美國雅培 (ABT) 2003 Q2 法說會逐字稿

Good day everyone and welcome to TheraSense’s Second Quarter 2003 Conference call. (Caller instructions follow). As a reminder, this call is being recorded today, Thursday July 24, 2003. I will now turn this conference over to Mark Lortz Chairman and CEO of TheraSense. Please go ahead, Mr. Lortz.

Think you, operator, good afternoon and welcome. With me today on the call are Charlie Liamos, our CFO and COO and Mark Tatro, our VP of Finance.

Prior to discussing our results I need to advise you that during the course of this call we may make certain forward-looking statements regarding future events or future financial performance of TheraSense. We need to caution you not to place undo reliance on such forward-looking statements. They are not guarantees of future performance and involve known and unknown risks and uncertainties, which may cause actual results and performance to be materially different from that expressed or implied by those forward-looking statements. A description of these risks can be found in our Form 10-Q for the quarter ended March 31, 2003 and additional reports that we file with SEC. Information in this presentation concerning TheraSense’s forecast for future periods represents this outlook as of today's date and they undertake no obligation to update or revise any forward-looking statements.

Let me first give you an overview of the quarter. As you know from our press release today we reported strong sales and earnings results for the period ended June 31, 2003. We were encouraged by our Q2 results and are pleased to announce the following accomplishments for the quarter.

We had our largest quarter of product shipments with net revenues of $50.9m. This is up 24% from Q1. We improved our gross margin to 56%, up 3 percentage points from Q1. Our operating expenses were relatively flat and we reduced our operating loss to $0.08 per share compared to a $0.21 loss in Q1, demonstrating the leverage of this business at higher revenue levels. We approached breakeven cash flow with a net reduction in cash and investments of only $100,000 for the quarter. We achieved a more even flow of orders through the quarter as a result of reducing our channel inventory in the first and second quarters.

We introduced two new products at the ADA, TheraSense’s own FreeStyle Flash, which will be the smallest meter on the market with a substantially reduced test time and the Cosmore Insulin Technology system, which marries our FreeStyle Glucose Monitoring Technology with Dell Tech’s Cosmo Insulin Pump. We successfully completed the pivotal trials for Navigator, our continuous glucose monitoring system.

Continued improvements in market share also reflect the strength of our business. IMS National Prescription Audit data tracks prescription purchases. This NPA data for the second quarter shows that TheraSense has a 10% meter market share, a 71% increase year over year. Our strip share for the same period was 6.5%, a 50% share increase year over year.

IMS National Sales Perspective data, formerly RPP, tracks purchases from wholesalers and manufacturers. Basically NSP tracks the flow of products into the distribution channel. For the 90 days ending in May, NSP data shows FreeStyle to be the number four brand meter on the market at a 10.1% unit share, a 77% increase year over year. For the same period FreeStyle is the number five strip, with a 6% unit share and a 52% increase year over year.

Nielsen data is compiled from our four major drugstore chains, Rite Aid, Walgreens, CVS, and Eckerd. These represent about 50% of the over the counter (OTC) market. FreeStyle product sales represents 7.8% total dollar category share, a 50% increase year over year. The trends indicated by all of this data reflect TheraSense’s continued long-term market share growth.

Let me recap a few of the highlights from the recent American Diabetes Association (ADA) meeting. In June, we participated in the ADA’s annual scientific sessions. There was a high amount of traffic and excitement at our booth, driven by the exhibition of both the FreeStyle Flash and the Cosmore Insulin Technology system.

We received positive feedback when we exhibited our next anticipated product, FreeStyle Flash. The FreeStyle Flash will be a sleek feature-packed system, designed for children and adults with diabetes, especially for frequent testers. It incorporates all the popular attributes of the FreeStyle system and uses our current FreeStyle strip, which uses the world smallest blood sample of only 0.3 microliters.

Flash, the world’s smallest meter, is designed to have other new features including a faster average test time of seven seconds plus a back lit display and lighted test strip board for easy testing at night or in dark conditions. It has four customizable daily alarms, which can be set to remind children and adults alike that it's time to test, supporting the ADA guidelines. FreeStyle Flash is expected to be available in the United States in the fourth quarter.

We also received positive feedback when we exhibited the Cosmore Insulin Technology system. This product was developed in collaboration with Dell Tech and marries the FreeStyle blood glucose monitoring technology with Dell Tech’s Cosmo insulin pump. The Cosmore system is a new all in one insulin pump and glucose monitor that allows users to test their glucose and administer insulin using one combined device, making for easier testing and insulin delivery.

Users will test by using the Cosmore system and a FreeStyle test strip. The glucose information is automatically transferred from the FreeStyle CosMonitor to the Cosmo pump via an infrared port. Any necessary changes in insulin amounts can be made from the bolus menu based on this transferred data. This system is currently pending 510K approval and is expected to launch early next year.

In addition, we presented encouraging clinical results from 30 participants in the pivotal home-use clinical trial for our continuous glucose monitoring system, Navigator. 97.4 percent of the readings from these participants were in the A. and B regions of the [Clark Aerogrid] [ph], which confirms previous encouraging results achieved in the clinic setting. We believe the quality of this data, combined with the trend information and predictive alarm capabilities from continuous monitoring provides strong support for our goal of obtaining a PMA approval.

Our PMA filing will seek FDA approval for our continuous glucose monitor to replace standard in vitro testing, which has not yet been achieved by any other company. We are currently analyzing the approximately 3 million data points generated by this clinical, in preparation for our PMA submission to the FDA. We remain on track for submission in the second half of 2003.

Now to give you an update in our efforts in the managed care area. We use the term “managed care” here to broadly cover health insurance both public and private. The vast majority of patients have some form of managed care coverage and comparable reimbursement is important, particularly in difficult financial times.

A recent article in the Wall Street Journal quoted data from the Bureau of Labor Statistics saying that America's average annual out-of-pocket expenses rose 26% between 1995 and 2001. The article goes on to cite a study completed by the Washington Business Group on Health, which represents 200 employers from across the country. They claimed that 80% of employers said they planned to increase co-pays or cost sharing in 2003.

The article further cites a yet to be published Rand study of 90,000 people with chronic diseases such as diabetes, which found that a doubling of co-pays for prescription drugs resulted in a 10% to 12% reduction in the use of medications. This confirms that co-pays are increasing and there is a significant consumer sensitivity to these increased co-pays. As a result, it has been a core part of our strategy to level the playing field and make FreeStyle available on an equal co-pay a basis.

We are seeing early signs of success. In the second quarter we were able to demonstrate continued momentum in expanding our managed care coverage on the equal co-pay basis. We are achieving this objective by presenting patient benefits such as reduced pain, the largest number of available test sites, and high accuracy at competitive pricing. This is supported by a rapidly growing user base.

We continue to maintain that many people will choose FreeStyle over competitive systems when the choice is under equal financial circumstances. Favorable responses from a number of plans put us well ahead of our internal targets for additional insured lives covered on an equal co-pays basis and supports our anticipated revenue ramp in the third and fourth quarters.

Now let me handed over to Charlie for review of our cute to financials and operations.

Thanks Mark. I'll start with our income statement results for the second quarter and a comparison to the second quarter of 2002.

Total revenues for the second quarter were $50.9m. Total revenues for the second quarter of 2002 were $59.2m, but remember this includes $20.4m attributable to the recognition of previously deferred revenues. Cost of revenues for the second quarter was $22.5m. Cost of revenues for the second quarter of 2002 was $34.4m, but again this includes $16.2m of costs attributable to the recognition of those previously deferred revenues.

Gross profits for the second quarter were $28.4m. Gross profits for the second quarter of 2002 were $24.8m, but please remember, again, this included $4.2m of gross profits from the recognition of previously deferred revenues. The resulting gross margin for the second quarter was 56%, compared to 42% gross margin for the second quarter of 2002.

The gross margin for the second quarter of 2002 was adversely impacted by the recognition of the previously deferred revenue, since that revenue had a relatively high proportion from system kits. Looking at gross margin increase in comparison to our preceding quarter, as we had expected we saw an increase of from 53% to 56%.

Research and development expenses decreased by 6% to $5.7m. While we expect research and development expenses will increase in future periods, we believe that they will remain at about a 9-11% of revenue level for the foreseeable future. Selling, general, and administrative expenses increased 19% to $26.5m. As we had anticipated, SG&A increased over the first quarter due to our sales force expansion. For the remainder of the year we would expect SG&A would remain at this dollar level per quarter.

This all resulted in a net loss for the quarter of $3.5m or $0.08 per share, compared to a net loss of $321m or $0.08 per share for the second quarter of 2002. The net loss for the second quarter of 2002 was favorably impacted by that $4.2m gross profit from the recognition of previously deferred revenues.

Now I would like to turn to our balance sheet at the quarter end.

We were very pleased to be operating cash flow positive for the quarter. We exited the quarter with cash and investments of $78.8m. Due to our strong cash position and anticipated future growth, which also paid down $4m of debt in the quarter. Due to semi-annual royalty payments we paid in the third quarter, we did not expect to be operating cash flow positive in the third quarter.

Accounts receivables were $37.3m. DSO on an unweighted basis decreased to 66 days versus 88 days at the end of the first quarter. DSO on a weighted basis were less than 60 days. While DSO on an unweighted basis may increase in future periods, we anticipate weighted DSO will remain at approximately 60 days.

TheraSense balance sheet inventories went down by 25%, when compared to inventory levels at the end of the first quarter. We were pleased to achieve this anticipated inventory reduction. In future periods, as our business grows and we launch new products, our inventory levels may rise a bit.

Now I would like to turn to our performance guidance for 2003.

We continue to believe that revenues for 2003 will be in the range of $210-220m and that 20-25% of that revenue will come from international sales. We continue to believe that revenues for the third quarter will be in the range of $56-59m. We continue to expect to be profitable on a quarterly basis in the third quarter of this year and we continue to believe that we will be cash flow positive on a quarterly basis in the fourth quarter of this year.

On our next conference call in the third quarter will give you guidance for 2004. This completes my financial overview. Now I'd like to turn the callback over to Mark.

As you can see, we are very pleased with our results to date. As our revenue growth continues to outpace the market and believe that our strong performance in managed care, we are well positioned to achieve our goals for the second half of 2003 as well.

We are now available to answer any questions you may have. Operator?

Thank you, ladies and gentlemen. (Caller instructions follow.)

One moment, please, for the first question. And we will take our first question from Tom Gunderson [ph] from Piper Jaffray. Please go ahead.

Let's take a look at Q3, Charlie, as long as you ended with that. SG&A, I think I heard right, stays at about the same numerical level for Q3 and Q4. Gross margin you said last quarter for you to be profitable it would have to pay and the 60% range. Is that still correct?

We actually think gross margin in the third quarter is going to be in the 58 percent range, Tom.

Okay.

And at $56m - that’s operating expense levels - we’re at a break even to slightly positive.

Okay and what did you exit -- you're doing kind of may a change in your cost of goods here as you go from old expensive to new less expensive. What did you exit Q2 at?

Our exit rate supports our assumption of 58% in the quarter and continues to support our assumption of a 60% gross margin rate by year-end.

Okay and SG&A, those levels staying steady, does that mean we’ve achieved the full manpower right now?

Yes we have. We’ve filled all of the expansion slots in the sales force at this point in time.

And then a last question before I get back in queue on the managed care segment here, Mark, and the equal co-pay, etc. You talked about being ahead of plan. As I recall, plan was $20m covered lives. Have we achieved that or close to that?

As I said, we are actually ahead of our internal plan on that, Tom, and the caveat here we need to just be careful of is the awards go through a number of different plays. Meaning from being awarded in the contracts, but more importantly from getting the awards to be on equal co-pay footing to also playing it through to conversion of customers. So, assuming reasonable timeframes to play through the conversion of customers once the awards have been made, we are well ahead of that plan.

To be there by the end of the year?

Yes sir.

Yes.

Okay, thank you.

Next question.

Thank you. We'll take our next question from Al Kildani [ph] with Unterberg, Towbin. Please go ahead.

Good afternoon. Charlie, did you mention that the international revenues in the quarter were what percentage of revenues?

International for the quarter was about 19%, Al. We still think that for the year they're going to come in at the 20-25% range.

What's the status of the renegotiated distribution agreement with the Disetronic and I mean, is that still based on the contractual minimums that had been in place for?

Yes, I mean at this point, Al, the Disetronic in its revised format here is meeting all of its contractual obligations. They had committed to increase their sales force by about 50%. Our best estimate is that that's about a third of the way through the process. They are still kind of sorting out personnel between themselves and the pump side that went to Roche. But all indications at this point is that they're going to be able to meet or exceeded their commitments.

Okay and how much of the payment you received earlier this year from Disetronic counted against revenues in the quarter?

We recognized $600,000 in the quarter.

Great, thank you. I know you've gone, perhaps, through this exercise before, but given the very strong results, I wanted to ask again. If you could sort of the walk us through in as much detail as possible the measures you take to insure that your sales are actually reflecting flow-through to meet the end user demand and there's not again sort of accumulating as an issue with your distributors?

Yeah. I mean, Al, there's a number of ways that we particularly watch that. Number one is, as I mentioned, in the share data. We monitor not only the volumes of product going into the channel, but more importantly in many ways the NPA data and the Nielsen data monitors the increasing volume of product going out of the stores, through both the prescription and the OTC side to the customers.

So, clearly it's an input/output equation. We watch carefully what we ship in and what goes out and our data continues to support that we are moving the inventory levels in the channel. Not only down as we had anticipated, but we are also making significant strides in moving it to the store level and getting it in the appropriate place places to also avoid stock outs.

I guess I am wondering how much of the process is a reconciliation of different third party data points and how much is actually actively ensuring that there's flow-through from say the distribution centers to retail.

It's all of those things. I mean, bear in mind that a couple of things would probably influence us and people who distribute and stock our products to have a little bit heavier inventories than maybe some of the larger players in the industry. Number one, we have an increasing rate of product leaving the store as our market share grows. Therefore most of their systems would have a larger number in the sense that if you're backward looking relative to the day's supply on hand, they would anticipate that obviously with an increasing sales growth and stock more in order to cover the accelerated growth rates.

We've also, in order to really work the issues and make sure that the materials are moved from the regional and major warehousing centers into the stores, we've put a significant level of 30 people involved in really working the retail side of the house. To aggressively manage the flow-through issues and reduce store stock outs so that despite the fact that we have less SKUs per store and in some cases, compared to the top players, less store depth of product, that we don't suffer from that with excessive stock outs.

So, all those reasons to reflect probably a bit more tendency to have higher inventories in the channel, in order to backup the fairly thin levels of product at the store level.

Okay and then some of the other major, in particular one of the other major players in the market has reported seeing sort of slowing growth in the category and inventory contraction at retail. And I guess we're wondering what in particular you're seeing and are you simply overcoming that because there is a scale issue and you’re sort of the small up and coming organization, as opposed to the one that might have a lot larger presence already?

Well our view on the first part of the question, relative to market growth, our view is probably not as extreme as some of the other calls that have given their views on it. We would suggest that in the past the U.S. market has been probably growing in the 10-12% range and if it has slowed down a bit, its probably more in the 8-10%. And probably driven a bit by just the adverse economic times.

But we haven't seen anything, at least from our viewpoint, more dramatic than that at this point. So, we are just not quite tracking with some of the extremes that have been cited previously. And again, for us, being on an upswing and the fact that we've aggressively been working to improve the distribution flow-through, again we are seeing positive directional results.

Okay great, thank you.

Thank you and we'll take our next question from Ari Cole [ph] calling from Eaton Vance. Please proceed with your question.

Good afternoon gentlemen and best of luck on a go forward basis.

Thank you.

Regarding the Messenger, which I guess is maybe now Navigator --

Correct.

Can you clarify the timeline, hopefully, for approval from a regulatory perspective, in terms of when you think you'll actually file the product? And the most important question is what is the potential amount of time it might take for finally getting approval for the launching of the product?

Well be important part is the latter part, which is the launch of the product. At this point we still anticipate the submission of the FDA/PMA in the second half of this year. And again, going through a huge amount of data and going through a lot of analysis to segregate the data, cross tab it through all sorts of different analyses for ethnicity, age, sex, all of those different kinds of different population sub segments that are required.

Based upon a submission here in the second half of the year, again, very hard to be predictive of the FDA, but typically we're talking in the 15-month timeframe for approval. And again, depending upon what questions they might ask for this unique approval, depending upon any panels that might be convened, etc. So, basically we would be talking somewhere in the neighborhood of 15 months plus or minus from the time of submission.

Okay. Unlike or maybe similar to drugs now with the FDA, do you have rolling submissions were some of the paperwork will already be there? Or is it all kind of filed one day, in complete format, the first time they get a peek at it?

We have had a number of discussions with them. But we did not choose to go with a modular approach and so the majority of the data they will be seeing for the first time. But that's not to say that we haven't had significant conversations with the FDA over the past several years with both the form and substance and content of our submission.

Okay. The reason I ask is the Navigator clearly is going to be much more of an innovative or revolutionary glucose monitoring device vis-a-vis what is out there today. And for that reason I'm just assuming that there might be a higher risk of questions or delays by the FDA, because of concerns about such a branded device. So that's why I'm wondering if the way in which are going to submit, does it minimize or increase your risk of having the process be further delayed?

Well I think the bigger issue is traditionally, in the glucose monitoring industry today, the submissions for conventional in vitro monitoring have been 510K’s. Obviously the reason this is a PMA is because of those additional risks, as you say and part of the reason it's a longer cycle time expectation in getting through the process.

It is our obligation to demonstrate the safety and efficacy of this product for the claims that we would like to see indicated for this product. Therefore, based upon what we know at this point, the times that I cited to you earlier are reflective of those risks as we know them today.

Okay thanks and one last thing. Could you give us your best guesstimate for how many weeks of inventory or dollars of inventory there are in the channel? Because you may have heard that there are certainly people who thought that your revenues this quarter would not be as good as they were because of a continued problem with excess inventory in the channel.

Yes. I mean, just to be more complete on an earlier answer and then I'll come to your next question here. We did, by the way, evaluate whether we should do that modular submission relative to the Navigator product and based upon the various scenarios and timelines, we did not think it would save us any time in going that way, so that was a conscious choice.

Relative to your question on inventories in the channel, as we mentioned earlier we have been monitoring this area very, very crucially. We have worked very hard in both are staffing and our logistics capabilities to make sure that not only are we seeing the stores replenished at the appropriate levels so we do not experience some of the issues we had in Q3 a year ago with excess of stock outs and some areas, we have also worked very hard to continue to build our relationships with these retailers, increase their store level stocking and both width and depth so to speak in their shelf planning. And we continue to work with them for their varied promotional calendars.

But having said that, our promotional activities are traditional with the others in the industry and we are not doing anything out of the ordinary in that sense. We're competing very aggressively relative to our direct consumer advertising in other areas, but our promotional activities and our movements of products through the channel we're just monitoring a lot better, I think, than previously in making sure that we’re getting the right level of flow-through.

So, the simple answer would be that your channel inventory is kind of at the appropriate levels now or even below where you'd like them to be?

No. I would say that they are appropriate to slightly higher than we’d like. We would expect to continue to work them down to some extent. But I would expect, as long as we’re on this accelerating growth plan, that we would continue to have somewhat higher inventories on a day’s supply basis, in a sense, than some of our less rapidly growing brethren.

Understood. Great, well, thank you.

You’re welcome.

Thank you and our next question comes from Sara Mitchell-Moore [ph] from SG Cowen. Please go ahead with your question.

Mark, if you can step back on the inventory? You made some comments about how you guys are tracking things at the retail end. Can you just tell us kind of what improvements you’ve made at getting some additional visibility at the wholesaler level?

Well, Sara, I mean the big thing is making sure that the wholesale supplies there are adequate to back fill not only the third party smaller independent stores, ect, as well as the backup inventory for the major chains that we sell directly to.

Frankly, as we improve the conditions at the retail level and are able to ship to them directly, it does put some diminished requirement on some of the wholesalers in the sense that they’re not being turned to quite as frequently for a backup supply, if we fix the problem at the store level. So, it is a bit of a connected system here in that sense.

So, the biggest issue, first of all, for us is to insure that our consumers are adequately supplied with product and don’t have to be inconvenienced by not being able to find it appropriately on the shelves. Or worse yet, aren’t tempted to be switched to another product because of it’s availability, so clearly, that helps.

The other thing that I would say that increases our velocity at the store level, as we are able to make progress here in managed care and equal the co-pays, of course that helps the store turnover and increases the velocity at the store level. So, all of these things work very much hand in hand to improve the flow-through in the system.

Okay and on the Navigator, can you update us on where you are as far as scaling up manufacturing for the sensor?

The sensor manufacturing process is in prototype stage at this point and the process is consistent with what we would expect to do in high volume manufacturing. But we would just do it on a larger scale so to speak, but the key process parameters are identical. We’re very confident that given the timeline that we anticipate, as we talked earlier, that the full scale production equipment that resembles the processes we’re doing now at the smaller scale will be more than available. And the manufacturing issues, at this point, we don’t expect to be pacing our ability to commercialize the product.

Great. Thank you.

Thank you. Our next question comes from Neil Jacobs [ph] from Bodri Capital Management. Please go ahead with your question.

Good afternoon and congrats on the quarter, two quick questions on the top line. In your revenue guidance that you’ve given for the remainder of the year, does that incorporate any revenues from the Flash product in Q4?

It would in Q4 to some degree, but we’re not expecting a large contribution at that point. We do expect to launch the product in the latter half of the year. But again, it’ll be basically building initial inventories of the meter, but recall that they come in strips, so there will not be any significant need to increase inventories for the strip there. So, the answer to your question is yes it includes it, but it is not particularly material.

Okay, thank you and secondly on the initial front, I don’t recall what your international revenue breakdown was in the first quarter, but what -- sorry?

It was 24%.

Twenty-four percent, okay. So, do you expect continued higher growth through the remainder of the year, international versus domestic?

I would say we expect it to be pretty much in the same proportions. We expect the year to end at about 20-25% international. We continue to see a little bit of softness still in the Middle East and we’re catching up. As we mentioned earlier, a couple of our franchises that are gaining momentum but didn’t get off to quite the start that they did, but in the net result we still expect the year to end in that 20-25% range.

Got you and does that envision any new geographies being added?

Yes a few. But the biggest and most developed countries will still dominate that. So, new territory expansions will basically start building the framework for growth in the international arena. In future years it will not have a huge impact on this year. None of them are large enough that will cause any big shift as we open those.

Remember that overall the international arena is about half of the $4.5b market and so in the longer term we will need to continually address and grow the international business. To reach that proportion, it would more a 50-50 level.

Great. Thank you very much.

You’re welcome.

Once again, if you would like to ask a question, please press the star and one on your touch-tone phone. And we will take a follow-up question from Tom Gunderson [ph] of Piper Jaffray. Please go ahead.

I have two quick questions for model building. Number one, can you give us the revenue breakdown for percentage strips versus meters?

Yeah. The strip contribution is about 85%.

And were ASPs up, down, or stable in the quarter?

They were up slightly in the quarter.

And you expect them to stay that way for the rest of the year as far as hitting the plan?

Yes.

On an aggregate basis, yes.

Okay. Those are the two quick ones. Thanks.

Great. Thanks Tom.

Thank you and once again if you would like to ask a question, please press the star and one on your touch-tone phone. And we will take our next question from Ari Cole [ph] from Eaton Vance. Please go ahead.

Good afternoon again. One question about R&D. As you know, you had an extra focus and increase in spending on the Messenger/Navigator this year ahead of your submission to the FDA. I guess over the 12 or 15 months when its in the FDA’s hands, I mean, are we going to continue seeing an increase in R&D for the Company on an aggregate basis? Or might it actually decline, because all that spending that was needed is temporarily put on hold because the project’s done, so to speak?

The answer to your question is we don’t expect in the next year our R&D spending proportionately to go down. And the reason for that is while we have what we believe are the essential pieces to go to the FDA with for our PMA submission, we certainly will continue to do a number of consumer based clinicals to perfect the user interface. Make the product easy and reliable to use, try to gain information from people on the ways we can help them incorporate this kind of a technology into their lives in a very amenable fashion to their daily routine. And so we would expect that, based upon that type of work that will go on in parallel with our correspondence with the FDA, that the level of expenditures would remain fairly constant to up slightly.

In dollars?

Yes.

In dollars.

Got it. Thank you.

Uh-huh.

Thank you and we’ll take our next question from Lynn Piper [ph] from Thomas Weisel Partners. Please go ahead.

Hi.

Hi Lynn.

I have a couple questions about the managed care progress you’re making. I guess, first of all, what would you say is the time lag from when you win a contract of equal co-pay for a managed care provider to when we would actually see some revenue contribution from that contract?

Yeah, Lynn, it’s hard to give you a very definite answer on that, because some of the plans vary substantially. Some literally cover tens of millions of lives and some cover tens of thousands. But it can as short as around 4-6 weeks and it could be in the neighborhood of 3-6 months, kind of depending upon the size of the plan.

Okay and then just secondly, I know you had talked a lot about as your strip volume gets up to 85% of your share, where it is now of your mix and your target gross margin getting up towards 60%. How would adding managed care contracts and negotiating that affect your gross margin target going forward, or would it?

Well, we think that one of the things about the managed care is, again, being able to not have situations where people start using the product and have to stop and so we have that negative investment of the system kits without the recurring revenue stream. So we think that the ability for managed care allowing us to keep those customers longer will offset the cost associated with the rebates for the managed care plans.

So, the simple answer to your question, then Lynn, is that with all the puts and takes we don’t expect the further penetration of managed care in the net to be a major issue for us. And we expect to be able to generate the same kind of margins because we can reduce some of the expenses of customer turnover.

Okay great. Congratulations on the nice quarter.

Thank you very much.

Thank you and we’ll take our next question from Kevin Kotler [ph] from Galleon. Please go ahead.

Yeah hi, Kevin Kotler here, great quarter.

Thanks Kevin.

Did you say when you’re going to show more than 30 patients-worth of data? Like how many patients were in the trial in total?

The trial in total had slightly over 100 patients. We would expect to publish that sometime after the submission, probably at one of the next scientific sessions, perhaps at the November Diabetes Technology conference. We have to allow time, obviously, for abstract submission, which sometimes can be a number of months to get clearance for those conferences. But obviously all that data, all 100 patients plus will be in the data we submit to the FDA and again, we will publish that in a scientific session at our first opportunity after that.

And has the FDA said anything to you about in terms of expedited review?

They have already granted us expedited review.

Okay, so just given that and I guess given the fact that Mini Med, Medtronic, they either got approval or they’re expecting approval of a home product in like, I guess, the October/November timeframe without a panel. The guidance of 15 months, given expedited review and given your conversations with the FDA, it just seems a little bit long. I mean, is there any reason why it wouldn’t be more of a standard maybe 12 months for a PMA and then expedited would be more of a 9-month process? What has to go on from now to the time that you file your full PMA that gives you this kind of longer timeframe?

You know Kevin, we’d be delighted if the answer was faster, but there is a big difficult in between the indications that we are seeking and what we understand to be the indications that MiniMed/Medtronic is seeking. Our understanding of their next-stage product, it is still going to be indicated for adjunctive use to in vitro monitoring.

Oh.

And so given that we’re going for larger indications to be used as a replacement for in vitro testing, I think its appropriate for us to estimate what that new set of indications would typically cause FDA and therefore we hold with the 15-month estimate. If we can navigate our way through that and satisfy everybody’s questions on a faster basis we’d be delighted, but I don’t want to set unrealistic expectations with people. Given that no one else has received these indications previously.

Okay and granted it makes a lot of sense to be conservative. But just going back on what MiniMed has done and what the GlucoWatch was has done, has the IDE that you ran, did the FDA sign off on it saying that that data set that you were going to collect was sufficient to get this indication that you’re seeking? Or is that still kind of an unknown?

Well that’s not exactly how it works. I mean, they agree with the discussions with us relative to our protocols for the clinical trials. Then, as we present the data to them and make our arguments with them in that presentation, it is up to us to demonstrate that the product is safe and effective for the indications that we are seeking, okay. It’s not like there is a pre-established hurdle that if the data is this and it’s greater than this number then you automatically get approval.

So, that is part of the reason that we can’t be in any way taking the FDA’s review for granted here and we have to allow sufficient time to go through this and go through any of their questions. If they choose to invoke a panel, which we’re assuming that they will, but they don’t have to, again we’re trying not to be presumptuous on assuming what questions and issues they would have. Again, no one has gone where we’re going.

Right.

So, again, we’d rather err on the side of allowing for adequate time to do that than have yourself and other people potentially be disappointed.

Understand and just one last follow-up and I do appreciate your conservatism here and I’m not trying to beat you up on this, other than just trying to understand what we’re facing in terms of the process. Again, going back and what we’ve seen in other panel meetings is this issue of, for example, and you mentioned it already. So the whole issue of did you have enough African Americans in the trial and children and different types of skin.

Uh-huh.

All those kinds of questions. Do you feel that the current trial that you have, do you feel that it encompasses enough of the different variations in the population by itself? And not really question whether or not the data is good, but just those kinds of basic issues that seem kind of more on the obvious side?

We believe so. I mean, the benefit perhaps of having observed the panels that took place relative to MiniMed/Medtronic and Signus indicates that we were able to, in those public sessions, understand some of the issues, sensitivities, and questions that panel members and FDA had. And so we hopefully have learned from all that and we do believe, obviously, that the populations that we’ve included in our clinical trials encompass sufficient range and depth in those areas to do that

And again, assuming that our judgment there is correct and the FDA supports that, then we would expect that the breadth and diversity of the people we have in our clinicals will support what we’re doing. Again, it’s not our opinion that counts, obviously. Its FDA’s opinion that counts on that, but we did try to be obviously intelligent and learn from what other people’s experiences with them in the discussions were.

Thank you.

Thank you and we’ll take our next question from Sam Chang [ph] with RBC Capital Markets. Please go ahead.

Hi, good afternoon.

Hi Sam.

The various market data continues to show that the meter share and the strip share numbers continue to widen. Is that what you’re expecting and when can we kind of see sort of like a pull through and kind of see that margin starting to close up?

Well, Sam, I would say overall that we’re not really seeing them widen per se, but we’re not seeing them close radically either. We do believe, as we mentioned in the earlier part of the year, that with the greater success in managed care we should be able to help that substantially. And that, as Charlie mentioned, when we place systems today, people would like to stay with them but can’t because they can’t afford a higher tiered co-pay and whatever and then lose those customers. That’s always going to cause some of the meters we place not to have traction so to speak and pull through to strip share.

So, as we continue to make benefits there, beneficial strides there I should say, we would expect that to help close the gap somewhat, but always there’s a high level of growth. The meter share will always be somewhat higher than the strip share and will be a leading indicator so to speak, as long as we’re on an increasing trajectory.

Okay, thanks, just one more follow-up. There’s quite a bit uptick in the month of May. Was there any particular reason for that or was it just kind of a month-to-month variation we’re seeing there?

Well I think the May data, as far as we can see, was consistent with the growth we’re seeing. I mean, we have always felt that these third party data sources are a little bit subject to variations in timing and that’s why we have tended to really go more with the 90-day rolling data. It does tend to kind of smooth out some of the month-to-month fluctuations.

But we do think that on a 90-day basis that the level of increase we’re seeing in shares is indicative of the continued growth of the FreeStyle product line and then the greater number of physicians that are prescribing, as well as the greater success on reimbursement. So, all of those things are continuing to contribute to the growth of the product.

Okay, thanks.

You’re welcome.

Thank you and we’ll take our next question from Kim Weeks from Thomas Weisel Partners. Please go ahead.

Hi guys, thanks for taking us back in queue, just a couple of questions. Looking at expectations for FreeStyle Flash to come out in the fourth quarter of the year, have you made any plans as far as kind of negotiating any extra shelf space for the Flash product? Or are you planning on working within your existing constraints?

We have had great success at this point. We’re very pleased with retailers’ response to the additional stocking of the Flash system in conjunction with our current FreeStyle product. Many of them are in the process here, in the September to November timeframe, of replanning their shelf spacing for the 2004 calendar year. So, we are hopeful that in the process of that and if Flash has the patient popularity, that we would expect that we would be able to obtain sufficient shelf space for both products.

Okay and do you have any estimates in your mind -- I know that probably in the fourth quarter of this year the Flash impact is somewhat minimal. But going into 2004, do you have any expectations for any general ASP increases?

Well again, the cost of the system and the selling price isn’t going to be materially different. What we’re really hoping that Flash does is meet with, again, a little bit better for the variety of different patient needs. It is very hard and a very mature and segmented market today for any one product to meet everyone’s needs, so with a combination of Flash and the original FreeStyle we hope to be able to cross a wider breadth of patient needs with that. And at the same time, provide retailer benefit by having a common strip between them so they don’t have to expand additional shelf space for additional strip presence.

So, really we think that the presence of Flash in the market place, as well as the Dell Tech Cos monitor system will help build our product acceptance in the market for all types of users. And as we give our guidance next quarter for 2004, we expect that the availability of both types of products will support our 2004 guidance.

Okay. Thanks and we actually just have one more. This may be looking too much to 2004 as well, but do you have any sense of any kind of seasonality in the strip business, relative to the reimbursement such that at year-end you see patients stocking up? Kind of in case a product might be about to go off formulary, for example?

There are a couple of what I would call seasonality points in this market that we’ve seen historically. But they’re not so much reimbursement related, as far as we see. I mean, sometimes in the early summer months we see people buy a little bit less, because they tend to stock up prior to going on vacations. And sometimes at the tail end of the year people will defer purchases of medical supplies, including diabetes supplies, in lieu of holiday gifts and expenses.

Beyond that, we don’t see a whole lot of seasonality and Kim, I’m not aware of any seasonality particularly driven by reimbursement and stocking and along those lines.

Okay great. Thank you.

Uh-huh.

Thank you and our last question comes from Al Kildani [ph] from Unterberg, Towbin. Please go ahead.

Yes, I wonder, of the progress you made in terms of signing new contracts with the managed care organizations and especially considering the nice sequential move you had in Q2 revenues. Can you give us an idea of how much of the benefits you’ve realized so far from any progress you made earlier this year, perhaps late last year versus those that are sort of accruing to you downstream?

Yeah, Al, let’s say that basically what we’ve seen so far, the good news is its just the tip of the iceberg. The encouraging thing is that we’ve had good success and as I mentioned before, it does take a while to play through and convert patients. As you can imagine, by the time people go back into their doctor for their appointment or go back to the store and find out, to their hopeful delight, that FreeStyle is now reimbursed at the same levels of others, that is not an instantaneous message.

But we certainly do our best to enhance that by informing people on plans that FreeStyle is now covered and informing doctors on those plans that it’s now covered. So, I would say that to you question, you’ve just begun to see the results of the success we’ve had and we expect to have more success to come.

Great. Thanks and congratulations on the improvement.

Thank you.

Thank you. Since there are no further questions, Mr. Lortz please continue with any closing comments.

Ladies and gentlemen, again, I hope you share our enthusiasm for the results from this past quarter. We truly appreciate your support of TheraSense and we look forward to many successful quarters to come. Thank you very much.

Ladies and gentlemen, that concludes our conference call for today. You may disconnect and thank you for participating. 1