Insulet Corp (PODD) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insulet first-quarter for 2008 earnings conference call. My name is Jahida and I will be your coordinator for today. At this time, all participants are in listen-only mode and we will be facilitating a question-and-answer session towards the end 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, CEO. Please proceed.

Thank you, operator. Good afternoon, everyone, and welcome. With me today is Carson Boess, Insulet's Chief Financial Officer. Thanks for joining us to discuss our results from the first quarter of '08, another strong quarter for Insulet.

We will be making forward-looking statements about various aspects of our business, so please refer to our 10-K for a full discussion of our risk factors.

I am very proud to say that we have hit a number of important commercial milestones this quarter. We added approximately 1200 new customers, another record quarter for new customer growth, and we've broken through a major milestone for our installed customer base by surpassing the 5000 customer mark.

Since the time that we were designing and developing the OmniPod system, we were always confident that the product's customer friendly form factor would be immensely appealing to people with diabetes. We were sure that if we could deliver insulin pump therapy without the disadvantages of conventional pumps, we can overcome the obstacles preventing so many people from choosing the best possible treatment for Type 1 diabetes.

The tough part, we knew, was going to be building the manufacturing capacity to meet the market's interest level in such an innovative product. I am proud to say that we've continued to make impressive advances on the production front and reached a manufacturing output of 95,000 pods per month at the end of April. And we are on track to reduce our per unit production cost and break through positive gross margins sometime during Q3 and achieve positive quarterly gross margins for the full fourth quarter of this year.

Based on this type of progress, we were confident that the time had come and the first quarter had built out a sales, marketing, and customer support infrastructure to match our new capacity levels. One of our first initiatives in executing this strategy for 2008 was to significantly ramp up the expansion of our sales force. We've added 32 territory managers since the beginning of the year and now the total 49 reps. I am pleased to say that we now have nationwide sales coverage and we expect the new reps added in Q1 to be contributing to sales by the end of Q2.

We are also broadening the scope of our marketing activities to expand consumer awareness at the OmniPod. At the same time, we will continue reaching out aggressively to healthcare professionals. A key part of our consumer outreach strategy is to get people to try the OmniPod and see how easy it is to use through our unique trial program using the OmniPod personal demonstration kit or PDK.

We recently introduced a non-inserting PDK which 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.

Since we've achieve national sales coverage, we've been able to increase our direct-to-consumer marketing. In January, we began running direct-to-consumer magazine and Internet banner advertising featuring the link to the PDK order page. We've also been running ads on dLife, a television program targeting the diabetes community. These activities have driven an increase in excess of 50% in traffic to our website.

In addition, a few weeks ago, we dropped our first direct mailing marketing piece to people with Type 1 diabetes. We've also continued to engage in a variety of local marketing events that enable potential customers to learn about and experience the OmniPod system. We are very encouraged by the early results from all of these marketing programs.

We continue to invest in demonstrating the clinical differentiation of the OmniPod system relative to other insulin delivery options. We are focused on expanding the market for our product including the use of OmniPod in the hospital setting in applications outside the diabetes market. We believe there are a number of potential applications as a result the OmniPod's cost model and the control it allows hospital staff. We are supporting the first clinical trials of the OmniPod in the hospital setting, which recently enrolled its first patient.

As an example of the strong and varied interest in OmniPod, it was specifically selected to be used in a preclinical study presented by Micromet Inc. at the American Association of Cancer Research meeting in April exploring different routes of administration of its BiTE antibody for the treatment of cancer. The data demonstrated good bioavailability and predictable serum levels of BiTE antibodies delivered through the OmniPod system. And the study's author specifically noted OmniPod's potential to improve the quality of life for patients receiving cancer treatment.

In addition, we expect to announce an agreement for our first non-diabetes drug delivery application later this year. While we always knew OmniPod would emerge as a platform technology for innovation, other leaders in the diabetes space are recognizing this too. Insulet is an industry partner in the Juvenile Diabetes Research Foundation's Artificial Pancreas Project. Since we became involved last year, the majority of the sites have elected OmniPod as the insulin delivery technology of choice for the research.

Our cutting-edge engineering was also recognized by the NIH and FDA, when they invited John Garibotto, our Vice President of Research, Development and Engineering, to participate in an upcoming FDA/NIH JDRF workshop on engineering considerations for building the closed loop system. We are honored that the product is being sought after by the thought leaders, clinicians, and institutions.

Other industry players are also recognizing OmniPod's value. We continue to work with Abbott and DexCom to integrate their continuous glucose sensing in our PDM. These types of agreements demonstrate the power of the OmniPod system to capture and grow the insulin pump market and the value that market holds for our patients who provide -- for our partners who provide diabetes diagnostic treatment tools.

Looking ahead, our plan for the rest of 2008 is to continue investing in the business, both in manufacturing and in sales and marketing infrastructure. With OmniPod production up more than 58% in the first four months of the year, we are on track to achieve our business goals. As we continue to see our manufacturing capacity in China come on line successfully, we will invest in additional capabilities that will allow us to exceed our original manufacturing production plans.

Now I will turn the call over to Carsten to discuss our financial results in more detail.

Thank you, Duane. In the first quarter of 2008 we recorded sales of $6.7 million compared to $2 million in the first quarter of 2007. On a sequential basis, revenue rose from $4.4 million in the fourth quarter of 2007, representing an increase of 53%. Reported revenue for the first quarter of 2008 was favorably impacted by $1.2 million due to a change to the Company's estimate of deferred revenue. Prior to the first quarter of 2008, the Company deferred revenue on all initial shipments from the final 45 days in the quarter.

The Company's deferred revenue is now based on two years of historical experience. If we adjust for deferred revenue, the sequential increase from fourth quarter 2007 to first quarter of 2008 was 31%, which is a better representation of the growth of the underlying business.

During the first three months of 2008, approximately 1200 new patients began using the OmniPod system. From the first quarter 2007 to the first quarter 2008, revenue increased 232% while in the same period our cost of revenue increased only 119%, a reflection of the significant leverage in our model.

Operating expenses were $16.7 million in the first quarter of 2008, up from $8.2 million in the first quarter of 2007. The majority of this increase was related to increased sales and marketing expenses. Operating expenses were up 21% from $13.7 million in the fourth quarter of 2007 as we significantly ramped up our sales and marketing efforts by customer care, through training and clinical services, sampling, marketing, and reimbursement, as well as significantly increasing the number of territory managers to a level of 49.

We reported a net loss of $19.9 million for the first quarter of 2008 compared with a net loss of $11.6 million for the first quarter of 2007 and a net loss of $15.7 million for the fourth quarter of last year. As of March 2008, Insulet's cash and cash equivalents totaled $73 million, compared to $94.6 million at December 31, 2007.

Moving to guidance, we continue to expect revenues for the full year 2008 to be in the range of $40 million to $45 million. We anticipate our 2008 operating loss to be in the range of $55 million to $60 million. A key initiative for Insulet is to drive down our production costs for OmniPod. We believe we have significant leverage in our financial model and higher volumes drives economics of scale. We have substantially improved our gross loss and expect to achieve even more upside from incremental manufacturing output in 2008.

As a result, we expect to break even on a gross margin basis sometime during the third quarter and achieve positive quarterly gross margins for the full of fourth quarter of 2008.

Based on the progress to daily manufacturing output, we continue to expect to be able to accelerate our manufacturing capacity towards the end of 2008, reaching or exceeding an output level of 200,000 OmniPods per month in the fourth quarter. In the remainder of 2008, we'll continue to invest in our salesforce, reinvestment processing, customer service, marketing, sampling, training, and education. We expect these investments will help drive patient enrollment particular towards the end of 2008 and into 2009.

Now I'll turn the call back to Duane.

Thanks, Carsten. Over 1.2 million Americans have Types 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 Types 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 insulin infusion therapy market opportunity. Our product's ease-of-use combined with its discrete tubeless feature set has the potential to significantly expand the use of pump therapy among people with diabetes.

This year we are investing in our business. We remain focused on increasing our manufacturing capacity and in particular expanding our commercialization efforts in order to meet the growing demand for the OmniPod system. We are confident that our unique and easy-to-use product can address a significant unmet need in the diabetes therapy market and advance our mission to improve the lives of people with diabetes.

With that, operator, I would like to open up the line for questions.

(OPERATOR INSTRUCTIONS) Paul Choi, Merrill Lynch.

Just first on the patient adds, you guys have in the past couple of quarters added about 1100, 1200 patients each quarter here while you have been ramping up the sales force. Can you just help us gauge in terms of what your demand levels are seeing and how much you are holding the reins back in terms of distributing OmniPod out there, given the fact you guys have ramped up your sales force significantly?

I think, Paul, just looking back, if you look at the last couple quarters here I think we've gone about 750 patients, 950, and then the reported numbers for this. So we are continuing to ramp up those numbers. That's number one. Number two is, if you take a look at the productivity level that we are at, we believe that 95,000 OmniPods per month can support approximately another 1200, 1300 patients in a comfortable manner. So what we're trying to do is gauge the effectiveness of the sales force when we bring them in to have them hit the same stride as the production. So that is kind of where we're going with this.

So I guess implication now with the back end half of the year being so heavily reliant, can you just help us understand how much pent-up demand there is that you think in terms of incremental potential patient adds and perhaps a target number exiting this year?

I think while we are comfortable -- and you can probably back into the number -- I think we're very comfortable with the $40 million to $45 million worth of revenue. We basically said that we're going to exit the year at approximately 200,000 pods per month on the manufacturing and if you use a map model of 14 to 15 pods roughly per patient per month, it will kind of give you a pretty good indication of where we think we're going to be.

With regards to the demand we're still early in marketing programs, but as we stated we've seen a 50% increase just in doing a few little ads. We continue to monitor -- if you look in our advertising, we have different 800 numbers for the various ads so we can try to understand which are the most productive. We are now just in the process given that a lot of these ads were generated in the back half of the first quarter, what we want to do is it's great that we have got leads. It's great that people are interested in trying the product. The obvious next step is over the next few months here we're going to tract and see how many turn into orders and we will have a much better feel for that by the end of Q2.

Great, then on the expense side, it looks in terms of sales and marketing expenses it went up by about $3 million versus the previous quarter, Carsten. Can you help us understand how much of that will be sort of one time DTC sales force additions and how much of that will be ongoing for the rest the year?

Actually, the $8.5 million in the first quarter will be a good representation of the common quarters. You'll continue to see a slight increase. The three drivers in the growth from the $5.5 million in fourth quarter of '07 to the $8.5 in first quarter are 32 new reps coming in early in the quarter. It is as you exactly point out, the DTC, and we will carefully monitor the dollars we are spending in DTC and see if they get the appropriate return.

Then number three is and that is very important, that is we're investing in samples because we have this as an important differentiated factor for us in the marketplace because we can sample our product and therefore to have 32 new reps productive come end of Q2, we have to continue invest in samples to make sure they have the samples with them the healthcare professional offices. So the expense Q1 is a good representation with a slight increase as we move forward.

And last question in terms of the cash burn, it looks like you guys went through $20 million to 421 million approximately this quarter versus the fourth quarter. Is this the bulk of the cash you are going to use for this year? Should the cash spent for the rest the year abate off from these levels?

A good representation is we have guided to an operating loss in the neighborhood of $55 million to $60 million as indicated here. If you consider and expect a CapEx number of an additional $10 million to $12 million for the year, then you have a good indicator.

Great, thanks a lot.

Mike Weinstein, JPMorgan.

Thank you, good afternoon, guys. A lot of different ground I'd like to cover if we could. Let me just first go through a couple metrics that I'd love to get your read on. One would be patient retention rates or reorder rates, let's say, once they start on a pod.

And then two, can you talk about product quality, any return issues that you may be seeing? What is the overall satisfaction with these device? Obviously having followed the pump market for longer than I like to say, pumps have historically had issues following initial launches. Yours has gone extremely well at this point, so would just love to get an update on both patient satisfaction and resulting retention rates and then product quality, any issues we should be aware of.

Sure, I guess the answer to your first question is the attrition rate for the product is running right now about 7% to 8%. About half of that is related to insurance. Okay, give you some indication whether it is copays or secondary insurance not covering enough of the piece. So I would tell you about half of that is related to financial and then the other half is broken down amongst literally hundreds of categories.

With regards to the product quality, as we continue to ramp and as we continue to ramp as quickly as we are ramping, what we do is we're constantly monitoring the quality. We're monitoring the quality in the field. I would tell you this last big step up from where we are, the 50 some of percent growth, we monitor all the stuff at the final test. I would tell you that the quality -- a final test slipped maybe one point or two. We've been constantly monitoring that.

The real issue for us has nothing to do with us. It really is when we take that big step up, a 50% interest increase, we really continue to stress the supply chain. So we are paying very, very careful attention to that. We are reacting immediately to it when we see something like that. But I would tell you I think overall we continue to do satisfaction surveys and granted they are surveys done by an independent house for us, but we still continue to kind of march in the 80%, 85% range on an ongoing basis. So we haven't seen -- from those surveys, it's probably the best indicator. We haven't seen any attrition.

Okay, you have dramatically increased your number of territory managers obviously since you started the year. Could you talk about the training of those managers? What you've had to do to train them? Where they came from? Where they from other diabetes companies, other areas? Then what is your sense on a productivity curve for a new rep hire?

To give you some sense, the background of all these diabetes -- Shawna Gvazdauskas, who is our Senior VP of Sales and Marketing, has a significant amount of experience in this space, has literally thousands of contacts. She has leveraged all those to help us ramp as quickly as we have. All the people that we have brought on as an average -- don't hold me to every one -- but as an average they have about ten years experience in the diabetes industry. There's a significant number of them from strip companies from competing pump companies and there was some guys that came from kind of an I-port type thing. But all of whom have significant diabetes background. So we have been very, very fortunate. We have very, very seasoned people.

Now, with regards to how we are kind of tracking the effectiveness of this group, I would tell you a lot of these guys started -- their start day was pretty much the beginning of January. We had a national sales meeting. We flew everybody into one place and we literally spent a week training all those people. Then they went out. The regional managers traveled with of them, so we probably have a couple weeks hands-on experience with all the individuals.

We brought all the people from the company to one place to get them comfortable with it. We brought customer service people, field service people, to get them all up to speed. We went through all the product demos. So I would tell you the way we are kind of tracking it and our internal profile is it's 90 to 120 days from the time we get them in the building depending on when we get them trained up and we are assuming that they are going to be as effective as the existing guys.

Now, there's only two territories we have divided. So those two I would say are an exception because we really don't know. What we did is as part of the expansion we divided a couple of territories because we really want to start understanding the dynamics of those two territories. So obviously if we're going to continue to grow and we don't think we need a lot more people, but if we divide those territories, that profile may be a little different than just putting someone in a new territory.

Okay, so with just the timing of the ads that you had and where you are in your manufacturing program, obviously you made a lot of progress here in the last few months. It would seem that you've got both pieces in place manufacturing, the reps, obviously the product to now to really start to open up the gates a little bit on a market and product, fair statement? So we should see that start to manifest a little bit the second quarter but then more meaningfully in the third and fourth quarters on your revenue ramp?

That is spot on.

Let me just switch, if I can to Carsten just on the OpEx. So obviously you are guiding to a decrease in your quarterly operating loss over the next three quarters. I was hoping you could provide some additional insight into that.

That is absolutely correct and the key driver here and that is why we are stressing and what we are telling the market. We are stressing that we will be able to drive [costs] to gross margins towards the very end of the year and therefore allowing that dollar amount coming from gross profit towards the end of the year to reinvest now in our sales and marketing infrastructure in particular.

So that's why I'm saying on the OpEx side and the key driver there and I think I said on the last call that 80-plus% of our investment in OpEx will actually comes from the sales and marketing line. And it is important to stress that Q4 is the quarter where we will break through a d full quarter in terms of the gross margin and that the dollars we are investing now in the sales and marketing infrastructure.

And your view is that your SG&A expenditures will be relatively stable with the addition of whatever commission dollars you are paying out and your additional promotional expenses?

That is exactly correct. In a way, an experiment is if you take Q1 OpEx and you multiplied it by 4, then it is $66 million in total OpEx for the year. And that means in that scenario, $6 million have to come for us to hit the $60 million operating loss, the $6 million has to come from the gross margin line.

If you continue with various scenarios there, because I just said to Paul there will be a slight increase in the sales marketing cost, that means the contribution from gross margin has to exceed that. We are on plan to do so.

Got you. And last and I will let some others jump in here, I apologize. Your cash position is $73 million at the end of the first quarter. You were potentially going to refinance some of your existing debt. Maybe you can just update us on that if you can at this point.

Yes, we continue to the remain comfortable on the cash position liquidity. We are currently exploring the debt refinancing alternatives that are out there and expect to pursue a refinancing of the existing facility before the end of the next couple of quarters. So the signal is that we are comfortable with the position and the progress we are making in that respect.

Thank you, guys.

Mimi Pham, JMP Securities.

Good afternoon. Can you talk about the timeline for the Abbott or DexCom integration? Last week DexCom had mentioned December 2009 timeframe for [7] to be integrated with either your or J&J's pump.

I think maybe -- look, our goal with both partners is basically to be into the FDA in the first half of 2009 and then both of our partners are significantly more familiar with that whole regulatory path. But our goal with both partners is in the first half of '09 to be into the FDA.

Meaning submit the PMA supplement if a supplement is necessary first half of '09?

Whatever form of documents that it would be, but the engineering and everything else would be completely done. We would have satisfied whatever requirements there are from the FDA and we would have submitted.

Then on reimbursement coverage, I know you normally talk about it in terms of number of lives, but now that you have sales covering 50 states, can you speak to it in terms of how many states you cover?

We cover all the states. I would tell you some of the states range from 50% coverage to as high as 90% coverage. That's -- we have four people ongoing continuing to try to fill in all those boxes.

And then your 49 territory managers, is that --? Are you done for '08 and are you done for '09 or do you add more at this point?

We think the right number, and I think we've consistently said it, is somewhere between 50 and 55. And I think a lot of that is just going to depend whether we fill that out before the end of the year is going to just depend on how all of this is going.

Thanks, and then last question (multiple speakers) sorry, go ahead.

I said, we just think that is about the right number to be at.

Okay, then the last question, do you have the estimated percent of new patients versus upgrades for that 1200?

It's still running about 75/25. I mean, we haven't seen anything. It is going to be interesting from our standpoint once we start seeing some of the effects of this advertising and direct-to-consumer -- if that metric starts to change anyway because that would be the way we would find those people.

Okay, thank you very much.

Bruce Cranna, Leerink Swann.

Good afternoon. First of all, Carsten, just on the deferred revenue piece, is the $1.2 million in the quarter, was that just changing the accrual rate for the quarter or was there some reversal of prior period in that number as well?

What we are saying is that the reported revenue of Q1 was $6.671 million, right? If we had done it the old way, i.e. the way we were doing it by the end of fourth quarter, then the revenue would have been $1.2 million lower, so $5.5 million, which would still have been a 25% sequential growth.

Just based upon your quarterly run rate and what rate you defer quarterly sales as?

Yes, so we have in a way moved by end of fourth quarter from a strict 45 day deferral, the last 45 days sales of quarter to now a deferral policy that is linked to our historical track record in terms of returns, in terms of a typical gross to sales calculation elements. Then it is also important because it is actually interesting that the deferred revenue by end of Q1 equals the deferred revenue by end of Q4. And a key element of that is that in that deferred element is the current portion of the Abbott prepayment associated with the changed script deal with Abbott. So that is important to keep in mind. It is a total coincidence that those two numbers by end of Q4 and end of Q1 are the same.

Okay, thank you for that. Then you mentioned you are now over 5000 users. Can you put a little bit of a finer point on that for our benefit?

I think, look, we are running at about a 7%, 8% attrition rate. You add that into the installed base before with the 1200 and I think you get there or less. The only reason we're starting to shy away from just the total number is simply due to the fact that, you know, calculating that -- changes on a daily basis or a weekly basis and as we get more and more people under the curve here, it's just getting tougher and tougher to track.

But like I said, having said that, the attrition rate and the new customers which we really think are the driver of this whole business, those are the two numbers for you.

Okay, I'm starting off with a 4900 from last quarter.

Yes, whatever that -- you got it.

Okay, then I just want to revisit your plans in Europe. Are you guys still thinking a CE Mark sometime this year?

Well, we are looking to file CE Mark by the end of this year with the agency there and have that in place before the end of this year, yes.

Okay, I guess last question from me. Seeing some of the I guess early prototypes of some next generation products out there, I'm kind of curious when you guys think about the OmniPod and I think we would all probably admit there will be a day when there is competition in the field. Do you contemplate any sort of next generation device? If so, what kind of things do you guys focus on when you think about that?

I think there's a couple of things. One is obviously we're working with the industry partners to integrate continuous sensing, which would be the next step up. So we'd have two versions. Then the next piece of our development we continue to look at ways to make the product smaller. We think we have a thorough understanding of the product. We have several different variations on the drawing board at different stages of development. So we think we know how to get to the next step in this particular product.

Okay, you might share some sort of I guess a prototype with us when the time is right?

Yes, I think -- look, at the end of the day what we always worry about, what we always worried about is we think we have a state-of-the-art product at the moment. We have a pretty wide-open field, so the last thing in the world we want to be doing is competing with ourselves. But when the time is right, we are very cognizant of all the players that are out there. We also I think are very cognizant of all the hurdles that we're going to have to overcome, which is more than just creating a product.

So we understand -- we think we understand our product very well. We think we understand the timing of where and when all that could happen.

Okay, thank you.

William Plovanic, Canaccord Adams.

Good afternoon. This is actually Anup for Bill. Can you hear me okay? So I am actually going to follow up a little bit on the previous question regarding potential -- just new products coming onto the market. There's some buzz about Medingo coming out with a product. Can you just compare and contrast some of the -- what people are talking about on the street versus your OmniPod and how you may be able to maintain your hedge?

This year, I will start with the most basic. I can make 100,000 a month and they are running around with a prototype. I think until they are in the marketplace there's really not a lot to talk about.

Okay, in terms of foreign exchange for your COGS, do you think foreign exchange is going to impact your ultimate cost of your products and is it also going to in any way impact your raw material costs?

Look, I think I'll answer the second part of the question first. The only threat we have to our raw material costs is we have more silver oxide batteries in our product and with the price of silver going up, that has the potential to be problematic. While we've had long-term contracts in place -- nothing lasts forever. So that would be the one threat we see.

With regards to foreign exchange and the rest of the stuff, we're very, very comparable with. But that is the one that we cannot control. With regards to the strength of foreign currency, it is interesting. As we start talking to people in Europe and looking at the strength of the euro versus the U.S. dollar, given that reimbursements all in euros over there, we actually think it's a very interesting opportunity for us.

Okay, then the last question before I jump back in is given the ramp in reduction that we saw this quarter, do you still feel confident about reaching 400,000 units by sometime in early '09? And also you mentioned you were thinking about increasing your capacity. Are you starting to think about a third line? And if so, have you made any changes in terms of your timing for actually purchasing that third line or the second line for China?

Bill, where we are in -- where we are is the production number you see is basically the chassis being built in Asia and being sent to us. We are -- the equipment is all installed right now with the people at Flextronics in China. They are in the process of qualifying that entire line, so we are really -- before we make any decision we're looking to sometime in Q3 see that line come up.

If that line comes up and I think at that point in time we're going to be pretty comfortable looking forward at larger potential volumes. But we still have to see it come up. We're thrilled with the progress. We are very impressed with the quality of work being performed by the Flextronics people, but we are still not up and running yet. That's -- like I said -- the chassis are being produced there, but the actual final product continues to come out of Bedford.

Okay, so you're still on track for the 400,000 units by sometime in early (multiple speakers) --?

We are still on, yes.

Okay, thank you very much.

Ben Andrew, William Blair.

Good afternoon, guys. Just maybe three questions. First, Duane, how do you think about and measure rep productivity in the field today? Is that going to change in any way over the course of '08?

I think that what we have is we have a track record with some of the guys on the East Coast have been selling now for almost two years so we benchmarked a lot of people against them based on the number of key endocrinologists in a particular territory. So we think we have a pretty good understanding and we're seeing the ramp up and we're monitoring that right now.

The thing I would tell you that we really do not have a good feel for is when we take a territory and split it in half, do you get twice the productivity? Do you get half the productivity? We are going to have to monitor that. So a lot of territories that we're going into it's a function of the amount of lives we have covered, which is key, and then the number of key endocrinologists. So we're monitoring all that.

We look at the productivity for the territory managers in terms -- it's pretty simple. It's number of referrals and shipments per month per rep. Like I said, we have a pretty good benchmark that we started on the East Coast. We have some people that have two years experience. We have some people that have one year experience, so we think we understand the ramp, but like I said, right now we are watching.

Because if I just do a little bit of math and if I look at Q1, 1250 new patients, 17 reps active coming into the year, maybe those weren't all fully active and I know there's a range there even with that group. But you are basically 74 new patients per rep. Is that a relevant number? You've got a lot more data than we do, but is that one way for us to think about it?

That is one way for you think about it, yes.

Okay. And second if you think about the training and other infrastructure support systems that you guys are going to need over the course of 2008, is that contributing meaningfully to spending or is that still to come or -- because if I think back to the days at MiniMed, the level of support they were building in the back office both for reimbursement and patient support was the substantial.

I think we are -- I would tell you that the major challenge for us today right now based on watching the sales reps, we think we have a pretty good understanding of the productivity. Like I said, only time will tell. So we're pretty comfortable with that. The challenge for us in pure candor is we have to get the backroom right and that's -- it's one thing to get a referral in. It's a whole other thing to get it processed. So we are going to several industry leaders. We have a couple of consultants that have come in to help us and we're beginning to streamline that.

Having said that, we think we understand it, but once again, we're talking about a significant ramp up between here and the end of the year. We have taken a big first step here in the first quarter. So that is going to be -- to be honest with you -- I think that he is going to be the gating factor.

I don't think it is product demand. I don't think it is interest from the field. I don't it's going to be the productivity of the salespeople, although we haven't proven all that yet. I think the real challenge for us is just making sure we have the right, most efficient infrastructure. How we go about doing that, we're looking at various models right now.

Do you think you are far enough along in that look for the ramp you've got in Q2 to Q4? Can you really support 4000 or 5000 patient adds?

It is -- we think we understand how to get there, but understanding and actually executing, we have to go through it. So I think Q2 is going to be a real good test for us and then Q3 will be another significant ramp. If we can execute as well as we hope in Q3, then I think we will be fine. But that is going to be the real big step up for us.

Right, then somebody asked before about product quality issues and you talked about seeing a little bit of a bump in issues. Are you catching those at the manufacture level or are those coming back out of the field?

I would tell you -- I would love to tell you we're catching them all at the manufacturing, but we have seen a slight blip of probably 1% to 2% out in the field in terms of phone calls. We have reacted to them. I think our customer service is doing a great job. I think it gets pretty high marks when people talk to them and I think what we have seen we have been able to deal with so for.

Do you credit back a pod or two and try to make nice to the patient or do you lose people from that? Has it become occurring with any people?

It is -- I would tell you it takes a lot of time and effort to get the patients. So we will do whatever it takes to keep the patient.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Philip Legendy, Thomas Weisel Partner.

Good afternoon. I wanted to ask if you've seen any changes in pricing in the quarter. Revenues were a bit high for what we would have expected at $30 a pod.

No, the pricing -- the pricing is just a function of the mix that is running through based on the insurance carriers and where the stuff comes from. So let's put it this way, there is nothing of note.

Okay, so $30 is still kind of the [strikes] on here for price?

Right in line with $30, yes.

Okay, then just a few technicals. What -- maybe for Carsten, what was the total contribution from deferred revenues in the quarter?

That is the $1.2 million.

Okay, the $1.2 million is the total, not the difference between what it would have been. Okay, got it. Then what percent of revenues are you now deferring now that you have these two years of experience?

Remember again, we have $1.3 million in deferred revenue and we had revenue in the quarter of $6.7 million, so the percents there give you an indication. Remember again, an important piece there is the current portion of the Abbott prepayment associated with the changed script deal.

Right, CapEx in the quarter? I didn't hear you say what it was.

CapEx in the quarter, it is actually not in the press release, but will be in the 10-Q was $5 million. A significant portion of that was finalization of downstairs in Bedford and then the -- a part of the payment for the machinery that has gone to China, as Duane alluded to before.

And while you see -- it is not new equipment, while the equipment is here, it's typically the way it works is one-third on upfront, one-third on delivery, and one-third on final approval.

Okay, and then I guess last question I just wanted follow-on on one of the previous questions. Kind of in general I wonder if you can give us an update on what you are seeing competitively? There has been buzz about Medingo, but just wonder if you could just put it to bed for us all, kind of what's going on out there?

Once again, what we are seeing is we are seeing Medtronic MiniMed linking continuous sensing with insulin pump. That is what we're seeing competitively in the market. We don't see anything from Medingo in the market. The only time we talked about Medingo was on these particular calls. So I guess -- and I apologize if it sounds curt, but look, at the end of the day when we have to compete with them, we think we understand a lot about their products, but I would tell you it's all second and third hand. We think we're in a great position to compete with them.

But until they are in the market actually selling and doing all this, it is a theoretical exercise that I don't want to get roped into.

Fair enough. Thanks, guys.

Amrit Nagpal, Weintraub.

Carson, I wanted to follow up on the discussion you were having with Mike Weinstein on the gross margin. I think you said that if you annualized the operating expenses for the first quarter that would be roughly $66 million. And as you said, it will be little higher, so call it $67 million or $68 million. So in order to make your net loss guidance, you'd need $6 million of positive contribution from the gross profit line? Is that correct?

That is correct in the scenario. We we'd just take the OpEx of Q1 and multiply by 4. So that is $66 million and if we have to hit the high or the lowest end of the operating loss of $60 million that means $6 million has to come from the gross margin. That is just to indicate to you that what we are doing it is we are taking that expected gross margin contribution end year and investing up front in the year to make sure we have built the infrastructure from a sales margin point of view.

Okay, that's very helpful. Just to follow upon that, so if you took the high end of your revenue guidance, $45 million, and if you applied $6 million of gross profit, that would imply for the year that you'd have a positive 13% gross margin which would I guess based on the comments that you made about hitting breakeven during the third quarter and getting positive for the full fourth quarter, doesn't that imply by math a gross margin well above 50% in the fourth quarter of the year? Or am I doing the math wrong?

It implies a significant ramp up in gross margin in the fourth quarter and as we indicated, we are planning now and on the way to break through sometime during Q3. So your math is correct.

Okay, because I just want to make sure. It sounds like you are very confident about it. I just want to make sure I understand because I guess I was operating under the assumption that if you hit breakeven sometime during the third quarter, that is a gradual process of generating a significant gross profit percentage. But it sounds like it might be more steep than I had anticipated.

And a key element here naturally is that we are currently at the 95,000 monthly output and we are confident that we'll get to the 200,000 output per month in the fourth quarter as a result of that because it is all volume driven both in terms of building material and in terms of absorption of overhead costs. We feel confident that we'll get there.

Thank you.

A follow-up from William Plovanic.

Thank you for taking the extra call -- extra question. You had previously mentioned on other calls that you would be partnering with a pharmaceutical company. Is the Micromet portion of the press release, is that the partnership you had mentioned or been discussing? Or is there something else?

That is not the partnership we are alluding to, no.

So are you still expecting something by the end of the year?

We would be disappointed if we don't get something by the end of the year, correct.

Thank you.

At this time, you do not have any more questions in queue and I would like to turn the presentation back to management for closing remarks.

I would like to thank everybody for joining us today and we look forward to updating you on our next call. Thanks a lot.

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