Executive Highlights
- Sales of Tandem’s t:slim insulin pump and related supplies totaled $15.7 million in 2Q15, a 28% sequential increase from 1Q15 and a 53% year-over-year (YOY) gain from 2Q14.
- Tandem shipped 3,331 t:slim pumps in 2Q15, a 49% YOY increase from 2Q14 and a 34% sequential increase from 2Q15.
- FDA approval of the t:slim G4 is still expected in 2H15, and Tandem is “actively working” to commence shipments in 4Q15. Tandem also announced a development agreement with Dexcom to integrate the G5 and G6 CGM systems into future generation t:slim pumps.
This afternoon, Tandem CEO Kim Blickenstaff led the company’s 2Q15 financial update. Below, we enclose the call’s top ten financial and R&D highlights, followed by a pipeline summary and Q&A.
Financial Highlights
1. Sales of Tandem’s t:slim insulin pump and related supplies totaled $15.7 million in 2Q15, a 28% sequential increase from 1Q15 and a 53% year-over-year (YOY) gain from 2Q14. Guidance for full-year revenue in the range of $70-$75 million (41-51% growth vs. 2014) was maintained. Tandem will need a big 2H15, as the company is only 39% of the way to the guidance mid-point, and no sales force expansion is planned.
2. Tandem shipped 3,331 t:slim pumps in 2Q15, a 49% YOY increase from 2Q14 and a 34% sequential increase from 2Q15. Since launch in August 2012, 24,160 pumps have been shipped. “Approximately half” of new customers are new to pump therapy.
3. The 480-unit t:flex launched in June, with sales of $1.4 million on 374 units far exceeding expectations. Management increased the guidance for 2015 t:flex sales from $1-3 million to $4-6 million. Patients with type 1 diabetes were the “large majority” of initial customers.
4. The sales force was much more productive in 2Q15, selling 19 pumps per month per territory on average, up sequentially from 14 in 1Q15 and from 12 in 2Q14.
5. Sales to distributors rose to 78% from 71% in 2Q14, and gross margin declined to 31% in 2Q15 from 34% in 2Q14. Net loss also increased slightly to $19.5 million from $19.2 million. The business does not seem to be trending towards profitability near-term, though perhaps it will once volumes expand. Current cash of $100 million is expected to last for 12+ months.
R&D Pipeline Highlights
6. FDA approval of the t:slim G4 is still expected in 2H15, and Tandem is “actively working” to commence shipments in 4Q15. Tandem will not offer an upgrade program allowing those on the t:slim to get on the t:slim G4. It is difficult to know how many patients will value the integration, given the connectivity value of the Dexcom Share receiver and potential for a Gen 5 launch by the end of the year.
7. Tandem announced a development agreement with Dexcom to integrate the G5 and G6 CGM systems into future generation t:slim pumps. The goal is an automated insulin delivery product. Management did not offer any timing, though we assume at least 12+ months away.
8. Tandem filed a pre-IDE package with the FDA for its insulin-only artificial pancreas product; the company will meet with the Agency later this quarter, with an IDE filing expected by the end of the year. A two-step approach seems to be the plan (predictive low glucose suspend first, then hybrid closed loop).
9. Tandem plans to submit an FDA 510(k) application in 4Q15 to bring the t:slim to younger age groups. Management did not share specifics on the expected age range; for context, the current t:slim is approved for patients 12 years and older.
10. Management expects an FDA 510(k) filing of “Project Odyssey” by year-end, roughly consistent with the previous “4Q15” timing. This will allow remote online updating of the t:slim’s pump software. Initially, Project Odyssey will be a vehicle for smaller software updates for the t:slim and t:flex, with future potential to activate built-in Bluetooth to enable CGM integration.
Financial and Business Highlights
1. Sales of Tandem’s t:slim insulin pump and related supplies totaled $15.7 million in 2Q15, a 28% sequential increase from 1Q15 and a 53% year-over-year (YOY) gain from 2Q14. This marked Tandem’s eighth consecutive quarter of 40%+ growth, and a nice rebound from a seasonally weak 1Q15. The sales were Tandem’s second highest ever, just behind $17.9 million from a breakout 4Q14 performance. The comparison was also not easy, as 2Q14 saw 86% YOY growth (the t:slim’s ninth quarter on the market). Pump sales represented 83% of total sales, in line with prior quarters. Though not a perfect comparison, after 12 quarters of revenue, Tandem’s 2Q15 sales of $15.7 million are on par with Insulet’s 1Q09 sales of $12.5 million. The cumulative revenue story is a bit different – $109 million for Tandem vs. $65 million for Insulet 12 quarters in – though it of course it took the OmniPod a while to ramp up, given its very differentiated business model and offering.
- Management cited improved sales rep productivity (see below) and the successful launch of the 480-unit t:flex pump ($1.4 million in sales over just one month) as driving factors in the quarter’s growth. There was definitely optimism, but also some temperance based on emerging headwinds: the high utilization of distributors (78% in 2Q15, up from 71% in 2Q14); a potential negative impact as customers await the potential launch of the t:slim G4 in 2H15; and some potential cannibalization of t:slim sales given the early success of t:flex in type 1.
Figure 1: Tandem Quarterly Sales – 2Q13-2Q15
Table 1: Tandem Sales – 2Q14-2Q15
|
2Q14 |
3Q14 |
4Q14 |
1Q15 |
2Q15 |
Sales (millions) |
$10.3 |
$13.5 |
$17.9 |
$12.3 |
$15.7 |
YOY Growth |
86% |
74% |
75% |
53% |
53% |
Sequential Growth |
27% |
31% |
33% |
-31% |
28% |
- Management reaffirmed guidance for full-year revenue in the range of $70-$75 million (41-51% growth vs. 2014). Based on the strong quarter, the guidance for 2015 t:flex sales rose significantly from $1-3 million to $4-6 million. Still, overall full-year guidance was not correspondingly increased, as management expects some potential disruption as patients delay purchasing the t:slim in favor of the t:slim G4; if the approval of t:slim G4 comes late in the year (e.g., November), 4Q15 sales may be negatively impacted. The guidance does not include any positive financial impact from the launch of the t:slim G4. This conservatism is good to see, though we’d note that Tandem is only 39% of the way to the mid-point of the full-year guidance, and this year will not have the benefit of a sales force expansion like 2014.
2. Tandem shipped 3,331 t:slim pumps in 2Q15, a 49% YOY increase from 2Q14 and a 34% sequential increase from 2Q15. Similar to revenue, it was Tandem’s second highest quarter of pump shipments in its history (to be expected since 82% of sales come from pump shipments). Since launch in August 2012, 24,160 pumps have been shipped. Unlike the previous two quarters, today’s call did not estimate what fraction of the insulin pump market this represents – Tandem estimated it had ~6% of the market in 1Q15 and ~4% of the market in 4Q14.
- Encouragingly, Tandem is still reporting that “approximately half” of its new customers are new to pump therapy. This is one of the most critical metrics to follow in gauging the sustainability of Tandem’s growth.
Table 2: Pump Shipments in 2Q14-2Q15
|
2Q14 |
3Q14 |
4Q14 |
1Q15 |
2Q15 |
Cumulative since launch (Aug 2012) |
Pump Shipments |
2,235 |
2,935 |
3,929 |
2,487 |
3,331 |
24,160 |
YOY Growth |
64% |
59% |
63% |
44% |
49% |
--- |
Sequential Growth |
30% |
31% |
34% |
-37% |
34% |
--- |
Cumulative % of Installed Base New to Pump |
~50% |
~50% |
~50% |
~50% |
~50% |
~50% |

3. The 480-unit t:flex launched in June, right on par with expectations. Sales of $1.4 million on 374 units far exceeded expectations, and management increased the guidance for 2015 t:flex sales from $1-3 million to $4-6 million. Notably, a survey was sent out to these early customers, with 55 responses. Patients with type 1 diabetes were the “large majority”, and “more than half” converted to t:flex from a competitive pump. The average age was 50-60 years. Notably, most respondents would have purchased a t:slim if the t:flex was not available – management was honest in saying that it was “more cannibalization than we expected.” Some of the early strength was attributed to pent up demand, as about half of the orders shipped prior to the official launch in June (presumably those who shared their email asking for more information). Management was frank in stating that the type 2 opportunity is large, but brings administrative challenges on the reimbursement front. The guidance seems appropriately conservative, though it is interesting to think about what fraction of type 1s could benefit from the larger reservoir size.
- The call repeatedly emphasized Tandem’s “portfolio” of pumps targeting different patient needs, starting with the t:slim and t:flex. This will grow with the t:slim G4, plus future offerings that integrate Dexcom’s G5 and G6 and automated insulin delivery. It’s a smart competitive move, and if the remote software update comes to fruition (see Project Odyssey below), Tandem should be able to leverage the same pump body but offer different software depending on patient needs.
- At 480 units, Tandem’s t:flex is the largest reservoir on the market by far (second is the Roche Accu-Chek Combo at 315 units); the pump is well designed from a cost-of-good-sold perspective, using the exact same t:slim pump body but a larger 480-unit cartridge that slides into the pump
4. The sales force was much more productive in 2Q15, selling 19 pumps per month per territory on average, up sequentially from 14 in 1Q15 and from 12 in 2Q14. The gain was attributed to the maturity of the sales force and the business’ typical seasonality. As a reminder, it has now been one year since the sales force expanded from 36 to 60 territories. Management expects the quarterly average productivity to increase throughout 2015, reaching ~20 pumps per month per territory by the end of the year. The expected peak productivity for the current sales force is in the “low-to-mid 20s,” and there is not firm timeline on an expansion.
5. Sales to distributors rose to 78% from 71% in 2Q14; the YOY increase was again attributed to a distributor that began servicing United Healthcare. This expands access and brought a “meaningful contribution” to overall sales, though margins are lower on these pumps – in Q&A, management said the typical pump price for distributors is ~$4,000, compared to $4,000-$5,000 for direct business. Management was not optimistic about the ability to sell direct to customers of the largest payers (e.g., Anthem, Aetna) any time soon, given the ongoing merger deals (Aetna/Humana, Cigna/Anthem).
- Gross margin declined to 31% in 2Q15 from 34% in 2Q14, consistent with expectations for variable gross margins as volumes expand. On the bright side, gross margins on a rolling 12-month basis (2Q14-2Q15) improved to 31% from 22% in the prior 12 months (2Q13-2Q14). The long-term goal is a 60% gross margin, though management expects that in three to five years.
- Gross profit rose to $4.8 million from $3.4 million in 2Q14, though net loss increased to $19.5 million from $19.2 million. Overall, the business’ profitability does not seem to be markedly increasing right now, though it probably unreasonable to expect that until volumes expand and manufacturing becomes more automated.
- Current cash of $99.7 million declined $18.6 million sequentially from 1Q15. Financial resources are expected to last for at least the next 12 months.
R&D Pipeline
6. FDA approval of the t:slim G4 is still expected in 2H15 (12-18 months post-submission), with launch to follow within 60 days. Tandem is “actively working” to commence shipments in 4Q15. The regulatory process is now in the “Q&A portion,” as the site inspection wrapped up in 1Q15. Management was frank in stating they “don’t know” the remaining timeline, though things seems to be “grinding towards an endpoint” and in the “neighborhood of getting across the line.”
- Notably, Tandem will not offer an upgrade program allowing those on the t:slim to get on the t:slim G4. This is unfortunate from a patient perspective, though it is the reality of being a young company without other business units to help cover the cost. As a near-term solution, the company is trying through Project Odyssey to make the t:slim’s software remotely upgradeable; as we understand it, patients will not be able to upgrade the existing t:slim to a G4 or G5 compatible product near-term.
- What is difficult to ascertain is how many patients will value the G4 integration, given the connectivity value of the Dexcom Share receiver and potential for a Gen 5 launch by the end of the year. The t:slim G4 won’t be compatible with Gen 5, and it also doesn’t have the updated G4AP algorithm. It was fantastic to see Tandem sign the updated agreement to integrate Gens 5 and 6 (this was a must-do! See below), though we assume those are at least 12 months away. How will patients weigh between getting data on their phone (with G5) or on the pump screen (with G4)? The pace of regulatory feedback for pump integrations has lagged behind Dexcom’s pace of new products.
7. Tandem announced a development agreement with Dexcom to integrate the G5 and G6 CGM systems into future generation t:slim pumps. Wording made it clear that the goal is automated insulin delivery – this was outstanding to hear and follows Dexcom’s publicly announced development agreements with Insulet and Bigfoot for the Gen 5 CGM (we’re not sure if work with Animas includes G5, though per J&J’s 2Q15 call, a next-gen closed-loop offering is in the works). Tandem management did not offer any timing on these products, though we assume they are more than 12 months away. For context, Gen 5 is currently under FDA review, with a launch expected by end of year. Gen 6 is slated for a pre-pivotal study this summer, with a potential launch in 1H17. The news parallels Dexcom’s 1Q15 call, which expressed its strongest commitment yet to automated insulin delivery.
8. In 2Q15, Tandem filed a pre-IDE package with the FDA for its insulin-only artificial pancreas product; the company will meet with the Agency later this quarter, with an IDE filing expected by the end of the year – the previous timing expected an IDE filing in “2H15,” so things may be running a bit behind. In Q&A, management made it clear that the “first step” will stop insulin delivery (presumably predictive low glucose suspend), and the “second step” will increase insulin delivery (presumably hybrid closed loop). On prior calls, management was less staged in its discussion, leaving potential for the initial product to be a hypo-hyper minimizer; it now seems less likely that is the case.
- We understand the more conservative approach to go with PLGS first, though we’d note that Medtronic has already begun the pivotal study of the MiniMed 670G hybrid closed loop. That study is single-arm, 150 patients, and has an expected completion date in May 2016; per JPM 2015, US launch of the 670G is expected by April 2017. Meanwhile, an FDA submission of the MiniMed 640G (predictive low glucose suspend) is expected this calendar year, with launch ambitiously slated by April 2016. Even though Medtronic has historically missed its timelines, Tandem will almost certainly come to market after Medtronic’s near-term automated insulin delivery options. With that in mind, going for hybrid closed loop – while more ambitious – might be prudent to stay competitive. Of course, there is also Animas, Bigfoot, Bionic Pancreas, Insulet, and Type Zero to think about, all of whom are going beyond PLGS with the Dexcom CGM. A competitive environment indeed!
- Consistent with prior updates, this product will be insulin-only. As of the 1Q15 call, the dual-chamber pump was not being moved forward.
9. Tandem plans to submit an FDA 510(k) application in 4Q15 to bring the t:slim to younger age groups. The human factors studies are currently under way. Management did not share specifics on the expected age range; for context, the current t:slim is approved for patients 12 years and older.
10. Management expects an FDA 510(k) filing of “Project Odyssey” by year-end, roughly consistent with the previous “4Q15” timing. This will allow remote online updating of the t:slim’s pump software. Initially, Project Odyssey will be a vehicle for software updates for the t:slim and t:flex – we imagine user interface and menu changes to start. In the future, there may be potential to turn these existing pump’s built-in Bluetooth radios on (they are embedded in the current pumps, but not enabled), allowing them to integrate with Bluetooth enabled CGM (e.g., Dexcom’s Gen 5). Management said the devices and timing are “highly dependent” on regulatory questions that are in discussion – for one, we’re not sure if a pump approved and sold under a 510(k) can be turned into a PMA device via software update. It would be amazing from a patient and business perspective if that was possible, though there is plenty of regulatory nuance here!
- The goal of Project Odyssey is to provide a user experience similar to smartphones, where a new version of the device’s operating system can be easily downloaded. Tandem has a vision to offer a next-gen universal pump platform whereby patients and providers will have the flexibility to select the “most fitting software for their needs.” This seems brilliant in our view, as it could allow a pump user interface more tailored to the individual needs of the patient (e.g., a simple setup for a type 2, a more complicated setup for an intensively managed type 1). This is similar in theory to what Dexcom did with the G4AP algorithm, which allowed patients to remotely upgrade the already commercialized G4 Platinum receiver. We hope to see many more products go this direction.
Pipeline Summary
Pipeline Product |
Timeline |
t:flex |
Shipped in June 2015. |
t:slim G4 |
Approval expected in 2H15; launch to commence within 60 days. |
Dexcom partnership for to integrate G5 and G6 |
Unknown |
Artificial pancreas project
|
FDA IDE filing by end of 2015 |
Project Odyssey
|
FDA 510(k) filing expected in 4Q15 |
t:dual |
JDRF Partnership announced on January 8, 2013. As of 1Q15, not being advanced. |
t:sport |
No recent updates. |
Questions and Answers
Q: Sales productivity keeps going up as you predicted. What is your forecast for the end of the year? As you have a second product and get ready for a third product, where do you see productivity topping out? At what level will you add more sales reps to keep growth going?
A: I suspect it will top out in the low to mid 20s. We are seeing improvement and movement in the right direction. We are taking a look at the underserved territories where there is more potential than we’re currently addressing with our headcount. We’ll keep you posted. It won’t be as grand as the last expansion, but it will contribute to an additional acceleration of sales. We’re just beginning to think about that.
Q: You said the average was 19, but what is the range? Is it a 2-unit range, a 10 units range? What are the top guys doing?
A: It’s an extreme range; the top guys are doing extremely well. I am not going to give you a quantity breakout on it.
Q: You’ll be at AADE next week, and your product is arguably the easiest to use, which diabetes educators should appreciate. Do you have any papers or training sessions planned that would increase educators’ knowledge?
A: We have a large event on Wednesday, August 5. We will go through the t:slim and t:flex. We also have training sessions set up that focus on our pump’s ease of use. That will be the focus at the trade show because that’s what differentiates us.
Q: What is the variability around the $70-$75 million guidance estimate, given people waiting to go on the t:slim G4? How much room will t:flex give you?
A: I think the t:flex does give us upside. And again, this is sort of who is waiting for the product and who cannibalized this push over to t:flex, and we know that there was a significant amount of that. And always when you have these new products transitions there is little bit of choppiness, because people are waiting; we have lot of people in queue that are waiting for the integrated CGM. So we don't have a good quantification on it. We will know when our results come what did happen. But we definitely know that people are sitting on the sidelines waiting for the G4 and waiting for that product before they pull the trigger.
It really depends on when we would get the approval of G4, what the timing of it would do, and what it would impact on a quarterly basis. If we happen to get that approval some time early on in the year, I think before the remainder of this year, I think its impact on the year in the $70 million to $75 million will be minimal as far as people waiting, because we will be able to service those customers within 60 days of approval. So we do intend to begin shipping products in that 60-day window. So if anybody is holding back, 60 days after approval, we expect to have their order fulfilled.
Q: Can you remind us of where you are now? Last quarter you were inspected by the FDA, and it went well. You will ship within 60 days of approval. But you cannot recognize revenue within 60 days?
A: First, we could recognize revenue that is at the 60-day mark. You are right in that that we would take orders in advance of that. So if you look at the process, 30 days after we receive approval, we anticipate taking customer orders and beginning to process their insurance. That's typically a 30-day process, which puts us to the 60 days when we'd actually ship the product and that's when you get that revenue recognition piece of it.
And as far as where we are with interactions with the FDA, it continues to be positive, and we continue to be in the Q&A portion of it. It’s hard to tell though where you are in that process. But to your point the manufacturing portion really was wrapped up. We did have our site inspection that went well and all the questions associated with it are closed.
We are just in the remaining question portion and we don't know their remaining timeline. We feel like we are grinding towards that end point as we have with other filings that we've had. So we feel like we are in the neighborhood of getting across the line.
Q: Regarding the Dexcom agreement, does this just give you access to the future gen sensors, or should we think of it as a deeper relationship to develop future products?
A: It does give us access to future generations. We’re trying to stay up with their latest generations as they make improvements. It does make it a better product for the artificial pancreas program, and those generations will be part of it. So it is a deeper relationship. We both wanted to get to that automated insulin delivery shut off aspect and turning back on. It’s probably a two-step process in terms of how we develop that and getting beyond just display to control.
Q: What about the performance of the Animas Vibe during the quarter. What impact, if any, has it had on your business?
A: It was within the range of our expectation as to how we thought it would do. I’m not sure they’ve quantified how well its doing. It’s serving a niche patient population that does want that feature. We’re in that race to be second to market with an integrated product. The Vibe is doing well, but it hasn’t hurt our numbers.
Q: On the contacting front, are there direct contracts that are meaningful in the pipeline? Should we expect to hear anything in the next 12-18 months?
A: The larger plans like Anthem and Aetna are all involved in merger mania. For us, it’s business course as usual. We are signing other contracts. But for the two major players, it’s not happening any time while the merger discussions are ongoing.
Q: On the guidance, you had $70-$75, which included $1-3 million for t:flex. You upped t:flex. By definition, that seems to suggest a slightly more cautious outlook for t:slim. Can you help us understand the moving pieces and why guidance stayed the same, despite a stronger out-of-the-gate performance?
A: Some of the early success has been on the type 1 side. I do believe that the type 2 has done a little bit better. I think we're probably more comfortable to the point that we've raised the overall estimate of it. But at this time, it's still early and with our expectations on what we think are going to be challenges on the reimbursement side, I think it was one-month worth of sales from the June shipment. I think it's still little too early for us to commit to a higher expectation for t:flex and a higher overall expectation. But we'll play it out see how the rest of the year goes and as we move along we feel that we're comfortable raising the expectations we'll do it at that time.
Q: In the early experience with t:flex, is it the same distributors vs. direct business? And are the insurance hurdles more than expected, or as expected? Are you opening new accounts with t:flex, or are the majority in existing accounts?
A: Let’s start with the success of t:flex as far as the reimbursement process. I think it is moving as we expected. I think some of it moves faster, but it is really plan specific, and so some patients move into the queue quicker and get through it quicker, others are in the process a long time. And they do go through distributors; there’s still an equal proportion of the distributor mix as our t:slim.
I think it's still little early and we're talking only about 300 customers at this point. Our survey data was on the first maybe 100 or 150. So it’s a small portion and it’s still too early.
Q: What about the distributor/direct mix?
A: It’s a variety. Obviously having two products in the bags of our sales reps has helped them open the door. I heard of one specific circumstance, where the response was to call back and ask them to talk about it. And so that has helped open the door, and that opens the door not just for t:flex but also t:slim. And that's part of our overall strategy is having multiple products able to access patients with diverse needs. I think it is helping. It’s hard to quantify. It's hard for me to say at this point if its 10% of our business or 50% of our business; it’s too early.
Q: Are the gross margins the same on t:flex?
A: The price points on the ASP are exactly the same. The codes that we utilize are the same. As far as the gross margin, I haven’t gotten to that level of detail, but the manufacturing is generally the same. The pumps are generally the same. The cartridges are slightly different. I think I mentioned on the last call, we do expect some early noise as we scale up that product and we did have that happen here in the second quarter to a little extent, but not meaningful because of the small volumes. So for the most part it is expected to be sort of in the same range as t:slim.
Q: Great job controlling OpEx. I think you mentioned in 2016 you are likely to see more gross margin expansion. I thought I heard you mention more automated equipment. What impact will that have?
A: Realize that we launched our product in 2012, so it's roughly three years. So during the year or so, we've been scaling as we move along and we're making improvements in manufacturing that increase our efficiencies and contribute to the gross margin improvement. We are now moving towards having three products in the fourth quarter, one of which is a PMA product, which has slightly stricter controls on being able to make changes to the manufacturing line. So we are moving towards increasing our capability to deal with three products. We are just trying to create some flexibility and create some advance preparation to the volumes we expect to see going into 2016.
Q: I didn’t hear timing on G5. Are there mile markers over the next 12-18 months?
A: No, we haven't given any timing. That's really highly dependent on what's going on in our AP program, and we really haven't laid out milestones and timings for that, other than our pre-IDE, which I mentioned. So no, we don't have any timelines laid out.
Q: With t-flex and t-slim, both with BLE [Bluetooth low energy], would it be fair to think both would be game for potential integration with G5 in any future iteration? And does it make sense as you are starting to see maybe a skew toward type 1 with t-flex to try to integrate that with G4, or is that just going to too old by the time you get through that kind of approval process?
A: Well technically it’s possible what you are describing; we are thinking that in our development plan. G4 is a separate radio so there isn't a way for t-slim or t-flex to have that integration capability with their built in Bluetooth radio; that is really more aligned with the future generation Dexcom product.
Q: What is the percentage of new users from MDI vs. competitive pumps?
A: Still about 50%/50%. Not much change there.
Q: Will you seek a younger age for the integrated t:slim G4?
A: At this time we don't have plans for a lower age indication for the t:slim G4. We think there is a significant opportunity with t:slim and we are looking to really evolve our product pipeline based on that evolution of t:slim.
Q: When you look at the US pump market, does you latest market research suggest it has started to grow faster? Has penetration finally moved beyond that 30% we’re always quoting?
A: We don’t have good data. From industry information, Insulet and we are growing that portion of the type 1 market not on pumps. We’re doing that. It’s a fairly small scale, considering the base of users and non-users. Overall, the market continues to grow at a pretty healthy place. The Question is what does t:flex do on the type 2 side?
Q: Will that depend on insurance based on your learning so far?
A: Correct. Economics and insurance is going to be big portion of people deciding to go on pump technology.
Q: Strategically, why are you not offering an upgrade or rebate incentive so you don’t run into potential headwinds in 2H15?
A: Upgrades are something that we actually put a lot of though into. We’re a young company without other business units. So we have to make a decision on how to best manage business, and we decided not to offer upgrades. We're trying through the Odyssey program to make the software upgradeable on the t:slim in the future, which should answer and help that sort of product life cycle. At this point, we are not going to offer a G4 upgrade from the basic t:slim.
Q: What would the gross margin have been if that distributor percentage had stayed the same or trended lower in the quarter? That continues to climb, and obviously there are a lot of positives of that but there is a negative to go along with it.
A: It really would be on the ASP side of things. As an example, pump distributors pay roughly $4,000. For a direct, it’s anywhere from $4,000 to $5,000. So, it's really going to be whatever pickup that is.
Q: Do you make any money on the infusion sets there?
A: We do. There is a positive gross margin for sets; it’s a negative gross margin for the cartridges.
Q: Is the artificial pancreas product one or two hormones?
A: It’s one hormone: regulating administration of insulin. Shutting it off and turning it on if you’re going low would be the first step.
Q: How far along are you? Is that a two-year process? Medtronic has been working with different projects for 15 years. Is this a 2-3 year clinical program?
A: The pathway is not going to be defined until we get in front of them and talk to them. I think the more problematic piece of this is actually turning on insulin. That would be the second step, so we don't have a timeline at this time. I'm optimistic that the climate has changed and there's amenability to looking at these algorithms for both these pieces of automated insulin that we're looking at.
Q: What is the timeframe for an integration post G5 approval?
A: We haven’t given guidance on that; it’s too early.
Q: You talked about a disruption in patient decisions, maybe some will pause post t:slim G4 approval. Does the guidance reflect that fully? What is the range of outcomes you might see if things happen at the wrong time?
A: I don't think you have an impact on the year unless that approval comes right towards the end of the year, within that 60-day period. So if it comes in mid November, then it will be 60 days after that by the time we fulfill the orders. So it could impact the year in that case. We are hopeful the approval will come sooner than that, in which case it won’t have an impact on the full year guidance. With respect to Q3 and Q4 it really depends on when it might come through approval and then how long it takes us to actually begin shipping. So the $70-75 million does not include any G4 revenue – just to be clear on that. Once we do get approval for that, we are likely to update our guidance and give some color on how we would expect that to impact the quarters.
Q: Just to be clear, the $70-$75 million does include some potential disruption within the quarters but not on the full year?
A: Correct. The impact is what it would do to the timing of decisions of people who signed up for t:slim or t:flex and now want to change their mind.
Q: Last quarter ~10% of your customers were type 2. Did you see a significant percentage of those people upgrade to the t:flex during the quarter at all?
A: We don't actually have an upgrade program in place, and so people who previously chose the t:slim continue to be t:slim customers. About half of our orders for t:flex actually came in prior to our official launch announcement. Those are exactly the people with that pent up demand – type 1s who were waiting for that product to become available.
Q: With Asante closing, did you see any benefit from their prior customer? It was a small base, but were any coming over?
A: It was marginal and not something that we really noticed.
Q: What was depreciation and amortization?
A: I think it was about $1.3 million.
-- by Adam Brown and Kelly Close