Insulet Corp (PODD) 2007 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second-quarter 2007 Insulet Corporation earnings conference call. My name is Twalicia and I will be your operator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (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, Mr. Duane DeSisto, CEO. Please proceed, sir.

Thank you operator. Good morning everyone. Welcome and thanks for joining us for our second-quarter 2007 call. We will be making forward-looking statements about various aspects of our business so please refer to our 10-Q and S1 for a full disclosure of our risk factors.

As you have seen from our press release yesterday, we have demonstrated impressive growth in a very short period of time. Our quarterly revenue increased 265% year-over-year and the number of customers using the OmniPod System nearly doubled to around 2450 from approximately 1250 at the end of 2006. In the second quarter the number of patients using the OmniPod increased by approximately 40%.

We've accomplished this expansion by focusing on two key areas, increasing our manufacturing capacity and expanding our sales and marketing initiatives.

Let's start with the first focus area, increasing our manufacturing capacity while reducing per unit production costs. The OmniPod is designed for automated manufacturing and we continue to increase the level of automation in our current line. As we expanded our manufacturing production output, we are able to support additional geographical penetration into the U.S. market.

During the second quarter we also received the first chassis subassemblies from our manufacturing partner, Flextronics International. Early in the third quarter, we completed qualifying Flextronics chassis line from a quality standpoint and we expect to expand our agreement with Flextronics to cover the full production of OmniPod. By the end of 2008 we want Flextronics to be producing complete OmniPods while obtaining a fully loaded cost of goods of $15 or less per pod.

As our manufacturing capacity has increased, we have succeeded in opening new geographic territories in the U.S. At the end of the second quarter we added parts to the Southwest and West Coast to our existing East Coast and Midwest sales region. We will continue to implement this phased commercial rollout of OmniPod System until we can provide sufficient quantities to sustain national distribution.

At several recent healthcare professionals shows including AACE, ADA and AADE and the Children's With Diabetes consumer show we unveiled our patient demonstration kit or PDK to provide hundreds of show attendees with free trials of the OmniPod System. In addition, we rolled out the PDK program to our entire healthcare professional sales force at the end of Q1 of this year.

Through this unique program, show attendees and patients visiting their doctors office can wear the OmniPod and experience firsthand the system's ease-of-use and virtually pain-free cannula insertion. The PDK program is proving to be a powerful tool as it helps us to expand the market for CSII therapy, enhance sales productivity and generate patient referrals for the OmniPod System.

In the area of Managed Care, we contracted with plans covering around 96 million lives and we are close to executing several additional contracts with new insurance carriers.

On the clinical front, we have many initiatives under way. One of these, a study funded by Insulet and conducted by Dr. Howard Zisser of Sansum Diabetes Center was presented at the ADA meeting in June. The study found that short-term interruptions in continuous subcutaneous insulin infusion therapy can result of significant glucose elevation in Type 1 diabetes patients. This study underscores the potential benefits of insulin delivery systems which do not require disconnection such as the OmniPod System.

Now I'll turn the call over to Carsten to review the financial results in more detail.

Thank you, Duane. In the second quarter of 2007 we recorded sales of $3.2 million compared to $0.9 million in the second quarter of last year. On a sequential basis revenue rose 60% from $2 million in the first quarter of 2007. At the end of the second quarter of 2007, 2450 customers were using the OmniPod System up from 1750 customers at the end of the first quarter, a 40% increase. This is the highest number ever in terms of quarterly new customer additions.

In the same period as revenue increased 265% from second quarter 2006 to second quarter 2007, our cost of revenue increased only 50%, 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 OmniPods is recognized on a deferred revenue basis. We deferred revenue by 45 days and as such at the end of the second quarter, the Company's deferred revenue balance was $763,000.

Turning to expenses, operating expenses were $8.7 million in the second quarter of 2007 up from $5.3 million in the second quarter of 2006 and up 6% from $8.2 million in the first quarter of this year. The majority of this increase was related to increased sales and marketing expenses. We reported a net loss of $12.7 million for the second quarter of 2007 compared with a net loss of $8.7 million for the second quarter of last year and a net loss of $11.6 million for the first quarter of this year.

As of June 2007, Insulet's cash, cash equivalents and marketable securities totaled $119.8 million including the net proceeds of $113.4 million from the Company's initial public offering in May, compared to $33.2 million at the end of 2006.

Moving to guidance, we continue to expect revenues in the range of $10 million to $12 million for the full-year 2007. We anticipate that our quarterly net losses into 2008 will remain at the same level as the net loss in the second quarter of 2007 and possibly increase as a result of our ongoing investment, manufacturing capacity expansion, and sales and marketing infrastructure.

With that, I will turn the call back to Duane for some closing remarks.

Thanks, Carsten. We continue to be excited by the enormous market potential that we see for the OmniPod System. The market for insulin infusion therapy for patients with Type 1 diabetes in the United States represents a $4.3 billion opportunity.

Despite the demonstrated clinical benefits of the CSII therapy, the market is still significantly underpenetrated. Today only approximately 25% of the Type 1 diabetes patients using insulin pumps due to complicated, costly and inconvenient conventional pump technology. The OmniPod System is specifically designed to break down these barriers to CSII therapy.

Our product's innovative design particularly the lack of tubing, automated, virtually pain-free cannula insertion and ease-of-use makes it an extremely attractive option for patients. It is also attractive to the healthcare providers as it reduces the expense and burden associated with patient training. And for payers, it reduces the upfront costs and risks with the pay-as-you-go model.

We are focused on executing our sales, marketing, and manufacturing goals so that we can maximize this opportunity for Insulet and our shareholders. I'm proud of the growth we're demonstrating. We're in a great position to significantly expand the use of insulin pump therapy among people with insulin-dependent diabetes and improve their lives.

And with that, operator, we are ready to open the line for questions.

(OPERATOR INSTRUCTIONS) Mike Weinstein, JPMorgan.

Hi, guys, it's Kim here for Mike. I just had a couple quick questions here, the first I guess on manufacturing. Can you just talk a little bit about your progress in-house to date? Would you characterize yourselves as on plan, ahead of plan, behind plan?

And then the second one is actually on the guidance, maybe a little more detail on how you are handling guidance for the rest of the year particularly given what we would expect is strong demand on the heels of the ADA, the AADE and the CWD meetings? Just kind of wondering, are you in a position at least near-term where you think you can handle the volume off of these trade shows?

Sure. With regards to manufacturing, I think what we've told everyone back probably about three or four months ago was that we believe we will exit the year making in excess of 50,000 pods per month. We still believe that. And I think how that kind of rolls into the guidance once again, this is really -- our guidance on revenue is really being driven by manufacturing. The demand is there, we have no doubt about that.

And I just give everyone a sense of it, it's pretty simple. I think A, we're probably being a little bit conservative but that is being driven by we are on plan vis-a-vis automating the facility in Bedford; we brought in three new pieces of equipment in the quarter. I'm happy to report they are all up and running but we want to see them running for an extended period of time before you lock in and say we've got that. Flextronics, the Flextronics line by the middle of Q3, we have a fully qualified line. We received two or three lives already from Flextronics at a quality level that is equivalent to everything that we can produce in Bedford so we are very excited about that.

With regards to your question, I think we're being a little conservative. We just want a little more track record on all of these things but they are on plan, we are comfortable with exiting the year in excess of 50,000 pods per month. But we really do want just a little bit more track record from both our Asian supplier and new equipment in-house.

Okay, sounds good. So just to be clear you are pretty aggressively or comfortably adding patients at this point?

We are doing -- to give you some sense -- we are probably a little ahead as far as expanding sales force. In addition to that, to give you a little bit more sense on where we think we're going to be here, we just hired a VP of Customer Service to help us grow that department. Because it's more than just selling. You have to support this group. We hired a gentleman named Steve Bubrick, who was with TheraSense and then with Abbott Diabetes Care. He literally started yesterday so we are pretty comfortable that we should get exactly where we want to be.

Okay, great. Thanks a lot.

Bruce Cranna, Leerink Swann.

Good morning. Duane, just as sort of a follow onto that question, in terms of guidance you left the year intact on the top line at $10 million to $12 million. You've obviously had a pretty good first half, I think $5.2 million or so in revenues. So I guess first off, wondering any reason not to suspect that the high end of the range is more realistic? And maybe part two of the question is do you guys expect any I guess third-quarter seasonality in your business?

So, I would tell you yes, the high end of the range is probably more realistic and as we sit here today, we have not seen the seasonality but we are guarded against that because we've looked at all the other pump companies that have been through that. They've all experienced that. We have not yet seen that. So we have a very short period of time here to get through the summer months.

But that was one of the things that has been sticking in the back of our head, looking at the other companies that have been down this path, the summer seems to be the slow months. We have not seen that but that obviously figures into how we look at the world.

Right. And then Carsten, just so I understand your comments on deferred revenue. Did you mention a whole dollar number that you booked in the quarter?

Yes, I mentioned that the deferred revenue by the end of second quarter 2007 was $763,000, up from $284,000 by the beginning of the year. So that is an amount that rests on the balance sheet.

Right, that's a balance sheet amount. But none taken in -- if you will -- into the P&L?

No.

So I'm just trying to make my model work and you may or may not want to give me this kind of color, but if I look at the patient adds from Q1 to Q2, and kind of do the math on what I think is the price per PDM, etc., I guess some of those 700 patients are buying PDMs and some are not and therefore winding up in deferred revenues. Can you give us any sense as to what the split is there?

Just to give you some sense, the way that works is every new patient -- every new patient when they come on board basically the shipment of the starter kit in the first quarters, their first three months of supplies gets deferred for 45 days. So if the new patients come on in the first 45 days of the quarter, you'll see them on the P&L. If they came on day 46 on, you won't see -- you'll see them on the balance sheet. It's just pretty much just how the math works.

Every patient regardless of whether or not they are with a payer that you already contract with?

Every patient, it really centers around some accounting rules that until we have two years worth of experience on -- because we offer a 45-day money-back -- or it's a 45-day money-back guarantee, we have to defer that until we have two years worth of experience. Once we have two years worth of experience, the accounting rules say you can make a judgment which will obviously be less than that. I mean we are not seeing that kind of attrition in any way, shape or form.

Right. And the expenses associated with those starter kits?

That is deferred as well on the balance sheet.

And then I guess last question for me, I recall last quarter we were talking about the split in terms of patients, the patients you added or maybe the patients you have on board between multiple daily injectors and those that are prior pumpers, if you will. Any change to that split? Did you see anything in terms of the patients you are adding this quarter, the 700 or so folks? Is it sort of still three-quarters coming from injectors and one-quarter from pumpers?

It is still very close to 75-25. You are correct.

Okay, thank you.

Paul Choi, Merrill Lynch.

Thank you. Good morning guys. Just if we could turn back to manufacturing, please. Can you just give us a sense of with Flextronics, I think you guys shifted the chassis assembly to them this quarter and you said you've gotten a couple of lots. Are there any sort of quality issues that you think are kind of of concern that you want to review a little bit more or are you more or less ready to go with what you've received so far?

We have put their -- we have qualified their product and we finished that qualification. To give you some sense, the way the qualification works is basically they produce lines, we put them in the product, we do destructive testing, we analyze them. The quality level out of Asia is equal to anything we produce in the U.S. So we are now very confident we are now very confident that they can produce at the same level we can, obviously with the big difference being significantly lower cost.

So in the third quarter we are now putting those chassis into salable product.

Okay, so starting this quarter you'll utilize --?

Starting this quarter we will start reflecting that. It's really going to show up in the fourth quarter because by the time we qualify the whole line and everything else, I think we probably have maybe two lots that will actually have that product plus we have some inventory. So by the time the thing starts flushing through the P&L, it's more in lines with the fourth quarter. But the quality level of those chassis are equivalent to what we produce in the U.S., yes.

Great. That is very useful. In terms of your monthly production rate exiting the quarter, are we still in the 30,000 unit vicinity?

Yes, and the reason for that for everybody on the line, it really is kind of a step function as we will go along at a certain level and then a couple things will happen and we will bump it up. It will bump up dramatically. So the guidance we gave everybody when we're going public was we exit the year at 50,000 plus pods per month. We still feel very, very comfortable with that.

Okay, great. Then in terms of your comments, Duane, with the payer contract negotiation. Did you find anybody of name or note that is new this quarter? And who among sort of the major payers is still outstanding that you are still working with?

I mean I really wouldn't want to get into who we're still working with so therefore I lose some leverage on this whole thing. But I mean we just give everyone a reference point and we've picked up the 3 million to 4 million lives so obviously it was -- there weren't any very, very significant ones. They are all important but not a real national carrier. We are very close hopefully with a couple of these guys, you know, mired a little bit in the bureaucracy getting all the paperwork through.

So my hope here is and I think what we told everyone is we thought we'd have about 125 million lives on the contract by the end of the year. And once again, I see no reason to believe that we won't hit that number.

Okay great. If we could return to patient growth for a second. It's a pretty big step up over the previous quarter. Can you give us maybe a little color as to whether it is more a function of organic growth at some of the centers you've already penetrated and have good relationships with or is it more a function of your geographic expansion as you mentioned in the West and Southwest? Any color on that would be appreciated?

It really is a combo and it's about half, Paul, to give you some sense, it's about half and half. I would tell you the Midwest was up and running for the entire quarter. We saw a significant growth in our significant initial penetration in there. By the same token, the East Coast continues to have organic growth in those centers plus we're bringing on some new physician offices and hospitals.

But it really was a combination of both. The West Coast and the Southwest, that part of the sales force really came on at the very end of the quarter so they really didn't figure too much into that number.

Great, thanks a lot.

(OPERATOR INSTRUCTIONS) William Plovanic, Canaccord Adams.

Great. Thank you, good morning. Just you talked about expansion of distribution. I was wondering, Duane, if you could give us some color on exactly where you ended the quarter in terms of reps and managers?

Sure. Very briefly, we ended the quarter -- and keeping in mind that about one-third of these guys came on in the last couple of weeks of the quarter. But we ended the quarter with 15 sales reps, two key account managers and then we had two regional managers and I think we have four insurance contract specialists.

And what was your goal for year-end '07? Can you remind us of that?

It was 15 direct salespeople, two key account managers and four insurance contractors. So it was those numbers -- our goal for the end of the year was exactly what I just described to you. We are bringing in people ahead of that timeline.

All right, that is all I had. Thank you.

There appears to be no additional questions at this time. I would now like to turn the call back over to Duane DeSisto, CEO.

Thanks everyone for joining us today. Once again we look forward to updating you on our progress on the next call and we appreciate your continued interest in the Company. Thank you.

This concludes your presentation. You may now disconnect and have a wonderful day.