Insulet Corp (PODD) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Insulent Corporation Fourth Quarter and Full-Year 2007 Earnings Conference Call. My name is Jahiada and I will be your coordinator for today. At this time, all participants are in a listen-only mode and we will be facilitating a question and answer session towards 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 presentation over to your host for today's call, Mr. Duane DeSisto, President and CEO of Insulet. Please proceed.

Thank you, operator. Good morning, everyone, and welcome. Thanks for joining us for our fourth quarter and full-year 2007 call. We will be making forward-looking statements about various aspects of our business, so please refer to our 10-Q and S-1 for a full discussion of risk factors.

2007 was a tremendous growth year for Insulet Corporation. We have more than tripled the number of customers using the OmniPod System, significantly increased our manufacturing volume, and expanded our sales force coverage in the U.S. We achieved all this, while significantly lowering our gross loss in the fourth quarter.

We achieved this growth by focusing on several key goals in 2007. The most critical of which was expanding our manufacturing capacity. We designed the OmniPod for automated manufacturing and throughout 2007, we increased the level of automation in our existing line. In the first half of the year, we entered into an agreement with Flextronics International for it to manufacture a key subassembly. Later in the year, we expanded that agreement to include production of the complete OmniPod.

At the time of our IPO in May, we were producing 30,000 Pods per month. Today, our manufacturing output has reached 75,000 Pods per month. Our plans to increase production volume and build our commercial operation are on track for 2008 and we are poised to meet the growing demand for our innovative product. We expect that our agreement with Flextronics will enable us to exceed our goal of producing 200,000 Pods per month by the end of 2008.

We now expect to accelerate towards the 400,000 monthly production level in the first half of 2009, rather than our previous expectation of reaching 400,000 by the end of 2009. We are pleased to say that the automated equipment for our first full Asian line has arrived at Flextronics' site in China.

Another key initiative for Insulet is reducing our per OmniPod unit product cost. We believe we have significant leverage in our financial model and higher volumes drive economies of scale. In 2007, as our manufacturing capacity increased, we substantially improved our gross loss and expect to achieve even more upside from incremental manufacturing automation in 2008. As a result, we believe we'll be able to reach positive gross margins before the end of 2008.

With increased manufacturing output and reduced per unit cost, we have been able to expand our sales and marketing initiatives and 2008 will be a year of further investment in that aspect of our business.

We introduced OmniPod using a phased commercial roll-out strategy. We continued to accelerate the rollout of OmniPod scaling up from 17 territory managers at the end of the year to over 40 as of today, significantly ahead of our previous target of 30 territory managers by mid-year. We anticipate that these new reps should achieve solid productivity by the end of the second quarter.

We also have some really exciting sales and marketing initiatives in place. We recently added a new dimension to the OmniPod trial program by introducing a non-inserting personal demonstration kit or PDK. It expands the reach of our trial program as patients no longer need to go through a doctor to experience the product. Potential customers can order the non-inserting PDK directly through our website. In January, we began running direct-to-consumer magazine ads and internet banner advertising featuring the link to the PDK order page and we're very pleased with the results so far.

Another important part of our strategy to get more people to try the OmniPod system is to engage people on a local level and spread awareness through regional market activities. One example was this past weekend here in the Boston area. We sponsored a terrific event with Radio Disney in the JDRF. The Jonas Brothers-themed festival was exclusively for kids with diabetes and their families and we had several hundred attendees and approximately 100 people demoed the product. These types of events are perfect opportunities for OmniPod product demos and this is just one of the many local market events we have planned throughout this year.

In addition to patient awareness, our roll-out strategy has been focused on two important precursors to patient adoption -- key physician awareness and third-party payor reimbursement. Healthcare professionals benefit from the more efficient training model of the OmniPod System. Insurance providers benefit from the lower upfront costs and our pay-as-you-go model.

In 2007, we demonstrated impressive growth by focusing on these two audiences. As of the end of the year, we had contracts with insurance companies to have 146 million lives under coverage. In 2008, we'll continue to broaden our reach and plan to launch the OmniPod system nationally. We've also been working on clinical initiatives that demonstrate the clinical and functional benefits of the OmniPod system relative to other insulin-delivery options.

In 2007, at the American Diabetes Association's 67th Annual Scientific Session, Dr. Howard Zisser presented the results of a study, which found that short-term interruptions of continuous subcutaneous insulin infusion therapy can result in significant glucose elevation of Type 1 diabetes patients. The full results of this study were recently published in the February 2008 Diabetes Care. It underscores the potential benefits of the OmniPod System, which does not require disconnection.

In 2008, we will continue to pursue a variety of clinical developments to both further demonstrate the benefits of the OmniPod System as well as broaden its potential uses. We also believe that we will announce our first non-diabetes drug delivery application before the end of this year.

While we always knew OmniPod would emerge as a platform technology, other leaders in the diabetes space are recognizing this too. In January, we signed a joint development agreement with DexCom to integrate their continuous glucose monitoring technology into the OmniPod Personal Diabetes Manager. We have a similar development agreement with Abbott Diabetes Care to integrate their continuous glucose monitoring system, the Navigator, which was just approved by the FDA last week.

An OmniPod PDM with either Abbott or DexCom technology will combine the proven benefits of insulin-pump therapy in continuous glucose monitoring in a single, safe, discrete and easy-to-use system. We believe an integrated system that utilizes a consumer-focus and customer-friendly design of the OmniPod platform will broaden and expand the acceptance of the technology beyond what can be accomplished with the alternative on the market today.

Another example of OmniPod's platform value is our expanded agreement with Abbott Diabetes Care for their FreeStyle Blood Glucose Monitor. Earlier this month, we amended our existing licensing and development agreement to make FreeStyle the exclusive meter available in the OmniPod PDM. In connection with this amendment, Abbott paid us a one-time fee and will begin reimbursing us for services provided in connection with each sale of a PDM with a FreeStyle meter starting in July 2008.

Since there was some confusion about this, I'd like to clarify that this agreement covers Abbott's blood glucose meter, not their continuous blood glucose monitoring technology. It does not impact our joint development agreement with DexCom. And it may be terminated by us in the event that Insulet is acquired by third-party. We believe this amended agreement with Abbott demonstrates the power of the OmniPod System to capture and grow the insulin pump market as well as the value that market holds for our partners, who provide diabetes diagnostic tools.

Looking ahead to 2008, our plan is to invest in the business both in the manufacturing and sales and marketing infrastructure. As we continue to see our manufacturing capacity in China come online successfully, we will invest in additional capabilities that will allow us to exceed our original manufacturing production goals. Now, I'll turn the call over to Carsten to discuss our financial results in more detail.

Thank you, Duane. In the fourth quarter of 2007, we recorded sales of $4.4 million, compared to $1.6 million in the fourth quarter of 2006. On a sequential basis, revenue rose 15% from $3.8 million in the third quarter of 2007. At the end of the fourth quarter of 2007, approximately 4,150 customers were using the OmniPod System, a 30% increase from 3,200 customers at the end of the third quarter of 2007.

As you aware, we deferred revenue for new patients for 45 days. If we add back the deferred revenue, the sequential increase from third quarter 2007 to fourth quarter was approximately 25%, which is a far better representation of the growth of the underlying business.

From the fourth quarter 2006 to the fourth quarter 2007, revenue increased 166%, while in the same period, our cost of revenue increased only 69%, a reflection of the significant leverage in our model. And if we look more carefully at the fourth quarter 2007 results compared to the third quarter 2007, this trend clearly accelerated in the fourth quarter as cost of revenues declined 12%, while revenue increased 15%. In other words, our gross loss declined 39% in the fourth quarter, compared to the third quarter.

Operating expenses were $13.7 million in the fourth quarter of 2007, up from $6.9 million in the fourth quarter of 2006. The majority of this increase was related to increased sales and marketing expenses. Operating expenses were up 27% from $10.8 million in the third quarter of 2007, as we continued ramping up our sales and marketing efforts, like customer care, training, sampling, marketing and reimbursement, as well as territory managers. In addition, we incurred costs associated with the secondary offering in November 2007.

We reported a net loss of $15.7 million for the fourth quarter of 2007, compared with a net loss of $10.9 million for the fourth quarter of 2006. And a net loss of $13.6 million for the third quarter of this year. Net loss in the fourth quarter included approximately $900,000 associated with cost of the Company's secondary offering completed in November 2007.

As of December 2007, Insulet's cash totaled $94.6 million, compared to $33.2 million at the end of 2006, including the net proceeds of $113.4 million from the Company's initial public offering in May and approximately $9.2 million from the Company's secondary offerings.

For the full year 2007, revenue increased to $13.4 million, compared to $3.7 million in 2006, representing more than a tripling of revenue. Net loss for the year was $53.5 million, compared to a net loss of $36.2 million for 2006. Operating expenses for 2007 increased to $41.5 million from $22.6 million in 2006, primarily driven by increased sales and marketing expenses.

Moving on to guidance. We are projecting revenues for 2008 to be in the range of $40 million to $45 million. We anticipate our 2008 operating loss to be the in the range of $55 million to $60 million. We expect to achieve positive quarterly gross margins no later than the fourth quarter of 2008.

Additionally, as Duane indicated earlier, based on the progress to date in manufacturing output, we now expect to be able to accelerate our manufacturing capacity build up in early 2009 beyond previously expected production output numbers.

Accordingly, in 2008, we plan on significantly increasing our investment in our sales force, reimbursement processing, customer service, marketing, sampling, training and education. We expect these investments will help drive patient enrollment, particular towards the very end of 2008 and into 2009.

So, to sum up the progress in 2007. We tripled our manufacturing output. We more than tripled our revenue and patient numbers. And we took more than $20 out of the fully load of cost of revenue for OmniPod. In addition, we have scaled up the number of territory managers from five to more than 40 and, as such, we feel well equipped to deliver another successful year in 2008. Now, I'll turn the call back to Duane.

Thanks, Carsten. Over $1.2 million Americans have Type 1 diabetes. Insulin pump therapy offers them the best control and the least risk of severe long-term complications. Yet, conventional insulin pumps are cumbersome, costly and complicated for both patients and providers. Consequently, less than a quarter of the patients with Type 1 diabetes currently take advantage of insulin pump therapy.

With the OmniPod System's innovative design, Insulet is gaining ground penetrating the $4.3 billion infusion therapy market opportunity. Our product's discreet, tubeless feature set has the potential to significantly expand the use of pump therapy amongst people with diabetes.

In 2008, we intend to invest in our business. We will remain focused on increasing our manufacturing capacity and expanding our commercialization efforts in order to meet the strong ingrown demand for the OmniPod System. We are confident that our unique product can address a significant, unmet need in the diabetes therapy market and advance our mission to improve the lives of people with diabetes. And with that, operator, I'd like to open up the line for questions. Operator.

(OPERATOR INSTRUCTIONS). And your first question comes from the line of Mike Weinstein with JPMorgan. Please proceed.

Oh, hi, there. It's Kim here for Mike. How are you guys?

Good.

Good. Just a couple. Wanted to see if you could talk a little bit more in detail on your marketing strategy, particularly as you come up the curve with OmniPod supply over the next kind of 12 to 18 months. Are we talking about kind of a heavy onslaught with DTC advertising? Are we targeting more individual thought leaders? And maybe, you can go into a little more detail on that.

Sure. I think the -- first of all, obviously, we've accelerated the build-out of the sales force. So, we're feeling good about the production side of the business. So, that's step one. The second step really is to do more public relations. And, our definition, once again, our definition of direct-to-consumer advertising is really to advertise in the diabetes-focused magazines. It is -- it's Children with Diabetes. It's on the JDRF sites. And, it's doing more local. This really is kind of a grassroots-type marketing campaign to focus on the people that have Type 1 diabetes.

Okay. That, that's really helpful. And then, I guess, on the manufacturing front, sounds like really a positive update there, where you're looking to accelerate your move to the 400,000 units per month and my understanding is that would be through ramping Bedford. So, I guess, two questions there is -- what investment is required to get Bedford from where we are today to kind of the 200,000 units per month level? And then, what would the gross margin look like at that kind of volume there in Bedford versus say what you can get done on a gross margin line --?

I think quite simply, what the investment in Bedford has been completed. So, we actually accomplished that during 2007. All the equipment for China is on the ground at Flex facility in China. So, other than the final third, approximately 30% payment, all that money has already been invested. So, those two facilities gives us the capability of producing 400,000 Pods per month. We are going to charge ahead with both of them.

I think the guidance we've given in the past is out of Asia, 200,000 Pods per month of fully loaded build of material is below $15.00. And, out of Bedford, it's basically if we only produced it in Bedford, it would be a positive margin. So, obviously, it'd be in the $20.00 to $25.00 range. And so, if you do math, depending on how much we get out of either one is kind of a weighted average. But that's kind of the guidance we've given in the past. It's nothing that's really changed in that regard.

Okay. Great. Well, congratulations, guys. Thanks.

Thank you.

Your next question comes from the line of Paul Choi with Merrill Lynch. Please proceed.

Good morning. Just with respect on the manufacturing in terms of the ramping up to 400,000 units by middle of next year. It sounds like most of the manufacturing will still have to come through Bedford and then Flextronics will ramp up as a later period in late this year, early next year. So, should we think about the margin ramp up still being really somewhat dependent more on Bedford at the moment and then we'll see incremental benefit coming through perhaps late this year and early next year from Flextronics' manufacturing?

I think the -- Paul, I think Flextronics, our goal is to have all this online the fourth quarter. Asia be all online in the fourth quarter this year or the first quarter of -- well, it all should be online in the fourth quarter of this year.

Okay.

The Asian facility. So, basically, give you some sense of the timing of that.

Okay. Very good. Then, a financial question in terms of cash usage. Since the IPO, you guys have been averaging about $12 million a quarter in cash usage. Are you comfortable with that rate on a quarterly basis for 2008, given the incremental spending you guys are targeting for for sales force investment and manufacturing ramp up? Is that a generally comfortable rate you guys are budgeting for?

Oh, this question, if you take a look at the free cash flow during the quarters, you're right. Quarter one was $14 million, quarter two, $12.7 million, and quarter three, $15.6 million, and here in fourth quarter, it was at $17.9 million. And the thing to remember about fourth quarter is, we actually started repaying the debt, the $30 million debt facility, which we were supposed to start paying back with 33 equal monthly installments of $900,000. We started October 1.

So, going into 2008, the plan is over the next three to six months to work on refinancing the debt. And, as a result of that, you would see, given our guidance of $55 million to $60 million that the burn will be just because of an approximate $10 million CapEx that we'll have to spend in 2008. That it will just be on the high side of the $60 million level and divide that by four and you have your answer.

Okay. Very good. Then, just one perhaps line item in terms of modeling purposes with respect to research and development. You guys have a couple more things coming on in terms of continuous glucose monitoring and in the fourth quarter, we saw a bit of a step up in R&D expenditure to a little over $3 million. Are you guys comfortable with that rate or is that more of a seasonal effect here on a quarterly basis?

I think we are comfortable with that rate. And again, it is related to, as you mentioned yourself, that we are moving ahead with the two continuous sensing projects -- the one with DexCom; the one with Abbott. And then, on top of that, we have a few interesting additional clinical projects going on -- the new 500 starting on Type 2 gestational starting pediatric study. So, we're comfortable with that rate.

Speaking about '08 in total in terms of use of operational spend, the key is, however, to signal that in excess of 80% of the delta cost '08 versus 2007 will be dedicated towards building the sales and marketing infrastructure. So, that will be the driver from a cost perspective in 2008. So, that we build that and invest in that infrastructure appropriately to be able to handle the additional volume end of this year going into 2009.

Great. Thanks a lot, guys. I'll jump back into queue.

Thanks.

Your next question comes from the line of Bruce Cranna with Leerink Swann. Please proceed.

Hi, good morning, everyone.

Good morning.

Hey, Duane, I know prior to this call we had talked about capacity being at about 200,000 per month by the end of this year and it sounds like that's going to be exceeded a little bit as Asia comes online. And, I don't want to fine of a point on it, but is that a reasonable way to think of it? That actually 4Q you might be above that level of capacity in the sort of a linear progression from there to 400K by let's say mid-'09 or something?

That is a reasonable way to think about it.

And how do you think about, I guess, having the demand for that kind of capacity? It's a material step up from here. Do you guys feel comfortable with -- you have that kind of demand out there? Do you have any sense of latent patient demand? Any sort of metrics we can think about?

So, Bruce, this will be a little bit of a long-winded answer, but we do believe the demand is out there, that's why we've accelerated the sales force. The second way to look at this is basically, having 400,000 Pods per month accounts for about 2% of the Type 1 diabetes market. Now, having said that, we will have a much better indication on the back half of Q2, as a lot of these salespeople we've just hired become effective.

So, that will be a much better indication. But, obviously, we're making the investment. It's only 2% of the Type 1 diabetes market. So, it's not like we're shooting the moon here. So, yes, we think so. We'll know a lot more at the end of Q2.

But you don't sort of maintain a backlog or anything?

The backlog in the diabetes space, if you don't process the order and ship the order within 60 days to 90 days, most patients will move onto something else. So, that is kind of how we're operating.

Okay. And then, I just want to talk about Abbott and the FreeStyle agreement a little bit and make sure I understand it. Can you perhaps give us a sense of how much the one-time fee was?

No. We're basically -- the agreement with Abbott is we're going to keep that confidential. We filed for confidentiality with the SEC. So, we'll leave it at that.

But we're going to see that come into the P&L, I would imagine, in Q1?

I imagine your right.

Remember the upfront fee will be amortized over the period after contract, which is a five-year period.

I'm just --

So, Abbott, a very insignificant impact in terms of P&L effect in 2008.

That's fair. I just was trying to figure out if it's going to come in on the other income line, Carsten.

No, not all income. It'll definitely be positive from a cash flow perspective, but not from a P&L perspective.

My question is, will it -- as small as might be, does it come in on the other income line of the P&L?

It's passed through the revenue line.

So, it's come in on the revenue line?

Yes.

Okay. And then, you talk in the press release about the reimbursement that Abbott's paying you for the customer care activities. You probably don't want to ballpark that either, but how should we think about that? Is that an offset to SG&A? Or is that coming in other income as well?

That's out of the revenue line as well.

That's going to come in on the revenue line.

Yes.

Okay. And last one for me, I'm sorry if I missed this Duane. I think you said something about a -- in 2008, a non-insulin product or initiative. I guess, some color there, if you don't mind?

Well, since we do not have one finalized, we are well down the road with a couple of potential activities here, both are pharma products outside the diabetes space and, I guess, the best way to put it is would be disappointed if one of these didn't turn into an agreement. So, we have two that we've gone through stability testing, flow accuracy testing and we're well down the way. So, it is our belief that this is in fact a platform technology. And more than us talking about it, hopefully, we'll have an agreement in place in 2008 to prove it.

And if that happened in 2008, there would be an announcement of an agreement, not necessarily you supplying the product to someone?

It'd be announcement agreement. And knowing what I know about both of them, it'd really be 2000 -- it'd start showing up in the P&L 2009, more than likely.

Tremendous. Thank you.

Your next question comes from the line of Ben Andrew with William Blair. Please proceed.

Good morning. Just a quick follow-up on the last question. Carsten, with the $40 million to $45 million revenue projection you've got for '08, what percent of that is coming from non-Pod revenues? Is it material, say 5% even?

No. It is not material in 2008. It is immaterial in 2008. Where we start to see the full-year impact of the flat fee for PDM, we shift according to the Abbott contract is then starting really January 1, 2009. So, we'll see this have a greater impact in 2009. But in 2008, not material.

Okay. And so, but it may well material in 2009 versus the total that you have at that point?

That is correct. Yes.

Okay. And as you think about the expansion of the sales force, what is the impact that you're seeing in the field today? And, you're waiting for the second quarter to sort of see the full benefit, but is that allowing you to open up additional accounts and start to prime the pump for placements that we'll see really taking effect in the back half to take advantage of the new capacity?

In a word, yes. I think very simply, there was a significant amount of pent up demand. People that had been made aware of the product, have not seen the product. So, what is happening as we speak, a lot of people for the first time are actually going to be able to touch, feel and see the product. And that's really what's going on now. How much we convert into orders, we'll start seeing the results in the back half of the second quarter.

Okay. And, Duane, can you talk about patient churn rates. What chunk of patients that go on the system, don't keep using it after say a month, or three or six months?

It changes from month to month, but we continue to run 94% to 95% retention rates.

Okay. So, the number, the 4,150 number is really an ongoing patient number. So, if we think about the delta, we would gross it up a little bit from Q3 to Q4?

Yes, that's a net -- the number we provide you is always the net number.

Okay. And then, we've sort of seen a pretty steady progression of the Pod capacity up to 75 here from the IPO. Should we continue to expect you to ramp up to 200, say, towards the fourth quarter in a linear fashion? I know you said linear from 200 to 400, but is it going to be linear up to 200? Or is there a step function in there?

It's a clearly step function. So, a lower slope on the curve going into second quarter, starting to accelerate in third quarter towards the 200,000 level or slightly above 200,000 level in the fourth quarter.

Okay. Great. And then, in terms of the Navigator, now that Abbott's finally had approval of the product, do you have an updated perspective on when you can launch a combined product with them?

Both engineering teams met last week in conjunction with that approval in Chicago and we're working out a timeline. So, the answer is, not yet.

Okay. Thank you.

Your next question comes from the line of William Plovanic with Canaccord Adams. Please proceed.

Great. Thank you. Good morning.

Hi, Bill.

Couple of questions. Just a little clarity. You say, it's 75 reps, or I'm sorry, 40 reps. When roughly did you have those bodies in place?

Most of the offers and acceptances occurred in the month of January and they have been coming on since then. So, as we sit here today, we do have the 40 that are now on the payroll. Some have been on board for 30 days. Some have been on board for about a week.

Okay. And then, when did they all go through training?

The people that have been board for a week will go through training in the next week or so. The other people have in fact been through training. My understanding is, last week, they received their business cards. So, that'll give you some sense of how new they are. And then, they should all, obviously, they're all out in the field working as we speak. But to give you, it really is a first quarter event, where we brought them all on board.

Right. Yes, that's what I was looking for. And then, in terms of the manufacturing capacity and the 75,000 at the end of February, was that a phenomenon you kind of hit in the month of February? Or was that hit earlier in the quarter? And my question really stems from, how much inventory are you going to have as we kind of move forward?

So, the 75,000 is also a good representation of the month of March. And then, a slight ramp up going into second quarter. And, as I said, to Ben's question, then a little bit slower ramp up going into Q2, accelerating in third quarter towards the 200,000 level. We still on the inventory front, when you get our 10-K, you get a chance to see the inventory. And there, we are still running at six weeks of inventory that we have communicated. And that is important in terms of final product. And the reason is that we want to make sure that we have sufficient safety inventory on hand.

Okay, good. And then, you mentioned that you can get down to about $20.00 to $25.00 per Pod in the Bedford facility. If I kind of just do the math, it looks like your costs in the quarter was around $40.00 a Pod, maybe a little more than that. When do you see reaching that $20.00 to $25.00 per unit?

I think the magic number for us, Bill, is once we start producing 200,000 Pods per month, whether it comes out of Asia or comes out of the U.S., we start making positive margins. How big the margin is is determined whether it comes out of Asia or the U.S. But around 200,000 Pods per month that really is the breakeven. And, once again, to put it perspective, that's 1% of the Type 1 diabetes patients that supports.

Right. No, I understand that. And then, in terms of your Chinese manufacturing, that equipment will be put in place. You'll have one line up and running. You haven't said, did you have multiple machinery builds so that you can have a second and third line going up simultaneously? Or is this a deal where you get the first line up, tweak it, and then you order more machinery? Or where are we in the process of kind of getting the next lines going?

What we're going to do, we're going to put the equipment in place. We're going to tweak it. Make sure everything works well in Asia. And at that point in time, we can then accelerate the plan.

Okay. And then, just the last question I have is, in terms of the customer care costs, I believe one of the biggest differentiators for your model was your significantly lower cost of customer service due to the fact that it's a disposable. As we're two years into launch now, we're still ramping up. Can you still -- do you still think that plays true? Or do you think that the support costs are going to be a little higher in terms of what you originally expected?

It's still our belief that we can do this for 20% to 25% less than the traditional insulin pump company.

Okay. Yes --

We have seen nothing to date that would lead us to any different conclusion.

Okay. And then, I didn't see an update on the number of lives covered.

Through the end of the year, we had approximately 146 million to 147 million lives covered and, to put that in perspective, that was through about 200 million private lives in the U.S. And, Bill, from our standpoint, we'll continue to monitor that and, if it changes materially, we'll let you know, but we've kind of put that a little bit in our rearview mirror here.

Great. Okay. Thanks, guys. Good quarter.

Thanks.

Your next question comes from the line Phil Legendy with Thomas Weisel Partners. Please proceed.

Hi, guys. Good morning.

Good morning.

I have -- I wanted to ask if you could outline for us, when you say that you may be able to get to the 400,000 in monthly production by the first half of '09, where would the components of those units be produced? Is that -- cause I -- my understanding is that your currently producing the chassis in China and then assembling them in Bedford. So, I guess, what's the mix that you would be assuming at that point in time?

At the 400,000 Pod level, all the chassis would be produced in China and then, complete Pods would be coming out of Asia and chassis subassemblies would be sent to the Bedford facility and the final product would be produced here. So, it would be produced in both places, but all the chassis subassemblies would be coming out of Asia.

Okay. So -- okay. And then, how many -- you gave the number of reps, how many total people are there in the selling organization? Because I know there are other kinds of folks in there as well.

I think the best way to look at that between customer service, reimbursement, marketing, clinical educators, it's about -- it's probably a little more than double that.

Than double the 40?

Yes. Between the infrastructure, the customer service people, the reimbursement people, so it's probably, if you double that number, you're approximately there. I don't have the exact head count, but that it'd kind of give you order of magnitude. What that number would like.

Headcount is around 80. Okay. And then, you have talked in the past about pushing production even harder and potentially even ceasing production in the United States. And, I guess I'm wondering, if you have your finger on the trigger, what would be the sign that you'd wait for in China to make that move?

I really think what we're looking for is we want to see that equipment come up on schedule and every indication is at the moment that it is. And then, we want to see, once again, the quality of the product coming out. I would tell you internally, what we're taking a very hard look at is we kind of have a first mover advantage in the disposable pump business. And the real key for us, I think is to gobble up as much market share as quickly as we can. So, like I said, what we're waiting on is to actually see China up and completely working.

I mean, I think as a Company, we got through the first hurdle, which was new ground for us, which was producing the equipment in the U.S., having the people from Flex basically sit with the guys from [Wright] Industry, disassemble the equipment, move it offshore, get it all through customs, get it all up to their facility in China. All that went pluperfect. And now, the next big step, obviously, is the facility's all built, we just got to get the equipment up and running. And then, we could evaluate -- we could validate the equipment and we could evaluate the quality of product to come out of there.

And this is the equipment that let's you produce the finished product in China. Is that right?

Correct. What we're looking for is complete and total product coming out of Asia.

And how many quarter -- I mean, how many quarters of good product would you wait to see until you said, okay, this is working?

Our view is pretty much and I think we've insisted here, it really is for us, we think it's going to be about a fourth quarter event, that we'll have enough experience that we'll really know.

Okay.

Because the trick, when you do something offshore like this, isn't the fact that the product works. The question is how quickly can you react when something breaks. Some one of the pieces of equipment. Is the capability on the ground into place like Asia to be able to respond immediately and get it back up and working. So, when everything works right, it's easy to shake your head and say, that's terrific.

The real question is, is, like I said in the Bedford facility is pretty easy. The engineers are on the second floor. The equipment's on the first floor. They walk down a set of steps. So, what we really want to do is understand that whole interrelationship with the people of Flex and once Asia's up and working.

Okay. Thanks very much.

Thank you.

And your next question comes from the line of Mimi Pham with JMP Securities. Please proceed.

Hi, good morning. Duane, on your sales guidance, would you say the difference between the high end and the low end is primarily based on your assumptions of Pod utilization? Or how quickly you reach new centers? Or your manufacturing ramp?

I think the difference between the high and low is just sum Pod utilization.

Pod utilization, okay. And then, for the ADA this year, can you review again your key message? It's not -- based on your presence last year, I feel like most of the attendees would already know about the OmniPod and the advantages over traditional pumps. What's the newer message you want to sort of hone on this year?

I think there's a couple of things. I'm cautiously optimistic we'll have a little clinical data that I won't go into on this call, but I think we'll have a little clinical data to show the effects of long-term use on the OmniPod System and how it's impacting people's A1C. So, we're hoping to be in position to present that at the ADA. We'll have done some prototype work on the integration of the continuous sensing, so we can start showing that to people. So, I think it's a couple of product-related things and hopefully a couple of clinical-related things that we have going on.

Okay. And then, do you -- can you provide some general sense of how many potential tide customers you loose to Medtronic, just because Medtronic pumps interact with CGM?

I mean, I'd be guessing. I'd absolutely be guessing. So, on good protocol, I won't. I would tell you about when we go head-to-head with Medtronic that is the issue that they put in the forefront as the basis of their argument. So, it is from what we can tell, that is their key competitive advantage and that's what they present. So --

Okay. And then, last question, how are you tracking your return on the DTC investment? Is it just number of new leads? Or how --?

Right now, we're doing it in terms of number of new leads. So, like I said, we started, we did the first kind of banner advertising on websites and with Children with Diabetes, that started in January. And, where we are all in this whole process is, we've had over 1,000 people request a demo, the kind of wearable demo kit, and then we're going to track that to conversions, which obviously is the ultimate test.

Okay. So as long as you're getting hits and requests for demos, you'll continue to invest in the DTC?

Yes. Mimi, it is our belief that if we can get a customer to wear this product, we're more than halfway home on converting them. So, it's very, very important that people get the opportunity to trial the product in our mind, because a) we're uniquely positioned and we're the only company where you can actually wear a sample before you ever have to buy the product. So, it's very important to us.

Okay. Thank you very much.

Your next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed.

Hey, good morning. Just two questions. Which insulin user type is converting to the OmniPod faster?

75% of our customers have never been on a pump before, so they're typically multiple daily injections.

Okay. And, you significantly ramped manufacturing last couple of quarters. Is new OmniPod user rate increasing at the same rate as manufacturing?

They are going lock-step, just give you some sense. Before we'd hired the sales people, we'd have to see the production. So, I would tell you the number sales reps trails the production slightly, but we are trying to do it as close to lock-step as we possibly can.

Okay. Thank you.

Thanks.

Your next question comes from the line of [Matt Mulberger] with Renaissance Capital. Please proceed.

Good morning, everyone.

Good morning.

First, one quick bookkeeping item. I was wondering what your total debt outstanding was at the end the fourth quarter?

Total debt outstanding as we started October 1 repaying principal was by $900,000 a month, was approximately $27 million.

Great. And then, second, on Medtronic, I know in your original IPO prospectus and then also in the secondary prospectus, about a year ago, you guys received a letter, I guess, inviting you to discuss taking a license. I was wondering, has there been any development on that front?

There's been no further developments on that front.

Great. Thank you very much.

Your next question comes from the line of Vivian Wohl with Federated Kaufmann. Please proceed.

Good morning, gentlemen. I'm wondering when the accountants will deem your experience to be sufficient so that you don't have to reserve for the new users?

Vivian, that -- the rules are pretty explicit, you have to have eight quarters under your belt. So, that basically says, in Q1 of this year, we have the ability to calculate -- based on that eight quarters, we have the ability to calculate a more reasonable reserve.

Okay. And, since we're almost through with Q1, can you give us some sense of the continuing momentum this quarter? Obviously, you have nice guidance for the full year. I'm just wondering if you can comment on Q1?

I think the important thing there is that the only in a way update that we've given you is a production number, 75,000. And again, as we have tracked in third quarter, as we have tracked in fourth quarter. Then, a good ratio between patients we bring on board and production number is 0.1 to 0.7. So, let's take fourth quarter, for instance, 60,000 in production and 4,150. That ratio is approximately 0.7. And if you do the same on 75,000, then you'll get to a number of approximately 5,100 customers.

So, that you gives you a sense and that also speaks nicely to what I talked about before that it is a flatter line in the beginning of the year that then accelerates going into third quarter. And then, as Duane alluded to, the 40 or more than 40 reps we have on board now will really start to be productive come end of second quarter, which will allow us to also see an acceleration on that side of the business.

Okay. Great. Thank you.

Thanks.

(OPERATOR INSTRUCTIONS). And your next question comes from the line of William Plovanic, with Canaccord Adams. Please proceed.

My follow-up was answered. Thanks.

(OPERATOR INSTRUCTIONS). At this time, you do not have any more questions in queue and I would like to turn the presentation back to Mr. DeSisto for closing remark.

Thanks, everyone, for joining us today. We look forward to updating all of you on our progress on our next call. Thanks a lot.

Thank you very much for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.