Q2 2019 Earnings Call
Good day, ladies and gentlemen, and thank you for your patience welcome to Tandem's second quarter 2019 earnings call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.
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As a reminder, this conference maybe recorded.
I would now like to turn the call over to your host SVP and Chief administrative officer, Susan Morrison you may begin.
Thank you <unk> good afternoon, everyone and thanks for joining Hana second quarter 2019 earnings call.
Today's discussion will include forward looking statements.
These statements reflect management's expectations about future events product development timelines and financial performance and operating plans and speak only as of today's date.
There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward looking statements.
A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward looking statements is highlighted in our press release issued earlier today and under the risk factors portion and elsewhere in our most recent annual report on Form 10-K quarterly report on Form 10-Q , and our other SEC filings.
We assume no obligation to publicly update any forward looking statements, whether as a result of new information future events or other factors.
In addition, today's discussion will include references to adjusted EBITDA, which is a non-GAAP financial measure adjusted EBITDA is a key measure used by us to evaluate operating performance generate future operating plans and make strategic decisions for the allocation of capital.
Please refer to the Investor Center of our website for further information.
Today's call participants include Kim Blickenstaff, our executive Chairman.
John shared in our President and CEO , Brian Hanson, our EVP and Chief commercial officer, and leave Ostler, our EVP and Chief Financial Officer.
Following our prepared remarks, we'll open up the call for questions.
Thanks, everyone in advance for limiting yourself to two questions getting back into the queue with that I will turn the call over to Kim.
Thanks, Susan and welcome everyone to today's call Q2 was another quarter of record highs and milestone achievements. It's the result of our entire organization, maintaining focus and executing at extremely high level.
We have seen strong positive momentum, which positions us for an exciting back half of this year and beyond.
In addition to preparing for continued growth. Our team has also been focusing on our longer term strategic planning.
We've made great progress in advancing diabetes technology and are positioned to continue addressing the primary challenges of our industry that still remain. These include the burden of managing diabetes, which has improved with offerings like our bayes like Q technology, but continues to be significant for people with diabetes.
Healthcare providers are struggling to keep up with patient volumes and care demands and risk bearing entities such as the payers are focused on transitioning care to a least cost setting.
As a result patient care is evolving and we have tandem wearable.
Overall, we are working to provide tools to aid in therapy management with a singular focus on diabetes and are beginning to deliver systems that are designed to be simple to use and improve patient outcomes.
Pump innovation and leadership remain fundamental to our success and providing the world's best insulin delivery system. The number one customer support will remain our goals along with our commitment to continuous innovation.
We also recognize the value of enabling an ecosystem of best in class partners around our devices and Dexcom CGM is a great example of this in addition, we believe the thoughtful expansion of our data capture and analysis platforms will drive further insights and solutions for all of our customers, which includes patients providers and payers.
Overall, we are working to deepen our customer engagements and our focus is to deliver solutions not just technology.
We held our analyst day, nearly a year ago, we shared some of this vision for our company. We also discussed that in addition to our strong short term momentum. We also have a solid long term growth trajectory.
Today's results are evidence that we are delivering on the short term momentum ahead of our prior expectations. In fact, the three to five year targets, we laid out incredibly look more like the should've been two to three year targets with this performance and following our strategic planning efforts I believe we are the strongest position in our company's history to achieve meaningful longer term growth.
We remain committed to continuing to execute at a high level in achieving the goals that we set for our company in support of the diabetes community with that I'll now turn it over to John .
Thanks Kim.
As we have been working on our longer term strategy something ive been particularly proud of the team's unwavering dedication to our mission to improve the lives of people with diabetes relentless innovation and regular revolutionary customer experience.
Is this focus that is driving our successful execution. Today, we are very proud of nearly 100000 people now use a tandem insulin bump in the night in the United States. In addition, we've launched in 12, new countries in the past year and we've now shipped nearly 18000 pumps outside the United States. Our results in the second quarter that contributed to these numbers are particularly impressive our domestic shipments were in line with what Weve achieved in our seasonally high fourth quarter last year, and we've already shipped more pumps worldwide in the first half of 2019 compared to all four quarters of last year combined.
We are also beginning to see greater evidence that we are making progress in our longer term goal to bring the benefits of pump therapy more people with diabetes.
Historically, we estimated about 30% of the 1.6 million people with type one in the United States using insulin pump and that between 25 to 30000 people convert each year from using multiple daily injections.
Even with the strength we saw this quarter, we continue to have about half our new customers report converting from MD.
This trend combined with other pump manufacturer results and third party data suggest that the number of people adopting pump therapy for the first time could be doubled what it has been in the past.
We felt like there is a building momentum shift in the insulin pump market over the last 18 months and we are now beginning to see the data to support it to US this demonstrates that technology combined with ease of use drives adoption.
We've scaled very quickly to meet the growing demands of the TCIL next to pump. This took tremendous cross functional effort throughout the organization and we are working to ensure organizational readiness for the our continued growth.
There are a few parts of the organization in particular, where I'd like to highlight some of the recent scalability efforts, which include activities with our field sales and clinical team our insurance verification and sales support teams as well as our customer technical service group and manufacturing.
Starting with our sales and clinical few organizations, we've had about 72 territories since 2016.
During this time, we've opportunistically added sales reps and additional clinical educators based on demand.
Following the positive momentum of our Bayes like Q launch, we recognize the need for a modest expansion and have begun hiring in select regions by the end of 2019, we anticipate being closer to 80 territories.
Our internal sales support and customer support teams have also needed to increase to support our growing installed base. As a reminder, we directly support our us and Canadian customers, while our international district distribution partner support our customers in other countries.
The ease of use of our technology has been a big factor in allowing us to manage growth in these organizations and we've also been investing in solutions that allow us to grow our sales faster than the support resources that being said, we have invested and will continue to invest in these groups as part of our mission to deliver revolutionary customer service.
In support of this effort, we have decided to start building up a parallel facility in Boise, Idaho that will be dedicated to supporting many of the positions that scale with our customer base, such as customer technical support and insurance verification. These departments will continue to operate as part of our headquarters in San Diego as well that rather than continuing to expand locally we will be focusing on hiring efforts in new positions in these groups in Boise.
We've established an amazing culture here at tandem that we're looking to continue in our Boise site and are thrilled that a number of our existing employees have already voiced interest in moving to Boise to help lead this effort.
In addition to our customer facing roles. We've also been concentrating on scalability of our operational groups manufacturing has been a primary focus I was pleased that we were able to catch up on our previously unfilled international demand this quarter.
As we have shared previously we order three additional T. Slim cartridge lines earlier this year and made improvements in the automation to increase capacity. In addition, we have ordered our first t. sport cartridge manufacturing line in preparation for launch later next year.
For the long term, we continue to carefully weigh the choice of expanding our manufacturing operations further or outsourcing certain aspects to experience third parties.
I believe our scalability efforts across the organization are particularly important this year as worldwide demand for our T. Slim X two is continuing to increase as we expanded internationally and plan for new product launches.
Of course, the next new pump a team is preparing to launch is the TCIL next do with control acute technology, it's especially exciting as we believe when we launched this system. It will be the most advanced automation insulin offering in the world.
As a reminder, this system utilizes the T Slim X to pump Imbeds, our implementation of the algorithm technology. We licensed from type zero and uses glucose values index calm G Ssix CGM sensor.
In addition to adjusting basal insulin to minimize hyper and hypoglycemia and improving our users time spent within the target to got glycemic range. It's also designed to automate correction boluses.
As we previously shared pivotal data from the TCIL next two with control of Q was presented at the June American Diabetes Association scientific sessions.
It was a fitting conference as the data was generated in the NIH funded the CLP three arm of the ITCL trial and was at two scientific study that compared the performance of our system to a control group something thats not been done by our competitors in the past.
It's been described as the most comprehensive study in diabetes technology in years, when you consider the size randomization with a control arm nimble exclusion criteria, 20% MDR participation and duration.
The results were very positive our primary and secondary outcomes were met with statistical significance.
Timing range was 71%, representing an 11 percentage point improvement from the control group.
The participants had a wide range of agencies and each group improved significantly the system remained in closed loop mode, 92% of the entire six month period and the quality of life metrics works the outstanding all at 4.5 or greater on a scale of one to five.
And scientific studies, the nuance of data actually becomes very important. It's why study results can't be compared directly, particularly between scientific studies and marketing studies.
An element of the study that is indisputable, though and continues to amaze me along with our investigators and other key opinion leaders is that a 100% of the 168 participants remained in the study for the full six month month duration.
With this combined with the overwhelmingly positive anecdotal feedback it's not surprising that the vast majority of study participants at opted to continue to use a country like you system through the extension Phase study.
We received the full dataset in July and it has now been submitted to the FDA for review as a reminder, the regulatory submission is focused on the algorithm or ultimate controller as a T. Slim next two was approved as the industry's first alternate controller enabled insulin pump earlier this year.
Based on this timing we continue to prepare for commercial launch of the Houston next to with control like you in the fourth quarter pending FDA approval, we anticipate that our initial launch will be for people of age 14 in older based on the age group of of the participants in the DLP three study.
As a reminder, we are funding a separate trial the DCF LTE five study to lower control accuse aging indication to age six and above.
Enrollment for this study is underway and approximately half of the anticipated 100 participants have now been enrolled.
Based on this timing we plan to file a regulatory submission to the FDA to lower control like use age indication after the new year strategically what's most important is receiving pediatric approval in advance of the kids summer camp season, which is a significant educational and marketing opportunity.
As we have discussed previously controlled like he was designed to be offered to our T. Slim XT customers as a software update.
We are uniquely positioned to offer this capability today through our tandem device updater and have historically provided software updates, including integration with Dexcom Gfive sensor and our Bayes like you algorithm for no additional cost.
Whether or not we will charge for Detroit, who has been a broad topic of discussion within tandem. We believe there's great value to our control acute algorithm, but have also given great thought to our commitment to help simplify diabetes management and improve the lives of people with diabetes.
As a result, we have decided that all new software or feature updates for the T. Slim next to pump approved by the FDA before the end of 2020 will be available to our in warranty UES customers as a no cost download.
This offer will be available to our customers who purchased the TCIL next to pump before the end of 2020.
Additional details are available in a separate press release issued today.
Because our international launch plans varied by country, our pricing outside the United States is still under evaluation.
As you can see tandem is firing on all cylinders and our momentum is strong as we enter the back half of this year.
If you talk to our employees there is a bunch of excitement about what we are delivering today, but even more about whats to come as our opportunity to improve hundreds of thousands of more lives is tremendous to all of our employees. Thank you.
You are driving Tandems incredible success, which is reflected in our twoq results.
To help provide some additional color on our positive momentum I've asked Brian Hanson to join US today to provide his perspective directly many of you have met Brian for anyone who is not Brian has successfully led our commercial organization since 2016.
Under his leadership, our commercial team banded together during challenging times maintained our core values and is now propelling this tremendous growth. While we are preparing for the future in the past year. Brian has also been fundamental and leading our expansion outside of the United States I'd now like to turn the call over to Brian to share his perspective on what we are experiencing worldwide.
Thanks, John one incredible time to be part of tandem say things are busy is an understatement, but the positive feedback we continue to receive from patients is quite motivational.
Working to understand the perspective of our customers our health care providers and the broader diabetes community is and always has been a pillar of our company.
Market research and behavioral sciences, or central and our decision, making processes and recently more than 10000 tandem customers responded to our survey focused on satisfaction.
Additionally, we recently received new insulin pump survey data for DQ in a in independent research group.
The results between the two surveys were remarkably consistent and highlighted that our customers are very satisfied with the T. Slim X to in fact, our survey showed the highest satisfaction scores in the company's history and DQ and his data showed that tandems customers are the most satisfied amongst the pump manufacturers.
We also ranked as having the highest satisfaction for our patient support services among pump manufacturers.
We received positive ratings and our own survey as well with our growing customer base as John discussed its an area. We are continue invest in as a service. We offer is just as important as the insulin pumps we sell.
And finally post survey showed that we have a world class net promoter score and DQSA highlighted the tandems is the highest among pump manufacturers.
For anyone not familiar with net promoter scores, it's a customer satisfaction benchmark that measures how likely are customers are to recommend you to a friend is intended to measure a customer's overall sentiment about our brand versus their perception of a singular interaction or purchase.
MPS is becoming an increasingly popular measure, particularly with payers and tandems excellent NPS scores are helpful. In our ongoing discussions with these important business partners.
In addition to survey data, we continue to hear positive anecdotal feedback about the ease of use of the tandem.
T Slim X to our tandem device updater, and our Bazell Q technology.
These factors combined with our service is what I believe is driving the growth and penetration of the insulin pump market and is what is positioning tandem as a leader in both.
Faisal like you in particular is benefiting us in three ways with health care providers that we did not experience historically.
First having an automated insulin delivery feature is opening doors for us in offices, who previously did not prescribed tandem pumps.
Second as individuals go back for a follow up appointments with their health care providers, it's common to see improved outcomes as well as a higher level of patient engagement.
Third phase like you is demonstrating the health care providers that innovations like automated insulin delivery does not have to be a burden on their office.
Faisal Ike use ease of training is a factor we regularly receive positive feedback on and we believe it is contributing to its rapid adoption.
As we look at the profile of our new customers as John mentioned, we are thrilled to see that about half report being new to pump therapy.
Of the conversions people switching from Medtronic makeup the greatest percentage followed by those coming from animates.
Our T Slim X two offering has been highly attractive to animus customers since their announcement to exit the market almost two years ago.
We don't have good visibility to how many of them as customers remain but we believe the vast vast majority of animus customers have already selected a new insulin pump.
As a reminder, animus has stated that supplies and support for their pumps will no longer be available after September thirtyth of this year.
That being said since people typically purchase pump supplies every 90 days, we anticipate that we will continue to see animates conversions in the United States throughout the second half of this year and to some extent in the first part of next year.
Beyond that we may see former animus customers, who are not yet eligible for insurance reimbursement and therefore opted to take a medtronic pump at no cost, but plan to move to a tandem pump following their warranty expiration date.
Outside the United States, our international sales efforts, we're jump started by NSS exit from the pump business and the majority of our OEM sales. This year can be attributed to animates conversions.
Converting animus customers has been the priority for our distribution partners, but we are seeing solid organic demand and now that this can be their primary focus we are excited for its potential.
In addition to marketing the features and benefits T. Slim X. Two offers today, we're also broadly launching bazell Q and our tandem device updater outside the United States in the second half of this year.
In fact, I'm happy to share that in June we officially launched basal III Q in our first couple of countries.
The timing for availability in different countries varies by geography, and as a decision we make in consultation with our distribution partners and also depends on different regulatory and reimbursement requirements.
Having bazell like you to market internationally will be a growth driver as we look to 2020.
In addition, we are working on entering select countries with developed insulin pump therapy markets, where we did not launching our first phase of expansion, but now have identified partners that we expect and also contribute to our growth outside the United States.
Domestically, we believe basal III Q will continue to drive our growth in the upcoming months. In addition to our increasing number of customers who are eligible under their insurance plans to be reimbursed for a tandem insulin pump once again and of course, our upcoming control I Q launch.
The no cost software update offering that John described for T. Slim X to customers is likely to even out pent up demand that we may have experienced otherwise in advance of our control like you launch if we did not have the tandem device updater.
Since control like you is not approved we have not yet commenced any marketing efforts, but there's an excitement building for this product and we're very excited to deliver.
With that I'll now turn the call over to Lee.
Thank you, Brian and good afternoon, everyone.
Q2 exceeded all expectations, marking the seventh straight quarter at a greater than 55% year over year sales growth and the fourth straight quarter greater than 70%.
As you saw in today's press release, we have increased our worldwide sales guidance again to a range of 350 million to 365.
Which includes an increase in our international sales guidance range to 55 million to 16.
We shipped 21300 worldwide, which is a nearly 300% year over year increase resulting in 93 million in sales.
Our international expansion played a key role in this remarkable achievement as well as benefit from the same domestic growth drivers. We have seen since late 2017, which include renewable.
New product sales from India users and competitor conversion.
As John and Brian discussed the U.S. market appears to be growing at an unprecedented pace.
Are you at our US sales alone were $70 million in the second quarter of which pump sales comprised 69%.
This was driven primarily by 12800 pump shipments, which were 135% higher than the second quarter of last year.
This also represents a 32% increase sequentially.
By comparison, our second quarter sequential increase and 2017 and 2018 averaged only 22%.
We estimate that our domestic and warranty and install base now exceeds 96000 based on the cumulative number of pumps shipped in the last four years.
Yes, perhaps it makes once again reflected the doubling of renewals year over year to approximately 1600, which include sales from warranties expiring as far back as 2016.
We continue to be pleased with our progress related to customer retention and renewal.
Looking forward renewals will continue to be a strong growth driver as the opportunities from warranty expirations continue to accelerate and we launch new innovation.
As we think about our progress for the year to date, we continue to see equal strength from all of the growth driver.
Outside of the renewal population MD I conversions remain strong while competitor conversions have kept pace.
And with his contribution continues to make up nearly 18% of our non renewal shipments and we believe there is a high likelihood that this will continue through the end of the year as the remaining animal population works through their transition.
As a result of our progress in the first half of the year and with what we saw in July we are increasing our domestic sales expectations to a range of 295 million to 305 million.
From our first quarter range of 255 million to 265 million.
We continue to anticipate typical domestic seasonality across the third and fourth quarters due to insurance deductible dynamic.
Outside the U.S., our sales in the second quarter were $23 million, which pump sales comprised 74%. We shipped 8500 pumps to 13500 pumps on a year to date basis and nearly 18000 since inception.
The first half of 2019 Bennett benefited by approximately 7 million from the fulfillment of the remaining 2018 commitment.
As a reminder, we were unable to fulfill all of the international pump demand in 2018, you just apply our constraints for a particular component parts. The by the end of the second quarter, we fully resolve the situation.
We are increasing our international sales guidance for 2019 to a range of 55 million to 60 million based on our expectation for continued market penetration in existing geographies.
With the rapid uptake in the worldwide installed base, which we estimate to be approximately 114000 customers based on who purchased a pump in the last four years, our supply sales grew 113% year over year.
Consistent with the first quarter infusions that sales were 20% of total sales followed by cartridge sales at 10%.
With increasing sales and higher manufacturing volumes gross margin continues to be favorably impacted our gross margin was 54% in the second quarter compared to 44% in the second quarter of 2018.
This improvement is the result of a combination of factors.
Product sales mix heavily weighted to pump.
Our reduction in overhead rate per unit and continuous benefit from process efficiencies.
Tom said, the highest gross margin profile, and therefore, where the greatest contributor to our gross margin expansion.
Gross margin also increased sequentially from 51% in the first quarter, we anticipate that our gross margin will continue to progress through this year based on typical pump sales seasonality in the U.S. and growth in manufacturing volumes.
With the higher sales expectations for 2019, we significantly ramped up production to increase inventory level.
Through various process improvements in cartridge manufacturing, we have increased our outlook on existing equipment from a run rate of 12 million units annually to 14 million units.
The three new cartridge manufacturing lines, we ordered earlier this year, we'll also add capacity for 59 additional units on an annual basis.
We are increasing our gross margin expectation for the full year to approximately 54% keeping in mind that we may experience pressure from other factors such as geographical mix and variability in noncash stock based compensation.
The gross margin, we continue to demonstrate leverage in operating expenses by achieving adjusted EBITDA of 13%, which excludes the impact of non cash stock based compensation.
This was our third quarter in a row of positive adjusted EBITDA.
We continue to make investments to thoughtfully scale the business for the record setting sales growth, we are experiencing including additional customer support personnel for the installed base execution of R&D objectives and facilities expansion.
Our 173% sales growth year over year far outpaced the increase in operating expenses.
Operating expenses were 52 million in the quarter, including $11 million and noncash stock based compensation, which compared to operating expenses of $29 million in the prior year, including only $3 million stock compensation.
Our total cash and investments balance increased to 131 million at the end of the second quarter from 126 line at the end of Q1 and 129 million at the end of the year.
This included 8 million year to date, and our capital investments for the beginning of both facilities and manufacturing capacity expansion, which is a substantial increase every cent only 3 million in all of 2018.
These investments were more than offset by 11 million generated from employee stock benefit plans.
We now anticipate being cash flow positive on a full year basis, Despite an estimate of capital expenditures, reaching 20 million.
To summarize our 2019 outlook our financial guidance is for worldwide sales in a range of 350 million to $365 million, including international sales of 55 million to $60 million.
We expect gross margin for the year to average, 54% and we expect adjusted EBITDA in the range of 5% to 10%.
Our non cash charges for stock compensation depreciation and amortization are expected to be approximately 60 million include as components of both cost of sales and operating expense.
Looking beyond 2019, our longer term goal is primarily relate to product adoption driven by our portfolio of innovative products managed care and profitability.
The five year goal, we laid out at our analyst day to reach a worldwide installed base of 225000 seem very ambitious less than one year ago.
As Tim mentioned earlier this has now accelerated our expectation to reach that install base milestone earlier than estimated primarily because of the stronger than anticipated demand for basal like Q.
We're going to wait to see the remainder of the year, especially with the upcoming launch of control like you to provide an updated longer term installed base goal.
Driving managed care acceptance is another longer term topline initiatives for the first time, we are able to engage in clinical discussions with insurance payers, which is instrumental in driving our managed care strategy.
Accordingly, your priority for our organization is to transition more business to the direct channel from approximately 25% of our business today to 50% over the longer term.
Additionally, we would like to explore partnerships with payers through value based arrangements, where we can both share and the positive outcome that the use of our system can drive, particularly based on the benefits, we expect to see from control IPO.
In addition to driving the topline in achieving above industry sales growth. We continue to focus on profitability. We have made significant gross margin progress for the past few years through capacity utilization by implementing efficiencies are into products and the linearity reducing material costs.
Improving product reliability and watching our keylock infusion set.
We believe long term success will be defined by achieving a gross margin of at least 60% and that this may be accomplished through further capacity utilization and the potential incorporation of contract manufacturing by driving managed care initiatives and also focusing on cost reduction and future product generation such as T sport.
By combining these gross margin improvements with the investments we are making today in our other scalability initiatives. John described we remain confident in achieving our long term operating margin objective of at least 25%.
With that I will turn it over to the operator for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered I'd like to leave yourself from the queue. Please press the pound key and our first question comes from the line of Joanne, which from BMO capital. Your question. Please.
Thank you very much for taking my question and nice quarter would really be an understatement.
Two questions really control acute.
EMEA created a little bit of confusion at least among some investors that we spoke with can you give us a little bit of the physician feedback that you've been hearing after the meeting.
Sure Hi, Joanne.
First of all I just want to say that we are very pleased with the results.
Yes, there is definitely a divergence of opinion between.
Okay wells in academics and what we described as our initial expectations, but I think it's really important to us to say that you can't really compare results of different trials. That's something that's really important I would say that the cave wells and academics are extremely pleased with the data and they have said that to us over and over again I mean, we met the primary and secondary outcomes.
The improvement was immediate and it was maintained for the entire six months. We had 92 present time in closed loop on the quality of life metrics for over the top and I would say that.
The most important element of that study was the fact that when you look at the stratification of timing range versus a one season. There was a very wide range of agencies from five and a half a turn and a half and every group improved that was a really really big deal and so.
I think that we're extremely satisfied and excited and I think this is going to be a great product as soon as it comes to market.
Thank you and my follow up is as you think about bringing that product to market you'd commented earlier, they haven't really begun the long term marketing plan, what does it take to to launch it and.
Not just in terms of mechanics of getting the brochure put together, but also on the expense side. Thank you.
I think that we are absolutely working in a large cross functional team to make sure that we're preparing ourselves for the long side I think what Brian was referring to is we can't we can't say this publicly we can't really talk about what we're doing but we're definitely working to make this happen.
I think that other than the obvious other than like you suggested the.
Manuals and things like that the one thing that we're preparing to do this a little bit different as we are working to aggressively train the healthcare providers in the few weeks that followed the release, we believe that this is.
There are differences in the.
Control I Q system that require us to provide training that are important and so we plan to do that in the two to three weeks that follow the release and I think that's that's the one big deal probably that's been different from what we've done in the past.
And Joe and to your question on the expenses, we don't anticipate any outsized expenses in the quarter associated with the launch.
Thank you.
Thank you. Our next question comes from the line of Alex Nowak from Craig Hallum Capital. Your question. Please.
Good afternoon, everyone and congrats on the results John just going back to what you said on and the you know the number of MDR users switching the pumps and certainly accelerated here in the last 18 months, how should we expect this trend to more for over the next two to three years, because obviously, there's a lot of room still left to go 30% diabetics in using a pump but are you getting what we call the low hanging fruit and the users right now or is this acceleration across the board and a trend that should continue for the next couple of years.
Well I don't think we have the ability to characterize sort of the types of MD users that are coming but I will say that if you look at just look at the second quarter data.
There was approximately 12.3 to 12.3 thousand 4000.
Domestic pump sales and you take out the renewals and that gets us down to about.
5500.
MDR users and so you basically just annualize that and face take into account seasonality no thats that by itself is up in the 20 to 25000 units per year, which is typically what happens annually for the whole industry. So you also have to take into account, our medtronic and you've got to take into account insulet others. So it really seems like theres acceleration interest that we are successfully improving market penetration and I believe this technology I think is the technology and ease of use is driving adoption.
Okay understood and then just any update with your conversations with United Health Group, particularly after the conference.
So thanks, Alex I would put unitedhealthcare in the bucket with all the major Payors. It's been really great to have these like you data and now with some real world data to support it and now with the control like you data. We can continue in these very engaging conversations which I think are going to be helpful. In the long term as we try to achieve our managed care objective. So things are progressing well with all the players.
Okay understood. Thank you.
Thank you. Our next question comes from the line of Brooks Oneil from Lake Street Capital. Your question. Please.
Good afternoon, congratulations on everything they do.
So we're actually revenue.
It's Rob me I'm curious if there's any significant difference between.
Faisal line queue in control.
Well I would preclude.
Somebody who want to be in control.
Algorithm.
For buying.
Faisal like Q right now and just getting the software update when it's approved by the FDA.
Well.
I think that the right now the way we plan to do this is there going to be pumps in the marketplace that have basically like Q on them when.
When control I Q is available they will be able to upload their pumps with control like you at for no charge.
As long as the palms in warranty.
And it was purchased before 2020. So that's that's what our plan is and I think that this is important we think this is going to.
It's going to drive.
Uptake of the device.
We're very sensitive to people, who have diabetes and we think it's a very important decision and this was the right decision for us.
I think it's a great decision that.
Maybe.
I have just one other question for Lee, it's a little bit technical and you probably know I'm not an accountant Philip I get in over my head I apologize in advance but.
I saw I think you commented that there was <unk> point 4 million of expense related to.
The award.
And I was curious what the total amount of.
Non cash warrant.
Expense.
You anticipate for the full year. So we can make sure we have our models correct.
I'm sure and Brooks, you're correct. It was 4.4 million in the second quarter and 13 million in the first quarter. It's a very difficult thing to model because it solely relies on the stock price movements at the end of each quarter, we revalue those warrants.
So again difficult to estimate our forecast we have about 400000 of them left it was obvious that people continue to exercise and it will it will reduce the exposure in the future.
Sure that's great. Thank you very much and again congratulations.
Thank you.
Thank you. Our next question comes from the line of JP Mckim from Piper Jaffray. Your question. Please.
Hi, good afternoon, congratulations on the quarter I wanted to ask one for Brian on the international side yet.
I'm trying to understand you talked about organic demand there and I mean, how do we parse out maybe in the numbers slip adamant with organic and then get to some of these.
New countries that you are kind of excited about.
Opening up as kind of new territories.
Hi, Thanks for the question. So that first phase one was going into well established territories that had the distribution partners that worked with animus and our primary focus there was getting those animus patients. They had converted over to the tandem pump we've been surprised in some of those markets and clearly in the 12 countries. They all vary a little bit, but we've been surprised with the demand on the organic side are those looking for a new pump. So either patients that are new to pump therapy or patients that have had their pump for.
For years and are ready to select the new one now that the animus patients are.
Rapidly getting to the end of that conversion period here at the end of September of this year.
Other efforts can go towards getting new ones on and again that demand has been very positive for us. So we think thats what fuels. The second half of this year and into 2020, and then as we look at some other markets, where there wasn't distribution partners for us too.
Select they were more directly tied countries those have well characterized pump markets, Germany is a good example, and those are areas for us where we are having final conversations hopefully getting partners in place and and drive some real good organic growth there and they'll probably be a few animus patients left over there, but they just didn't have a distribution partner for us to jump on so.
It's been surprisingly strong surprisingly positive were really pretty strongly in grain now in international marketplace and all the meetings and what have you. So we think it will continue to be very good for us Jvs I would just add that Brian mentioned in the script that we have begun to release space why Q and our other use.
Countries, and we think thats going to have to have a significant uptake a more competitive offering against.
Particularly medtronic.
That's helpful and then.
During the time when you talk about upgraded already do either paid or control like Q like where we're at you where are you in terms of your installed base being even on CGM like how many patients are on CGM and is there any is there any strategy or anything that you can partner with closer with Dexcom in terms of.
Co marketing or or have some sort of bundled offering to get everybody on CGM quicker.
I'm sure I'll start with the numbers.
Where we have where we are today is about 50% of our customers have days like you enabled on their pump and about 70% or a little more actually have updatable pump. So if they don't have these like you today people are able to access it whenever they're ready or controller Q when that comes about and I'll, let Brian talk about the dot com collaboration we have a great relationship with Dexcom and our counterparts. My counterparts, specifically on the commercial side, we were incredibly close together I think there's always opportunities to market with each other work we show in the field and find those.
Patients who aren't using CGM today in our algorithms are certainly helped driving that right now so.
I see a very positive.
Thank you.
Thank you. Our next question comes from the line of Travis Steed from Bank of America. Your question. Please.
Hi, congratulations on another great quarter.
I appreciate the comments on the animal business looking at the puts and takes on is clearly going to be some analysts next year, but a lot less than you had this year I'm coming up with roughly 20 to 25 million dollar headwind.
Also notable but are still so small compared to the overall growth you are seeing and it seemed like reasonable Matthew.
And so when it comes to the Animus business, it's really hard to understand how many people have actually made their decision. We think that we are nearing.
The bulk of that that we think there will be a tailwind to next year. So I know that I can really forecast what that amount will be but I will say that in terms of where our growth goes next year, we're going to be watching control like you at the end of this year and I think it's going to be a significant driver that will continue to fuel medtronic conversions as well as people coming from anti.
Okay and on doubling the direct business in the U.S.
Maybe comment a little bit on what what does it take to do that and and how should we think about the incremental margin or profit dollars for each patient this direct versus distributor and then one other comment on your share of Mds patients over the last few quarters.
So I'll start with the last one our India share has been about the same we still continue to get about 50% of our patients from the MD population and when I think about moving from that 25% to 50% direct it really just comes back to those conversations that we're having with payers today that the ability to have this clinical data to get into those offices is making a huge difference and just getting to the table and people have been very intrigued by the information that we're providing it's more than just a pump now it's really a therapy for their patients. So thats whats going to help us move the needle on that direct business and then in terms of margin. We haven't really discussed it but thats really that is important to get HRC at more than 60% long term gross margin.
Great. Thank you.
Thank you. Our next question comes from the line of Matt Blackman from Stifel. Your question. Please.
Good afternoon, everyone, maybe if I could start with John made maybe I missed this but any sense on the timing of the full publication of the control like you data Im just curious what additional metrics might we see in that data that we didn't see released at Ada.
Thats a good question and I.
I honestly can't answer it accurately I can say that the manuscripts have been submitted I don't even know the journalist they've been submitted to.
I would say that Theres theres several things I do know that will be included we'll see a lot more quality of life metrics. There was only three or four mentioned in the data that was presented by.
Sue Brown at the Ada I think a lot more quality of life metrics and I think there will be a significantly more detail on the nuance of each of the.
The factors that were measured during the study.
Different this categorization looking at different groups.
Just a lot more detail than that was presented there it was pretty general what was shown at 88.
All right. That's helpful. And then maybe just shifting to international I want to follow up and understand when you talk about the sort of organic opportunity that you're seeing when you say organic are you are you talking about taking from competitors. Other than animals are you define that is as MD conversion or some combination of both.
This is Brian yes, some combination of both for sure and.
There is other pump manufacturers outside the us as well and.
Theres opportunities to pick up some additional.
Pump share from those so but yes, I think those two are definitely the.
The two main areas of growth outside of the animus conversions and I would just add to that if you think about the international markets in the us where it's been stuck at a penetration rate of about 30% international markets provide an even bigger opportunity where it's been in the 10% to 20% range depending on the geography.
And any sense of what the international pump market has been growing if you compare that to me what the U.S. month market have been going over the last several years.
Okay greatly varies by geographies and some are much larger and better characterize some are really early on we've kind of got a hodgepodge of those if we look at the 12 countries we've entered.
And then I'm going to sneak one more in I assume the when you when you're going to target. These next round of companies.
Of countries that you'd be going after the the ones with the more defined already.
Establish market opportunity that is that correct.
Yes that would be correct.
But they also need to have.
The Dexcom sensors, yes.
Got it all right. Thank you so much appreciate it.
Thank you. Our next question comes from the line of Brian Luxor from Cowen Your question. Please.
Hi, good afternoon, thanks for taking my questions.
Starting with another couple animus funds I apologize if I missed this but first can you confirm whether or not animus represent a low twentys percentage of us new patient shipments similar to recent.
And then can you just talk do hedge accounting for NMS within guidance Wise international expected to decelerate. So much in the second half if you're launching bays like you and opening new countries and then within the U.S. are you assuming animus conversions declined materially in Q4 or stay stable throughout 2019.
I'm sure that there was a lot so I want to start with what I remember and you can help me if I missed some of it but I was coming from the U.S. side related to analysts and the way we're thinking about it is yes. It has been just under around 18% of our non renewal of shipments pretty much since they announced their exit and so we've been very happy with that uptake and I think that what we'll see there will continue to be at about that level through the end of the year and then I think we'll start to tail as we go into 2020, but I think you're still be opportunities because people might hold onto their pump stay with backup on supplies and so it doesn't just drop off like a cliff.
Then with the new products, we have coming in the next two years I think we can we'll overcome.
With that what that might look like as it as it goes away from the business.
When we look at the international side of it a little bit different story, there. So what we've seen so far really starting in the third quarter of last year.
Through the second quarter. This year this compression of all the analysts business that have been waiting for us to calm people knew we were on our way, but we're not ready to ship till the third quarter and then because the distributors were very motivated and they have the list they were able to convert those patients much more quickly. So we think it's pretty much behind us in the international market and one thing to think about when you look at first half over second half. It's very important to remember we did come out of 2018, and a backlog situation until about $7 million of sales in the first half of the year really pertain to on what we would have liked to have shipped in 2018. So when you put that in there.
And then you then you go forward it is a nice trend.
Got it very helpful.
And then a second one on gross margin you mentioned the ability to reach gross margin of 60% over the long term.
How should we think about long term is that something that can be achieved in two to three years that the great performance you put up to date relative to your prior targets or should we think about that is closer to maybe five years or beyond thank you.
It's more in the five year beyond the category. So we really do think about it in the longer term, but it's something that we're really focused on a number of the drivers would be the reimbursement opportunities as well as the introduction of sport into the market and then at the international business, depending on how much of it become as a percent of our overall business.
Does that answer your questions.
It does thank you very much like you. Our next question comes from the line of Jeff Johnson from Baird. Your question. Please.
Thank you good afternoon guys.
Lee maybe I just want to go back I hate to ask all these animals questions, but I just want to check one other thing on math.
You know my math anyway from the added information you gave this quarter and I appreciate that additional information or providing but it seems like animists pump numbers in the U.S. have been about 2000 pumps. The each of the last couple of quarters.
One can I just check if that's right, but more importantly, then I back into a medtronic or other competitive convert numbers that was almost 4000 pumps. This quarter in the U.S. last quarter I backed into about a 2000.
Number for that same kind of competitive ex animus convert. So my question really is are we seeing a big sequential increase in the competitive converge you feel like you're winning outside of the animus.
Bolus, because that's what it seems like in my numbers that seems like what were hearing in in our checks with docs, especially with Medtronic docs, but are you guys seeing truly seeing that in your numbers of that sequentially growth sequential growth of competitive converts away from other pump companies.
We absolutely are here you're correct.
Okay, and my numbers ballpark accurate.
Yes, so that 18% that we reference has been pretty consistent bounces up and down a little bit that pretty much since the fourth quarter at 17, when they first announced their exit we've seen about that level as a percent of our total on nonrenewal shipment.
And you've been making a lot of comments here you on the international and trying to make sure we understand that obviously the first half year, especially was more animosity it was.
Some.
From backlog and some other things that were helping that international number. So if the second half international is going to be let's say in line with your guidance 20 to 25 million in the second half should that be our jumping off point for than how we think about next year the quarterly pacing of revenue.
Or do we need to think about it even further step down there if some of that animus comes out there I mean, obviously you have some good guys for next year as well. So the 20 to 25 second half of this year can we build off that as we go forward into 2020 or how to think about that.
Yes, that's a perfect way to look at the run rate and we're really excited about getting days like you enter those markets. Because we have that will have a nice trajectory like we've seen in the U.S.
Thank you.
Thank you. Our next question comes from the line of Steven Lichtman from Oppenheimer. Your question. Please.
Thank you congratulations guys.
I guess, just first interesting to hear about some of the initiatives you're looking at relative to managed care with the data you have in hand.
Can you talk a little bit more about when we might hear more about that and do you think we will see some in places you launch control like you later this year.
It's always hard to predict when those will come into play I can say that we are having engaging conversations that payers tend to move very slowly some of them have their own cycles for when they will initiate new contract. Since then we'll just do it based on when they're ready and so I think we'll continue to see it over time and we look forward to giving you information athlete as we have more to share.
Okay, great. Thanks, Lee and then secondly, based based on the renewal number that you gave it seems like the.
The capture rate bumped up against sequentially, what was that number in terms of your capture rate and are you seeing signs that that will continue to build here in the in the coming quarters.
Absolutely, we're seeing nice steady progress with the renewals I think the most difficult part is that people have to remember that we're building off a small base from the early years of opportunities and as we continue to progress the opportunities are growing at a very rapid pace and so it's hard to evaluate that capture rate, particularly when you have people who two years outside of their warranty exploration are still making that decision to purchase that it's moving along very nicely and as we continue to build the base of opportunities coming to the table. It will be a nice growth driver for us as well.
Great. Thanks, Mike.
Thanks Bill.
Thank you. Our next question comes from the line of Matt Taylor from Yes. Your question. Please.
I. Thank you for taking the question.
I just wanted to ask a little bit about your decision to offer.
The control download for free for folks here in the U.S. and.
How you thought about that and what that could mean for your decision to do that or not do that in some of these are U.S. countries.
Right so.
We've been working on this decision for some time, it's been pretty complicated.
I think just sort of recap recap, we're we're going to offer the no cost download too.
US customers in warranty that purchase upon before the end of 2020.
I think that you know, we're very sensitive to the impact that this decision had on our current.
Pumpers as well as people or are considering tandem.
And I think that like based like you and can talk to you is going to be a significant.
Uptake is going to have significant uptake is going to reduce the burden and improve outcomes and we want to do everything we can to make sure that we get Max that we maximize the uptake of this device. This this product I think thats, reducing the eliminating the the cost burden as significant going to do that so we're.
We're excited about it and we think it's going to be a very.
Substantial and successful product in 2020.
And I apologize if I missed it but have you given a number this quarter recently on the conversion or percentage of your US based has bazell now.
Thank you Steve Yes, so we have approximately half of our customers have days like you enabled on their comp today in little more than 70% actually Havent Updatable, Tom So they would have ability to take today's like you if they haven't already or straight to control like you when it becomes available and when you think about that that's a pretty tremendous opportunity basically 70% of our customer base today has the opportunity to update to a very substantially improved algorithm and what they currently have in their systems Thats a big deal.
Okay.
Thank you very much.
Thank you. Our next question comes the line of Ravi Misra from Greenberg capital.
Hi, Good evening can you hear me okay.
We can't hear Rami, Hey, great. Thanks for taking the question. So hi, I wanted to ask Brian you to comment on so I think you mentioned earlier something about smoothing out demand and I was hoping you could give a little bit more color on that.
And then I have a question on margins. Thanks.
So they are demand from the perspective of having the tandem device updater in our current version yeah, just prices therefore allow him.
Yeah. I was wondering are you signaling something about how the revenue cadence should be going over the next.
A few quarters or just a little bit more detail on that commentary.
I think it's more of a comment of what would happen. If we did not have the tandem device updater with the announcement that control like Q data comes out that people start to hear it's potentially in review by the FDA and there is some timeline what that expectation may come than people pause and don't buy their next pump until that version comes that puts the company in a really odd position for a 3456 month period, while the huge advantages of the 10 device updater is those patients who buy the pub today no that especially at this no cost announcement here that they're not going to be in a disadvantaged position by getting it now a matter of fact, they somewhat jumped to the front line because they simply take a quake online training module download the software they've got control like Q. So we just believe that with those capabilities that we have in the x. to pump it smoothes out the demand beautifully for us we don't see that pause and therefore the cadence.
It should continue to grow with the excitement of both basler accused success and control I queues.
Offering at some point here in hopefully Q4.
Great. Thanks that was helpful. And then just on the on the market commentary in the market dynamics John .
I'd love to hear your kind of best stab at where the U.S. pump market is growing for type. One we've thought historically this has been sort of a high single digit maybe sounds like low double digit market, but given your tremendous kind of growth over the last few quarters do you see this as a market thats potentially stabilizing for the next few years in the mid teens or even higher.
I don't think its stabilizing at all I mean, I think that you know the numbers that we've seen in the past have been.
Thats sort of low mid mid low single digits for before that for the growth. The thing Thats really accelerating our mine has been the NDA the MD I conversions into the the uptake and pump penetration has really been the thing thats.
I think driving the uptake that we're seeing right now.
Let's say one other thing you know technology was fairly static for the last 10 years or so I mean, there were new wrinkles.
And we'll just saw a software upgrade replacement or model that we'd rather than the old term hardware replacement, we're seeing it just better faster for more people and its simpler and they are getting great control. So I think that's what you're going to be seeing we're ultimately ends up as you'll remember on 30% of type ones using pumps. This should be a lot higher. So if you have this quality of care and making insulin say I'd also say that just partnering with dexcom and having the G. Six connected to our system. That's a big deal as well I think no fingersticks is a really significant improvement and reduction in the burden that people have to face every day.
Great. Thanks, and then if I could just take one last question on the gross margin commentary and the guidance raise Lee can you just help us understand how much of what the kind of stock based comp neutral gross gross margin would have been because it looks like you brought up the stock based comp guidance as well. So the of that 52 to 54 bridge what would have been at the the SBC number was kind of equivalent to last quarter.
Sure. So the stock based comp has been running between one and 2% of the in the gross margin and I would expect that to continue through the end of the year, we did raise it and significantly but it's all going to be spread between operating expenses and cost of itself.
Great. Thanks, and then just from that perspective.
How do we is kind of the exit rate for Fourq you the way to think about next year.
And thanks, yes.
For the Yeah, I think that's reasonable for now.
Thank you. Our final question comes from the line of Danielle Antalffy from STB Leerink. Your question. Please.
Hi, good afternoon, everyone. Thanks, so much for taking the question congrats on a really good quarter.
Just thank you again.
Yes, no problem. Thank you guys.
Do I see the puts and takes as it relates to guidance I mean, you beat by about 20 530 million. It looks like I guess, its 20 million I can't remember, but a lot and that you're raising guidance by $50 million at the midpoint. So just.
Obviously, you have some level of confidence in that increase or outlook for the second half of the year and just wanted to get a little bit color from you on what the drivers of that increase level of confidence or is that the rate of renewals that you're seeing is it you know a backlog of RMR users are you seeing lower attrition rates like how what gives you the confidence and the drivers of the back half outlook. That's also now higher.
Right I guess, you know whats exciting at this time is that it comes from everything at this point I mean, and this is how we started 2018 there were so many opportunities to grow the business, but there was a question of which ones would grow the best which Michael where we where we would be successful and they all came to fruition and we're continuing to see that enthusiasm. This year. We think base like he has been a big reason for that trajectory change as because even into 19, it's been growing at a more rapid rate than last year and so it's based on what we've seen this first half that we think will continue through the end of the year.
Okay, that's helpful and as it relates to control like Q.
Our should we thinking about this as potentially driving a similar inflection, albeit off of a larger a larger base, but a similar inflection as we saw with baize like you is it that much of a step function improvement obviously the data is an improvement, but just curious how you guys are thinking about that as it relates to.
Not asking for 2020 guidance, but just.
Conceptually how to think about it.
I mean, obviously, it's just it's just speculation on our part, but I think we absolutely think it will be strong product, we think that when you compare the overall performance. When you look at the results for this clinical study, we really have confidence this is going to be a great product, but you know that's all we have to wait and see.
Alright, thanks, so much guys.
Hi, Angie.
This does conclude the question and answer session of today's program I'd like to hand, the program back to executive Chairman Kim Blickenstaff for any further remarks.
Thank you very much and we look forward to seeing everyone. Soon we have quite a conference schedule coming up here in the fall we're hosting a number of bus tours the upcoming weeks. Some wall Street attending various conferences scheduled for September is of the Baird Healthcare Conference in New York on September 4th there's the Dougherty and company conference in Minneapolis on the offset the September Morgan Stanley Healthcare Conference as on September 11th in New York and then the Lake Street conferences on September 12.
In New York as well so thanks for joining US today, we had another good conference call and getting close to 200 people. There is sort of a first for us.
We really appreciate your interest and we'll be seeing many of you out in the coming all coming months. Thank you for being on today.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.