Memorandum

Tandem 2Q14 – Revenues rise 86% on sales force expansion; PMA for Dexcom G4 Platinum integration filed with the FDA – July 31, 2014

Executive Highlights

  • Sales of Tandem’s t:slim insulin pump and related supplies totaled $10.3 million in 2Q14, an 86% year-over-year gain from 2Q13 and a 27% sequential increase from 1Q14.
  • Tandem shipped 2,235 t:slim pumps in 2Q14, a 64% increase from 2Q13 and an impressive 30% sequential increase from 1Q14. Roughly half of the installed base is new to pumping.
  • A couple weeks ago, Tandem filed a PMA with the FDA for the t:slim with Dexcom CGM integration. FDA filing of t:flex (480-unit reservoir) is expected in 3Q14; launch is targeted for 1H15.

This afternoon, Tandem CEO Mr. Kim Blickenstaff led an efficient 33-minute 2Q14 financial results call. In Tandem's third public quarter following the company’s $125 million IPO in November 2013, sales rebounded after a challenging first quarter hampered by seasonality and a disruptive sales force expansion. The performance was encouraging for second quarter, though we likely won’t have a true sense of t:slim’s traction in the marketplace until the second half of this year – the stakes are high as the consensus revenue estimates are about 50% higher on average than results this quarter (less in 3Q and much more in 4Q, traditionally the highest quarter by far). This report contains the top business and R&D highlights from the call, followed by a pipeline summary and Q&A.

Financial and Business Highlights

1. Sales of Tandem’s t:slim insulin pump and related supplies totaled $10.3 million in 2Q14, an 86% year-over-year (YOY) gain from 2Q13 and a 27% sequential increase from 1Q14.

2. Tandem shipped 2,235 t:slim pumps in 2Q14, a 64% increase from 2Q13 and a 30% sequential increase from 1Q14. Since launch in August 2012, 11,487 pumps have been shipped, giving Tandem an ~2-3% US pump market share. This is significant market expansion for being on the market such a relatively short time.

3. Good news on the profitability front - gross margin in 2Q14 was 34%, a significant rise from 11% in 1Q14 and 7% in 2Q13.

4. Management said that the 1Q14 sales force expansion from 36 to 60 territories/reps is still expected to impact sales in 3Q14 and 4Q14. The territory disruption tapered off in 2Q14, but was still present.

5. The Kaiser Northern California contract first announced in 1Q14 has expanded to Southern California, Colorado, and the Pacific Northwest. This will roll out late in the third quarter and enable Tandem to serve ~90% of Kaiser’s 9.5 million covered lives on a direct basis.

6. As of June 30, Tandem had $96 million in cash and cash equivalents, sufficient for operating needs for the next 18 months (the same runway given in the 4Q13 and 1Q14 calls).

7. Management cited data from the quarterly dQ&A patient panel (n=1,200 pumpers) that the t:slim ranks first among insulin pumps available today, both for overall satisfaction and customer support satisfaction. In Q&A, management cited the availability of the Medtronic MiniMed 530G and Asante Snap as the biggest changes to the competitive landscape in 2Q14.

R&D Pipeline Highlights

8. Notably, a couple weeks ago, Tandem submitted a PMA to the FDA seeking approval of its t:slim insulin pump integrated with the Dexcom G4 Platinum CGM (“t:slim G4”). A 12-18 month review is expected, placing approval in mid/end-2015. The filing was accepted today, long before the end of the typical 45 day period that FDA has to decide whether or not to accept it. We believe there will be a lot of excitement about this product although we haven’t tried it yet so haven’t been able to fully assess it.

9. An FDA 510(k) filing of t:flex – the same t:slim pump body but with a larger capacity 480-unit reservoir – is expected in 3Q14. Following an expected six-month review, a launch is targeted for 1H15.

10. There was no mention of the t:dual and t:sport projects, pipeline devices that were first discussed in detail at JPM 2013. We look forward to hearing more on the t:dual in particular as we believe there will be major value further out in Tandem being a supplier to automated insulin delivery.

Financial and Business Highlights

1. Sales of Tandem’s t:slim insulin pump and related supplies totaled $10.3 million in 2Q14, an 86% year-over-year (YOY) gain from 2Q13 and a 27% sequential increase from 1Q14. This represented Tandem’s highest ever quarterly sales, and management highlighted that 2Q14 sales were actually on par with the strong 4Q13 sales of $10.2 million. The year-over-year comparison was not particularly challenging, as 2Q13’s sales of $5.5 million came in Tandem’s third quarter on the market. The strong sequential increase was attributed to the 1Q14 sales rep expansion (see #3 below). Management said the disruption from the sales rep territory realignment is largely tapering off, though again emphasized that productivity won’t reach a peak until the back half of the year (which is now, unless they actually mean the last quarter of 2014).

 

1Q13

2Q13

3Q13

4Q13

2013

1Q14

2Q14

Sales (millions)

$5.5

$5.5

$7.7

$10.2

$29.0

$8.1

$10.3

YOY Growth

---

---

---

343%

1,060%

47%

86%

Sequential Growth

139%

0%

40%

32%

---

-21%

27%

  • Sales from the t:slim pump represented 85% of Tandem’s total 2Q14 sales, similar to 86% last quarter and down from 91% in 2Q13. The remaining 15% is attributable to infusion sets and cartridges. Sales of t:slim supplies and accessories more than tripled year-over-year, which is to be expected given the larger installed base. Due to a significant portion of the business running through distributors (see below), Tandem’s margins are currently higher on the pump than related supplies.
  • Management confidently reaffirmed the 2014 guidance outlined in the 4Q13 and 1Q14 calls – sales in the range of $48-$54 million, a 66-86% year-over-year increase from 2013. Halfway through 2014, Tandem stands at $18.4 million in sales, only 38% of the way to the lower end of the guidance. However, management expressed confidence in the guidance given a parallel experience in 2013 – after a 1Q13 sales force expansion (11 to 36 reps), the company’s 1H13 sales also stood at 38% of the way to the eventual full-year 2013 sales. Given the rep expansion in 1Q14 (36 to 60 reps). fourth quarter typically accelerated growth, and the expanded Kaiser contract, management believes hitting the guidance is very achievable. In the 4Q13 call, management commented that the guidance represents a “pretty conservative estimate” and the goal is to hit the upper end of the range. The guidance does not assume any revenues from new products (t:flex or t:slim G4). Our model calls for $12 million and $17 million, approximately, over the next two quarters, which comes to a total of approximately $48 million,(the lower end of the $48-$54 million guidance range).   

2. Tandem shipped 2,235 t:slim pumps in 2Q14, a 64% increase from 2Q13 and a 30% sequential increase from 1Q14. Since launch in August 2012, 11,487 pumps have been shipped. Remarks estimated that Tandem’s installed base gives it a ~2-3% US pump market share, equating to ~450,000 US patients on insulin pumps. For context, Insulet reported at JPM in January that it had a market share of 15% on an installed base of ~60,000 patients.

  • “Approximately half our customers are new to pump therapy.” We’d note that this was less granularity than management provided in the 4Q13 and 1Q14 calls, where exact percentages were shared (see below) – we typically see management teams release fewer metrics as they go public and grow bigger and Tandem is behaving as expected in this perspective.  If Tandem can retain an approximate ~50% split of MDIs, that represents an addressable market of ~945,000 type 1s in the US (assuming ~63% of US type 1s are not on pumps and there are ~1.5 million type 1s in the US). As with Insulet, we believe this metric is one of the most key numbers to follow in obtaining a broad outlook on Tandem’s business and future growth prospects.

 

2Q13

3Q13

4Q13

1Q14

2Q14

Cumulative since launch (August 2012)

Pump Shipments

1,363

1,851

2,406

1,723

2,235

11,487

YOY Growth

---

807%

185%

102%

64%

---

Sequential Growth

60%

36%

30%

-28%

30%

---

Cumulative % of Installed Base New to Pump

Not given

Not given

45%

48%

~50%

~50%

3. Gross margin in 2Q14 reached 34%, a significant increase from 11% in 1Q14 and 7% in 2Q13. The improvement was attributed to a decrease in per unit manufacturing overhead associated with higher production volumes. Management still expects some gross margin choppiness throughout the year, as the company is “still at the relatively early stage of commercialization.” Though Tandem’s commercial office footprint in San Diego just increased by 20,000 square feet, manufacturing is “contained in one area” and new products (t:slim G4 and t:flex) will not require building new manufacturing facilities. Margin improvements are expected as volumes rise, and the long-term gross margin goal remains in the low to mid 60%-range (consistent with the 4Q13 call). We do not expect to see Tandem hit the goal for at least a couple of years (it took Insulet nine years to reach a mid-60% gross margin on the US OmniPod).

4. Management said the 1Q14 sales force expansion from 36-60 territories/reps is still expected to impact sales in 3Q14 and 4Q14. They noted that every single territory was changed, which led to a significant disruption in the first quarter. While this started to taper in the second quarter, there was still some “disruption” associated with reps transitioning accounts and becoming acquainted with new accounts. Specifically, management said the rise in reps has helped increase Tandem’s visibility among diabetes educators, doctors, and patients. The larger sales force is still expected to reach steady state productivity after 9-12 months, meaning the greatest impact will be seen in the fourth quarter. Last year, Tandem recognized 35% of its full-year sales in the fourth quarter following a 1Q13 expansion from 11 to 36 territories/reps. The company will need a similar performance in 2014 to hit its revenue guidance.

  • Management believes that 60 territories/reps are “appropriate coverage” for the diabetes community – for comparison, we’d note that Medtronic has 975 sales reps (inside + outside sales; see our 2014 Analyst Day report), Insulet has 135 reps, and Dexcom has 90 reps (note – these numbers may not be directly comparable, as we’re not sure if Dexcom/Tandem/Insulet numbers include both inside and outside sales). We’re also not sure how many reps Animas, Asante, and Roche have.

5. Notably, the Kaiser Northern California contract first announced in 1Q14 has expanded to Southern California, Colorado, and the Pacific Northwest. This will roll out late in the third quarter and allow Tandem to serve ~90% of Kaiser’s 9.5 million covered lives on a direct basis. Similar to 1Q14, the company did not quantify the margin impact, but suggested the contracts will definitely help with a sales ramp in 2H14. Tandem is also in active discussions with other large national payers, according to management, though no further details were shared. We think it’s an excellent sign strategically that Kaiser has brought Tandem on.

  • As of 1Q14, 70% of sales ran through distributors, a slight increase compared to 68% in 1Q14 and 66% in 4Q13 – as a reminder, Tandem’s ultimate goal is to have only 25-30% of sales running through distributors. The 10-Q report stated that as of 2Q14, Tandem’s two largest distributors – Edgepark and CCS Medical – accounted for approximately 36% of sales. This should only improve over time as the company gains more scale and has more conversations with payers.

6. As of June 30, Tandem had $96 million in cash and cash equivalents, sufficient for operating needs for the next 18 months (the same runway given in the 4Q13 and 1Q14 calls). Current cash resources could carry Tandem to breakeven, though that will depend on rep productivity, new product approvals, and gains in operating leverage. Tandem also has access to an additional $30 million through a term loan agreement with Capital Royalty, which must be exercised by March 31, 2015 – that would extend the cash runway even further. When asked about plans to raise money through an equity offering, management suggested this would not be on the radar until mid-2015 at the earliest.

  • In July, Tandem will make two $1 million cash payments to Dexcom and Smiths Medical (Deltec Cozmo). The former is a milestone payment now that Tandem has filed a PMA for the t:slim G4. The payment to Smiths is a final $1 million license fee related to Tandem’s acquisition of patents. We believe these are related to the bolus calculator.
  • Operating loss in 2Q14 was $18.3 million, a 34% increase from $13.7 million in 2Q13, but 13% lower sequentially from $21 million in 1Q14. Consistent with the 1Q14 call, operating margin for the full year 2014 is expected to be in the range of -130% to -140%. In the 4Q13 call, Management mentioned the mid-20% range is the  operating margins range that the company ultimately expected for Tandem. .

7. “The t:slim ranked #1 among insulin pumps available today, both for overall satisfaction and customer support satisfaction.” Management cited data from the quarterly dQ&A patient panel, which asked more than 1,200 pumpers to give feedback on 17 pump and pump support attributes – t:slim ranked #1 in 14 of the 17 categories, including effort required for training. For more information, please contact Richard Wood at Richard.wood@d-qa.com.

  • In Q&A, management mentioned Medtronic’s MiniMed 530G and Asante’s Snap as two products that colored the competitive landscape in 2Q14. CEO Kim Blickenstaff called the MiniMed 530G a “new offering,” but said Medtronic “has pretty tight control over their established base” and “tends to get to its own customers first” (implying that this product affects Tandem’s ability to acquire Medtronic pumpers eligible for a new pump). In addition, the Asante Snap – which has now launched regionally in the Southeast (originally just in Northeast)– had “some localized activity.” Management shared no other thoughts on the competitive landscape.

R&D Pipeline

8. A couple weeks ago, Tandem submitted a PMA to the FDA seeking approval of its t:slim insulin pump integrated with the Dexcom G4 Platinum CGM (“t:slim G4,” a name change from the previous “t:sensor”). The FDA accepted the PMA today. The 1Q14 call expected the submission in June, meaning Tandem filed the PMA a couple weeks later than expected. Consistent with prior calls, management expects a 12-18 month review cycle, placing approval in mid/end-2015. This timeline seems appropriately conservative given the ongoing ~16-month review of the Animas Vibe with Dexcom G4 Platinum integration (submitted in April 2013) – as a reminder, PMA applications have a statutory 180-day review, though this is new regulatory territory for pump companies like Tandem and Animas, since insulin pumps require a much less rigorous 510(k) application.

  • An unanswered question is what percentage of Dexcom users will move to the Animas Vibe or t:slim G4 upon approval of an CGM-integrated pump. These two products offer the most obvious benefits to current Tandem/Animas pumpers using a Dexcom G4 Platinum although in the dQ&A surveys, integration is what is most sought after. What will be more interesting for the competitive landscape, however, is whether the integrations persuade non-Animas, non-Tandem, Dexcom G4 users to switch to a new pump – we know that at least some unknown fraction of Medtronic pumpers (we assume at least ~5%), as well as ~25% of Insulet’s installed base use the Dexcom G4 Platinum.
  • We wonder how Dexcom will balance the timing of the Gen 5 mobile platform with the commercialization of the G4 Platinum-integrated Tandem and Animas pumps. If Gen 5 is indeed commercialized sometime in 2015 or early 2016, we wonder if Dexcom would produce two transmitters – one for Tandem’s t:slim G4 and the Animas Vibe, and another for the Gen 5 mobile platform (smartphone app + potential for a small receiver). Tandem does have a Bluetooth enabled research pump that has been used in closed-loop studies, most notably with Drs. Ed Damiano and Steven Russell’s bionic pancreas – we wonder if the t:slim G4 will integrate Bluetooth compatibility with the Gen 5 transmitter, or interface with the current G4 Platinum transmitter. As a reminder, the Tandem-Dexcom agreement originally planned to integrate Gen 5, but advanced to prioritize the G4 Platinum.
  • The integration deal is low-risk for Dexcom with lots of upside for both companies. Tandem paid Dexcom $1.0 million at the commencement of the collaboration (2012) and $1.0 million in July based upon FDA submission; Dexcom will receive a final $1.0 million milestone payment upon approval. Additionally, Tandem will reimburse Dexcom up to $1.0 million of Dexcom’s development costs (not material as of the 2Q14 10-Q report). Upon commercialization and as compensation for the non-exclusive license rights, Tandem will also pay Dexcom a royalty of $100 per integrated pump sold. Overall, we see integration as a major win-win for both companies – Dexcom can sell more sensors, while Tandem can compete more directly with Medtronic (and eventually Animas) and perhaps pave the way for future automated insulin delivery devices.

9. An FDA 510(k) filing of t:flex – the same t:slim pump body but with a larger capacity 480-unit reservoir – is expected in 3Q14 (“a few weeks” from now). This timing was consistent with the 1Q14 call, which expected a filing in “mid-2014” following work on the t:slim G4. Tandem still expects a six-month FDA review, placing potential approval in late 2014/early 2015. A launch is expected in 1H15. For context, the t:slim’s original 510(k) application was approved after an approximate six-month review. The current t:slim has a 300-unit capacity.

  • Management estimates the target market for t:flex is the ~1.2 million US type 2s who use daily rapid-acting insulin. Tandem estimates that only 50,000-100,000 type 2s currently use an insulin pump (“a significant opportunity” for expansion with the t:flex).

10. Consistent with the 4Q13 and 1Q14 calls, today’s update did not mention the t:dual and t:sport projects, pipeline devices that were first discussed in detail at JPM 2013. Both are longer-term R&D projects than t:slim G4 and t:flex, so it was not a surprise to us that they were again absent from the call.

  • t:dual – Tandem’s dual chambered infusion pump is in partnership with JDRF. The agreement’s goal is a “fully automated artificial pancreas system using therapies in conjunction with insulin.” According to the terms of the agreement, JDRF will provide research funding up to $3.0 million based on the achievement of R&D milestones, not to exceed research costs incurred by Tandem. The milestones are anticipated to be reached by September 2015. As of the 2Q14 10-Q report, Tandem had received $0.7 million in milestones from JDRF, no change from 1Q14.
    • There’s an ongoing spirited debate in the field if more than one hormone is needed for closed-loop control. Some have argued that use of glucagon should be used in a rescue fashion only, while others believe more chronic use on a daily basis allows for more aggressive insulin dosing and avoidance of hypoglycemia (e.g., Drs. Ed Damiano and Steven Russell’s approach). Aside from the pump itself, key questions for insulin+glucagon closed-loop systems are the absence of a stable glucagon (Xeris is furthest along, with a phase 2 study ongoing using a pump formulation) and cost. Dr. Fran Kaufman shared her view at Keystone 2014 that the added benefit of tighter glycemic control with insulin+glucagon (vs. insulin alone) are likely outweighed by the additional cost. For now, it’s still fairly premature to know exactly what the commercial prospects of multi-hormone systems look like, given the number of unanswered questions. These should become clearer over time, especially once Dr. Damiano and his team finish the current 11-day multicenter home study and move to a larger pivotal trial. We have not heard much discussion of using amylin or GLP-1 agonists in a dual-chambered pump, which is a largely unexplored and potential fruitful area to deal with the challenges of postprandial excursions.
  • t:sport – At JPM 2013, the t:sport was expected to be a discreetly worn tubed pump (35-40% smaller than the t:slim) controlled with a wireless touchscreen handheld (i.e., no on-pump screen). The t:sport was characterized as ideal for those who are active (“a fitness pump”) or those who want more discretion. Medtronic’s 2014 Analyst Day announced a new product, the MiniMed Flex, which is a very similar concept to the t:sport – a “hybrid pump” with tubing, but with a smaller footprint that will allow patients to choose whether to wear it on OR off the body. No timing or very specific details were shared on that device.

Pipeline Summary

Pipeline Product

Timeline

t:slim G4
t:slim insulin pump with Dexcom G4 Platinum CGM integration

FDA PMA filing in July 2014; 12-18 month review expected.

t:flex
t:slim with a larger capacity 480-unit reservoir

FDA 510(k) filing in 3Q14. Six-month review expected; 1H15 launch.

t:dual
Dual-chamber t:slim in partnership with JDRF

JDRF Partnership announced on January 8, 2013. JDRF supporting Tandem with up to $3.0 million in performance-based milestone funding through September 2015 to complete development, testing, and manufacturing. To date, $0.7 million received.

t:sport
Smaller t:slim controlled by wireless touchscreen handheld

???

Questions and Answers

Q: You mentioned that 70% of sales are coming from distributors. That’s up just slightly, and probably not meaningfully from 1Q14. You talked a little bit about Kaiser. Have there been any wins or changes in the private payers since last call?

A: It’s really just steady progress. I don’t think there’s any meaningful contracts besides Kaiser. There are some other ones in negotiation including large ones, but I’d rather not discuss those until they become more meaningful and more substantive.

Q: Did you see any changes from the other pump companies in 2Q14 as you start to grow larger? Did you see any impact from any new entrants out there?

A: The landscape is pretty consistent with what we saw last quarter. The Medtronic MiniMed 530G is a new offering. They have pretty tight control over their established base, and they tend to get to their own customers first. That’s first and foremost the biggest competitive element out there. The Asante Snap product is being launched regionally – it was down in the Southeast. There was some localized activity there. Really those are the only two things that have colored the competitive landscape. It’s pretty much consistent with last quarter.

Q: You said you expect to see some choppiness with gross margin. Can you help us think through the puts and takes as we look at rest of the year? Is 34% basically sustainable? What is the likelihood of improving sequentially?

A: If you look at our quarterly margins from 2013, you’ll see some choppiness. That’s just as we scale up. A big part of the margin story is volume. Us hitting 34% is very good, and it’s not a surprise we would do that considering the volume we’ve picked up. I do expect our margin to increase as we move toward our long-term target in the low-to-mid 60s. That’s going to be primarily volume driven as well as new product entrants into our manufacturing process. If you’re looking more short term between now and the end of the year I think we can still see some meaningful progress, primarily because of the volume story. We are working on a lot of things to improve on the efficiency side of business beside the volume that will have meaningful impact. We are at a small scale, and one misstep could give manufacturing a hiccup. We expect to see some choppiness because we saw it last year.

Q: Can you update us on the conversion rate from MDI vs. switchers?

A: There hasn’t really been a substantial change on the margins of conversion from MDI vs. switchers. That remains about 50/50. Going forward, we expect to see it remain at the 50-50 split that we’re seeing right now.

Q: On the sales force moving around with 36 reps in different territories – could you provide color on reps close to peak? You’re approaching 12 months experience with 25-30 reps – how many have been moved around? Can you give us color on how many reps you have or how close you are to peak? Could you provide more color on that whole productivity metric?

A: We’re not giving that level of granularity. I don’t think we’re at 12 months of experience for anybody; with the reset in the first quarter, every territory got reset. If you look at a territory like New York, it has a geography that got cut by about two-thirds. That person is starting completely over. That’s the same through that original group we had, so I don’t think that there is anyone at that 12-month peak; we’ve reset everyone to zero. Obviously, we need to see people having sequential gains going forward in order to hit our number for the balance of the year going forward. Seasonality at the end of year will be a big factor.

Q: Is the Dexcom $1 million payment accounted for in this current quarter on R&D expense? Or, will it be recognized in the third quarter?

A: It will be a 3Q charge.

Q: With the t:sensor, or t:slim G4 - as you’re calling it - what should we expect about the dialogue with the FDA? Will you have a meeting to go over the filing? What gives you the confidence behind that 12-18 month review expectation?

A: The 12-18 months has been the experience for everyone in the PMA pathway. On 510(k), there’s consistently a six month review on that track. We’re forecasting what others are experiencing. Obviously there is dialogue with rounds of questions as you move through the process. I don’t know if we’ll be commenting publically on that. We’ll update people as we know more. FDA did accept our filing as of today.

Q: On the t:flex, you would be filing in the next couple of weeks?

A: It will be a few weeks. We are in the process of gathering, filing, and putting it together. Then we have to review it internally and legally. We’ll submit as soon as we’re done.

Q: One question on the guidance. You mentioned that roughly 35% of year last year came in 4Q13. Is that what we should expect this year?

A: I’m not giving specific guidance on 4Q14. If you look at what we did in 2013, we went to an expansion, and even through that expansion, you can see what impact was. It was heavily back-end loaded. It was roughly 35% on a GAAP basis, and I want to remind you, in 1Q13, we recognized $1.9 million of product shipments from the prior year because of deferred revenue. So if you’re just looking at activity, it’s probably closer to 37% on a non-GAAP basis. The 35% is also the industry average, as well, in terms of seasonality and spread. We wouldn’t expect something different.

Q: The street consensus is above 35% already anyway. I’m just curious as to the message you’re trying to send on the guidance. Two more questions. First, in terms of cash position and cash burn, when will you consider raising equity again? At the time of IPO, you made clear that this IPO was not necessarily going to get you to profitability and you may have to do another raise. When you look at the business  and cash burn today, do you think 2015 is a year you might have to do another equity raise?

A: Our cash expectation is minimally 18 months. For us, it really depends on how productivity for the existing sales force ramps. Additionally, it depends on when and if we get approval for t:slim G4 and t:flex, and what that does for it. We have a comfortable runway to be able to see that next year before deciding if we need to raise cash. It’s really looking at middle of 2015 before we get to a point where we might need to do something on that. The other piece of that is we still have access to $30 million under Capital Royalty, which we can draw until March 31 of next year and that will extend the runway to make that decision.

Q: I’m trying to gauge your confidence in the back half of this year. Since the IPO, the quarters that you have been delivering, is a little bit less than the Street has been forecasting. Also, the rep productivity you need in back half of the year is substantially greater than that needed in the first half. Could you mention some things that have given you confidence in the back-half guidance given the things that have gone on in the first half of the year?

A: We’ve drawn our confidence from the expansion from 11 to 36 territories, and what we saw in rep timing, productivity improvements, and how that played out last year. The first quarter of the year is always the most challenging. It was within our expectation for how much disruption we had – it was self-inflicted. We will see these productivity gains in the second half of the year through seasoning of the reps and the seasonality spread. Those two factors are real, and we have seen those in the prior year. That’s the best forecast we have.

Q: Could Kaiser really help in back half of the year? Are there other contract wins we should be expecting over the rest of year?

A: Those were headwinds last year. We were basically locked out of Kaiser, so that really opens up a third of the patient population in state of California. We’re going to have several happy reps here in California that will see less of headwind in terms of volume gains. We are in negotiations with several payers, including a couple of large ones. I’m hopeful we’ll get those done and they will impact the remainder of the year.

Q: In terms of guidance. A question on the operating margin – there were a few things that helped it, particularly the increase in gross margin, a contract win, and even some of the operating expenses came in lower than we expected. What are your expectations for 2H14 where you would reiterate the guidance of 130-140%?

A: The gross margins will play a role in that. The other aspect of that is the management of operating expenses. We’ve done a very good job of managing that this quarter. I do expect them to increase as we move along. We have several large trade shows that we do in the third quarter. Additionally, expenses are employee oriented, and if we do very well then Commissions and bonuses ramp up. I mentioned two charges in the third quarter that will impact numbers. Sales are going to be a big part of operating margins, as well as the gross margin impact and just having the volume out there.

Q: Is the warranty for the four to five years the patient is on the pump? If a pump does break, is there incremental revenue from any replacement for hardware?

A: There is a four-year warranty on the pump. Replaced or fixed at that point. As far as incremental revenue related to warranty, we don’t currently have that.

Q: In terms of expansion of manufacturing facilities, I know you said that the t:flex would be somewhere in 2015, and you have other new products. Do you plan on increasing, or expanding the facilities and what do you think that could do for margins?

A: We are expecting to expand facilities from a corporate standpoint. Here in 2Q14, we added about 20,000 square feet to our footprint. The manufacturing is contained in one area. Generally, new products will use existing facilities. There will be some incremental investment for ancillary equipment and the unique of new products. For most part, we’re not rebuilding manufacturing facilities for new products.

Closing remarks: Thank you for joining us this afternoon, and thank you for the questions we just answered. The company will have representatives heading to Orlando to the American Association for Diabetes Educators Annual Meeting, August 6-9. This is an important meeting for Tandem, since diabetes educators play a vital role in supporting patients with diabetes. We continue to partner with the diabetes community to build awareness of pump therapy and t:slim’s sleek, modern interface. In conclusion, I was pleased to see positive momentum this quarter throughout the company, especially in 1H14, and I look forward to keeping you updated on the progress on future conference calls. Thanks for joining us.

 

--by Adam Brown, Hannah Martin, and Kelly Close