Tandem 4Q19 – “More Than 12,000” Have Upgraded to Control-IQ; Global Revenue Hits Record $108 Million (+42% YOY) on 19,602 Pumps Shipped; Smartphone Control for t:slim X2 Coming 2H20 – February 24, 2020

Tandem reported 4Q19 financial results today in a call led by Executive Chairman Kim Blickenstaff, CEO John Sheridan, and CFO Leigh Vosseller. Check out our top highlights below!

Control-IQ Highlights – Launch, Mobile App, Future Updates

1. Control-IQ Launch: “More Than 12,000” Have Updated, “More Than 7,000” Trained Healthcare Providers, Technical Support “Overwhelmed” Initially

In the first earnings call after the much-anticipated launch of Control-IQ in January, CEO John Sheridan shared some figures on the launch. In “early January,” Tandem began training healthcare providers and to date, there are “over 7,000” trained HCPs, including “nearly all” of the top prescribers. As a sign of the incredible excitement around Control-IQ, “more than 10,000” people logged into Tandem Device Updater looking for update information even before Tandem began notifying customers. Given Mr. Sheridan’s remarks later in the call, that represents more than one-tenth of Tandem’s entire updateable pump user base. The response was so strong that Tandem’s customer support was “overwhelmed” and Mr. Sheridan offered an apology to anyone who faced extended wait times. “More than 12,000” people have already updated their t:slim X2 pumps with Control-IQ and Mr. Sheridan called the customer responses “phenomenal.” Mr. Sheridan was so confident about Control-IQ, that during an analyst question on Tandem’s 1Q20 expectations, Mr. Sheridan interjected that he was expecting Control-IQ to create an “inflection.” While we do agree that the response from patients has been extremely impressive, we also note the obvious - it would be better if the wait times were a less serious issue, as that would instill higher confidence in the infrastructure.

• New t:slim X2 pumps with Control-IQ began shipping to customers last month, while emails also began being sent to notify customers of the update. Mr. Sheridan shared that the updateable pump user base in the US was in “excess of 90,000” – we wonder if everyone has been notified yet and how many of those have begun the update process. Tandem’s emails to current users provide access to an “online portal” where users can request a new prescription and complete their online training – for context, the training for Basal-IQ took ~45-minutes to complete.

2. In Process of Launching t:slim X2 Smartphone App

In the first update on Tandem’s t:slim X2 smartphone app since 3Q19, the company is “in the process of launching” the first generation of the app, which will bring wireless uploading of t:slim X2 insulin dosing data along with CGM data into t:connect. The new app will remove the burden of cabled data transfer for both patients and providers – a huge win, a necessary driver for more continuous/remote management, and the potential first no-cable-upload for a pump in the US. (Insulet has not yet launched automatic uploads for Dash - from what we can tell, Dash must still be plugged in to a Mac/PC to upload to Glooko.) Additionally, the data upload will be “real-time,” and during Q&A, Mr. Sheridan noted that allowing pump users to share their data real-time with followers was “definitely something” Tandem is interested in.

• The t:connect app offers secondary display (mirror) of pump information, including Dexcom CGM trend, insulin on board, recent boluses, and basal information. The user interface looks friendly and very useful! It will be interesting to see how Tandem displays the automated basal and bolus dosing with Control-IQ – will it look like the below? For context, the Tandem app has a tighter integration with Dexcom, showing CGM and insulin delivery data within the same app; Insulet’s Dash Display app only shows the pod’s insulin information, requiring the Dexcom app to be running separately.

3. FDA Submission for Smartphone Bolusing with t:slim X2 “This Summer,” Preparing for Launch in 2H20

In a later version of the t:slim X2 app, Tandem announced today that it is preparing to launch smartphone bolusing in the “second half” of 2020. Apparently, Tandem has been working on this feature for “some time” (presumably with work on t:sport) and is aiming to submit this feature to the FDA “this summer.” While we haven’t heard anything about this before, this announcement doesn’t necessarily come as a surprise. As Mr. Sheridan stated during Q&A, being able to dose insulin from a personal smartphone (or even smartwatch) is one of the most requested features of pump users and Insulet has intended to launch its Omnipod Horizon hybrid closed system with smartphone control for over a year (folks using Loop are very used to this and not having this would be perceived as a step backwards among many users). Tandem is intending to launch the smartphone control on both iOS and Android phones, though it wasn’t specified whether these would come at the same time. Insulet intends to launch Horizon with smartphone control on Android first (probably, Samsung Galaxy phones), before eventually coming to iOS. Tidepool Loop aims to bring smartphone pump control to iPhones. Importantly, Mr. Sheridan did note that this feature would, like Control-IQ, be made available at no-cost to in-warranty users. We’re curious what sort of training or restrictions the FDA might require around smartphone control, but it’s incredibly exciting and encouraging to see Tandem making the latest features available to its customers at no additional charge to the patient.

• “If you talk to people who are using our mobile app today, in general, when you look at what the number one feature that people [who don’t have it] would desire it's the ability to bolus from a phone. It's the one thing that you really do when you're out and about that's public and so I think being able to do that for a phone really improves the discretion and reduces the burden of diabetes on the people who are using our systems. We think it's going to be it's going to be a great addition to our portfolio of products and capabilities with the systems. We're very excited about it. And as I said we – we're looking at some time the second half of this year to roll it out.” – Mr. Sheridan (Editor’s note – in addition to discretion, many patients also just feel it’s faster and more convenient)

• Mr. Sheridan called mobile bolusing “probably the most complex issue” Tandem is working on, though he characterized the FDA as very open to the idea: “As time has gone on [the FDA has] become more open to phone control. In fact, in the last year or year and a half the conversations we've had with them actually have encouraged us to move forward with control from unrestricted phone because it's what everybody uses in their lives today. They just want it as a matter of reducing the burden. I think it's something that they want us to achieve. We're moving forward in that direction. You heard that not only will we have full phone control for t:sport but we also have the ability to remotely bolus from the t:slim X2 mobile app which I think is a really big deal. The thing is I think that they're concerned about are obviously cybersecurity and making sure that the risk factors that are associated with cybersecurity are addressed in the design of the device.” – Mr. Sheridan

4. Pediatric (6+ Years) Submission in 1Q20 Following DCLP5 Readout; OUS Launch in 2H20

The Control-IQ pivotal trial for pediatrics (6-13 years) is now complete and read out ATTD on Thursday. Results were quite consistent with the adult pivotal study (14+ years). Over 16 weeks, Time in Range in the Control-IQ group increased from 53% at baseline to 67%, compared to those in the SAP group, who increased Time in Range from 51% to 55% (p<0.001). Like the adult trial, the vast majority of Time in Range improvement came at night, with the closed loop group reaching an astounding 80% Time in Range compared to 54% in the SAP group. Again, similar to the adult study, treatment effect on Time in Range emerged during the first month of the trial and persisted consistently over the course of the four month study. See ATTD Day #2 for a full breakdown.

• With the pivotal trial now complete, Tandem is “on track” to submit to the FDA this quarter. Given the strong pivotal data and well-studied (and now FDA-cleared) algorithm, it’s certainly possible that Tandem could launch Control-IQ in pediatrics before the summer, allowing the company to get ahead of diabetes camp season.

• During prepared remarks, we learned that Basal-IQ is now available in “more than half” of Tandem’s international geographies and Control-IQ launch is aimed for the back half of this year. Importantly, the Tandem Device Updater was not completely rolled out outside the US until the end of 3Q19. Anecdotally, we expect demand for Basal-IQ and Control-IQ to be quite high; at the ATTD 2020 exhibit hall, many European providers stopped by the Tandem booth to ask about availability. Tandem is launching in France, Germany, and the Benelux (Belgium, Netherlands, and Luxembourg) in “early 2020,” and CFO Leigh Vosseller noted during Q&A that t:slim X2 is already covered in France.

5. “Incremental Updates” to Control-IQ in Progress; Fully Closed Loop Algorithm in 2021

In another announcement, Mr. Sheridan stated that Tandem aims to have a “fully closed loop system capable of complete bolus and basal insulin automation” with its next AID update in “2021.” This is a fairly aggressive timeline, as Medtronic’s “Personalized Closed Loop” is the only other system looking to have meal handling and phone control by the end of 2021. See our AID competitive landscape. In the meantime, Tandem has already begun discussions with the FDA on segmenting various features in Control-IQ by risk in order to determine the proper regulatory path for Tandem to make “incremental updates” to Control-IQ. Management didn’t share many specifics on what those updates might look like, other than that they are “intended to improve the clinical outcomes,” “offer greater personalization,” and make the system “easier to use.” This sounds very positive.

Financial Highlights

1. Global Revenue Reaches Record $108 Million, Rising 42% YOY; FY19 Sales of $362 Million, Rising +97% YOY; US 4Q19 Revenue of $98 Million, +42% YOY

Tandem’s quarterly worldwide revenue crossed the $100 million mark for the first time 4Q19, rising 42% YOY to $108 million on an extremely challenging comparison to 91% YOY growth in 4Q18. Sequentially, sales rose a robust 14% from the previous record of $95 million set in 3Q19. Notably, the 42% YOY growth seen in 4Q19 is the lowest YOY growth rate in 11 quarters, breaking eight straight quarters of >50% YOY sales growth, five consecutive quarters of >70% growth, and three straight quarters of >100% growth. As usual, pump shipments made up the majority of sales (68%), followed by infusion sets (21%) and cartridges (11%). 

• US revenue saw particularly strong growth, rising 42% YOY to $98 million on a very difficult comparison to 73% growth in 4Q18. Domestic sales drove a whopping 91% of overall company growth in the quarter, the highest rate since Tandem began selling its pumps outside the US. For FY19, US revenue totaled $302 million, a 73% YOY increase from FY18. Tandem began 2019 with approximately 70 US territories; with the incredibly strong demand seen in 2019, CFO Leigh Vosseller reported the company now has “about 90” territories.

• International sales also rose 42% YOY in 4Q19 to $10 million. Sequentially, sales were down 36% from 3Q19 and less than half of the record $23 million set in 2Q19. As a reminder, in 2Q19, Tandem was able to satisfy pent-up demand that had been supply constrained. The remaining Animas conversion opportunity had also mostly disappeared by 2Q19, with some modest contribution in 3Q19. During Q&A, Ms. Vosseller told analysts they could consider OUS sales in the first half of 2019 as “almost all Animas conversions,” while the second half of the year was “new market activity.” Ms. Vosseller also noted that “in many cases” Tandem’s OUS distributors did not want to begin sending out pumps with Basal-IQ until Tandem Device Updater was online – that came at the “very end of the third quarter.” 4Q19 marked t:slim X2’s sixth ever quarter of international availability. For the full year 2019, the first full year of t:slim X2 availability, Tandem recorded $60 million in revenue. During prepared remarks, Mr. Sheridan noted that Basal-IQ is now available in “more than half” of Tandem’s OUS geographies and Control-IQ is expected to roll out in the “back half” of the year. We imagine Medtronic will be stronger overseas since it is not competing with Tandem’s Control IQ.

2. Pump Shipments of 19,602, Rising 21% YOY; In-Warranty Worldwide Installed Base of 142,000 Users, 118,000 Domestically; Half of New Users Still Coming from MDI

Tandem shipped 19,602 pumps worldwide in 4Q19, rising 21% YOY on a very tough comparison to 132% YOY growth in 4Q18. US pump shipments totaled 17,453, rising an impressive 26% sequentially from the previous record of 13,814 set in 3Q19. International shipments fell to their lowest level since the first quarter of OUS availability, totaling 2,149 shipments in the quarter. As we noted above, the Animas conversion opportunity has essentially disappeared and the Tandem’s particularly strong 2Q19 OUS numbers were driven by pent-up demand. Notably, Ms. Vosseller estimated that “approximately 2,000” people delayed their pump purchases due to Control-IQ; in other words, those “approximately 2,000” will purchase a pump in 2020 who would have otherwise purchase a pump in 2019.

• Tandem’s in-warranty US installed base is at 118,000, rising from 107,000 at the end of 3Q19. Globally, Tandem’s user base is now “approximately 142,000” (24,000 OUS). Note that these estimates are likely conservative, as they only count pump purchases in the past four years. In reality, Tandem is still renewing pumps from warranties that expired in 2016-2017 – i.e., 3-4 years later! Impressively, during Q&A, Mr. Sheridan shared that the number of updateable pumps in the US “in excess of 90,000” – presumably, all of these customers have now been notified about Control-IQ’s availability.

• Tandem continues to see an increasing number of renewals: in 4Q19, the company fulfilled 3,300 pump renewals, compared to approximately 2,000 in 3Q19. Ms. Vosseller estimated the total renewal opportunity as about 30,000, with Tandem renewing “more than half” of the customers. Especially as Tandem’s installed base grows, scaling renewals will become an increasingly important part of Tandem’s business. The ability to provide software updates (particularly, for free) is certainly a strong pull for customers to stay on t:slim pumps. Reimbursement and coverage remain potential challenges; analysts brought up both Medtronic’s preferred deal with UnitedHealth Group and Insulet’s pharmacy model with Dash during Q&A.

  • “I don't see that the pharmacy channel is off the table for us. More importantly, right now, we're working on building the relationships with the payers and increasing our direct presence. We think that's the right avenue: to work closely with the payers to determine the right channel for our product. Our being very highly specialized, I think one different thing to note between us and Medtronic today is that they're not only selling durable pumps, they're selling a pump combined with sensors. So, what impact that has on which channel they go through, you know I can't really comment. But it is different from our position.” – Mr. Sheridan

  • “Well, we don't provide specific updates on payer situations. But, I would say that in general we're very pleased with all the conversations we're having with payers and longer term our goal is to increase our direct presence and seek additional reimbursement for these algorithms. You do know now that the New England Journal article is huge. I think that's exactly what they asked us to do and now that Control-IQ is in the market and I think we're in a position to have meaningful conversations with them.” – Mr. Sheridan

• About half of Tandem’s new users are still coming from MDI, in line with numbers we’ve heard over the past few years. Insulet continues to see a higher rate of MDI conversions (making up “75%-80% of new US users), but both companies are certainly doing their part to expand the entire pump market. Of note, during his opening remarks, Executive Chairman Kim Blickenstaff noted that the US pump market has grown by 40% over the last five years to 600,000 people. Over that same time, Tandem has seen its market share in the US rise from “less than 5%” to “nearly 20%.”

3. Gross Margin of 56%; Adjusted EBITDA of $23 Million, Adjusted EBITDA Margin of 21%; Cash Flow Positive in FY19

Tandem’s profitability metrics continue to trend positively:

• Gross margin in 4Q19 was 56%, compared to 54% in 3Q19 and 55% in 4Q18. For FY19, gross margin came in at 54%, a significant improvement from 49% gross margin in FY18. Ms. Vosseller noted that Tandem would continue to make investments in 2020 around manufacturing capacity, specifically around cartridges. During Q&A, she stated her “absolute” confidence that Tandem is on track to hit its 60% gross margin target. This was big confidence.

• Tandem ended the quarter with $177 million cash, up from $157 million in 3Q19. Tandem has been cash flow positive for three straight quarters, and ended FY19 with about $50 million more in cash than FY18. This is impressive for a pump company growing this fast, and an expectation going forward – even with investments in manufacturing capacity and a lot of marketing and sales investment for Control-IQ. As a reminder, at Tandem’s 2018 Analyst Day, Ms. Vosseller had outlined a goal for cash flow breakeven in 2H19.

• Operating expenses totaled $58 million in 4Q19, rising 41% from $41 million in 4Q18. For FY19, operating expenses totaled $211 million, rising 57% from $135 million in FY18. With FY19 revenue growing at 97% YOY, Tandem is exhibiting excellent operating leverage.

• Adjusted EBITDA in the quarter was $23 million, about double the $12 million recorded in 4Q18. Adjusted EBITDA margin was 21%, impressively considerably from 16% in 4Q18. In FY19, adjusted EBITDA was +$47 million, or 13% of sales, compared to -$15 million, or -8% of sales, a year ago.

4. FY20 Guidance: $450-$465 Million in Revenue (+24%-28% YOY); OUS Sales of $70-$75 Million (+17%-25% YOY); Gross Margin of 54%

Tandem is guiding for $450-$465 million in revenue in FY20, representing 24%-28% YOY growth. This would represent a significant slowdown from the 97% YOY growth rate seen in FY19, though from a much higher base. Ms. Vosseller was asked about Tandem’s guidance philosophy during Q&A, to which she responded the guidance was designed to capture “what we think is in our control.” In other words, the guidance is “cautious” around regulatory timelines and timing of competitor launches – overall uncertainty is probably also included as a risk.

• Gross margin is guided for 54% in FY20, even with FY19. Ms. Vosseller noted a 1%-2% impact due to “royalty associated with Control-IQ and potential tariff uncertainty.” Presumably, the Control-IQ royalty is related to Dexcom’s ownership of TypeZero’s inControl algorithm. Additionally, Tandem is making investments in manufacturing capacity, particularly around cartridges. Adjusted EBITDA margin is guided for +12%-14% for FY20, in line with 13% in FY19.

Pipeline Highlights

1. t:sport – ACE Pump Submission “This Summer,” Expected Launch Pushed to “First Half of 2021” With Smartphone Control

During prepared remarks, Mr. Sheridan shared that t:sport will be submitted to the FDA in two regulatory filings, with one filing for t:sport with a dedicated controller and another with t:sport and smartphone control. In line with previous expectations, Tandem is aiming to submit t:sport as an ACE pump with the dedicated controller by “this summer,” but will wait to launch the pump until both the dedicated controller and smartphone control versions of the pump are FDA cleared. Full commercial launch of t:sport is aimed for “the first half of 2021.” This comes at a delay from the 2018 Analyst Meeting expectations to launch in 2H20 – the delay is likely caused by the two separate filings needed to launch t:sport with smartphone control. In the 3Q19 call, we learned that the hardware for t:sport has already been finalized; today, Mr. Sheridan noted that work on manufacturing preparing has begun.

• As a reminder, t:sport is a screenless, wirelessly controlled tubed pump (short infusion set), which will include the Control-IQ algorithm and iCGM integration (no new clinical data will be needed). 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.

  • Mr. Sheridan offered some perspective on the intended audiences for t:sport vs. t:slim X2: “t:slim X2 is designed for people who want a 300-unit cartridge and their diabetes management is contained in a single device. t:sport is well suited for people who prefer greater discretion with a 200-unit cartridge and more remote operation. Both pumps have been designed to feature remote updatability, CGM integration and our latest automated insulin delivery technology.”

Slide taken from Tandem’s 2018 Analyst Meeting.

2. Abbott Partnership Still Being Finalized

One analyst asked for an update on Tandem’s partnership with Abbott announced in October 2019:

• “We are still working with Abbott on the agreement. They’ve just been working through the details of the agreement right now. It's a good team, we have confidence that we're going to get this thing been taken care of in the near future.” – Mr. Sheridan

Questions and Answers

Q: I hear that the FDA is particularly sensitive about the issues related to phone control, and I was particularly intrigued by the work you’re doing in that area. Can you just share with us any sort of sense from the conversation you’ve had with the FDA. And what are the key issues they want you to demonstrate to give you approval for phone control and for t:sport?

John Sheridan (President and CEO): I would say that a couple of years ago, the way you describe the FDA’s feeling is about phone control is true. However, as time has gone on, hey have become more open to phone control. In fact, in the last year or year-and-a-half, the conversations we've had with them actually have encouraged us to move forward with control from unrestricted phone because it's what everybody uses in their lives today. They just want a way of reducing the burden. I think it's something that they want us to achieve. We're moving forward in that direction. You heard that not only will we have full phone control for t:sport but we also have the ability to remotely bolus from the t:slim X2 mobile app which I think is a really big deal. I think that they're concerned about y cybersecurity and making sure that the risk factors that are associated with cybersecurity are addressed in the design of the device.

Q: Have you detected any change in the relationship with United HealthCare in the discussion and the tone from them related to the success you’ve had with Control-IQ. What appears to be a significant problem for Medtronic with their recall?

Mr. Sheridan: We don't provide specific updates on particularly payer situations. I would say that in general we're very pleased with all the conversations we're having with payers, and longer term, our goal is to increase our direct presence and seek additional reimbursement for these algorithms. The New England Journal of Meidicine article is huge. I think that's exactly what they asked us to do, and now that Control-IQ is in the market, I think we're in a position to have meaningful conversations with them.

Q: I just want to start on what happened in the quarter here with international that was trending around 4,000 pumps a quarter. As it came in at about half of that, I wanted to know what happened there in the quarter. What gives you confidence in the rebound as you included in the guide?

Leish Vosseller (CFO and EVP): When it comes to international where we ended up for the year, there were a number of moving parts I would say in the third and the fourth quarter. As we had talked about beforee, the Animas conversion opportunity was almost fully complete by the end of second quarter. Some of it fell into the third quarter, so the third quarter is slightly benefited from a little bit more Animas opportunity. We also began to rollout Basal-IQ and even more importantly the Tandem Device Updater. That product didn’t become available until the very end of the third quarter, and what happened in many cases was that distributors did not want to begin sending out new pumps of Basal-IQ until their existing patients could update, which impacted the launches a little bit. That's really what was going in the fourth quarter. I would say as we think about the baseline as we go into next year, it’s really an average of what we saw in the third quarter and the fourth quarter. It’s a good launching point as you think about our existing markets, but we’re also excited that we’re launching into the new geographies which are doubling our opportunity next year.

Q: We saw the Medtronic is recently trialing the 670G pump and the accessories by the PBM channel. Is the PBM channel ever an option here for Tandem, or is the DME remain the preferred pathway for you?

Ms. Vosseller: I don't see that the pharmacy channel as not off the table for us. More importantly right now, we're working on building the relationships with the payers and increasing our direct presence. We think that's the right avenue to work closely with the payers and determine the right channel for our product. Ours being very highly specialized, I think one different center standard to note between us and Medtronic today is that they're not only selling durable pump but also a pump combined with sensors. What impact that has on which channel they go through I can't really comment on, but it is different from our position.

Q: I want to start with the Control-IQ launch. You mentioned you trained I think about 7,000 healthcare providers today. Can you give us a sense of how far along you are in that process? How much more work do you have to do on that front to really make it broadly available to the patients all those providers are managing?

Mr. Sheridan: We're approaching our plans, and I think that we've trained nearly all the people we have to train. I think that as time goes on, there is going to be a continued requirement for this. I think the majority of what we planned on doing has now been accomplished.

Q: I just wanted to go back to the different factors that are impacting gross margin. I think I heard 1 to 2 points headwind from the Control-IQ royalty. Are there other sort of specific items there that are holding you back this year and that you know are keeping you from making steady progress?

Ms. Vosseller: I would point to a couple of factors. First and foremost is that we’re extending our manufacturing capacity again. As you can imagine, when you expand, you have to get to a point then where you can leverage. We're doubling the cartridge capacity which means we won't be fully utilizing that in 2020. Add to that then the onset of the royalty but the one that you point was really a combination of a number of smaller factors that weren't individually significant. However, when added together, it was royalty. There is a little bit of uncertainty around tariffs and where that my head in 2020. Those were the two primary items that were new to the story.

Q: I just wanted to touch on the 2,000 patients that you delayed. I'm curious but I thought the number would be a little higher than that given the impact on the revenues in Q3 and Q4. I don't know if you're being conservative there or if you're maybe seeing a small impact from the Medtronic 780G upgrade program. How did you come up with that 2,000 number?

Ms. Vosseller: As you can imagine, it's a little bit typical to ascertain the number, but there a couple of factors. We looked at the anecdotal information that we had from physicians and from our field in particular as they were interacting in the physician’s offices. There were some offices that were prescribing, some that were waiting, and some patients that were waiting. Add that then to our own expectations for the year. However, the 2,000 pumps represent roughly a little more than 10% of what we did in the fourth quarter. 

Q: It looks the full year 2020, you're assuming more patients in the U.S. then you did in 2019? What your thoughts are on driving that acceleration shift or gains versus MDI conversions? In Q4, did Animas contribute any patients, or was 50% from share gains?

Ms. Vosseller: I'll start with 2020. If we look ahead, we actually are expecting more patients to come to us in the year than we did in 2019. From an MDI perspective, we're looking at least as many who will come to market next year as this year or if not more. We alsoo expect that competitor conversions will keep pace. We kept that nice healthy balance of about 50/50 between MDI patient and competitor conversion. From an analyst’s perspective though, it did start to decline in the fourth quarter just as we had anticipated prior to fourth quarter. They had been averaging about 80% of our new shipment whereas in the fourth quarter it went down just under 10%. We think that will continue to dwindle. There may be some folks who took advantage of Medtronic’s upgrade program that would come to us, appearig that they're Medtronic customers, but we don't really anticipate much from them in 2020.

Q: You've in the past characterized your guidance philosophy as a goal post that you would hope to exceed. I'm assuming that philosophy is still unchanged as we think about 2020?

Ms. Vosseller: Yes, so just to frame up our philosophy is, we try to capture what we think is more within our control. For example, renewals are one area that we have better visibility into what's available to us and better relationships with those patients. In fact, I should have mentioned that's one of our main growth drivers for next year as well. However, we're typically cautious around things when it comes to FDA approval or even timing of competitor launches. Those are things until we see demonstrated evidence. We are reluctant to factor that in.

Q: I see the first quarter in particular having a similar mix as it has in prior years. If I just do the raw math on that, and granted there are some moving parts there, but it would imply a number that would be roughly in line a little bit below consensus. Is that math right? Is there also something we should be sensitive to, or again does this just go back to the initial point of starting offf conservative and seeing how this all plays out?

Ms. Vosseller: I agree that we would still think about the traditional seasonality curve for pump shipments in the U.S. which are typically about 16% to 17% in the first quarter. One thing that I would be thoughtful about is what the impact of Control-IQ has on the year. We're just getting going with that, and that's one of the areas where while we're very enthusiastic about the opportunity to come, we're still cautious about it. Until we start to demonstrate that inflection is where John would say definitely there's going to be an inflection.

Q: As a follow-up, historically domestic new patient adds have declined 25% to 35% sequentially versus Q4. That historic seasonality doesn’t seem to make much sense to us given the 2,000 customers pushing Q4 to Q1 plus the Control-IQ launch. Can you just talk a bit more about your rationale and why wouldn’t Q1 be much stronger than typical seasonality in the U.S.?

Ms. Vosseller: Great. One thing to think about that Control-IQ differently is that we don't anticipate that all came in the first quarter. These are folks who waited to make their purchase. Some of them will still have limitations on when their deductibles will reset. We anticipate that those are spread more evenly across the year. It may play an interesting dynamic from Q4 to Q1 in that Q4 was a little softer than we typically see because of that deferral piece of it. For now, the best way to think about is to look at the typical historical trend.

Q: It's been awhile since you've updated us on supplies versus pump gross margin. Could you be willing to talk about what overall supplies gross margin has increased to in 2019? How do you think about the pathway there moving forward as you expand capacity with your customers on and make steps to outsource some production? Do you still expect to achieve a 50% gross margin over the next five years?

Ms. Vosseller: Absolutely, we are still well on track to hit our 60% margin target. Unfortunately, we won't give product margin by product simply for competitive reasons, but I can say that the supply margins have continue to scale since we first broke even back in the third quarter of 2016 and scaled nicely as we continue to leverage our cartridge capacity. We also have the full benefit of the infusion set sails that we were missing at that point in time. We're veryy confident at where we're headed. Some of the other opportunities as you mentioned would be outsourcing to our third-party manufacturer to help reduce costs as well as just again leveraging the capacity that we're building.

Q: How are you thinking about having two competitive launches coming in 2020? How are you thinking about a potential pause within the market ahead of those launches and what's factored into your guidance from a competitive perspective? Do you see the same dynamic coming ahead of the competitive launches and impacting your ability to add new patients?

Ms. Vosseller: Yes. That's one of the areas where we think about our guidance philosophy. We are thoughtful about what could come later in the year that we don't have control over. As of today, we have much more visibility as to what's happening here in the first and even leading into the second quarter. However, the back half is always the most difficult part to predict particularly when we have just the seasonality curve which pushes so much at the back half. That's one thing that we're being thoughtful about, and we'll keep our eyes on them and continue to update you each quarter as we learn more about those factors and the impact it may or may not have on us.

Q: I'm curious about where you are both from an internal perspective as well as the competitive perspective about the capture rate for the renewal stream. It feels like your guidance probably assumes some acceleration of that capture rate. Is this true? Can you also give color around where you are or where you expect to be exiting 2020?

Ms. Vosseller: Yes. We're very excited about the progress that we've made in renewal so far, and we have a dedicated effort within the company as you can imagine. That's the focus just on that opportunity whether it's from the very beginning when a patient gets a pump, the retention effort, or all the way through to the very end to get them to renewed by their next pump. So far, we have continued to scale up and accelerate the number of people that are converting. I think what's exciting to me is when we look at our internal figures and when we look year-by-year the number of people whose warrants expired in 2016 and 2017 versus 2017. We're stil today seeing increases in people renewing from those subsets. That continues to move the needle. This is for improving the renewal rate on the warranties that have already expired and the factors that are really going to try drive the renewal business going forward.

Q: I wanted to start a little bit on the pump side of things. I think you talked about folks that were new to pumping, and by our math, it looks like about 25% of your pumpers in 2018 were new to pumping. In 2019, it was closer to 33% by our math. Can you share a bit about the dyamics that are going on there as far as what you're seeing in terms of capturing market share of people coming in that maybe would have gone elsehwere?

Ms. Vosseller: Sure. I think I'll start by saying if you first back out the number of patients that were renewal shipments in those years, the difference is about 50/50 for people coming to the new pump therapies versus people from competitor pumps. That's been very consistent since the beginning of our history. I think that was one of the most surprising and best elements of 2019. We saw strength everywhere, and even the MDI population coming to pump therapy was increasing. We saw similar increases in the competitor conversions to Tandem. We're excited about that dynamic and we think with the strength of Control-IQ we have the same opportunity to do that in 2020.

Q: Shifting over the international business, the number of pumpers this upcoming year is roughly flat. I know there's a deferral going on as people are waiting for Control-IQ, but can you just talk about some of the dynamics there you know keeping pumpers interested in Tandem? I'm a little surprised that growth trajectory there wouldn't be a little bit better from a number of pumpers perspective given that you're doing a pretty big sales force expansion especially in Germany.

Ms. Vosseller: Sure. One of the important things we have known about 2019 was that that a big piece of our business came from that conversion opportunity. You can look at the first half of the year as almost all Animas converters and that second half of year in the new market type. There was a little bit of the other going on in both parties, but I like to draw a line there and say look really more at the average of what happened in Q3 and Q4. Those were all new and what I will call new market activities which are the baseline for our existing geographies. That is what will be coming later on from Germany, France and the Benelux countries. Keep in mind those might have a slower uptake even though they’re very large geographies because when starting off at new market, we have to go and help physicians become familiar with us and with our products. It's a difficult comparison to just look at 2019 as a base, and you really have to bifurcate between the halves of the year.

Q: I just wanted to follow up on some of the comments that you made on Q1 especially with regards to the bottleneck that you saw with customers inquiring about Control-IQ. Did you see actual sales disruption, or was it just people looking for feedback? Did you also have a comment in the prepared comments about the pause lifting with the initial sales that you’d seen so far in Q1? Do you have any color we could get on the dynamics of the uptake so far in the quarter?

Mr. Sheridan: Sure. Let me start by saying the majority of the people who have a pump in the United States have updateable pumps. That number is in excess of 90,000 once we made the announcement that Control-IQ was available in mid-January. We were just overwhelmed by people looking for information on how to update their pumps. We had 10,000-plus calls just how do I update, how do I get my prescription in, and how do I work with the portal? We were so overwhelmed by that since it was a surpsie, but we have since gotten past it. As I said, we have really been focused on scalability. I think we have scaled the organization to a point where we were able to deal with it and have gotten it under control now. I don't think it's had any effect on our ability to ship new pumps. This was entirely about people updating in the marketplace that already had updateable pumps. We're very enthusiastic. Al you have to do really is just look on social media and you'll see that people are really excited about the device. People who are using it today described it as life changing and it’s been a real excitement for all of us to participate in.

Q: Just to follow-up on your clinical development, you mentioned some things that you're doing to stay the clinical leader. How can you enhance the core Control-IQ system to make sure that that algorithm and system kind of stays one step ahead of some of these other competitors who are going to come online with comparable sensors and reasonable algorithms?

Mr. Sheridan: That's a good question as well. As you also saw, we just recently completed our pivotal for the team’s groups, and the results were great. We are consistent with the data we saw from the adults. We expect to get approval for the six-plus age category here shortly which is all great news. We have been talking to the FDA and have been looking carefully about a number of changes that we're interested in making to the device. These changes would improve the clinical outcomes of the device as well as improve personalization and ease of use. So there’s a number of things that we have in mind. We're trying to understand what is the risk profile of these changes and how much clinical work will be required to support them. Right now, we're not going to release any information as to when specifically we expect to see these changes, but I will say that I think the next meaningful update for Control-IQ will be in 2021.

Q: I'm not sure how much this question will latch with your last answer, but can you talk a little bit more about the functionality with the new mobile application with t:slim? You mentioned bolus will be the key opportunity for patients later this year. Do you anticipate that functionality to continue to build as we look out beyond that and into 2021?

Mr. Sheridan: Absolutely. Right now, we’re in the midst of just the final testing of the mobile app. It's a connected device that means it's connected to all of our systems. It's a lot different than just the pump. That's tethered to a computer for t:connect updates. It's really important that we're sure that this device is going to work properly and provide a great experience, so we plan to roll it out here next month. This device will provide a secondary display, and the people who are currently using it today have siad that once they got the mobile device ,they never looked at their pumps again which is huge. It's also going to really help the HCPs because it will have real-time uploads to t:connect. They'll no longer have to update their pumps when people come to their offices which is a meaningful distraction for them in their practices. We're excited to talk about the remote bolus feature. If you talk to people who are using our mobile app today, the number one feature that people desire is the ability to bolus from a phone. It's the one thing that you really do when you're out and about that's public. I think being able to do that for a phone really improves the discretion and reduces the burden of diabetes on the people who are using our systems. We think it's going to be a great addition to our portfolio of products and capabilities with the systems. We're very excited about it. As I said, we're looking at some time the second half of this year to roll it out. This is basically one step in our overall strategy to have full control because when we come forward with the t:sport, it will have a mobile app that has full control over all the features.

Q: Given the cash position and the free cash flow generation in addition to the look of deploying that cash, you talked about making some investments on the customer service side. Would you be looking to accelerate the sales force as this year, or how are you looking at the footprint overall?

Ms. Vosseller: We'll continue to closely evaluate what we think we need in order to drive the top line. We actually increased the size of our sales force from about 70 territories middle of the year to about 90 territories today. At this point, we feel very comfortable with that number, but we'll always look at that across the year. If we think we need to add, then we definitely would use our resources to do that.

Q: I want to follow-up on the mobile app there. Is that going to be on an iOS or an Android? Is it your personal phone and not a separate controller? More importantly, if the FDA will allow mobile bolus seen from your own phone and a pump tends has auto basal, what would it have concerns about t:sport getting pushed for phone control to next year? What are other functionality issues that the FDA might be looking at with Tandem or all the other pump companies if they'll already allow mobile bolus this soon?

Mr. Sheridan: Just to answer your first question, we do plan to have capability on unrestricted iOS and Android phones. We'll be moving forward in that direction., and I think that the way we look at it is a stepwise process. I think that mobile bolus is probably the most complex issue that we want to address, so we think dealing with it right away is the correct approach. When you look at t:sport, we had originally planned to submit it with the remote controller this summer. We would then submit a separate filing just for the mobile app, but in the conversations that we had with the FDA, we've changed that. For now, it will be the pump plus the mobile app following. It's just a matter of following the direction from the FDA. That's basically the way our development pathway and pipeline has also been defined.

Q: I'd just like to confirm on the guidance question with respect to competition. You've said a couple of times now you're very thoughtful on how you think about competition embedded within guidance, and I think that makes total sense. However, does that mean you've assumed those competitors are coming and that you've built in a little bit of cushion in the back half of the year? I think you also made a comment about things about not embedding things in guidance you cannot control. Does that mean you have not assumed any kind of change in market dynamics in the back half in your guidance? 

Ms. Vosseller: Sure, you're right. When it comes to competitors and the potential coming to market, just the discussion around the product coming can put pressure. We have factored in some level of pressure associated with that possibility.

Q: In terms of product enhancements to Control-IQ, I appreciate the detail on phone control. Where are you with the ability to share pump data with so-called followers?

Mr. Sheridan: It's something that we have in the works but not something we've actually given specific times on yet. However, it's definitely something we're interested in doing.

Q: Do you have any update or progress on your partnership with Abbott?

Mr. Sheridan: We are still working with Abbott on the agreement. It’s just working through the details of the agreement right now. It’s a good team, and we have confidence that we're going to get this thing taken care of in the near future.

Q: In terms of the launch in France, do you have reimbursement there? Is that something that will kind of delay revenue recognition in France?

Ms. Vosseller: There is reimbursement for pump there. We will try to launch in France and Germany during the first half of the year and then the other Benelux countries.

--by Albert Cai and Kelly Close