美國雅培 (ABT) 2002 Q4 法說會逐字稿

Good day afternoon and welcome to TheraSense fourth quarter 2002 conference call. Participants are in a listen-only mode. Later we will conduct a question-and-answer session. At that time if you would like to ask a question, please the tar and 1 on your touch-tone phone. Any recording of the call is not permitted without written authorization from TheraSense. The call is being recorded. I would like to turn the call over to Mark Lortz, Chairman and C.E.O. of TheraSense.

Thank you, everyone. Good afternoon. Welcome to TheraSense's conference call describing our fourth quarter 2002 and year end 2002. I have Charlie Liamos (ph) Chief Financial Officer and Mark Tatro, our Vice President of Finance. I need to re mind you of the safe harbor statement. We may make certain forward-looking statements regarding the future events of TheraSense. We need to caution you not to replace -- involve known and unknown risks and uncertainties which may cause actual results in performance to be materially different from those applied by the forward-looking statements. A description of these risks can be found in the form 10-Q for September 30, 2002 and additional reports we file with the S.E.C. Information this presentation concerning TheraSense's forecast for future periods represents this date only as of today's date. Having said that, today's call, we're going to review highlights from 2002, where we currently stand in terms of our position within the glucose monitoring industry and lastly, 2003 initiatives and guidance. First, let's just talk about 2002 full year results. We had an outstanding year in 2000. Our total revenues were $177.7 million compared with $71.9 million in 2001. That represents 147% increase in revenues year over year. Our quarterly revenues in fourth quarter were -- which compares with 26.5 million, a 74% increase. Year to year gross profit for 2002 was 84.9 million as compared to 22.7 million in 2001 which is a 274% increase in gross profits.

On a quarterly basis, Q42002 was -- as compared to Q4 of 2001, 9.9 million, a 147% increase. Beyond the tremendous financial performance that we were able to achieve, we also were able to launch two specialized products for intensive management customers, particularly freestyle tracker where we're able to build freestyle into a PDA giving people information for their management and freestyle CoPilot which a web based management program. We believe both programs continues to demonstrate TheraSense's technology leadership in the marketplace. Even more important, we completed our continuous monitoring systems accuracy study and began our pivotal trial for our clinicals in 2002. Overall, we achieved very significant presence in a very competitive $4 billion market and continue to see continued momentum in the fourth quarter in despite of unusually soft retail sales and a slumping economy. So I'm very pleased to report in the fourth quarter we were able to improve our U.S. retail stores and their inventory levels. As you know in the third quarter we described a number of issues we had around stock out issues.

We believe in the fourth quarter we were able to bring the stock out situations described and in line with the industry standards in our category. We were able to verify this through our own audit and objective third party audits of shelf conditions. Another issue we addressed was the coupon redemption levels and I'm pleased to say our coupon redemption levels require no further accrual rate adjustments and that we believe we're adequately reserved for that going forward. We did enter the people's republic of china market but with a different distributor than anticipated in Q3 and lower initial volumes. It's difficult to predict how well set some of these potential distributors R we did find another entry point and believe in the long-term this distributor will do an excellent job for us. Our TV advertising is helping to introduce freestyle to a very broad audience of people with diabetes, particularly type two and we continue to monitor that for its ongoing cost-effectiveness. We reduced our cost on meters by 13% in the fourth quarter and 45% over the course of the year. This reflects very positive impact of a successful move our metered manufacturing line to the peoples republic of china and additional meter cost component reduction. Furthermore we reduced cost on test strips by 5 (inaudible) in the fourth quarter and 25% over the full course of 2002. This we believe gives us competitive of goods sold and the ability to pursue management opportunities ahead of us. So you can see we have come at a long way in 2002 to establish freestyle as one of the most popular blood glucose monitoring -- on the market. We have several perimeters to help all of us more objectively evaluate shared growth. First of all, the IMS National Prescription Audit data which is outbound to customer what they take on in the prescription basis for the 90 days ended December 31, we showed a 7.7% meter share which is up 3.3 -- 3 points over 2002, a 75% increase year over year.

On the strip side, the 90 days ending December 31, 5.5% strip share, a 2.2% increase over 2002 representing a 67% increase year over year. Neilson, which gives us the OTC side of the house representing about 50 percent of the large volumes that go through the OTC side, that total dollar share data represents for us in the fourth quarter 7.4% share of the total dollars in the category, which is up 3.6 points for 2002 or a 95% increase year over year. The IMS retail provider perspective, which is the data that we've been sighing for the longest time measuring data volume into the channel for the 90 days rolling ending December of 2002 shows that freestyle is the number four brand meter on the market based upon kit sales. That is at 9.5% for the rolling 90 days. That is 5.1 points increase for the year 2002 and 115% increase year over year. It puts us in the number three position as a company with regards to dollar sales through system kits. On the strip side we are the number five in trip share at 5.1% for the rolling 90 days ended in December, 2.5% point increase for 2002 and a 98% increase year over year. The freestyle meter is at 11.5% on dollar share and it leads all companies in dollar share growth for 2002. That is a -- that represents 6-point increase for 2002 and 110% increase year over year. On the strip side, we are at 5.2% on dollar share and again lead all other companies in dollar share growth for 2002. 2.5 points increased in 2002 and again a 96% increase year over year. So you can see from all of these Datapoints and from both the OTC and the pharmacy side, the strip share and the meter share both continue to grow at a very nice rate and we're very pleased with the overall volume growth in this industry. Additional -- of our market acceptance are demonstrated by a survey done by " pharmacy today " who polled a thousand pharmacists across the United States and asked them what diabetes testing products they recommended.

Freestyle was in the top three of the blood glucose monitoring systems they recommended for self monitoring in the strips and the meter side and that reflects the progress we have made in the retail pharmacy retailing. Additionally we continue to sponsor continuing pharmacy education training, initially presented by Dr. John white and in the national pharmacists meeting in October and showing our commitment to education of pharmacists and continued performance of free style. On the international side of the house we a very significant growth year. We significantly expanded our international presence. In 2000, two the international business represents 24% of our 2002 revenues. We continue to expand globally through very carefully constructed strategic partnerships and we're off to an extremely fast start in Japan with a -- enjoying a 5% market share in 2002, again remembering we just launched there in February, 2002. in Europe and beyond that we added 20 new countries in 2002 bringing us to a total of 33 countries in which we're now shipping outside of the United States. This also includes the United Kingdom and Canada through our own TheraSense subsidiaries. This international expansion represents significant growth opportunity going forward as it represents half of the $4 million grew-- market but as we initialize these countries, there's variability in our quarter to quarter growth as being predictable to the extent of the initial penetration is somewhat different. Longer term this is a strong area for us as freestyle has tremendous popularity throughout the world. From a marketing and sales standpoint, our television advertising is continuing and we are very pleased with the test responses to it and we're going to continue to air those in the major metropolitan areas around the United States and continue to monitor those for their cost-effectiveness. We have had very positive attention to our products in Newsweek, Business Week, Wall Street Journal and parade magazine.

So again overall, we believe our awareness is increasing tremendously on freestyle and it puts us in a great position to really recognize the importance now for the next level of our business to target managed care and we realize that that is particularly important to us in the last months as we have seen the increasing sensitivity to higher co-payments in a weak economy. This is represented in a couple of key areas whereas we have all seen in the news, many companies are pushing out to void some of the additional increase costs for managed -- for health care in their businesses. They're pushing out a lot of this cost to their employees and a lot of time in the form of higher co-payments to medical benefits for their employees. That coupled with the worsening economy and higher unemployment gives greater sensitivity than before to the differences at copay levels. We believe that freestyle is preferred by customers, but we need to be preferred on more managed care plans to minimize this copaid difference that many experience. We also believe that, given our significant progress in freestyle market share as well as our significant progress in reducing our costs of goods that we are in an excellent position in order to achieve that kind of now penetration into the managed care arena. We continue to build our sales force. We added another 15% in our sales force for 2003, for health care professionals but now we're adding additional -- on national and district distribution channels and focus now on managed care specifically. In research and development, we presented our continuous monitoring data at the diabetes technology meeting on October 31 and November 2 of last year. There we presented to academy missions and experts and showed them the completeness of our accuracy study using a continuous glucose monitoring system.

We're pleased to show 98% of the results from our continuous monitor were in the A and B zone of the Clark air grid as compared to a yellow sprig instrument the standard laboratory reference used. This setting basically represent add three-day, 72-hour clinical setting with readings being taken every 15 minutes on 30 patients. The other important conclusion from that data, in addition to the significant accuracy shown is there were no differences found between arm stick and finger stick calibration on the patients where we tested that difference. Further on our continuous monitoring system, we are pleased to say we're back in our pivotal clinical trial. We have -- and we are very pleased with the initial progress there in those tiles. This sensor is based on our pat ebbed end wire technology which was developed at the university of Texas in Austin and it offer's significant number of advantages compared to conventional hide -- detection. It is a microwire sensor inserted through the skin by the patient about 5-centimeters deep. Many asked why we're able to get such improved results over what other people have experienced and clearly there are several key advantages that we believe our system has over similar technologies. Number one, in the area of stability, previous systems struggled with people whose sensitive for the unit of glucose -- that drifts over the life of the -- retrospective calibration. Our continuous sensors have a stable (inaudible) giving us basically no sensored rift over the three-day period. The other Kay area is oxygen dependence. Our continuing monitoring system does not rely on oxygen for system generation unlike other systems. Although oxygen can reduce the out put, it's smaller than many other systems. It's important because our oxygen concentrations can vary in the body giving rise to fairly large errors in other systems. Another key feature is interference -- it operates at a low potential and is gentler than those required by the market. This greatly reduces the ability for he interferences such as correspond business acid, acetaminophen to give a false response.

The other key features, it's designed tore hypoglycemic alarms. It has freestyle system. Freestyle is built into the system for backup therefore the people can't transform the numbers when they go to input the calibration data and if anything is wrong, they have a back up built in without carrying additional equipment. It also allows trends to provide better understanding of how to treat diabetes in an individual. Our continuous monitoring system gives not only a point in time reading but also -- for the trend at that point in time. As an example of where this is extremely important, say a patient is at 80-milligrams per deciliter and is moving up rapidly. In that case they would be coming back to the normal range and may not require any particular treatment. But if they were 80 decibels and dropping quickly, it might law allow them to -- to bring the person back up to a normal level instead of experiencing hypo-glisemia. You can see what a change the difference makes. The patients take the product home for three weeks and use the continuous monitor and compare it to freestyle readings on a periodic basis. The blind study does not see the data and our initial data back and the partially completed trials at this point shows again excellent clinical accuracy with 90 percent of the results in the (inaudible) range. Clark air grid. This particularly encouraging in that it has not deviated much from the clinical base study we did in the accuracy trials. We are continuing to target the completion of this trial and the submission of our PMA to the FDA for late summer, to the FDA. Additionally, our R&D group is focusing on bringing forward new and exciting products. We're translating our technical strength into market strength and we're convinced our studies show that we have the best performance in the market under a very broad set of circumstances. Our particular chemistry that we use in the freestyle -- of products with the mediator gives us several advantages over electrochemistry. It gives us tremendous April abilities in the presence of commonly interfering substances in the human body such as aspirin, Urich as it, acetaminophen and particularly in the presence of oxygen and variations in hematocrit models. We provide for our patients virtually painless testing from the widest variety of sites on the market.

We have significant detection capability for adequate sample which gave E. gives greater first-time test success and fewer wasted strips for our patients. Additionally from a technology standpoint we were able to enter into a licensing arrangement with health hero network in 2002. TheraSense is now the exclusive licensee under the diabetes field in more than 50 health hero patents and they have many patents pending. We believe the here over network has the most substantial portfolio in the market which enables does to do remote communications between different types of devices. We believe this position does very well for the future. In 2003, we see a number of additional opportunities. Further penetration of the U.S. and global markets. Certainly we're at the beginning of what we believe we did do here, the continuous submission to the MDA, managed care. As we talked about earlier, we are well positioned due to our growth and our ability to compete competitively from a cost standpoint. We believe we have the abilities to really leverage our platforms for the future, for 2003, 2004, and beyond and we will continue to demonstrate to this market global technology leadership in our Inn vet tree and (inaudible) platforms. I would like to turn you over to Charlie for a little more on our financial performance.

I would like to start with the income statements for the fourth quarter in comparison to 2001 -- revenues increased 46% to -- about 26% of the revenues came from international sales.

And we estimate two to 3 million came from our pharmacy detailing blitz including shelf conditions in the quarter. Cost revenues increased to 21. 7 million. This demonstrates the leverage of our business model and our ability to reduce costs. We achieve -- just don't get -- as market stated and test strip productions of 25%. The resulting gross profits increased 147% to 24.$5 million. The resulting gross margin was 53% compared to -- for the fourth quarter of 20001 much this was driven by a more favorable product mix and cost reductions achieved during the year. The product, was approximately as follows, about 80s percent of our sales from trips strips, 5 percent from ancillary products like Lansing devices (ph). Looking more specifically at our fourth quarter versus third quarter, our gross margin was relatively flat. It increased international sales in the quarter which have a lower transfer price but result in favorable margins, in an impact quarter to quarter. Also unusual -- shifting the production to the more automated packaging line from our slower and older manual line caused higher writeoffs on the strip area, and several component material cost reductions on our system kits occurred late in the quarter. The hit in December, so we're well positioned for 2003.

We expect our gross margins to be about 55% in the first quarter of 2003. As Mark said, we suspended our continuous pivotal trial in the fourth quarter and research and development expenses for the quarter -- we're back in the trials and we anticipate these -- our spending levels will pop back in the first quarter of -- as we continue to spend our research and products and support these -- for the year, we anticipate R&D spending to be approximately 10 to 11% of sales. Primarily due to our sales force expansion and our increase in advertising-related expenditures, SG&A expenses increased 40% to 25.$8 million. As market has stated, we are increasing our sales force by about 15 percent in the first quarter which will increase our SG&A spending in the first quarter then we expect it to be flat for the are sequential for the rest of year. This resulted in a 5.7 million loss or 14 cent were shared compared to net loss of 13 million or 34 cent per share for the fourth quarter of 2001, calculated (ph) on a to terrorism basis. Now I would like to turn to our balance sheet year end. We exited the year with cash and in investments of 77.9 million and this represent add burn in the quarter of approximately, different from the 18379 until we burned in the third quarter. Accounts receivable were -- with the third quarter debts pit an 18% increase in sales. Through our management of the sales process, reduced to 71 days at the end of the quarter looking at it on a weighted basis, day sales remain less than 60 at the close of the quarter.

Inventories were down about 8%. As you will remember, our inventories at the third quarter grew as we transitioned our meter manufacturing to china. We anticipate those will be further (inaudible) in the first quarter by 10 to 15 percent. Now I would like to turn to our performance guidance for 2003. We believe product revenue for2003 will be in the range of the 210 to 220 million. This represents a 35% growth over 2002 revenues when we exclude the contribution of the previously deferred revenues 20.4 million. We believe product revenues for the first quarter of 2003 will increase on a year over year basis will be significantly lower. We expect sales to consumers and related market shares and IMS S and Neilson to continue to grow. We continue to work at reducing inventory levels in the channel during the quarter. We expect to be profitable on a quarterly basis in the third quarter of this year. We have sufficient cash to fund our business through cash break even which I anticipate will happen in the fourth quarter of this year. Finally, we are completing the expansion of our facilities and we plan to move in at the end of the first quarter and begin also installing our second highly automated strip manufacturing line. The new facility scold dates our headquarters back in the one building, increases our test strip manufacturing capacity to support both 2003 and 2004 business plans, and the -- up of our continuous monitoring system. We anticipate cash (ph) expenditures for 20003 to be in the range of $12 million. CGMS equipment scaleup and other product-related equipment requirement. Now I would like to turn the -- back over to Mark.

That's our financial overview. Thanks, Charlie. I would like to open up this discussion in a moment to take questions but first I want to thank everybody for their support, through TheraSense and our inception and this past year, we very much appreciate your support and faith in it. Let me put it up for questions on the call. .

Ladies and gentlemen, if you have any question you will need to the press the star and your number 1. If your question has been answered already, you may -- one moment before they cue up the first question. First is Archie Smith from US Bancorp.

Hey, guys, how are you doing?

My voice is better than yours but it's colder here. I have a variety of questions. Most are fairly simple. Are you seeing any impact from the Beckton meter? I know it's -- their objectives are modest but I'm just wondering if you're seeing them there (ph) yet.

The market system has been out in Canada. We haven't seen any impact that is measure the up that a lot of people including the investor community and potential customers have had. We haven't seen any impact at this point. We will obviously watch it very carefully but at this point it has not had much of a reaction.

Charlie, what is your break even level stand at currently? Is it still in the low 50s or is it coming down?

It's still around the low 50s, at about a 60 percent it's gross margin on a (inaudible) base, what we see.

What were your gross (ph) margins throughout the quarter.

They're still around 70 percent. Is that likely to improve or do you think it will stay at second or that might actually take them down initially?

I think we will see them continue to improve. But you will probably see most of that impact in the quart quarter. The line will be up in the second quarter.

Are your strip ASP's in the U.S. stable?

...

We continue to -- yes. We continue to price our strips and systems both into the wholesale market at what we feel is the weighted average in the sense of the other leading brands (ph) so we continue to support the philosophy that you're not paying anymore for the technology, but the only thing you're giving up is pain. We price at parity with the other market leaders.

could you give me a quick synopsis of how you're doing in Canada and the UK? The startups there hampered Q through a -- Q3 a little.

Yes, they're moving at a rate but only a quarter behind where we thought they would be. But it is beginning to grow, as we have data measurable from those and IMS and others, we will report that.

CGS manufacturing, I'm getting a fair number of questions in terms of where you stand up because it seems like the program is moving forward.

We're continuing as we protect the expense sore and the sensor -- we're at the same time working here to real look at ways we can automatically but this in a testimony, over the exposure in very high tote and giving us great reliability. There's a lot of work to do there. As you have seen, the sons sore is extremely fall. Very interested and -- to me in highly -- we feel we have good processes here and it's a matter of taking them from prototype scale to high process scale. Our goal is to bring these products to people at an affordable cost level and, again, be able to see it's -- be able to be used by a large population of the (inaudible) community.

So it's safe to say you can manufacture on a (inaudible) but you can't scaled it up or attempted to scale it up yet?

That's correct. You've seen what we have been able to do with freestyle. When you talk about scale we're talking about prophesies from -- point, can be done in larger volumes, like going from a one up to a 4-5. So we're not looking radical improvements. We are just looking for ways to do them at better mass.

Can you give us quick discussion on how you're going to deal with the copay issues, which, as I understand it, relates to be at being at 33 and level four (inaudible) level two.

The people really like freestyle. But in this economy, if they're strapped with copays, in a -- versus secondary, they would experience differences of 20 or $30 a month. For some people that can be a deterrent especially when you're in -- times.

At the same level as the preferred product. We're not looking to be exclusive but we're looking for an even playing field with other more established players so that our patients have the ability to have the tries to pick what product they were. Given that playing field, we think you will see a long movement toward freestyle. So it's a matter of competing as these contracts come up and demonstrating the superiority of our technology and that we can compete competitively pricing wise which they're all sensitive to. As we get added to the formula, there are the copay disadvantages will disappear.

Do the contracts come up every year or do they tend to be multiyear bidding processes in.

They tend to be three to five year contracts. There's lot of variations around that but that's typical. And they're not always per se bid but many times they are but they're not bid on the truest sense in many cases. Many of the providers take into technology and benefits and support and service and all of those factors into account. They're not necessarily bid strictly on price alone. Those are the kinds of accounts we will target at the top of our priority list and the people who really are willing and able to differentiate between product performance and service and not strictly price.

Okay. One or two left quick questions, maybe for Charlie, is it too early for you guys to give us some more refined bottom line guidance either for Q1 or for fiscal '03 as a whole other than when you expect to break even or better?.

Well, I mean, what we try to do is, by giving you kind of an outline of what we think the operating expenses will coming in at, the 10 to 11% range, we think that will be pretty consistent quarter to quarter.

It sounds like SG&A you don't expect to go up much during the year?

No.

Most of that will hit in the first quarter, Archie.

What are you guessing for SG&A as -- for the first quarter?

What we're looking at would be -- we exited at 27 million, 29, and we're looking to be in the mid to low 27 million range. That would be the biggest step up.

And again that is supporting the sales force expansion as we add more people here to continue to penetrate the U.S. market and specifically target, you know, managed care and do a better job of retail distribution follow-up and to address some of the experiences that we had last year.

Okay. Even I can do that math, guys.

That's right.

Thanks for your help. I will get back in the cue.

No problem.

Next question?.

Sarah McElmore. Please go ahead.

Thank you. Good evening.

Good evening, Sarah.

Mark, could you just go through -- I nope that you -- could you remind us exactly what you're taking the number up to and give us an idea of numbers of where you're going with the managed care group and how that compares to your competitors?

Again, we are currently at 186 people. We said we're taking that up basically 15%. Over half of that increase, I would say, is focused on specifically managed care and strategic accounts in that regard. And the other key part of that, of course, is shoring up our abilities to support the retail distribution. I prefer not to -- for competitive reasons to define it any more precisely than that but that should give you good data for your model. We believe in both of those cases that will give us competitively sized retail distribution coverage as well as managed care coverage.

Okay. And on the DTC campaign spending, you talked a lot about looking at cost-effectiveness there. Can you give us an idea of exactly what you're looking at as far as metrics and how you're measuring your return on investment there?

The best we have, so we can get it on a weekly basis is get it beyond the test markets and to watch what happens in locations in stores, chains where we run the -- and then the non-metropolitan areas where we don't run the ads and then craft those to the add on and ad off weeks. Unlike some other competitors we are not running our ads (ph) on a continuous basis. We basically run them a couple of weeks on and then off and then cycle back again. We think that gives us good reminder ship but doesn't continually burn TV advertising dollars. Based on that, we can see the difference in the ad weeks and not non-add weeks and look at the up lift creativity by that. As we look at that up lift for the dollar spent that's how we gauge the cost-effectiveness of our advertising.

Over the long-term, I imagine that the first up lift your see is really people going out and getting kits and buying an national stock of strips. How do you track people going back to the stores and I guess you could call it a stick rate or something like that? What kind of data can you gather there?

Clearly that is something that we watch carefully. People initially bay buy the product. We want them to come back and do repeat purchases and we have done a lot to encourage that first buy. Part of the reason that we continue to be really focused here, as we've talked on managed care, is we know for them to stick at a -- it's a advantage issue and that is one of the areas that we are very focused on for this year and we have had some very Goodwins in the last few weeks and we expect to have more. And clearly that is one of the key objectives for us this year to eliminate that business. Technology is a big plus. Despite a preference, people in many cases affordably have to take their copay differences into account and that's -- that's not a plus for us at this point, is that -- you know, we're not preferred on a number of accounts. We can be covered but not necessarily the same rate.

Okay. And just a question on the seasonality of the business. It sounds like in Q1, you are expecting some seasonal slowness with the retailers year eastbound and certainly if you have any inventory in the channel, it would be obligated but can you give us a sense as you look forward is this a thing where you see a big buy in quarter in Q2 or how does that pace itself out in your mind.

I guess the best way to characterize it is historically we see the first quarter down three to 5 percent because to the point retailers are closing down their fiscal years and trying to be tight on inventory levels and things. You know, we want to help ourselves relative to more consistent and predictable buying (inaudible) we have been working to work down the level of inventories in the channel. So that our retailers and wholesalers will buy from us a couple of times for the quarter and not let it build up to a quarter end. So we're expecting a pretty good bounce back. You can do that mathematically, Sarah. If you look at the 210/220 guidance for the year in Q1 in order to have any kind of reasonable response to the overall number for the year, you can expect that the Q2 should be a pretty good bounce back from a level of kind of depleting some of the inventories in the channel he ever in Q1.

Okay, that's great. That's on the U.S. market. Often the international side, it sounds like you had a kind of ahead of expectation quarter there and you're looking, is it right for me to interpret you're looking for a dropoff in international shipments in Q1.

Not particularly. I mean, international is going to continue to grow. We were able to initialize the china market, but not at the original distributor that we had thought we were going into with the third quarter but we initialized the china market as a much more sustainable level with shipments there. We're now looking for many of these countries that we entered last year, 20 in all, to see follow on orders from them. They're not so many big new countries to enter into in 2003, so I would estimate that our quarter to quarter growth in international will be relatively steady unless some very large country opportunity or partnering opportunity there comes up that at this point we don't anticipate. So it should be much more of continuing penetration in the continuing countries rather than opening up new opportunities which is part of what gives us some of the variability in quarter to quarter growth.

Great. That's helpful. Thank you.

If you would like to ask a question, you may do so by pressing the star and one on you were touch-tone phone. Next question is Keenan Weeks (ph) from Thomas Wiesel, please go ahead.

Hi, guys, how are you?

Good. Thanks.

We just have a couple of questions. We had talked in some detail about the economics of the coupon program on the meter side. And I was wondering if you could give us any sort of sense of the magnitude of this program going forward.

Well, we think that -- I mean, couponing (ph), the impact of it in the 2003 numbers is going to be reasonably comparable as to what we have seen in 2003 and 2004. I mean it will be up slightly based on values but we think that in order to penetrate in the U.S. market, a couponing (ph) will be something that will need to continue to do.

And, again, a reminder for everyone. There are two times of the couponing (ph) that we're talking about here. One is the retail coupons that run on an alternating basis in various stores such as wall greens and Rite Aid on a roughly six week rotational basis. Those get low redemption levels. One that has had the most impact for us has been the health care profession coupons where we can use those at the pharmacy level and at the health care professional, Doctor, educator level and get people to try the product initially by letting them get a free system kit if they buy a hundred strips. So that's the coupon that probably has the highest perjury deem shun and the one that has the highest financial impact.

Okay. Thanks. And actually just as a follow up on the same lines, what do you expect -- you know we have this strip to meter ratio at 80/20, what can we expect, kind of exiting 2003?

We're actually at 85/15 as we just reported. But --.

Yeah, we think at the end of 2003 we will be at 85 percent coming from strips.

Right.

And again we have about 5% in there, as Charlie mentioned, from ancillary products, Lansing devices and other things and they're a good margin product.

Okay, thanks. Just one final question kind of on a separate issue. We had been looking for you to receive a letter of credit at the end of the quarter. I may have missed this at the beginning of the call. Did you make any comments relative to that?

Yes, the letter of cyst that we were referring to that was at issue in the third quarter is we were expecting a very large letter of credit for a strong initialization of the china market. That did not come through. That particular distributor was not able to get their financing arranged appropriately, and as I mentioned, we did enter the peoples republic of china market at a much lower sale, a different distributor. He didn't have quite as ambitious (ph) of initial start objectives and therefore we did get a letter of credit from them but a additional distributor, not the same, and a lower dollar value.

Okay, great, thanks so much.

Next question is Jill Jacobs (ph) from Beaudry Capital (ph). Please go ahead.

Yes, I was wondering if you could be a little more specific on the copay issue. I guess, where do you stand today, if you could help us quantify that a little bit, what are your goals for 2003, and do you expect as you achieve those goals there to be any financial impact on the company?

Sure. I mean, a couple of things, we don't have quite as broad of overall specific data here as I would like. But we estimate that we're covered on an equal basis on probably half of the reimbursement plans. I mean, Medicare for example fully covers us and many of the plans do. But there's another half out there that we can, by in large, get reimbursed on but it's some degree of disadvantage relative to the copay amount. These levels vary by company, depending upon how much a company has attempted to push some of their health care costs to their employees. I would say copay differences can range from five to $50 kinds of things but typically in the 20-dollar range from what we have seen. Depending upon your income level and if you're buying strips once a month, an additional 20-dollar copay can be significant to our patient base. Therefore we realize that is one of our key objectives is on that half of the reimbursement markup where we don't have the parity and the more of that we can achieve then the better chance we have to grow our share at an accelerated rate.

Okay. And thank you thank you very much. Do you expect there to be any financial implications as you tackle that other half of the market?

I think the financial implications that we're estimating are consistent with the guidance and the numbers that we have given. We continue to drive down our he costs and enable ourselves to be more aggressive there. As we have seen in the past years at the wholesale level, prices have been you stable in increasing so I think the net effect there is very consistent with the guidance that we have given and we think we're ready for that with the fine job our team has done in reducing costs.

Thank you very much.

You're welcome.

To ask a question press the star and then the 1 on your touch-tone phone. Next to Al Killdony.

Hi, Al.

Picking up on the last point, maybe it helpful to give us -- help us understand what your assumptions are or the underpinnings of your guidance are relative to overall pricing for 2003 for your products, especially strips?

OK, Mark, do you want to --.

Right. What we're looking at is traditionally in this space that strip pricing has gone up three to 5 percent on an annual basis at the wholesale and retail levels. And so that is factored in. And then offsetting that is factoring in the cost associated with more managed care at a slightly lower price. So those are two offsetting factors that we built into the revenue guidance for 2003.

Okay. But would it be fair to assume that, as part of going over -- of course more aggressively going after managed care, you're going to (inaudible) that annual price increase?

Not necessarily. I mean, and again I don't want to paint this craft as all that huge. I mean there's a lot of variability on these plans. And then some of them are far less price sensitive and far more forward thinking if you will, relative to the benefits of the technology, lower paying, greater health benefits from people testing more and being in better compliance. So, you know, obviously our priorities are not the ones who are strictly wanting to concentrate on price alone and not differentiate on the technology advantages that we believe we can represent. So, you know, we estimated that the best that we can here relative to where we think we have great opportunities to penetrate this market on the most approachable and most objective accounts that aren't strictly price only oriented.

Well, sort of picking up on that, what gives you the confidence that your market share gains to date have not been driven by sort of picking up the low hanging fruit in terms of those people that are the technologically savvy end of the market and willing to pay more out of market and now you're having to gain further market share by getting to people who have to pay more out of pocket and aren't used to it, how do you know you're not hitting up against a wall here that maybe you didn't see during the early stages in.

Well, I think the issue is -- I mean, this is not a surprise, Al. I think To be very candid about it, we have known those market and its competitive nature for some time. We have been working very steadfastly to aggressively reduce our costs. And based upon that, we believe now much smaller volume scales than our competitors have, we have competitive costs and we can continue to grow margins as well Aspen trait managed care with that. So this is not an unanticipated issue, nor is it something that is out lying in our model. I think realistically the only thing that has shifted of course is during the current recessionary period that none of us have been able to predict in this economy, the sense activity to this issue has certainly been there in a higher level as more companies push these costs out to their employees and higher levels of unemployment, you know, and poor returns in other areas for people and therefore more price sensitivity of the. And that was one of the primary reasons that we lowered our guidance for the year was to take that into account and those make this situation a bit more challenging due to the sensitivity level that people have to it. But we're quite prepared and very ready to compete in this arena. We knew this day would come and we're ready forest.

So at the risk of Stating the obvious, you take into consideration, you know, whatever changes you might have to make relative to the managed care market, when you talk about being able to get to that 60% overall gross margin level that will be obviously required will be profitable later this year?

Yes. Absolutely. And again to the best of our abilities we know this market pretty well and we know what some accounts expect and how far price sensitive they are. They are not big mysteries that sense. Clearly we think we're prepared for that and we have taken that into account and that is consistent with the guidance and data that we have given.

Great. Relative to the guidance you gave this year, do you make any assumptions or what are your expectations as to more competitive pressures with Beckton coming into the market, obviously as arch pointed out earlier they have modest expectations for the year but usually it's the case a new competitor will make some noise not market and could maybe free some new share gains, especially with their Medtronic relationship, what has been your thinking behind the guidance relative to the competitive out look?

They don't really have a trajectory to extrapolate. This is all speculative. The area we're expecting where it could be the most difficult or the most challenging for us and others in this market would be if Medtronic were to significantly get behind them and aggressively try to switch out their high frequency testing pump base of users and switch them over to BD (ph) based products but remember BD has the same relative to -- they have to equalize the copay situation and from a zero market share standpoint currently that will be very challenging for them to do. That's probably where we see the biggest sensitivity if med electronic would be aggressive in trying to switch out pump users of theirs, that could take a little edge off us as well as others that support that. But it does not affect us alone. It would affect the --.

Great. Lastly, quick question with regard to the increasing -- increasing the size of the sales force, are those people essentially now in place?

Some of them are in place. Others that are in the final stages of interview, completions in screening we expect to have them all in place by the end of the quarter.

Great. Thank you.

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