impressive 173% YOY on a tough comparison to 60% growth in 2Q18. Sequentially, sales rose 41% from the typical seasonal dip in 1Q19. Tandem’s 2Q19 revenue was its highest-ever, far surpassing the previous 4Q18 record of $76 million. Tandem has now seen seven consecutive quarters of >50% YOY sales growth, four quarters of >70% growth, and two straight quarters of sales more than doubling. Pump shipments made up the majority of sales (69%), followed by infusion sets (20%) and cartridges (10%).
US sales totaled $70 million, rising a strong 106% on a very difficult comparison to 60% YOY growth in 2Q18. Basal-IQ is clearly growing very nicely against Medtronic’s MiniMed 670G and Insulet’s Omnipod Dash. Notably, Tandem’s US sales are quickly closing in on Insulet’s ~$86 million in US Omnipod sales (1Q19).
International sales of $23 million more than doubled from $11 million in 1Q19, quickly rising to one-quarter of global revenue and driving a remarkable 39% of the quarter’s growth. This marked the fourth quarters of t:slim X2 on the OUS market, and it has seen steady sequential growth every single quarter (note green line below). On the call, management noted that backlogs from supplier shortages in 4Q18 and 1Q19 helped drive the strong sales numbers this quarter, along with a lot of pent-up demand from Animas users outside the US. (Tandem is using the same distributors as Animas.) CFO Leigh Vosseller said ~$7 million in 1H19 OUS revenue was from fulfillment of 2018 commitments. Tandem expects softer OUS sales of $20-25 million in 2H19, implying ~$10-$12 million in Q3 and Q4.
2. Pump Shipments of 21,258 Up 290% YOY! In-Warranty US Installed Base Estimated at 96,000; ~114,000 Tandem Customers Worldwide
Tandem shipped 21,258 pumps in 2Q19, nearly quadrupling (+290%) from 5,477 in 2Q18 and up 44% sequentially. US pump shipments totaled 12,799, just short of the record 12,935 in 4Q18. International shipments jumped an impressive 67% sequentially, totaling 8,459 for the quarter. After one year of OUS availability, Tandem has already shipped 17,810 pumps.
CFO Ms. Leigh Vosseller estimated that Tandem’s worldwide installed base is now approximately 114,000 customers (i.e., pumps shipped in the past four years). US in-warranty installed base is now >96,000 users.
Basal-IQ is now enabled on ~50% of pumps, and ~70% of pumps out in the field are software updateable. This means the conversion to Control-IQ hybrid closed loop in 4Q19 should go very fast indeed with the Tandem Device Updater (see pipeline section below).
Approximately half of Tandem’s new users still come from MDI, a similar rate as the last few quarters. During Q&A, CEO John Sheridan shared that “about 5,500” pumps had been shipped to MDI users this quarter. Tandem is continuing to expand the pump market at an excellent rate, and we’d expect it to accelerate even further once hybrid closed loop is available – the value proposition for getting on pump will grow quite a bit, though we also think it’s already growing due to the closed loop (especially since word is out to some, and the upgrade is free). Insulet most recently said ~75% of its customers come from MDI, though it is not growing as fast as Tandem in the US. (The business models are also very different now that Insulet is truly pay-as-you-go with no upfront PDM cost.) Management also emphasized more potential for international market penetration, where insulin pump use is estimated to be lower – “in the 10% to 20% range, depending on the geography.” We believe it’s even lower than that in some geographies.
US pump shipments included 1,600 renewals, doubling YOY. While management declined to share a renewal rate, the rate seems to have increased from the “about half” capture rate shared in 1Q19. Ms. Vosseller characterized renewals as “nice steady progress.” With the strong uptake of Basal-IQ, anticipated release of Control-IQ, and many more renewals up for grabs in the quarters ahead, this is a low-hanging opportunity for Tandem. Mr. Sheridan cited dQ&A data suggesting that Tandem’s customers are the most satisfied amongst pump manufacturers; contact dQ&A for more information.
Animas conversions represented “nearly 18%” of non-renewal pump shipments in 2Q19 and made up a sizeable piece of OUS sales through 1H19. That backs out to ~3,500 pumps globally in 2Q19 to Animas customers. Animas first exited the pump market in October 2017 and supplies for their pumps will no longer be available after September 30th (Medtronic now sells the cartridges and sets). While it’s impossible to know how many Animas users remain, Ms. Vosseller guessed that most are “pretty much behind us in the international market”, while some will remain in 2H19 and early 2020 in the US. Analysts asked rounds of questions quite relentlessly on this front, trying to ascertain whether the Animas business will dry up and the current growth is unsustainable; what was discounted, however, was how significant Control-IQ will be as the only Dexcom-integrated hybrid closed loop for at least 6-12 months. We look back to the decision J&J made not to recommend Tandem and see that a number of patients went for Tandem anyway – this was yet again a too-conservative decision by J&J management who cited legal risks when choosing Medtronic.
3. Gross Profit of $50 million (+231% YOY); Gross Margin of 54%; $131 Million in Cash; Adjusted EBITDA +$12 Million; Net Loss of $1.5 Million
Tandem reported gross profit of $50 million in 2Q19, more than tripling (+231%) from $15.1 million in 2Q18. Adjusted EBITDA, which excludes stock based compensation, came in positive for the third consecutive quarter at $12 million – a significant improvement from -$9.9 million in 2Q18.
Gross margin for 2Q19 was 54%, up remarkably from 44% in 2Q18 and 51% in 1Q19. Expectation for 2019’s gross margin was increased to ~54% – up from the previous 52% – due to higher percentage of revenue from pump sales (higher-margin), a reduction in overhead rate, and “process efficiencies.”
Tandem ended the quarter with $131 million cash, up from $126 million in 1Q19. The company expects to be cash-flow positive on a full-year basis, even with investments in capacity expansion.
Net loss was just $1.5 million, significantly improved from a net loss of $59.4 million in 2Q18. The loss recorded in this quarter included a $0.4 million non-cash charge related to outstanding warrants, while this charge totaled $42.5 million in 2Q18. These losses are difficult to predict as they stem from stock price movements. Tandem’s stock has doubled since this time last year, no trading above $65 (market cap: $3.5 billion).
Operating expenses rose 78% YOY to $52 million, far slower than the 173% YOY revenue growth – great leverage! Stock based compensation of $11 million was included in the operating expenses. Operating margin improved to -2% in the quarter from -41% in 2Q18.
4. 2019 Guidance Raised by a Whopping $50 Million – $350-$365 Million (+90%-99% YOY)
Management increased full-year 2019 guidance to between $350-$365 million, a whopping ~$50 million rise (at the midpoint) and now reflecting annual sales growth of 90%-99%. In 1Q19, full year sales guidance was also increased by $45 million – a reflection of Tandem’s very strong momentum. (Dexcom has similarly raised guidance by $75 million for two straight quarters; see yesterday’s report.) The guidance raise includes more optimism for international sales – from $45-$50 million to $55-$60 million for the year based on continued market penetration. Adjusted EBITDA for the year is expected to end positive, between 5%-10%.
Analysts’ concerns about the disappearing Animas opportunity were once again a major focus of Q&A. Guidance for OUS sales is significantly lower for the back half of the year compared to 1H19, and Ms. Vosseller said to expect a compression of the international Animas business following a lot of pent-up demand in 1H19. In the US, Animas conversion has held fairly steady in the mid-teens as a percentage (non-renewal) of pump shipments and is expected to stay at that level for the remainder of the year. Despite all the focus on the end of Animas conversions, Chief Commercial Officer Mr. Brian Hansen emphasized the growth opportunity for Tandem to convert MDI users (still the majority of people with type 1 diabetes) and competitors’ pumpers. Even in international markets, where the majority of Tandem’s business has been with former Animas customers, Mr. Hansen said the company is also seeing “solid” and “surprising” demand from new pump users. We think this will only increase as Tandem gets closer to a real closed loop.
Strong uptake for Basal-IQ and launch of Control-IQ (expected 4Q19) will be major growth and retention drivers for Tandem in 2Q19 and into 2020. Demand for Basal-IQ (launched August 2018) has been stronger than expected, and, for the first time, we heard that Basal-IQ has begun launch in Tandem’s OUS countries (see pipeline section below). The outcomes from Basal-IQ and Control-IQ could also help Tandem expand its partnerships with payers; potential value-based/shared savings contracts were mentioned in passing, though payer discussions were characterized vaguely. Without FDA approval, Tandem cannot market Control-IQ, but as expressed by Mr. Hansen, “There is an excitement building for this product.” We would agree.
“One of the huge advantages of the Tandem Device Updater is those patients who buy the pump today know that, especially with this no-cost announcement, that they're not going to be in a disadvantaged position by getting [the pump] now. A matter of fact, they’ve jumped to the front line because they simply take a quick online training module, download the software and they've got Control-IQ…It smooths out the demand beautifully for us. We don't see that pause and therefore the cadence should continue to grow with the excitement of both Basal-IQ's success and Control-IQ's offering hopefully in Q4.” – CCO Bryan Hansen
1. Control-IQ Pivotal Data Submitted to FDA; US Launch Still in 4Q19; Free Software Upgrade for t:slim X2 Users in US Through End of 2020
Following positive pivotal trial data at ADA 2019, Tandem has submitted the Control-IQ hybrid closed loop algorithm to the FDA; a US launch for 14+ years is still expected in 4Q19. It was not clear if it was a traditional PMA submission or a de novo submission as an iController. This launch timeline is unchanged since 1Q19 and is very reasonable – the FDA is only reviewing the algorithm itself, as the t:slim X2 ACE Pump and Dexcom G6 iCGM are already cleared devices. Additionally, FDA is very familiar with this hybrid closed loop algorithm (it has been studied for years in the academic setting), the pivotal study was much larger and more representative than the single-arm MiniMed 670G pivotal, and the 670G itself had an FDA review of only three months. Control-IQ will be the second hybrid closed loop on the US market and the first with a no fingersticks CGM (Dexcom G6), automatic correction boluses, and embedded Bluetooth. It is a meaningful leap over the 670G and we expect a lot of demand once it launches. See our complete coverage of the pivotal trial data at ADA 2019.
In fantastic news for the diabetes community, Tandem confirmed today that Control-IQ will indeed be offered as a free software update for: (i) in-warranty t:slim X2 pump users in the US; and (ii) those who purchase a Tandem pump in the US before December 31, 2020. Previously, there was consideration of charging a small upgrade fee; we’re elated to see Tandem made the right decision to prioritize access. Notably, “all software updates” approved by FDA through the end of 2020 will be offered for no cost – i.e., this will also allow pediatric t:slim X2 users (6+ years) to upgrade to Control-IQ once that indication is approved next year. The wide pump purchase window (17 months from now) also means that brand-new Tandem pump or new-to-CGM Dexcom users will be able to upgrade to get on Control-IQ anytime in the next 17 months, reducing the market “pause” that often accompanies new product launches. For Tandem, this will mean less choppy sales in the coming quarters – i.e., less pent-up demand, as users can get on the t:slim X2 now and upgrade to Control-IQ.
Just like the move from G5 integration to add Basal-IQ/G6, the Control-IQ software update for the t:slim X2 pump will be offered through the Tandem Device Updater at home. It will require completion of a “brief” online training module; we’re not sure if a new prescription will be required for Control-IQ, or if a Basal-IQ prescription will suffice.
Remarkably, 70% of Tandem’s installed base has a software-updateable pump, and 50% of the customer base already has Basal-IQ. CEO John Sheridan rightly characterized this as “tremendous” – i.e., the majority of Tandem’s customers will be able to immediately upgrade at home (without new hardware) to a substantially better product with hybrid closed loop automation. We’ve been saying it for several years, but it’s worth emphasizing – this is a pump-industry-changing paradigm of rolling out innovation via software. We assume there will be some upgrade program for the ~30% of users on older pumps that cannot be software updated.
Tandem remains the only pump company that offers free, in-warranty software updates from home – a compelling advantage for users in the ever-changing insulin pump market. This de-risks the choice of pump, as users no longer need to strategically “time” their purchase, predict pump innovation cycles, or plan to shell out thousands of dollars for new hardware. Medtronic aims to add this capability with the MiniMed 780G, which just began its pivotal study and is expected to launch by ADA 2020. We assume Insulet will be able to software update the Dash handheld to add Horizon’s hybrid closed loop user interface, though it has never commented on this front; however, Horizon will require new pods, as the algorithm is embedded in the pod itself.
The separate Control-IQ pediatric trial (n=150, 6+ years, four-month study) is “halfway” enrolled; an FDA filing is expected “after the new year” (i.e., early 2020). Tandem’s aims to obtain pediatric approval for Control-IQ before summer 2020 – diabetes camps offer a “significant educational and market opportunity.” According to the ClinicalTrials.gov page, pediatric study completion is expected by March 2020; in 1Q19, management forecasted a more aggressive plan to complete this study in September, though the current pace suggests that will not happen.
International launch plans for Control-IQ will vary by country and were not shared today. International pricing is also still under evaluation.
In discussing the Control-IQ pivotal trial results from ADA today, management highlighted the following key points. Some Wall Street analysts dinged Tandem for coming under the 1Q19 expectation for “mid-70%” time-in-range in the study, though we think that is misguided – the baseline time-in-range was quite low in this study (~60%), and the time-in-range delta over the control group was a very significant 11% points (+2.6 hours per day). The 670G pivotal had a baseline time-in-range at 67%, which improved to 72% by study end (i.e., +5% = half the delta).
Control-IQ’s pivotal was a “true scientific” and “comprehensive” study design – randomized, parallel control group, six months long, NIH-funded. It compared Tandem’s Control-IQ hybrid closed loop with Dexcom G6 CGM (n=112) vs. sensor-augmented pump (t:slim X2 pump/G6 with no automation; n=56). As a reminder, the 670G’s pivotal was a single-arm, pre-post design, comparing two weeks of baseline to three months of closed loop within the same person.
The pivotal met all primary and secondary endpoints – Time-in-range (70-180 mg/dl) was 2.6 hours per day better with Control-IQ – 70% vs. 59% (p<0.0001) – with most of the benefit coming from less time >180 mg/dl (-2.4 hours/day). Control-IQ had a 0.33% advantage in A1c at six months (baseline: 7.4%; p=0.0014), and mean CGM was 13 mg/dl lower with Control-IQ by the end of the study (156 vs. 170 mg/dl; p<0.001). Time <70 mg/dl was low at <2% in both groups, though still a smidgeon better with Control-IQ (-13 minutes/day). The time-in-range benefits of Control-IQ were realized in the first month, sustained over six months, and extended across the spectrum of baseline A1c levels (5.4%-10.6%) – the 24/7 automated basal insulin delivery (especially overnight) and automated correction boluses drove improvements for a broad population. Of note was the +21% time-in-range advantage in the middle (7.1%-7.5% A1c) group, a staggering five-hour/day improvement with Control-IQ vs. SAP!
All 168 participants completed the randomized study, and Control-IQ users spent a remarkable 92% (!) of the full six months with closed loop active – a stunning result highlighted by both Drs. Boris Kovatchev and Roy Beck in Q&A at ADA. The “vast majority” of study participants have opted to continue using Control-IQ during an extension phase.
Control-IQ achieved near-perfect scores on a technology acceptance questionnaire: ease of use was 4.7/5, usefulness was 4.6/5, trust was 4.5/5, and desire to continue using was an impressive 4.8/5 – an encouraging sign of the system’s simplicity (no modes to juggle), the no fingersticks G6, and limited alarms.
Notably, 20% of the Control-IQ study group was on MDI and 30% were not on CGM starting the study. The broad range of A1c’s was notable – this study was more real-world than many other closed loop studies.
See our complete coverage here.
2. Basal-IQ Begins OUS launch, More Countries Expected in 2H19
In June, Tandem began launching Basal-IQ in a “couple of countries,” and more international launches are expected in 2H19. Tandem’s pump is currently available in 11 countries outside the US – Australia, Canada, UK, Czech Republic, Denmark, Italy, New Zealand, Norway, Spain, South Africa, Sweden – though the Basal-IQ launches were not specified on the call today. (None of the country-specific websites indicate it has launched, either.) Commencing the OUS launch in June actually comes ~one month ahead of 1Q19 expectations to start in “2H19.” The cadence of countries in 2H19 will continue to depend on distribution partners, regulatory progress, reimbursement, and where Dexcom’s G6 is available. Basal-IQ has done very well in the US and it certainly makes Tandem more competitive against Medtronic OUS, where the 640G has been available for some time and 670G continues to launch in new countries.
3. t:sport launch in 2020; no mention of t:slim X2 mobile app
Tandem’s next-gen t:sport got one mention today: the company has ordered the first t:sport cartridge manufacturing line “in prep for launch next year.” This is in line with 1Q19 plans to submit an FDA ACE pump submission for t:sport in “mid-2020” and obtain clearance before the end of 2020. As a reminder, t:sport is a miniaturized, screenless, wirelessly controlled tubed pump, which will include Control-IQ hybrid closed loop and iCGM integration (no new clinical data will be needed). The no-screen pump will be controlled via app on a user’s own phone. t:sport is half the size of the current t:slim; will switch to a syringe-driven pumping mechanism (a big manufacturing change for Tandem); and will add wireless charging, water resistance, an on-device bolus button, and an easier fill process. Closed loop will still run on the pump if the phone is out of range, keeping Tandem more competitive with the on-body system design of Insulet’s Omnipod Horizon. (t:sport will still have tubing, whereas Omnipod will remain tubeless.)
The t:slim X2 mobile app was not mentioned today. As of 1Q19, it was expected to launch for Apple and Android this “summer,” offering secondary display of pump data and wireless data uploads from the t:slim X2 pump to t:connect. Will we see a launch at AADE? We got an updated look at the app in the ADA exhibit hall:
Questions and Answers
Q (Joanne Wuensch, BMO Capital): The Control-IQ data at ADA created a little bit of confusion at least among some investors that we spoke with, can you give us a little bit of the physician feedback that you’ve been hearing after at the ADA meeting?
John Sheridan (CEO): First of all, I just want to say that we are very pleased with the results. There is definitely a divergence of opinion between KOLs and academics and what we described as our initial expectations. But, I think it’s really important to say that you can’t really compare results of different trials. I would say that the KOLs and academics are extremely pleased with the data and they have said that to us over and over again. I mean, we met the primary and secondary outcomes. The improvement was immediate and it was maintained for the entire six months. We had 92% time in closed-loop, and the quality of life metrics were over the top. I think the most important element of that study was the fact that when you looked at the stratification of time in range versus A1Cs, there was a very wide range of A1Cs from 5.5 to 10.5 and every group improved. That was a really, really big deal. And so, I think that we’re extremely satisfied and excited. And I think this is going to be a great product soon as it comes to market.
Q (Joanne Wuensch, BMO Capital): As you think about bringing that product to market, you commented earlier that you haven’t really begun the launch of marketing plans. What does it take to launch it, not just in terms of mechanics of getting the brochure put together, but also on the expense side?
Mr. Sheridan: We are absolutely working in a large cross-functional team to make sure that we’re preparing ourselves for the launch. We can’t really talk about what we’re doing, but we are definitely working to make this happen. Other than the obvious, like you suggested with the manuals and things like that, the one thing that we’re preparing to do that is a little bit different is we are working to aggressively train the healthcare providers in the few weeks that follow the release. We believe that this is -- there are differences in the Control-IQ system that require us to provide training that are important. We plan to do that in the two to three weeks that follow the release.
Leigh Vosseller (CFO): On your question on the expenses, we don’t anticipate any outsized expenses in the quarter associated with the launch.
Q (Alexander Nowak, Craig-Hallum Capital): Going back to what you said on MDI, the number of MDI users switching to pumps has certainly accelerated here over the last 18 months. How should we expect this trend to more over the next two to three years because, obviously, there’s a lot of room still up to go with just 30% percent of diabetics using a pump? Are you getting what we’d call the low-hanging fruit MDI users right now or is this acceleration across the board and a trend that should continue for the next couple of years?
Mr. Sheridan: I don’t think we have the ability to characterize sort of the types of MDI users that are coming. I will say that if you look at, just the second quarter data, there were approximately 12,000 domestic pump sales; take out the renewals and that gets us down to about 5,500 MDI users. If you annualize that and take into account seasonality, that by itself is up 20,000 to 25,000 units per year, which is typically what happened for the whole industry. You also have to take into account Medtronic, Insulet, and others. It really seems like there is acceleration in interest that we are successfully improving market penetration. I believe it’s because the technology and ease of use is driving adoption.
Q (Alexander Nowak, Craig-Hallum Capital): Any update with your conversations with UnitedHealth Group, particularly after ADA?
Mr. Sheridan: I would put UnitedHealthcare in the bucket with all the major payers. It’s been really great to have the Basal-IQ data and now some real-world data to support it. With the Control-IQ data, we can continue in these very engaging conversations, which I think are going to be helpful in the long-term as we try to achieve our managed care objective. Things are progressing well with all the payers.
Q (Brooks O’Neil, Lake Street): I’m curious if there is any significant difference between Basal-IQ and Control-IQ that would preclude somebody who wanted the Control-IQ algorithm from buying Basal-IQ right now and just getting the software update when it’s approved by the FDA.
Mr. Sheridan: Right now, there are going to be pumps in the marketplace that have Basal-IQ on them. When Control-IQ is available, they will be able to upload their pumps with Control-IQ for no charge as long as the pump is in warranty and was purchased before the end of 2020. That’s what our plan is, and I think that this is important. We think this is going to drive uptake of the device and we’re very sensitive to people who have diabetes. We think it’s a very important decision and this was the right decision for us.
Q (JP McKim, Piper Jaffray): I wanted to ask one for Brian on the international side, because I’m trying to understand the organic demand there. How do we parse out in the numbers what was organic and then get to some of these new countries that you’re excited about opening up as new territories?
Brian Hansen (CCO): Phase 1 was going into well-established territories that had the distribution partners that worked with Animas, and our primary focus there was getting those Animas patients they had converted over to the Tandem pump. We’ve been surprised in some of those markets and clearly in the twelve countries they all vary a little bit, but we’ve been surprised by the demand on the organic side or those looking for a new pump - either patients that are new to pump therapy or patients that have had their pump for four years and are ready to select a new one. Now that the Animas patients are rapidly getting to the end of that conversion period here at the end of September of this year, all their efforts can go towards getting new ones on and again that demand has been very positive for us. We think that’s what fuels the second half of this year and into 2020.
As we look at some other markets where there weren’t distribution partners for us to select, they were more direct-type countries that have well-characterized pump markets. Germany is a good example, and those are areas for us where we’re having final conversations, getting partners in place, and hopefully driving some real good organic growth. There’ll probably be a few Animas patients left over there but they just didn’t have a distribution partner for us to jump on. It’s been surprisingly strong and surprisingly positive. We are pretty strongly ingrained now in international marketplace, so we think it will continue to be very good for us.
Mr. Sheridan: I would just add that Brian mentioned in the script that we have begun to release Basal-IQ in our OUS countries and we think that’s going to have a significant update, a more competitive offering against, particularly Medtronic.
Q (JP McKim, Piper Jaffray): When you talk about upgrading to either Basal or Control-IQ, where are you in terms of your installed base being even on CGM? Is there any strategy that you can partner closer with Dexcom in terms of co-marketing or have some sort of bundled offering to get everybody on CGM quicker?
Ms. Vosseller: I’ll start with the numbers. Where we are today is about 50% of our customers have Basal-IQ enabled on their pump, and about 70% or a little more actually have updatable pump. If they don’t have Basal-IQ today, people are able to access it whenever they are ready or Control-IQ when it comes about, and I’ll let Brian talk about the Dexcom collaboration.
Mr. Hansen: We have a great relationship with Dexcom and our counterparts, my counterpart specifically, on the commercial side, we work incredibly close together. I think there are always opportunities to market with each other, work with each other in the field and find those patients who aren’t using CGM today and our algorithms are certainly help driving that right now. I see it very positive.
Q (Travis Steed, Bank of America): Looking at the puts and takes, there’s clearly going to be some Animas next year but a lot less than you had this year. I’m coming up with roughly a $20 billion to $25 billion headwind, so noticeable but still small compared to the overall growth you’re seeing. Does this seem like reasonable math to you?
Ms. Vosseller: When it comes to the Animas business, it’s really hard to understand how many people have actually made their decision. We think that we’re nearing the bulk of it, but we think there will be a tail end to next year. I don’t know that I could really forecast what that amount will be, but I will say that in terms of where our growth goes next year, we’re going to be launching Control-IQ at the end of this year and I think it’s going to be a significant driver that will continue to fuel Medtronic conversions as well as people coming from MDI.
Q (Travis Steed, Bank of America): On doubling the direct business in the US, what does it take to do that? How should we think about the incremental margin or profit dollars for each patient that’s direct versus distributor? Can you comment on your share of MDI patients over the last few quarters?
Ms. Vosseller: I’ll start with the last one. Our MDI share has been about the same. We still continue to get about 50% of our patients from the MDI population. When I think about moving from that 25% to 50% through direct, it really just comes back to those conversations that we’re having with payers today. The ability to have this clinical data to get into those offices is making a huge difference. People have been very intrigued by the information that we’re providing. It’s more than just a pump now. It’s really a therapy for their patients. That’s what’s going to help us move the needle on that direct business. And then in terms of margin, we haven’t really discussed it, but that’s really, that is important to getting to our more than 60% long-term gross margin.
Q (Mat Blackman, Stifel): Any sense on the timing of the full publication of the Control-IQ data? I’m just curious what additional metrics might we see in that data that we didn’t see released at ADA.
Mr. Sheridan: That’s a good question and I honestly can’t answer it accurately. I can say that the manuscripts have been submitted. I don’t even know the journals they’ve have been submitted too. I would say that there are several things I do know that’ll be included. We’ll see a lot more quality of life metrics. There was only three or four mentioned in the data that was presented by Sue Brown at the ADA, I think a lot more quality of life metrics. I think it’ll be a significantly more detail on the nuance of each of the factors that were measured during the study, different, this categorization, looking at different groups, just a lot more detail than that was presented there. It was pretty general, what was shown at ADA.
Q (Mat Blackman, Stifel): Shifting to international, I want to follow up and understand when you talk about the sort of organic opportunity that you’re seeing. When you say organic, are you talking about taking from competitors other than Animas or are you defining that as MDI conversion or some combination of both?
Mr. Hansen: Some combination of both for sure. There are other pump manufacturers outside the U.S. as well and there are opportunities to pick up some additional pump share from those. Yeah, I think those two are definitely the two main areas of growth outside of the Animas conversions.
Ms. Vosseller: If you think about the international markets in the U.S. where it’s been stuck in a penetration rate of about 30%, the international markets provide an even bigger opportunity where it’s been in the 10% to 20% range depending on the geography.
Q (Mat Blackman, Stifel): Any sense of what the international pump market has been growing if you compare that to what the U.S. market has been growing over the last several years?
Mr. Hansen: I think it greatly varies by geographies and some are much larger and better characterized, some are really early on. We’ve kind of got a hodgepodge of those if we look at the 12 countries we’ve entered.
Q (Mat Blackman, Stifel): I assume when you’re going to target this next round of countries that you’d be going after the ones with the more defined, already established, market opportunity, is that correct?
Mr. Hansen: That would be correct.
Mr. Sheridan: They also need to have the Dexcom sensors.
Q (Ryan Blicker, Cowen and Company): Can you confirm whether or not Animas represented the low 20s percentage of US new patient shipments, similar to recent quarters? Then, can you talk about how you’re accounting for Animas within guidance - why is international expected to decelerate so much in the second half if you’re launching Basal-IQ and opening new countries? Then, within the US, are you assuming Animas conversions decline materially in Q4 or stay stable throughout 2019?
Ms. Vosseller: I’m going to start with what I remember, and you can help me if I missed some of it. Coming from the U.S. side related to Animas, yes, it has been just around 18% of our non-renewal shipments pretty much since they announced their exit. We’ve been very happy with that uptake, and I think that will continue to be at about that level through the end of the year. Then, I think it will start to tail as we go into 2020. There will still be opportunities, because people might hold on to their pumps or they will stock up on supplies, so it doesn’t just drop off like a cliff. With the new products we have coming in the next years, I think we can well overcome what that might look like as it goes away from the business.
When we look at the international side, it’s a little bit different story there. What we’ve seen so far, really starting in the third quarter of last year through the second quarter of this year, is this compression of all this Animas business that had been waiting for us to come. People knew we were on our way, but we’re not ready to ship until the third quarter. Then, because the distributors were very motivated and they have the list, they were able to convert those patients much more quickly. We think it’s pretty much behind us in the international market.
One thing to think about when you look at first half over second half is that we did come out of 2018 in a backlog situation. About $7 million of sales in the first half of the year really pertain to what we would have liked to have shipped in 2018. So, when you put that in there and then you go forward, it’s a nice trend.
Q (Ryan Blicker, Cowen and Company): You mentioned the ability to reach gross margin of 60% over the long term. How should we think about long term? Is that something that could be achieved in two to three years like the great performance you put up to date relative to your prior targets, or should we think about that as closer to maybe five years or beyond?
Ms. Vosseller: More in the five-year and beyond category. We really do think about it in the longer term, but it’s something that we’re really focused on. A number of the drivers would be the reimbursement opportunities as well as the introduction of t:sport into the market, and the international business, depending on how much it become as a percent of our overall business.
Q (Jeff Johnson, Baird): Are we seeing a big sequential increase in the competitive converts you feel like you’re winning outside of the Animas bolus? Are you seeing that in your numbers of that sequential growth of competitive converts away from other pump companies?
Ms. Vosseller: We absolutely are. You’re correct.
Q (Jeff Johnson, Baird): If the second half, international, is going to be in line with your guidance of $20 million to $25 million in the second half, should that be our jumping-off point for how we think about next year? Or, do we need to think about an even further step down there as some of that Animas comes out there?
Ms. Vosseller: Yes, that’s a perfect way to look at the run rate and we’re really excited about getting Basal-IQ into those markets because we hope it will have a nice trajectory like we’ve seen in the U.S.
Q (Steven Lichtman, Oppenheimer): It’s interesting to hear about some of the initiatives you’re looking at relative to managed care with the data you have in hand. Can you talk a little bit more about when we might hear more about that? And do you think we’ll see something in place as you launch Control-IQ later this year?
Ms. Vosseller: It’s always hard to predict when those will come into play. I can say that we’re having engaging conversations, but payers tend to move very slowly. Some of them have their own cycles for when they will initiate new contracts, so we’ll just do it based on when they’re ready. I think we’ll continue to see it over time and we look forward to giving you information as we have more to share.
Q (Steven Lichtman, Oppenheimer): Based on the renewal number that you gave, it seems like the capture rate bumped up again sequentially. What was that number in terms of your capture rate, and are you seeing signs that that will continue to build here in the coming quarters?
Ms. Vosseller: Absolutely. We’re seeing nice steady progress with the renewals. I think the most difficult part is that people have to remember that we’re building off a small base from the early years of opportunities. And as we continue to progress, the opportunities are growing at a very rapid pace. And so, it’s hard to evaluate that capture rate, particularly when you have people who two years outside of their warranty expiration are still making that decision to purchase. But it’s moving along very nicely. And as we continue to develop the base of opportunities coming to the table, it will be a nice growth driver for us as well.
Q (Matt Taylor, UBS): I just wanted to ask a little bit about your decision to offer the Control-IQ download for free for folks here in the US. How did you think about that and what that could that mean for your decision in some of these OUS countries?
Mr. Sheridan: We’ve been working on this decision for some time. It’s been pretty complicated. We’re going to offer the no-cost download to US customers, in-warranty, that purchase the pump before the end of 2020. We’re very sensitive to the impact that this decision had on our current pumpers, as well as people who are considering Tandem.
I think that like Basal-IQ, Control-IQ is going to have significant uptake. It’s going to reduce the burden and improve outcomes, and we want to do everything we can to make sure that we maximize the uptake of this device and this product. I think that reducing the or eliminating the cost burden is significantly going to do that. We’re excited about it and we think it’s going to be a very substantial and successful product in 2020.
Q (Matt Taylor, UBS): Have you given the number this quarter on the conversion or percentage of your US base that has Basal-IQ now?
Ms. Vosseller: Yes, approximately half of our customers have Basal-IQ enabled on their pump today and a little more than 70% actually have an updatable pump. They would have the ability to uptake the Basal-IQ if they haven’t already or go straight to Control-IQ when it becomes available.
Ms. Sheridan: That’s a pretty tremendous opportunity. Basically, 70% of our customer base today has the opportunity to update to a very substantially improved algorithm than what they currently have in their systems. It’s a big deal.
Q (Ravi Misra, Berenberg Capital): You mentioned earlier something about smoothing out demand and I was hoping you could give a little bit more color on that.
Mr. Hansen: Certainly, our demand from the perspective of having the Tandem Device Updater in our current pump version is what I was talking about.
I think it’s more of a comment of what would happen if we did not have the Tandem Device Updater. With the announcement that Control-IQ data comes out, people start to hear it’s potentially in review by the FDA. Then, people pause and don’t buy their next pump until that version comes. That puts the company in a really odd position for a three-, four-, five-, six-month period. One of the huge advantages of the Tandem Device Updater is those patients who buy the pump today know that, especially with this no-cost announcement, that they’re not going to be in a disadvantaged position by getting it now. As a matter of fact, they somewhat jump to the front of the line because they simply take a quick online trading module, download the software, and they’ve got Control-IQ.
With those capabilities that we have in the X2 pump, it smooths out the demand beautifully for us. We don’t see that pause and therefore the cadence should continue to grow with the excitement of both Basal-IQ’s success and Control-IQ’s Offering at some point here and hopefully Q4.
Q (Ravi Misra, Berenberg Capital): I’d love to hear your kind of best stab at where the US pump market is growing for type 1. We thought, historically, this has been sort of a high single-digit, maybe, low-double digit market but given your tremendous growth over the last few quarters, do you see this as a market that’s potentially stabilizing for the next few years in the mid-teens or even higher?
Mr. Sheridan: I don’t think it’s stabilizing at all. I think that the numbers that we’ve seen in the past have been that sort of low- to mid-single digits for the growth. That’s really accelerating in our mind. There’s been the MDI conversions into the uptake and pump penetration has really been the thing that’s driving the uptake that we’re seeing right now.
Mr. Blickenstaff: I’d like to say one other thing: technology was fairly static for the last 10 years or so. There are new wrinkles and with this software upgrade replacement model that we have, rather than the old hardware replacement, we’re seeing it get better, faster for more people. It’s simpler and they’re getting great control. I think that’s what you’re going to be seeing. Where it all ends up is around 30% of type 1s using pumps. This should be a lot higher if you have this quality of care and making insulin safe.
Mr. Sheridan: I’d also say that just partnering with Dexcom and having the G6 connected to our system, that’s a big deal as well. I think no finger sticks is a really significant improvement and reduction in the burden that people have to face every day.
Q (Ravi Misra, Berenberg Capital): Can you just help us understand how much of what the stock-based comp neutral gross margin would have been? It looks like you brought up the stock-based comp in guidance, as well? Of that 52% to 54% bridge, what would it have been at the SBC number was equivalent to last quarter?
Ms. Vosseller: The stock-based comp has been running between 1% and 2% of the gross margin and I would expect that to continue through the end of the year. We did raise it significantly, but it’s all going to be spread between operating expenses and cost of goods sold.
Q (Ravi Misra, Berenberg Capital): Is the exit rate for 4Q the way to think about next year?
Ms. Vosseller: For the, year, I think that’s reasonable for now.
Q (Danielle Antalffy, SVB Leerink): You beat guidance by about $25 million, $30 million it looks like - a lot. You’re raising guidance by $50 million at the midpoint. Obviously, you have some level of confidence in that increased outlook for the second half of the year. I just wanted to get a little bit color from you on what the drivers of that increase of level confidence are. Is that the rate of renewals that you’re seeing? Is it a backlog of Animas users? Are you seeing lower attrition rates? What gives you the confidence in the drivers for the back half outlook that’s also now higher?
Ms. Vosseller: I guess what’s exciting at this time is that it comes from everything at this point. Thisis how we started 2018: there were so many opportunities to grow the business, but there was a question of which ones would grow the best, which one where we would be successful. They all came to fruition, and we’re continuing to see that enthusiasm this year.
We think Basal-IQ has been a big reason for that trajectory change as could. Even into 2019, it’s been growing at a more rapid rate than last year. Based on what we’ve seen this first half that we think will continue through the end of the year.
Q (Danielle Antalffy, SVB Leerink): On Control-IQ, should we be thinking about this as potentially driving a similar inflection as we saw with Basal-IQ? Is it that much of a step function improvement?
Mr. Sheridan: It’s speculation on our part, but I think we absolutely have confidence this is going to be a great product. But, we have to wait and see.
--by Albert Cai, Adam Brown, and Kelly Close