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Tandem Diabetes Care Inc (NASDAQ:TNDM)
Q4 2019 Earnings Call
Feb 24, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Tandem's Fourth Quarter and Year-End 2019 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Susan Morrison, EVP and Chief Administrative Officer. Ma'am, you may begin.

Susan Morrison -- Executive Vice President and Chief Administrative Officer

Thank you. And welcome, everyone, to Tandem's fourth quarter and year-end 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 and in 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 our press release issued earlier today for further information.

Today's call participants include Kim Blickenstaff, our Executive Chairman; John Sheridan, President and CEO; and Leigh Vosseller, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll open up the call for questions. We appreciate everyone limiting themselves to two questions before getting back into the queue.

I'd now like to turn the call over to John.

John F. Sheridan -- President and Chief Executive Officer

Thanks, Susan, and welcome, everyone, to today's call. Before we discuss our results and plans for the year, I'd like to take a moment to express our sincere thanks to Kim. Kim became our Executive Chairman this past year after serving as President and CEO of Tandem for more than 12 years, and after March 6th will transition to a role of Chairman. Kim has been an incredible metric to me and the executive management team, and Tandem stories is a success because of his leadership and unwavering personal and financial support. We appreciate your guidance through the years and look forward to continuing to work closely with you in your new role as Chairman.

Kim D. Blickenstaff -- Tandem Diabetes Care Inc

Thank you, John, and thanks to all of our employees, who have helped build Tandem into a company that lives by its mission to improve the lives of people with diabetes. It's a hardworking group that is very passionate about our customers and building our company for long-term success.

Five years ago, we offered a fantastic insulin pump in the United States and had less than 5% market share. Since that time, we estimate that the US insulin pump market has grown by 40% to 600,000 pumpers of which we have nearly 20% market share. We believe this strong trajectory is largely due to our focus on innovation and technology advancements such as our Basal-IQ and Control-IQ automated insulin delivery technology, which are designed to be easy to use and help to reduce the burden of diabetes and improve clinical outcomes. With 2019 being a strong first full-year of sales outside the United States, we believe there's a similar opportunity to drive pump adoption in international markets.

If we look at five years from now, that's our goal for 0.5 million customers to use our products worldwide. To achieve this, we'll be working to lead an insulin therapy management by building a robust ecosystem and portfolio of data-driven products and services around our flagship insulin pumps. We'll also be continuing to invest more customer service and support to live up to our world-class standard we've set for ourselves.

I believe John and the team have the talent and the passion to accomplish this goal. As Chairman, I look forward to staying active with the company and helping Tandem along the path to achieving its longer term objectives. I'll remain meaningful shareholder and also look forward to continuing to build long-term value of our company.

With that, I'll turn back to John.

John F. Sheridan -- President and Chief Executive Officer

Thanks Kim. We've spent a lot of time refining our plans to achieve the vision Kim described. Some of which I'll touch on today. It really starts with our tremendous accomplishments in 2019. During this past year, we set records throughout our business that well positioned us for longer term success. These include shipping more pumps in 2019 than the past four years combined, nearly doubling our year-over-year sales, a five point year-over-year gross margin improvement and crossing a meaningful profitability measure by generating nearly $50 million in cash this year.

We also added to our growing list of company and industry first, the t:slim X2 was the first insulin pump to receive the ultimate controller enabled or ace pump designation from the FDA in February of 2019. And again, in December, Control-IQ was cleared as the first automated insulin dosing software in the new interoperable automated glycemic controller category.

In addition, we launched Basal-IQ and the Tandem Device Updater in the majority of the geographies where we have a presence outside the United States. What also stands out to me is the amazing cross-functional efforts it took throughout the business to support all of these accomplishments. Scalability was a primary focus for us in 2019 and we'll continue to be important in 2020 as we continue to invest in our infrastructure to keep up with the unprecedented growth and to prepare Tandem for the next stages of our business.

I am proud of the team's effort during this period, rapid expansion, particularly as we successfully maintained a high level of product quality, while tripling our manufacturing output. We demonstrated good foresight by ordering three new cartridge lines last year and while commencing a partnership with an experienced third-party manufacturer. We also invested in our customer support functions, both people and technology as we are committed to our goals of providing world-class service to all our customers.

While these efforts were happening behind the scenes at Tandem, much of the world was focused on our newest innovation, which we are now launching, the t:slim X2 with Cntrol-IQ. Control-IQ was the most anticipated product to launch in the diabetes community in years. As a reminder, this system offers an advanced hybrid-closed loop feature, utilizing Dexcom's G6 CGM sensor to help user's increase the time in the targeted glycemic range. It's also the first and only system cleared to deliver automated correction boluses in addition to adjusting insulin to help prevent high and low blood sugar.

Excitement for Control-IQ began to build after the 88th Scientific Sessions in June where the pivotal study was first revealed. The results were all very positive. All primary and secondary outcomes were met with statistical significance. Time and range was 71%, representing an 11 percentage point improvement from the control group. The participants had wide range of A1cs and each group improved significantly. The system remained in closed loop of 92% of the time for a six month period and the quality of life metrics were outstanding, all above 4.5 on a scale of 1 to 5. It was the first large scale closed loop study that included a dedicated control group and had no exclusion criteria, increasing the clinical significance of the study results.

This got the attention of key opinion leaders and then further fueling the anticipation of the Control-IQ release was the October publication of the study results in the New England Journal of Medicine. Reviews from trial participants also began trickling out through social media during the second half of the year and in mid-December we announced the FDA's clearance of our de novo application for Control-IQ.

We began training healthcare providers immediately and started processing Control-IQ orders in early January. To-date, we have surpassed our initial training goals and have trained more than 7,000 healthcare providers including nearly all of our top prescribers. We believe the positive experience from people delaying their purchasing decisions in the second half of last year awaiting Control-IQ approval has now lifted based on the growth we've already seen this year.

Last month we also began rolling out software updates for no cost to in warranty t:slim X2 customers in the United States. As we prepare to launch the update, more than 10,000 customers who had previously used our update portal for Basal-IQ, logged into the system in anticipation of getting Control-IQ before we began sending out invitations. Our technical support team was overwhelmed as people called in with questions about the availability of Control-IQ, questions about the prescription process and generally seeking help with portal experience. 20 of our customers who had an extended wait during this time, we apologize. We believe that the support we provided is just as important as our products and during this time frame we did not meet our service goals.

Thankfully, as I mentioned, scalability initiatives were a big focus throughout our business last year. We immediately took action and have dramatically reduced the wait times. Today more than 12,000 people have updated their t:slim X2 with Control-IQ technology, and their response and user experience described by our customers has been phenomenal. The term life changing is used regularly which further inspires us to bring new and exciting innovations to market. Advancement of our Control-IQ technology is a primary charter for our product development teams, along with offering innovative new pump hardware and progressing our digital health initiatives.

Starting with our automated insulin delivery technology with the launch of Control-IQ, we are now offering the most advanced AID system commercially available in the world. We are clinically in the lead and are accelerating our efforts to maintain this position. Our pediatric trial, that's intended to lower the age indication for Control-IQ to people aged six and above is now complete, and we are on track to file our supporting regulatory submission this quarter.

As we announced last week in conjunction with the ATTD conference, the data was positive and consistent with the results we saw for adults in adolescence using Control-IQ. Time and range for children using Control-IQ for four months increased from 53% to 67%, compared to those in the controller group were increased from 51% to 55% using sensor augmented pump alone. During the overnight period, time and range with Control-IQ technology was 80%, compared to 54% in the controller group. It was fantastic to see these outcomes, especially since children often struggle to keep their glucose in range.

To help accelerate our ability to bring further Control-IQ system enhancements to market, we are working with the FDA to segment various features by level of clinical risk to ultimately determine the regulatory path that will allow us to make incremental updates to our Control-IQ technology and then to deliver new benefits to our customers on a regular basis. The future Control-IQ enhancements we are working toward are intended to improve the clinical outcomes of the algorithm, as well as offer greater personalization, while we continue to make the systems easy to use. We are detailing a timeline for these features that we plan to add for competitive reasons, but we are working to offer our next AIG update in 2021. Ultimately, we seek to offer a fully closed loop system capable of complete bolus and basal insulin automation.

Turning to our hardware innovation initiatives, we are making great progress on t:sport development, as well as its manufacturing process readiness. As a reminder, t:sport is about half the size of t:slim, it doesn't have a touch screen and it is controlled by a separate device. We've developed t:sport to be operated by a mobile app or via a dedicated controller for people who prefer to keep the therapy management device separate from their mobile phone.

We intend to expand our product portfolio to offer t:sport in addition to our flagship t:slim X2 pump in order to provide people with choice in their diabetes management. t:slim X2 is designed for people who want a 300-unit cartridge and their diabetes management isn't contained in a single device. t:sport is well suited for people who prefer greater discretion with a 200-unit cartridge and remote operation. Both pumps have been designed to future remote updatability, CGM integration, and our latest automated insulin delivery technology.

As a result of recent discussions with the FDA regarding t:sport, the regulatory pathway will now be broken into two filings; one, for the t:sport pump with a dedicated controller, and the other with the t:sport pump and our mobile app. Timing-wise, our goal is still to submit the t:sport as an ace pump with a dedicated controller this summer, followed by a separate regulatory filing for t:sport with full control from a mobile app.

For the commercial launch, our current thinking is to wait until t:sport is approved with both the controller and the app. We plan to use the time between approvals for beta testing activities and to begin gaining greater experience with the t:sport before it's full for commercial launch, which pending FDA clearance we are planning for in the first half of 2021.

As we look to our commitment to innovation, 2020 is now positioned to be the year of Control-IQ and 2021 the year of t:sport. However, we also identified an interim opportunity to bring one of the most highly requested features to the t:slim X2 pump, the ability for the t:slim X2 customers to discreetly deliver a bolus from their mobile device.

To that end, I'm excited to share that we've been working on this feature for the t:slim X2 for some time, and our goal is to submit a regulatory filing for our mobile application with remote bolus capability for the t:slim this summer. This submission will be bit of a unchartered territory as there is not a commercial precedent for mobile control from an insulin pump using an unrestricted mobile device. And so the approval timing is difficult to predict, but as we are preparing to launch this feature in the US in the second half of 2020.

As with our other software updates offer to the Tandem Device Updater, we intend to offer the software update featuring remote bolus delivery free of charge to all our in-warranty t:slim X2 customers in the United States. The mobile app with remote bolus capability for the t:slim X2 and full remote control for the t:sport really brings us to the third major R&D focus, which is our digital health initiative. We are in the process of launching their first generation of our new mobile app this quarter, which is particularly exciting as is the foundation of our digital health strategy.

The first generation of the app will benefit patients by allowing our t:slim X2 to wirelessly upload data from their pump and CGM to our t:connect data management application. This is a significant feature as it takes away a manual step from our customers and their healthcare providers of having to upload pumps through a USB cable to see tracking and trending information in t:connect.

ACP's commonly share that they waste meaningful office time accessing data from different insulin pumps each day. With the launch of our new app, we will be offering the first wireless solution to address this issue and improve office efficiency by streamlining business. We often talk about our product pipeline in terms of domestic launches, but behind the scenes we are working to prepare each of these products for launch outside the United States as well. We ended the year with nearly 24,000 international customers, our t:slim X2 is now available in more than 13 countries outside the United States, which is an impressive accomplishment for our first full-year of or US.

Basal-IQ is now available in more than half our international geographies and our goal is to launch Control-IQ outside the United States in the back half of this year similarly to how we rolled out Basal-IQ. Overall, we believe that we are well-positioned in 2020 to achieve the longer term goals we set for the company. We'll be working to drive worldwide adoption of our products and further our position as a leader in insulin therapy management. We're committed to doing so by delivering a portfolio of solutions that is designed to improve patients outcomes, benefit the healthcare providers who care for our customers, and by demonstrating the value of our offerings to the payers who support them.

In addition, we are currently in a period of investment to support future growth, but remain committed to building a sustainable business with improving margins and strengthening our profitability profile. In combination these represent Tandem's top priorities for 2020 over the upcoming quarters I look forward to sharing our future achievements.

I'd now like to turn the call over to Leigh for additional color on 2019, as well as our guidance for the full-year.

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Thank you, John, and good afternoon everyone. We entered 2019 with an optimistic expectation of at least 40% sales growth and closed the year at $362 million in worldwide sales, which is nearly double our 2018 sales and the highest annual growth rate in our history. Strong demand for our t:slim X2 continues to drive success from all opportunities increasing penetration from people previously using MDI, a higher number of competitor conversions and growing traction within our own renewal population.

We shipped 73,400 pumps in 2019 versus 34,500 in 2018. In the fourth quarter alone we shipped 19,600 pumps worldwide, which is more than we shipped in all of 2017. Our fourth quarter sales of $108 million included $10 million from our international operation bringing us to $60 million for our first full-year of international sale. Domestically we shipped a total of 17,500 pumps in the quarter driving pump sales to nearly 70% of our $98 million in total domestic sales. We were very happy to continue to have about half of our new customers report that they were new to pump therapy.

In the fourth quarter shipments represented a 26% increase from the third quarter and 35% growth year-over-year. It is difficult to quantify the impact of the timing of Control-IQ had on 2019. However, our best estimate is that approximately 2,000 customers will purchase a pump in 2020, who would have otherwise purchased a pump last year.

We continue to see strength in our pace with our progress from our continuously increasing renewal opportunities included in pump shipments for the quarter were 3,300 pump renewals, which was an increase of approximately 80% year-over-year. Since inception more than half of our customers have renewed with us cumulatively out of the approximately 30,000 whose warranties have expired. It's important to note that nearly 20% of those warranty expirations did not occur until the fourth quarter of 2019 and that renewals are not automatic.

Looking forward into 2020 our total opportunities will increase by an additional 16,000. Internationally we shipped 2,100 pumps in the fourth quarter to reach a total of 19,700 shipped in 2019. This was in line with our expectations as our distributors turned their focus in Q4 to the launches of both Basal-IQ to new patients and the initial rollout of the Tandem Device Updater to existing patient.

We estimate that today there were approximately 200,000 people using insulin pump therapy in these geographies. This suggests that we have already exceeded 10% share with less than two years' experience in those markets. This is due largely to the Animas conversion opportunity, which was primarily fulfilled by the end of the second quarter in 2019 with modest benefit in the third quarter. Looking ahead, we expect that the introduction of new products combined with our launch into Germany, France, and the Benelux countries in early 2020 will continue to drive strong, double-digit growth for years to come.

Overall, we estimate that are in-warranty installed base is approximately 142,000 people with 118,000 people domestically and 24,000 people outside the United States. This continually increasing installed base drove a 91% annual increase in supply sales. For the full-year, comp sales represented 68% of total sales followed by an infusion set at 21% and cartridges at 11%.

As we look to the year ahead, 2020 is well-positioned with the majority of the catalyst still in place that drove our growth in 2019. Control-IQ will be the new technology driver of domestic adoption both growing the market and capturing share. We will also continue to benefit from our own growing renewal base. Accordingly, our domestic sales are expected to increase to be in the range of $380 million to $390 million. We believe demand for pump shipments will build across the year similar to the seasonality trends we have experienced in years past.

Outside the US, Basal-IQ is becoming more broadly available and we are preparing to begin the rollout of Control-IQ in the second half of the year. We expect that this combined with our new markets that double our international opportunity will drive international sales in a range of $70 million to $75 million. We expect that we will see more momentum in our international sales in the second half driven by the timing of our geographical expansion and the anticipated uptake of our AID system.

Having said that, the quarter-to-quarter ordering patterns of our international distributors are still difficult to predict as they continue to gain familiarity with our products and the market demand beyond the anonymous opportunity particularly around the timing of new launches. Overall, our worldwide sales expectations are in the range of $450 million to $465 million which is 24% to 28% growth over 2019, a year in which we experienced outside benefit from Animas' market exit.

Gross margin improved to 56% in the fourth quarter, in line with typical seasonal expectations, bringing us to 54% on a full-year basis. This included pressure from non-cash stock-based compensation for the full-year representing 2% of sales and compared to 49% gross margin in 2018 with stock comp at 1% of sales. We gained significant leverage as we nearly tripled our pump output in 2019 to meet market demand, as well as return inventory balances to target stocking levels.

2020 will continue to be a year of investment in manufacturing capacity, specifically in cartridge, as we keep pace with current demand and prepare for our next stage of growth. The drivers that typically have the largest impact on gross margin expectations are production volumes, sales mix, geography and reimbursement.

In addition, in 2020, we anticipate one to two points of impact from the onset of a royalty associated with Control-IQ and potential tariff uncertainty for raw materials. Therefore, we expect an overall gross margin of approximately 54%. We are confident in reaching our five-year goal of greater than 60% as we continue to leverage these near-term investments in our fixed infrastructure, as well as benefit from managed care initiatives to increase our direct contract percentage. We continue to progress toward our long-term profitability objectives with a record adjusted EBITDA margin of 21% in the fourth quarter. This was the fifth straight quarter of positive adjusted EBITDA, which excludes the impact of non-cash stock comp.

Operating expenses were $58 million in the fourth quarter including $16 million in non-cash stock comp, which compared to operating expenses of $41 million in the prior year including only $9 million in stock compensation. We dramatically improved our 2019 full-year adjusted EBITDA to 13% from negative 8% in 2018 as we rapidly scaled the business to meet market demand.

Throughout the year we began investments across all parts of the organization including the commercial infrastructure to support our growing installed base, the advancement of our R&D pipeline, facilities to accommodate our increasing employee population and continued organizational development activities necessary for a company of our size. 2020 will be a year of investment. We will continue to execute on the scalability initiatives recognizing the full-year impact of what we launched last year and focus on building for leverage in the long-term.

With that in mind we anticipate achieving an adjusted EBITDA margin in the range of 12% to 14% in 2020 with confidence in achieving our long-term goal to exceed 25%. We ended 2019 with $176 million in total cash and investments generating $47 million in cash for the year. This includes $22 million benefit from free cash flow with the remaining from employee stock plans and warrant exercises.

To summarize our 2020 outlook worldwide sales are estimated to be in the range of $450 million to $465 million, including international sales of $70 million to $75 million. We expect gross margin for the year to average 54% and we expect adjusted EBITDA in the range of 12% to 14%. Our non-cash charges for stock compensation, depreciation and amortization are expected to be approximately $60 million included as components of both cost of sales and operating expense.

With that, I will turn it over to the operator for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first comes from Brooks O'Neil Lake Street Capital. Your line is open.

Brooks O'Neil -- Lake Street Capital -- Analyst

Good afternoon, everyone. Can you hear me OK?

John F. Sheridan -- President and Chief Executive Officer

Yes, we can, Brooks.

Brooks O'Neil -- Lake Street Capital -- Analyst

Great, John. With all the amazing things you guys discussed in your prepared remarks, very difficult to limit myself to two questions, but I'm going to try hard. So first one, I'm curious -- I'm curious, I hear that the FDA is particularly sensitive about the issues related to phone control and I was particularly intrigued by the work we are doing on that area. Can you just share with us any sort of sense for the conversations you had with the FDA? And what are the key issues they want you to demonstrate to give you approval for phone control for t:sport?

John F. Sheridan -- President and Chief Executive Officer

Sure, good question. I would say that a couple of years ago the way you describe the FDA's feeling is about phone control is true. But as time has gone on they have become more open to phone control. And 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 kind of as a matter of reducing the burden.

So I think it's something that they want us to achieve. And 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.

Brooks O'Neil -- Lake Street Capital -- Analyst

Yes OK. So my second question, I'm just curious not whether you had discussions with your friends at UnitedHealth Care, but have you detected any change in the relationship in the discussion and the tone from them related to the success you've had with Control-IQ. And obviously the -- what appears to be a significant problem for Medtronic with their recall?

John F. Sheridan -- President and Chief Executive Officer

Well, we don't provide specific updates on particular 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, right now their Control-IQ is in the market and I think we're in a position to have meaningful conversations with them.

Brooks O'Neil -- Lake Street Capital -- Analyst

Yeah. Okay. Congratulations. I'm so excited for you guys.

Operator

Thank you. Our next question comes from Alex Nowak from Craig-Hallum Capital Group. Your line is open.

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

Great. Good afternoon everyone. Just wanted to start on what happened in the quarter here with international, you know, that was trending around 4,000 pumps a quarter or so. It did come in about half of that. So just curious what happened there in the quarter, and then just, what gives you confidence in the rebound as you included in the guide?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Sure, thanks Alex nice to talk to you. 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 before the Animas conversion opportunity was almost fully complete by the end of second quarter. Some of it fell into the third quarter so third quarter is slightly benefited from a little bit more Animas opportunity. But also what happened was that we 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 they're existing patients could update, which impacted the launches a little bit. So that's really what was going in the fourth quarter.

And 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.

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

Okay, understood. And then we saw the Medtronic is recently trialing the 670G pump and the accessories by the PBM channel. So similar to what insulin is doing there. So I'm curious is PBM channel ever an option here for Tandem or the DME remain the preferred pathway for you?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

I don't see that the pharmacy channel is 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. And we think that's the right avenue to work closely with the payers to determine the right channel for our product. Our is being very highly specialized, I think one difference to understand or to note between us and Medtronic today is that they're not only selling a durable pump, they're selling a pump combined with sensors. So what the impact that has on which channel they go through, I can't really comment too. But it is different from our position.

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

Okay, understood. Thank you.

Operator

Thank you. Our next question comes from Chris Pasquale from Guggenheim. Your line is open.

Chris Pasquale -- Guggenheim -- Analyst

Thanks, and congrats on great year guys. I wanted to start with the Control-IQ launch. You mentioned you've trained I think about 7,000 healthcare providers today. Just wanted to get 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 that all those providers are managing?

John F. Sheridan -- President and Chief Executive Officer

Thanks, Chris. I would say that we're -- well 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 continued this requirements for this, but I think the majority of what we planned on doing has now been accomplished.

Chris Pasquale -- Guggenheim -- Analyst

Okay, perfect. And then on gross margin, Leigh, I just wanted to go back to the different factors that are impacting that. I think, I've heard one to two points headwind from the Control-IQ royalty. Are there other sort of specific items there that are holding you back this year and that keeping you for making the steady progress?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Sure. I would point to a couple of factors. So, first and foremost, that we are expanding our manufacturing capacity again. And as you can imagine, when you expand, you have to get to a point then where you can leverage. So we are doubling the cartridge capacity, which means we won't be fully utilizing that in 2020.

And add to that then the onset of the royalty, but the one to two points, it's really a combination of a number of smaller factors that individually weren't significant that when added together with royalty, a little bit of uncertainty around tariffs and where that might head in 2020. Those are the two primary items that were new to the story I think for next year.

Chris Pasquale -- Guggenheim -- Analyst

Thanks.

Operator

Thank you. Our next question comes from Travis Steed from Bank of America. Your line is open.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Hi, good afternoon. I just wanted to touch on the 2,000 patients that you -- I think delayed. Just curious, I guess, I thought the number would be a little higher than that given the impact on the revenues in Q3 and Q4. So I don't know if you're being conservative there or if you're maybe seeing a small impact on the Medtronic 780G upgrade program. Just curious on how you came up with that 2,000 number?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Yes, as you can imagine, it's a little bit difficult of a number to ascertain, but we -- 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 physicians offices. There were some offices that would prescribing some that we're waiting or some patients that we're waiting, and then add to that, our own expectations for the year. But the 2,000 pumps represents roughly a little more than 10% of what we did in the fourth quarter, and so that's where we are today.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Okay. It looks like for the full year 2020 you're assuming more new patients in the US than you did in 2019. So just curious what your thoughts are on driving that acceleration, share gains versus MDI conversions? And in Q4, does Animas contribute any patients or was 50% from share gains?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Yes, I'll start with 2020. As we look ahead, we absolutely are expecting more patients to come to us in the year than we did in 2019. And what we think from an MDI perspective, we're looking at this at least as many will come to market next year as this year, if not more. And we also expect that competitive conversions will keep pace. So we kept at nice healthy balance of about 50-50 between MDI patients and competitor conversions.

From an Animas perspective, though it did start to decline in the fourth quarter, just as we had anticipated. Prior to the fourth quarter, it had been averaging about 18% of our new pump shipments, whereas in the fourth quarter, it went down just under 10%, and we think that will continue to dwindle. And -- there may be some folks who took advantage of Medtronic's upgrade program that would come to us appearing that they're Medtronic customers, but we don't really anticipate much from them in 2020.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Mathew Blackman from Stifel. Your line is open.

Mathew Blackman -- Stifel -- Analyst

Good afternoon, everyone. Thanks for the questions. Leigh, maybe to start, I think in the past you've characterized your guidance philosophy as a goalpost that you would hope to exceed them. I'm assuming that philosophy is still unchanged as we think about 2020?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

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

Mathew Blackman -- Stifel -- Analyst

Okay, understood. And so with that in mind, and as a sort of reflect on your comments about the shape of the year. So the first quarter, in particular, having a, I guess, a similar mix as it has in prior years. If I just do the raw math on that, granted there is some moving parts there, but it would imply a number that would be roughly in line, maybe a little bit below consensus. So first of all, is that math right?

And second, is there something we should be sensitive to or again, does this just go back to the initial point you made which is, hey, let's start off conservative and see how this all plays out? Thanks. I appreciate it.

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Right. So yes, I agree that we would still think about the traditional seasonality curve for pump shipments in the US, which are typically about 16% to 17% in the first quarter. One thing that I want to be -- have been thoughtful about is what the impact of Control-IQ has on the year. And so 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. And so until we start to demonstrate that inflection where John would say definitely there's going to be an inflection.

John F. Sheridan -- President and Chief Executive Officer

There's got to be an inflection.

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

So we're actually comfortable with the Q1 numbers as it stands.

Mathew Blackman -- Stifel -- Analyst

Okay. Thank you everybody. I appreciate it.

John F. Sheridan -- President and Chief Executive Officer

Yes. Thanks, Matt.

Operator

Thank you. Our next question comes from Ryan Blicker from Cowen. Your line is open.

Ryan Blicker -- Cowen & Company -- Analyst

Hi. Thanks for taking my question. Maybe just following up on the last question. So historically domestic new patient adds have declined 25% to 35% sequentially versus Q4. That historic seasonality doesn't seemed to make much sense to us given the 2,000 customers pushing Q4 to Q1 plus the Control-IQ launch. I guess can you just talk a bit more about your rationale and why wouldn't Q1 be much stronger than typical seasonality in the US?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Great. So one thing to think about that Control-IQ differently if you want to call it is that we don't anticipate that all comes in the first quarter. So these are folks who waited to make their purchase. And in some of them will still have I will call limitations if you will on when their deductibles will reset. So 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. But for now the best way to think about is look at the typical historical trend.

Ryan Blicker -- Cowen & Company -- Analyst

Got it. Okay, and then it's been awhile since you've updated us on supplies versus pump gross margin. Would 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? And then do you still expect to achieve a 50% gross margin over the next five years or so? Thank you.

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

So, yes, absolutely. We are still well on track to hit our 60% margin target. Unfortunately, we won't give product margins by product, simply for competitive reasons, but I can say that the suppliers margin have continued to scale since we first broke even back in the third quarter of 2016 and scale nicely as we continue to leverage our cartridge capacity, as well as the full benefit of the infusion set sales that we were if you want to call it missing at that point in time. And so we're very confident about where we're headed. Some of the other opportunities as you mentioned would be the outsourcing charge for third-party manufacturer to help reduce cost, as well as just, again, leveraging the capacity that we're building.

Operator

Thank you. Our next question comes from Danielle Antalffy from SVB Leerink. Your line is open.

Danielle Antalffy -- SVB Leerink -- Analyst

Thanks so much. Good afternoon, everyone. Congrats on a really solid year.

John F. Sheridan -- President and Chief Executive Officer

Thanks, Danielle.

Danielle Antalffy -- SVB Leerink -- Analyst

Quick question for you -- yes, no problem. Quick question on this whole dynamic of the pause that you guys saw ahead of the Control-IQ launch. Just curious how you're thinking about, you know, you might have two competitive launches coming at 2020. How are you thinking about a potential pause across, excuse me, 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?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Yes. So that's one of the areas where, when 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 and as to what's happening here in the first and even leading into the second quarter, but the back half is always the most difficult part to predict, particularly when we have such a seasonality curve, which pushes so much at the back half. So that's one thing that we're being thoughtful about and we'll keep our eyes on and we'll continue to update you each quarter as we learn more about about those factors and the impact it may or may not be having on it.

Danielle Antalffy -- SVB Leerink -- Analyst

Okay, great. And then my next question for you is on the capture rate for the renewal stream. I'm curious about where you are both from an internal -- from a Tandem perspective, as well as the competitive perspective. It feels like your guidance probably assume some acceleration of that capture rate. Curious if that's true and any color you can give around where you are and where you expect to be exiting 2020? Thank you so much.

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Yes. So we're very excited about the progress that we've made in renewals so far, and we have a dedicated effort within the company as you can imagine that's the focus just on an opportunity, whether it's from the very beginning when a patient gets the pump, the retention effort, all the way through to the very end to get them to renew to buy their next pump. And so far, we have continued to scale up or I guess I would say, accelerate the number of people that are converting. I think what's exciting to me is when we look at our internal figures and we look year-by-year. People whose warranties expire in 2016, '17 versus '18, we're still today seeing increases and people renewing from those subsets and so that continue to move the needle for us.

The other exciting part is that our business grew so rapidly. We're adding a significant number of opportunities on the go forward. So whether it's improving the renewal rate on the warranties that have already expired, but also adding to that, those are the factors that are really going to try the renewal business going forward.

Danielle Antalffy -- SVB Leerink -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Matthew O'Brien from Piper Sandler. Your line is open.

Matthew O'Brien -- Piper Sandler -- Analyst

Good afternoon. Thanks for taking my questions. Just wanted to start a little bit on the new pump or 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 '18 were new to pumping and in '19, it was closer to 33%. Again, that's by our math. So I'd love to hear just a little bit about the dynamics 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 elsewhere versus really starting to accelerate the market growth or helping to accelerate the market growth?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

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 that about 50-50 for people coming new to pump therapy versus people from competitor pumps, and that's been very consistent since the beginning of our history. And I think that was one of the most surprising and best elements of 2019. We saw strength everywhere. So even at the MDI population coming to pump therapy with increasing we saw similar increases in the competitor conversions to Tandem. And so, 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.

Matthew O'Brien -- Piper Sandler -- Analyst

Okay. Thanks. And then shifting over to international business. I guess, the number -- that a pumpers this upcoming years about flat by again our versus last year so. I know there is a deferral going on as people were waiting for Control-IQ, but can you just talk about some of the dynamics there, keeping pumpers interested in Tandem. I'm just, again, I'm a little surprised as given that you're doing a pretty big sales force expansion especially in Germany that the growth trajectory there wouldn't be a little bit better from a number of pumpers perspective?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Sure. So one important thing to note about 2019 with that, the major -- a big piece of our business came from that Tandem's conversion opportunity. So pretty much you can look at the first half of the year as almost all Animas converters and the second half of the year is being new market type activities. And so now there was a little bit at the other going on in both periods, but I'd like to draw a line there and say, look, really it more like Q3 and Q4, the average of what happened there, those were all new -- what I'll call new market activities, which are the baseline for our existing geographies.

And then later on to that, what will be coming from Germany, France and the Benelux countries. Keep in mind, those might have a smaller slower uptake even though they're very large geographies, because it is starting off new market we have to go going to become physicians you to become familiar with us and with our products. But I think it's a difficult comparison to just look at 2019 as your baseline, you really have to bifurcate between that you half of the year.

Matthew O'Brien -- Piper Sandler -- Analyst

All right. Thank you.

Operator

Our next question comes from Matt Taylor from UBS. Your line is open.

Matt Taylor -- UBS -- Analyst

Hi. Thank you for taking the question. And 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. So my question was really, did you see actual sales disruption or was it just people looking for feedback? And you had a comment in the prepared comments about the pause kind of lifting with the initial sales that you've seen so far in Q1? Any color that we could get on the dynamics of the uptake so far in the quarter?

John F. Sheridan -- President and Chief Executive Officer

Sure. So let me just start by saying today we have -- actually today the majority of the people who have a pump in the United States have updateable pumps. And so that number is in excess of 90,000. And 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. So, 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? So we're just overwhelmed by that. It was a surprise to us.

We have since gotten past it. We were as I said last year and this year we really been focused on scalability. And I think we scale the organization to a point where we were able to deal with it. And I think we've got it in control now. And 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. So we're very enthusiastic. And I'm sure you just -- all 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.

Matt Taylor -- UBS -- Analyst

And then 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?

John F. Sheridan -- President and Chief Executive Officer

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 -- or the data we saw from the adults. And we plan on submitting that the FDA here shortly, and we expect to get approval for the six plus age category here shortly, which is all great news. And we've mentioned this in the past, but we have been talking to the FDA. And we've 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.

And in the conversations we're having with the FDA today. 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 -- will release any information as to one specifically we expect to see these changes. But I will say, I think the next meaningful update for Control-IQ will be in 2021.

Matt Taylor -- UBS -- Analyst

Okay. Thanks, John.

John F. Sheridan -- President and Chief Executive Officer

Yes.

Operator

Thank you. Our next question comes from Steven Lichtman from Oppenheimer. Your line is open.

Steven Lichtman -- Oppenheimer -- Analyst

Thank you. Hi guys. I'm not sure how much this question will last with your last answer, John, but can you talk a little bit more about the functionality with the new mobile application with t:slim. You mentioned certainly the bolus thing 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 '21?

John F. Sheridan -- President and Chief Executive Officer

Well, absolutely. First of all, thanks for asking the question. We -- 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. And so it's really, it's really important that we are sure that this device is going to work properly and provide a great experience. So we plan to roll it out here next month and this device will provide a secondary display and the people who are using it today, say once they've actually got the mobile device, they never look at their pumps again which is huge. And it's also going to really help the HCPs, because it will have real time uploads to t:connect. So they'll they will no longer have to update their pump's when people come to their offices, which is a meaningful distraction for them in their practices.

So we're excited to talk about the remote bolus feature. I mean, you talk to people who are using our mobile app today, I think in general, when you look at the number one feature that people 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-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. So 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. And as I said we -- we're looking at some time the second half of this year to roll it out. I think that -- 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.

Steven Lichtman -- Oppenheimer -- Analyst

Yes, got it. And then just secondly, just given the cash position and the free cash flow generation, just curious as you're looking -- as you look to deploy that cash, you talked about making some investments on the customer service side I believe. Would you be looking to accelerate the sales force as this year or how are you looking at the footprint over there -- overall?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Great, so we'll continue to evaluate closely 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. I mean at this point, we feel very comfortable with that number, but again we'll always look at that across the year. If we think we need to add and then we definitely would use our resources to do that.

Steven Lichtman -- Oppenheimer -- Analyst

Great. Thanks, Leigh. Thanks, John.

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question from Jeff Johnson from Robert W. Baird. Your line is open.

Jeff Johnson -- Robert W. Baird -- Analyst

Thank you. Good afternoon. John, I want to follow-up on the mobile app there. So one, I want to make sure that that's like going to be on an iOS or an Android and it's your personal phone it's not like a separate controller just to confirm that on the t:slim X2? And more importantly, I guess if the FDA will allow mobile bolus seen from your own phone, a pump tends to have auto basal?

What would they have concerns about why t:sport I guess getting pushed for phone control to next year? What are other functionality issues that the FDA might be looking at with you guys or I'd assume all the other pump companies if they'll already allow mobile bolus in this soon?

John F. Sheridan -- President and Chief Executive Officer

Well I mean, I think just to answer your first question. Yes, we do plan to have capability on unrestricted iOS and Android phones. So, 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 deal with. And so, we think dealing with it right away is the right approach.

When you look at t:sport, you know t:sport we had originally planned to submit t:sport with the remote controller this summer. And then submit a separate filing just for the mobile app and I think in the conversations that we had with the FDA recently we've changed that. To now it will be the pump plus the mobile app and that will be following. So I think it's just a matter of following the direction from the FDA in that regard. And that's basically the way our development pathway and pipeline has been defined also.

Jeff Johnson -- Robert W. Baird -- Analyst

And then Leigh, I'd just like confirm on the guidance question on 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. But I can't tell from your answer does that mean you've assumed those competitors are coming and so, you've maybe built in a little bit of cushion in the back half of the year? Or you also made a comment about things you can't control you don't really embed in guidance. So does that mean you have not assumed any kind of change in market dynamics in the back half in your guidance? Just trying to understand kind of what's embedded from a competitive perspective in that back half guide? Thanks.

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Sure, you're right. When it comes to competitors and the potential coming to market, even sometime it's not when the products there, but just the discussion around the product coming, that can put pressure on. And so, we have factored in some level of pressure associated with that possibility.

Jeff Johnson -- Robert W. Baird -- Analyst

All right. Thank you.

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Jayson Bedford from Raymond James. Your line is open.

Jayson Bedford -- Raymond James -- Analyst

Hi, good afternoon. Thanks for taking the questions. Obviously a lot has been asked here. So just in terms of product enhancements to Control-IQ, appreciate the detail on phone control. Where are you with the ability to share pump data with so-called followers?

John F. Sheridan -- President and Chief Executive Officer

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

Jayson Bedford -- Raymond James -- Analyst

All right. Any update or progress on your partnership with Abbott?

John F. Sheridan -- President and Chief Executive Officer

We are still working with Abbott on the agreement. I think that when it comes to -- it's just 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.

Jayson Bedford -- Raymond James -- Analyst

Okay. And then just last quick one from me. In terms of the launch in France, do you have reimbursement there? Is that something that will kind of delay revenue recognition in France?

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

There is reimbursement for pump there. We -- and we try to launch here in the first half of the year in France and Germany, and the other Benelux countries.

Jayson Bedford -- Raymond James -- Analyst

Okay, thank you.

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Great, thank you.

Operator

Thank you. And that does conclude our question-and-answer session for today's conference. I now like to turn the conference back over to John Sheridan for any closing remarks.

John F. Sheridan -- President and Chief Executive Officer

Well, thanks, everybody, for listening in and participating in our call today. We look forward to seeing everyone soon. We are attending a number of conferences and hosting a number of bus tours in the upcoming weeks. We plan to be at the Leerink Global Healthcare Conference in New York tomorrow, on the 25th; the Cowen Annual Healthcare Conference in Boston on March 4th; the Barclays Global Healthcare Conference in Miami on March 11th; and the Oppenheimer Healthcare Conference on March 8th in New York City.

Thanks again for joining us today, and we look forward to keeping you updated on the company and our progress as we go on. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Susan Morrison -- Executive Vice President and Chief Administrative Officer

John F. Sheridan -- President and Chief Executive Officer

Kim D. Blickenstaff -- Tandem Diabetes Care Inc

Leigh Vosseller -- Executive Vice President and Chief Financial Officer

Brooks O'Neil -- Lake Street Capital -- Analyst

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

Chris Pasquale -- Guggenheim -- Analyst

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Mathew Blackman -- Stifel -- Analyst

Ryan Blicker -- Cowen & Company -- Analyst

Danielle Antalffy -- SVB Leerink -- Analyst

Matthew O'Brien -- Piper Sandler -- Analyst

Matt Taylor -- UBS -- Analyst

Steven Lichtman -- Oppenheimer -- Analyst

Jeff Johnson -- Robert W. Baird -- Analyst

Jayson Bedford -- Raymond James -- Analyst

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