Insulet Corp (PODD) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Insulet Corporation first quarter 2007 earnings conference call. My name is Lauren and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Mr. Duane DeSisto, President and CEO.

Good morning everyone and welcome, and thanks for joining us for our first quarter 2007 call and our first quarterly earnings results call ever. We will be making some forward-looking statements about various aspects of our business, so please refer to our S1 for a full discussion of our risk factors.

As you have seen from our press release yesterday we're very pleased with our first quarter results. First quarter 2007 revenue increased 9 times from the first quarter of 2006. And the number of customers using the OmniPod System grew nearly 40% from the prior quarter.

I realize that many of you who are on the line are new to our story thanks to our recently completed IPO. There are also many others who do not attend our roadshow presentation, so I would like to start by reviewing the tremendous market opportunity that we have before us.

The insulin infusion therapy market for Type 1 diabetes represents approximately a $4.3 billion opportunity for Insulet. Studies have demonstrated many advantages of subcutaneous insulin infusion, or CSII therapy, over multiple daily injection therapy. Those benefits include glycemic -- better glycemic control, a reduction in hypoglycemic events, reduction in glycemic variability, and improvement in the quality of life. Despite these results the market for CSII therapy is still significantly underpenetrated, with only approximately 21% of Type 1 patients on insulin pumps. This is largely due to the complicated, costly and inconvenient conventional insulin pump technology.

Our OmniPod system is a discrete and easy to use insulin infusion system that features two easy-to-use parts, with no tubing and fully automated cannula insertion. The OmniPod System is specifically designed to break down the barriers to CSII therapy, improve health outcomes and make diabetes a smaller part of people's lives. The OmniPod system can be worn for up to three straight days with no need for a disconnection. It can be used while swimming, enduring all sorts of challenging athletic activities.

In fact earlier this week we're very pleased to announce that Team Type 1, a group of eight competitive cyclists, all who have Type 1 diabetes, all wore the OmniPods during the Race Across America event. And they won it in a record-setting time. And for those of you who will be at the ADA this weekend, several of those Team Type 1 members will in fact be in our booth that you can talk to them first hand and get their reaction to the system under this high stress event.

The simplicity of the OmniPod system is designed, particularly the elastic tubing and automated cannula insertion, makes it an extremely attractive pump option for patients. OmniPod delivers value to health care professionals and payers as well. For health care providers OmniPod reduces their patient training burden and expenses. For payers OmniPod reduces their upfront cost as a result of the pay-as-you-go pricing.

To date Insulet has demonstrated an impressive customer revenue ramp for our phased commercial rollout. Our sales and marketing strategy has been to focus on the key accounts and physician awareness. OmniPod is currently available in the Eastern part of the United States and the Midwest, and we're currently opening territories on the West Coast, as we continue to expand our sales force.

We launched several new marketing initiatives in the first quarter, including our Personal Diabetes Demonstration Kit. PDK is designed to give potential patients a free opportunity to experience the lifestyle benefits of the OmniPod System. With the significant upfront cost of training required for traditional insulin pumps this program is truly unique to OmniPod. We are very pleased with the response we have received so far since its introduction.

We also conducted a customer satisfaction survey earlier this year. The results were highly positive, showing that the OmniPod increased satisfaction with the insulin therapy in both previous pumpers and injectors. In particular we saw a dramatic increase in satisfaction among those patients who switched from injections to the OmniPod. Over 94% of those surveyed indicated they would continue to use the OmniPod System, and 96% said that they would recommend OmniPod to other patients.

We have also had many clinical initiatives under way. Since the beginning of 2007 we have initiated several studies seeking to demonstrate the potential clinical and functional benefits of the OmniPod System relative to other insulin delivery options. There is an abstract of a study we supported with a grant, with the Samson Diabetes Center, which will also be presented at the ADA scientific session which will appear this Saturday, once again in Chicago.

Turning to reimbursement, we currently have entered into contracts establishing reimbursement with third-party payers covering an estimated 92 million lives. On the manufacturing front we have also made significant progress this year. We have increased our manufacturing production output, and will continue to increase it so we should exit 2007 with the capability to supporting in excess of 3500 patients. The OmniPod system is designed for automated manufacturing and is partially automated now. We have a subassembly agreement with Flextronics International for the chassis, and we expect to expand this agreement to cover the full line by the end of 2008, with the key goal of reaching a fully loaded cost of goods sold at $15 or below by the end of 2008.

Finally last month we completed our initial public offering with net proceeds from the offering totaling approximately $114 million. The additional financial resources, combined with our operational progress, put us firmly on track to grow the Company.

And with that, I will now turn it over to Carsten Boess, who is the CFO for the Corporation, to go through in more detail the financial results.

In the first quarter of 2007 we recorded sales of $2 million, a nine-fold increase over the first quarter of last year. On a sequential basis revenue rose 22% from $1.6 million in the fourth quarter of 2006. At the end of the first quarter of 2007, 1750 customers were using the OmniPod System, up from 1252 customers at the end of 2006, representing a 40% increase. This is a record for quarterly new customer adds.

In the same period, as revenue increased nine-fold, our cost of revenue increased only 66%, a reflection of the significant leverage in our model. The disposable OmniPods are a source of recurring revenue, which is recognized in the period in which they are sold. The revenue for the Personal Diabetes Manager and the first shipment of OmniPod is recognized on a deferred revenue basis. We defer revenue by 45 days, and as such at the end of the first quarter the Company's deferred revenue balance was $679,000 compared to $284,000 at the end of 2006.

Turning to expenses, operating expenses were $8.2 million in the first quarter of 2007, up 88% from $4.4 million in the first quarter of 2006. The majority of this increase was related to increased sales and marketing expenses. We reported a net loss of $11.6 million in the first quarter of 2007 compared with a net loss of $6.9 million for the first quarter of last year. As of March 31, 2007 Insulet's cash, cash equivalents and marketable securities totaled $19.1 million compared to $33.2 million at the end of 2006. Pro forma cash balance at March, 2007, including cash from the IPO proceeds, was approximately $133 million.

Moving to guidance for the full-year 2007, we expect revenues in the range of 10 to $12 million. We anticipate that our quarterly net losses into 2008 will continue at the same level or higher compared to the net losses in Q1 of 2007, as we are continuing the investment, manufacturing capacity expansion and safety modeling infrastructure.

Now I will turn the call back to Duane for some closing remarks.

This is a very exciting period for the growth of Insulet. We are focused on four key goals, increasing our manufacturing capacity, reducing per unit production cost, increasing sales and marketing efforts, and expanding third-party payer coverage. I am proud of the progress we are making towards achieving these goals. Our continued focus on these efforts and our increased financial strength put us in a great position to significantly expand the use of the insulin pump therapy among people with insulin-dependent diabetes and improve their lives.

And with that, operator, we're ready for questions.

(OPERATOR INSTRUCTIONS). Mike Weinstein, JPMorgan.

It is Kim here with Mike. We were hoping you could just talk a little bit more through the manufacturing goals, maybe even just starting with the rest of 2007, and kind of let us know where you are at right now in terms of capacity per month, and how that ramps up throughout the rest of this year? And then maybe with that the timing of the movement of the chassis over to Flextronics?

Sure, and I think let me just take a quick step back into history here to give everyone a sense of where we are with Flextronics. So our agreement with Flextronics is a three-phase process. The first process, which is the move the actual manufacturing of the circuit board, which is the single most expensive component, to Flextronics. That has been done. That has been completed, and that is now being incorporated into our product.

The second phase, which is to move the chassis subassembly -- and for those who are not familiar with that, that accounts for almost 50% of the labor involved in the product. We have moved that offshore, and at the beginning of last week the first chassis have come into the building from Asia, and we are in the process of testing them. So this will be our first -- the next run of product that we produce next week will include these chassis. And we will begin to evaluate how well that is going. But we have taken a significant step forward.

And then the third phase of the project would obviously be second, third, etc., lines to have the whole line over in Asia. And to give you some sense when we were doing the IPO we were basically -- we had exceeded 30,000 Pods per month. And like I said we will -- by the end of this year, we will be able to support in excess of 3500 customers. So the exact dates on when those ramp up obviously count come how good, how quickly we get converted to the stuff coming out of Asia. But we are in very good shape. We are on track to that, and we are very excited about where we are with Flextronics.

Okay, great. And are there any sort of milestones that we should think about internally over the course of the next twelve months in terms of as you bring more of the different steps to the manufacturing process up to automation?

Sure. I think from that standpoint there are two very significant milestones. One, like I said, is we should exit this year being able to support over 3500 customers by the end of this year. And we should complete next year making in excess -- one line will make in excess of 200,000 Pods per month, so you can do a little math on that. So those are the real two big milestones for us.

You know everything else obviously is all phased based on each piece of equipment coming up, so it would be very, very complicated to go through. But the big milestones that we are driving the Company to are those at the end of this year and the end of next year. And in conjunction with that, as I stated, once we get to over 200,000 Pods per month we will have a fully loaded cost below $15.

It is Mike. Let me just follow-up with a couple of questions. Could you talk about the mirroring of the manufacturing ramp with the marketing strategy in terms of to date you have limited the availability of the product? You have limited your marketing rollout because the supply has not been there. How do you just manage this, the challenge of continuing to roll out the product on a gradual basis with the manufacturing time?

And then ADA is kicking off. Can you just talk about your presence there, and anything we should be looking for?

Sure. I think what we have gone as a Company, the one thing we did not want to do is over promise and under deliver. So what we have done, if you just look at our history, we rolled the product out on the East Coast. We had five sales reps through the end of last year. We were up to 9 in the first quarter. As we sit here today, I believe we are up to 14. And our gut reaction is based on everything we are seeing. Next year we will be in the 30 range with the sales reps.

What we have done though is we have never back ordered a customer. We have no intention of ever back ordering a customer. So we have certain benchmarks that we can based on tooling coming up, based on pieces of automated equipment coming up. So what we do is we carefully monitor that. As it comes up we immediately start putting the effort on the sales and marketing side.

Well we have done to prepare those marketplaces to shorten the sales and marketing cycle, and I think one of the things you really want to understand here is there is key hospitals in all areas of the country that you really want to go to, key physicians that you want to touch and explain that technology to. So even though we may not be in a region with the sales force and clinical support, we are touching all those key institutions to prepare the marketplace so we can shorten the whole cycle that it takes to go from no sales reps to a productive sales reps. So we have dramatically taken care of all that.

With regards to the ADA I think one of the unique things we're going to do at the ADA, if you visit our booth at the ADA we have a separate area this year with the Personal Demonstration Kit that we have for people. You will be able to -- we have a physician there who will write a script for saline. And you will be able to come into our booth, try it and wear it. And I think that is going to be pretty unique on what we're doing.

You will also be able to see a little bit of our marketing campaign. As we continue to grow the business and we reach out and we touch all the physicians, we're starting to turn this more towards a consumer oriented marketing campaign. And you will see a little bit of that at the booth.

Great. We will let some others jump in here with questions. Thank you.

Paul Choi, Merrill Lynch.

Maybe if I could -- the demand-side and with patients, could you maybe just give us maybe some metrics as to where you think patient Pod usage is tracking, maybe on a monthly or a quarterly basis? Have we seen any significant movement there?

I would tell you that, you know, we brought on 500 new customers in the first quarter of this year. And while we won't give this guidance on a go forward basis, given the late nature of how this quarter is kind of all involved in the IPO, I mean we had more than exceeded that obviously already in this quarter.

But with regards to the usage, it continues tracking. I mean it is pretty much -- I think it is -- if you use the math of 1 every three days you're pretty close to where we are going. There is no change in anything to do with the dropout rate. We continue to see the usage grow. And the great part is we continue to see people experimenting with the product throughout the United States now in various different approaches, very different uses. So we're pretty excited about it. So we have really seen all the indications continue to be very positive.

Just a point of clarification on the dropout rate, are you still seeing patient retention roughly in the 95% vicinity? Is that a fair --?

Yes, that is a fair estimate.

95% retention. And then just maybe a quick financial question for Carsten. With respect to the short-term debt and your cash flow, where are you guys standing with that in terms of -- do you have to hit any more benchmarks? How should we think about that going forward for the next couple of quarters here?

For the next couple of quarters, so what is short-term we will when we report second quarter be able to move to long-term, the part of it that belongs in there long-term. And then we start paying principal on that term loan when we get to (inaudible) of this year, and we will be retaining that over a 33 month period. And until then it is interest only. And as we reported in the S1, it is an interest rate of 6% plus LIBOR. That is what I can share now.

Robert Faulkner, Thomas Weisel Partners.

I wonder if you could talk about two things. One, maybe elaborate on some of your customer research and let us know where your customers are coming from -- not geographically but are they pump users, are they non-pump users, and how you might expect that to evolve over time? And then secondly and related, when you add a salesperson how fast does that person ramp up in terms of meeting your goals for them?

Sure. With regards to the customer mix, I think when we started out it was pretty much 80% multiple daily injection patients, 20% pumpers. We have seen the mix shift just very slightly. It is about 75/25, the same ratio. So we continue to see that. And like I said, I think part of that is just the way that we market the product, which is we go to the physicians, we knock on their door. What we have found is in those instances where we do a little direct to -- where we do a little direct to physicians office where they allow us to do a little advertising, we do see a greater switching rate vis-a-vis the pumpers.

But currently it is about 75% multiple daily injections, 25% pumpers. And the bulk of our patients are coming from all the major endocrinologists office, all the major institutions. There is very few one-offs. We're knocking on the doors of the key diabetes endos in the US.

And how do you expect that ratio to evolve over time?

I think based on everything we have done and we have looked at, like I said we've done a couple of little test marketing campaigns, direct to consumer type campaigns, and I think over time, not so much in 2007, but once we fully cover the US, our belief is still consistent. We think it will probably been about 60, 65% multiple daily injection patients and 35 to 40% pump switchers.

Because as a group, like I said, the physicians when they decide -- when they do an evaluations of the patient what they are doing is a lot of new patients, a lot of people that probably should have been on a pump, but for various reasons chose not to be on a pump, are the guys that the key endos are forwarding to us. So we do think it will always be probably, at least in the foreseeable future, multiple daily injection patients versus pump switching. But we do see that continuing to go a little more towards the switchers.

Okay, and over -- now pump users, current pump users, not Pod users, have usually a time period before their reimbursement and can re-opted, if you will, just because --. Those pump users who are switching are they exclusively people who have had their pump for four years or three years or whatever the stipulation is for their payer?

To be honest with you, I really don't want -- I don't think I can drill down to that granularity, because I really don't know. But that would be -- my initial reaction would be that, that as their insurance comes up and they start looking around for what is the latest and greatest thing in pumping, if they are aware of our product, those seem to be the types of patients who we are in fact getting.

I think from a corporate standpoint though, just to give you some sense of where we keep continuing to look at this is there is about 250,000 people on pumps today. If you figure every four years 25% of that group comes into play, that is about 60,000 -- that's about 60,000 patients. And if you look at the Type 1 patients then on injections that is about 900,000. So we do continue to focus on the lion's share of this market opportunity.

I also asked about salespeople when you put them into a new spot, just how fast they ramp up?

Yes. Well we are finding, and we're rolled it out on the East Coast with five sales reps, and it took them about 3 to 6 months to get up to speed in the early days. All the learning that we took from that, the guys in the Midwest are at the same level of productivity in about two to three months that we were in six months on the East Coast. So we're getting much better at it.

And what do you think is contributing to that?

I think the key thing we learned a lot, right. First of all if you're going to go into a territory and the key endo has not -- the key endo or the key ophtho has not seen the product, the likelihood of making penetration -- the likelihood of making penetration in that particular territory is significantly problematic.

So what we have is we have two specialists, as I pointed out, that are visiting all the key clinics ahead of us putting the sales rep in there. So when you go in -- for instance, if you went into Boston -- all the guys at the [Javelin] had already seen -- they had already seen the product. They are comfortable with the concept of the product. So we think that is number one.

The second thing is with this PDK, the personal trial kit, the fact that we give people the ability to wear the product basically for free for three days physicians -- that has significantly shortened the physician's time to get comfortable with this. I mean it is a really easy trial where they can take in a patient and say, I tell you what, here is what we will do. We will fill it with saline. We will send you home, and you call me back. So if there's two -- I think those are the two key contributors to the quicker update.

(OPERATOR INSTRUCTIONS). Bruce Cranna, Leerink Swann.

Duane, I would like to talk about covered lives just a little bit more. Can you share with us perhaps any rough internal goal you have for where you would like to be at year-end on covered lives?

Well I guess our hope would be, if you kind of do the math here, and when you start using covered lives some of these plans overlap. But if you do the math, and you take a look at -- there's about 300 million people in the US. About two-thirds of those have private insurance coverage. What we have found in a territory by territory basis that to make sure that each sales rep is very productive, you have to be in about 60 to 65% of the people in that territory. And then the other -- at a minimum. And then the remaining portion can be kind of a one-off process. So that is really -- on a nationwide basis that is really kind of what we are shooting for. We would love to be a little closer to that number than where we are at the moment.

So internally that is what we're driving for. We have a lot of contracts. As you know, the issue with any of this contracting is even when you get the contracts and you are comfortable with it, the actual process to get it uploaded and get it into play, all of which takes time. So we continue to make progress with the plan. We have had very, very little push back. We are excited about where we are, but this stuff unfortunately just takes time to get through it.

Yes, typically how many payers, I guess, at any point in time are you typically negotiating with or in communication with?

I would tell you probably we get a couple of dozen that we're talking to at the moment.

Is there any common thread -- when you look back at your coverage successes to date, do you think there's any common thread besides geographically? You know, membership size or blues versus non-blues or anything like that?

No, to be honest with you, I think the common thread is once people have the opportunity to sit down and look at our pay-as-you-go model and they do the analysis, for any managed care plan it really is, if you look at this over a two to three year period there is significant upside potential for these guys. So I really do think from the managed care standpoint, it really is -- it is pure and simple, it is math.

I do believe over the next 12 to 24 months that some of the clinical work that we're doing in the background -- I mean we continue to drive clinical results. If we can continue to produce this, and like I said the first stage of that will be the abstract -- I can't get into the details until after the abstract is presented on Saturday. But I think if you take a look at that abstract that centers around disconnecting from a pump and what the impact of that is, we have several of those initiatives. We think if we can back all this up with clinical results in addition to everything else, obviously that will make that process even easier.

And just so I'm clear on Flextronics, did the second line -- have you guys made a decision on whether or not that is going to be your line, or whether or not you're going with Flextronics?

I think the way we view it is that there is two or three key pieces of equipment that we have designed and it is proprietary to us, that will always be ours. Now we may end up in fact buying that equipment and shipping it over there, or we may allow Flextronics to buy that equipment. But the proprietary nature of these two to three pieces of equipment will remain -- will in fact remain with us.

Okay, so it sounds like that is kind of up in the air still?

No, I think we continue to negotiate vis-a-vis the next line with Flextronics. I mean we are up to our eyeballs in negotiation with this. A group of their people from China will in fact be in the US next week that we're meeting with. So we continue to push that forward. Like I said, from our standpoint, and I think this is how we have developed the business from day one, it has been a phased process. Right? The circuit boards are working phenomenally well. They are now appearing in the product. The chassis have now arrived. And then obviously the last phase of this is line two. So we continue to work with them. And so the second line will in fact be in Asia. There is no question whatsoever about that. Who owns the actual pieces of equipment, that is a subject for negotiation.

Okay, and lastly just for Carsten, share count. Do you guys have a share account current post deal?

Yes, so exclusive of the options and the warrants the number is 25.8 in terms of shares outstanding.

(OPERATOR INSTRUCTIONS). There are no further questions in the queue. I will now turn the call back over to Mr. DeSisto for closing remarks.

Thank you. Once again I would like to thank everyone for joining us today. We will be hosting an analyst/investor event at the upcoming ADA in Chicago this weekend. And we welcome any of you that are present to come and join us. And we look forward to updating you on our progress on our next call. And with that, thank you very much.

This concludes the presentation. You may now disconnect, and have a great day.