Insulet Corp (PODD) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 1, 2009 Insulet Corporation earnings conference call. (Operator Instructions)

I'd now like to turn the presentation over to your host for today's call, Brian Roberts, chief financial officer. Please proceed.

Thank you. Good afternoon, everyone, and thank you for joining us for our first quarter conference call. I'm Brian Roberts, chief financial officer of Insulet. Joining me on the call today is Duane DeSisto, our chief executive officer.

Before we get started, I'd like to remind everyone that our discussion today may include forward-looking statements as defined under the securities laws. There are risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Information concerning the Company's potential risks and uncertainties is highlighted in the Company's press release issued earlier today and in the risk factors section of the Company's SEC filings, including the Company's Form 10-K for the year ended December 31st, 2008. These risk factors apply to our oral and written comments.

I'd also like to remind you that the guidance we're offering today represents a point in time estimate of our future performance. You'll find a link to the webcast of this call as well as to today's press release at www.myomnipod.com in the investor section.

And now I'll turn the call over to Duane.

Thanks, Brian. Good afternoon, everyone, and thank you for joining us.

I'm very pleased to report that the first quarter came in as we had expected. Revenue increased year-over-year by 87% to $12.5 million and gross profit increased by 67% from a quarter ago. We continued to make significant progress towards growing a strong and sustainable business that is revolutionizing the insulin pump marketplace.

Throughout 2008 we were focused on establishing our national sales footprint and dramatically improving our manufacturing capacity. Our results for the first quarter continue to demonstrate that those investments are paying off. We now turn our attention towards efficiency and expansion.

In the first quarter we continued to grow our top line, despite the difficult economy. We also have continued to demonstrate the leverage in our business model, with gross margins increasing to 16%, a 67% improvement in gross profit over last quarter.

In the first quarter we also strengthened our balance sheet by signing a credit facility with Deerfield Partners. When combined with our existing cash as of March 31st, we had up to $100 million in cash available to continue innovating and expanding the market opportunity for the OmniPod system.

However, we know that there is much more for us to do. Let me now take a few minutes to update you on the major areas of business where we're focusing our attention, manufacturing and operational efficiencies, new product innovation, and expansion opportunities.

First, manufacturing operational efficiencies. A key initiative for Insulet is to drive down our production costs per OmniPod. Our continued focus on improving manufacturing efficiencies is beginning to provide leverage to the business. As I mentioned, gross margins increased to 16% in the quarter, up from 10% in the fourth quarter of 2008.

More impressive, while nearly doubling our revenue this quarter as compared to Q1 a year ago, our cost of sales year-over-year increased by only 5%, resulting in a greater than $5 million improvement in gross profit. We expect gross margins to climb north of 20% in the second quarter and we continue to expect the cost per pod to decrease in the second half of the year to between $15 and $20 per pod.

We also made progress in reducing our operational expenses in the first quarter and we expect to drive further improvements throughout 2009. Within the commercial organization we are taking steps to institute a more disciplined metric-based approach across our field organization, managed care and reimbursement teams.

We think this will have a positive impact on improving sales productivity. Early results are positive. After a slow January and February, we have seen momentum increase in both March and April. We are cautiously optimistic that this trend will continue.

Now let me turn to product innovation. The design of the OmniPod Insulin Management System was awarded the top honor at the 2009 Edison Best New Product Awards, which recognizes excellence in new product development, marketing and innovation. As most of you know, in the first quarter one of our former competitors exited the diabetes industry, citing the difficulty in developing next generation products as one of the key reasons for their decision.

Of course, as the only tubing-free and wireless insulin pump on the market, the OmniPod system is state-of-the-art. This change in the competitive landscape gives us new opportunities. While it's in its early stages, we are enthusiastic about the potential of our announced program for [Cosmo] users to test-drive the OmniPod.

We expect to continue to be aggressive in the marketplace. Just this week we began the preorder period for our next generation PDM with a color screen and enhanced download capabilities. We look forward to formally launching the new PDM at the ADA conference in early June.

We continue to invest in development of both our next generation pod and a version of our PDM which will provide continuous glucose monitoring capability. We expect that we will be into the FDA by year-end with our integrated CGM solution.

Additionally, we continue to make progress in the area of non-diabetes applications. In fact, we expect to file for CE Mark approval for our first application in partnership with Ferring Pharmaceuticals during the second half of this year.

We also see great opportunity to expand the market for OmniPod internationally. Last month we announced the OmniPod had received CE Mark approval, giving us -- giving us the license required to begin to distribute it in Europe and other key diabetes markets. This is a significant milestone for the Company. We have already received enthusiastic feedback from key opinion leaders in Europe.

We are in discussions with prospective partners and distributors across the globe, not only in Europe but also in China, Australia, the Middle East, Canada and Latin America, to determine how we will go to market. We believe that we will be well positioned to be capturing significant revenue opportunities in 2010 and beyond.

Looking ahead, although we remain optimistic about our ability to continue growing the market opportunity for OmniPod System, we are appropriately concerned about the economy and its impact on both our business and the diabetes industry overall. We know that across the country, people with all kinds of diseases are more often faced with tough choices between financial concerns and their health.

People with diabetes are testing their blood sugar less, trying to conserve insulin, and in some cases foregoing the decision to switch from multiple daily injections to an insulin pump. Our annualized attrition rate increased to approximately 12% in Q1 from 10% in Q4, with the loss of healthcare benefits as the key driver in that change. We will continue to closely monitor the economy and its potential impact on our business.

With that, I'll turn the call over to Brian to provide additional details about the quarter and our expectations.

Thank you, Duane.

As Duane noted, our first quarter results were in line with our expectations for the business and the economy overall. Revenue increased by 87% to $12.5 million as compared to $6.7 million in the first quarter of 2008, as we saw demand rebound in March from a slow beginning to the quarter.

Our gross profit for the quarter was $2 million, or 16%, as compared to a gross loss of $3.3 million, or negative 50%, in the first quarter of 2008, a $5.3 million improvement year-over-year. As we continue to drive higher volumes, we are confident that margins will continue to improve. Looking towards the second quarter, we expect gross margins to be greater than 20%.

Operating expenses were $19.5 million for the quarter, up from $16.7 million in the first quarter of 2008. Adjusting for last quarter's impairment charge, operating expenses decreased by nearly $1 million in the first quarter as compared to the fourth quarter of last year. As we look forward, we expect to see an increase in sales expense in Q2 due to higher sampling costs as we roll out our next generation PDM. However, we do not expect to see an uptick in overall operating expenses.

We reported a first quarter 2009 net loss of $19.6 million, or $0.71 per share, as compared to a net loss of $19.9 million, or $0.73 per share, for the first quarter of '08. Our operating loss in the first quarter decreased by $2.5 million as compared to the first quarter of last year due to the significant improvement in gross profit.

As of March 31st, 2009, Insulet's cash and cash equivalents totaled $68.2 million as compared to $56.7 million at December 31st, 2008. During the quarter, as Duane mentioned, we entered into an agreement with Deerfield Management Company to provide us with up to $60 million in additional financing through a flexible credit facility.

In accordance with the agreement, Deerfield provided Insulet with $27.5 million of funding on March 31st, 2009. Amounts drawn under the credit facility will accrue interest at a rate of 9.75% per annum through the term of the loan. Undrawn amounts will accrue interest at a rate of 2.75% per annum. All funds drawn are repayable in September 2012.

In conjunction with the initial draw, we issued warrants to purchase 3.75 million shares of common stock at an exercise price of $3.13 per share. The warrants have a six-year life. The remaining 32.5 million may be drawn in increments of 6.5 million based on the achievement of certain quarterly financial milestones. Amounts must be drawn by November 2010. For each additional 6.5 million tranche drawn, we will issue 300,000 additional warrants to Deerfield to purchase shares of our common stock.

Also, effective January 1st, 2009, we adopted FASB Staff Position ABB 14-1, accounting for convertible debt instruments that may be settled in cash upon conversion. This new accounting standard requires us to determine a market interest rate for our outstanding convertible notes as if the convertible feature did not exist at the time the notes were issued. The higher amount is then reclassified from long term debt to the equity section of the balance sheet as a debt discount and then amortized as noncash interest expense into the income statement over the life of the notes.

Given this change, as well as the impact on interest from the new credit facility, we thought it would be helpful to provide additional color as to what you should expect in interest expense for the remainder of the year.

Assuming no additional draws on the credit facility, we expect interest expense of approximately $3.7 million per quarter. This is comprised of $2 million in cash interest per quarter related to both the convertible notes and the new credit facility, and $1.7 million in noncash interest expense per quarter related to the accounting change and the amortization of the value ascribed to the warrants and other financing costs incurred in connection with the new debt.

Turning to guidance, we are reiterating our estimate of revenues for the full year 2009 to be between $55 million and $65 million. We also continue to expect our 2009 operating loss to be in the range of $50 million to $60 million.

Finally, as the complexity of the business expands with the usage of distributors, both domestically and internationally, new product launches, the timing of reorders, growth of short term applications such as for gestational diabetes, and various short term offers such as our well received offer for Cosmo patients, we do not believe that gross patient additions or overall patient count are the best indicators of revenue.

Thus we will no longer provide patient count information, but instead will provide you with our estimate of revenue for the upcoming quarter. For the second quarter of 2009 we estimate revenue of $13.5 million to $14.5 million. That represents 8% to 16% sequential growth over the first quarter of 2009.

With that, let me turn the call back over to Duane.

Thank you, Brian.

In summary, we are pleased with the progress we made in the first quarter towards maximizing the market opportunity for OmniPod System. With additional capital secured, our second generation PDM about to launch, CE Mark approval in hand, and a robust new product pipeline, we are well positioned to drive further adoption of our state-of-the-art insulin pump and advance our mission to improve the lives of people with diabetes.

And with that, Operator, please open up the call for questions.

(Operator Instructions) The first question will come from the line of Bruce Cranna, Leerink Swann. Please proceed.

Hi. Good afternoon, guys.

Hi, Bruce.

Hey, Bruce.

A couple of things, I guess. Number one, Duane, do you have any idea of the number of Cosmo patients currently on the device?

No. I mean we've heard estimates. I think it'd be inappropriate for me to tell you. But obviously it's been a big range that we've heard. But off the top of my head, no.

Below or above your current level of patients?

We've heard estimates pretty much around our current level and significantly higher than our current level. So we really 00 to be honest with you, we really don't know.

Okay. And so why are you guys -- why will you not give patient counts anymore?

I think it's -- from our standpoint, right, the whole point of the patient count is pretty much for the market to try to extrapolate out the numbers. We're going to give you the revenue estimates and do it that way. We have people on gestational that's becoming a bigger piece of our business while still not material. They're only on the product for three months, so we'd be putting them in, new patients out, in and out.

We're giving people the opportunity -- we have a significant number of Cosmo patients that we offered basically a 30-day trial that may convert. But if you just do the normal math, the math's not going to work out the same way. So our sense of what's going on with that particular number, and we did it early on, was the market's using that to try to kind of extrapolate out the business and take a look at that.

What we're trying to do is take some of that ambiguity out of there by giving you guys our best estimate of where we are with the business, taking all those mixes into account and giving you our best estimate of where we think we'll be in the next quarter.

Okay. And were there revenues in the quarter from Abbott royalties?

Yes.

Yes.

Can you quantify those, Brian?

Yes, we had $1.1 million of revenue from Abbott in Q1.

Okay. And then last for me, I'm just looking at the operating loss guidance. I'm having a hard time kind of getting there. Can you give us -- I know you don't want to get into too much fine detail, but where's the leverage coming from? You're sort of in a [17 5] run rate and you're talking about midpoint, maybe [57 5], operating loss for the year. I mean should we be thinking of more leverage from the G&A line than we saw in this quarter? What are your thoughts there?

I think we absolutely believe that we've started to see some leverage in the G&A line here in Q1, coming down $1 million off of Q4. With the exception of the additional sampling expense we're expecting in Q2 for the PDM and to roll that out into the field, we'd expect to see G&A come down some more. In Q2 obviously we're saying we could offset that. So operating expenses being flat in Q2 would imply that the one-times being covered for.

And then the back half of the year, as Duane mentioned, we're putting some different metrics and processes into place across teams, like the reimbursement team and the managed care group in the field, and we think that's going to provide us some additional leverage as well.

Okay, thank you.

Next question comes from the line of Raj Denhoy, Thomas Weisel. Please proceed.

Hi. Good afternoon.

Hi, Raj.

Hi, Raj.

Wonder if I could ask, because I know you aren't going to give the patient numbers, but you mentioned, I think, a little bit on the sales force productivity, or at least seeing something on the sales force side. Have you seen an increase in the number of patients per salesperson being added at this point or are we still looking at some improvement yet to happen on that line?

I think, Raj, if you take a look at it, as we said, I think we expected January to be a slow month. February was probably a little softer than we anticipated. If you just look at March and April, there was a real uptick in the productivity per sales rep. So I have four -- I have four months in the book. Two were kind of below average or flat and two were above average. March and April were the two best months we've had in productivity probably in the history of the Company.

Now April is started to be impacted by Smith's a little bit, so we got to kind of weed through that. So I just don't think we have enough in this economy under our belt here where I'd feel comfortable telling you we got a number that makes sense. So like I said, January and February were a little soft, which we expected January. February was a little bit of a surprise. But March and April have both been better than we thought.

And do you still think the number of 50 sales reps is what you're going to keep for the year and are you expecting to do --?

That is absolutely the plan. We believe we can continue to leverage this group. So from our standpoint, our plan is right now that we think that[s probably the right number and we can leverage them and we think we can continue to improve productivity. Being four months and a week and a half in, I would tell you -- if I look at the last two months and week and a half, I'd tell you I think it's -- we're cautiously optimistic that that plan's going to work.

Okay. And just on the gross margin side, obviously you produce -- I guess I'm curious. Where are you producing right now? Is the -- are the pod in inventory at this point that you're selling out, are those all Chinese made at this point or do you still have some U.S. made inventory you're still working through?

I think at this point we're effectively all in Chinese pods. There could be a very small number left from the U.S., but we're effectively all China now.

Okay. And then just lastly on the PDM upgrade, is there a possibility of upgrade cycle for existing users? Is there a possibility of revenue in the latter half of the year as existing patients might want to buy the newest?

Yes.

And is that in your guidance at this point or is that upside?

Well, I think we're looking at -- we're looking at the back half of the year and I would tell you it depends on what program we roll out. And we're still kicking some of them around on what the upgrade program would look like for these patients. But it has the potential -- if it goes really, really well, it has the potential to be upside. But we have dialed in some conversion. We just don't know how big it'll be.

Okay. Thank you.

The next question comes from the line of Bill Plovanic, Canaccord Adams. Please proceed.

Great. Thank you. Can you hear me?

Hi, Bill.

Sure can. Hi, Bill.

Fantastic. Just a couple of questions here. First, did you give any color on the attrition rate during the quarter? Has that accelerated, decelerated, any thoughts there?

Sure. We gave some color. We basically said the attrition rate pretty much we were running around 10%. We're approximately 12% on an annualized basis and the increase, Bill, is the -- the vast majority of it is targeted right towards people losing healthcare coverage.

And then --.

(inaudible - microphone inaccessible)

Did you -- I'm sorry I'm jumped on literally five minutes late. Did you talk --?

No problem.

The receivables issue you had last quarter with the payors and any update on that?

Yes. Look, I think, and Brian can comment on it, but let's put it this way, it didn't get worse. Maybe it got a little bit better but it is a process that we are slogging, literally slogging our way through. Go ahead.

Yes, I think we've -- we're making progress with it. We've had some conversations with the plans. We think we're progressing towards solutions. But we're not there yet, so I'm hesitant to count my chickens here before they hatch.

Okay. And I'm just curious. I literally haven't heard of this issue with any of the other companies I deal with and I'm -- are they singling out the smaller companies or what do you think?

Well, two things, Bill. Maybe, a. we're more honest. Or, b. from our standpoint it's more of a material piece than a lot of these other companies. It could be lost in the rounding in some of the bigger guys.

And plus the third thing might be just because we're the new kids on the block. Most of these contracts came down in the last year for us, year, year and a half. So I don't think there's anything in particular geared towards us or our product. I don't think that's the case.

And did you get an update on the [Flex] manufacturing move?

It is --.

I know that -- and what kind of you're doing, because I know they have to move from one facility to another, I believe, and then it could potentially be shut down. Anything there?

Yes, we didn't give an update but we can do it quickly. Flex was shut down for a couple of weeks at the beginning of the year, so you saw a little dip in the inventory here because of Chinese New Year and a couple of things they were doing. The update's still scheduled -- the move's still scheduled either the -- sometime in the Q3 kind of period. I don't think it'll impact Q2. I think it'll really be a Q3 event.

And they're still planning on doing -- I mean, despite everything going on in the economy, they're still planning on doing that. Once again, it's being driven not by us, but by efficiencies they believe they can wring out of their medical business, which includes us and a bunch of the [meter] companies.

And for your product line, will that be a one-week shutdown, a month, two months?

We dialed -- we dialed in -- I think we dialed in six weeks, roughly. But they're telling us it could be a couple of weeks. But I think we actually dialed in almost six weeks into the plan.

Yes, that's correct. Our plan, as I think we talked about last call, was to end the year hopefully with closer to two months of inventory. You saw the inventory level this quarter started to come down and we've come down from probably near four months at the end of the year to about three months, a little over three months at this point. So we kind of planned for that. And we'll use that period of time to be able to get down to the two months by the end of the year.

Is that part of the increase in gross margin sequentially? Do you have to build up inventories before you shut it down for six weeks?

For Q2? I think we'd see a natural -- I think just with the leverage we're seeing overall and those volumes increase, we're -- just as patients increase, the business increases, we're seeing the margin leverage come through. So I don't think planning for the -- planning for the shutdown in Q3 really will have much of a material impact at all.

Okay. I'll jump back into queue. Thank you.

The next question will come from the line of [Matthew O'Brien], William Blair. Please proceed.

good afternoon. One clarification question. And this is for Brian. On the guidance that you provided coming out of Q4 versus Q1, did that assume this additional noncash interest expense when you provided that last quarter or are we basically looking at less expenditures coming out of the Q1 guidance?

To be clear, our guidance is set on operating loss. So interest expense has been -- is effectively underneath that. So the way -- when you look at the P&L, we go operating loss, then the interest expense, and that gets you to net loss. So the interest is outside of the operation loss guidance.

So that $55 million to $60 million of loss is operating loss then, okay.

Yes. That excludes interest.

Okay. And then secondly, on the gross margin side, looking at the quarter it seems like the cost per pod now is somewhere in the $27, $28 range. Getting down to $15 to $20 per pod, is that really kind of a December 31st kind of figure or something kind of more mid Q4 to get to that level? And then what would it take to get to $15 versus $20? Is it a volume issue? Is it more on the manufacturing side?

It's a little bit of both. We have -- as the volume increases, we have baked into some of our contracts pricing discounts that we'll be able to take, so that's -- there's a little bit of a doubling effect there that happens by being able to get it done.

As we look at the timing of it, we're saying second half. I'd kind of -- I tend to be a midpoint person, so I'd say if you're thinking second half, it's probably somewhere right around the beginning of Q4 would be the plan to hopefully kind of get underneath that $20 number.

Okay, and --.

Part of that'll depend upon the timing and the length of the shutdown with Flex in Q3.

Okay. And what would it take to get down to $15?

The $15 number, as you start getting closer to, like, 300,000, 350,000 pods per month is when you start heading down there.

Okay. And then finally, on the Cosmo decision or Smith's decision, the way that the release reads from Smith's, if a patient is on the Cosmo, they can continue to get their infusion sets going forward. If somebody wants to switch now from Smith's over to Insulet, can you just talk a little bit about that process? Is it easier for them to switch to a traditional pump where the reimbursement's upfront and then the recurring reimbursement's much lower than with you guys or how are insurance companies going to kind of swallow that change mid warranty?

I would tell you -- and I can't comment on how they're dealing with traditional pumps, but what we have done is we've basically given the Smith's customers a 30-day test-drive for the product and in that period of time we're talking to the managed care providers.

Surprisingly, the managed care providers are aware of what's happening with Smith's and are receptive. Not to put any money -- they don't want to pay for a new pump upfront, but they are receptive if it's a plan that we have approved. They are receptive to putting them on our product. We're having pretty good success with that.

So I guess the best way I could describe it, it's not an impediment to anything we're trying to do.

Okay, thank you.

Next question will come from the line of Mike Weinstein, JPMorgan. Please proceed.

Thanks, guys. It's [Kim] here for Mike. Just a --.

Hi, Kim.

Hi, there. A couple of quick ones. The first is just on the quarter here. Trying to understand the performance without actually having a new customer number. So I think your answer to one of the earlier questions was that you do have 50 sales reps and that's constant from the last quarter?

Correct.

Okay. And so is it fair to say -- in light of what we've obviously seen in the economy and what you talked about was weakness in January and February, as expected, is it fair to say that the productivity per rep did decline for the quarter, on average this quarter?

I think to categorize it, I think the overall quarter went down slightly. Not a material way but it did, in fact, go down slightly, the productivity per rep. I would tell you the month of March was the best month we ever had and then the month of April was better than that. So, like I said, that's why we're cautiously optimistic.

Like I said, we expected January, given reimbursement and healthcare and it's just the natural way sales forces work and comp plans work where you're kind of maxing out your commissions in the fourth quarter. So January is always a slow month for us. So I think the overall quarter, the overall fourth quarter productivity was down -- I mean the first quarter was down slightly from the fourth quarter. Not a material amount. And we're cautiously optimistic about how Q2 is shaping up here.

Okay. And you said in April, productivity was actually a little bit better than March?

The April productivity was the productivity per rep and the overall -- the overall referrals were the best month we've ever had in the history of the Company.

Okay. And in terms of -- just in terms of this -- just in terms of the sales number -- I'm sorry, the patient number going forward, so sounds like we get a little bit of confusion with the business model as you get more gestational patients and obviously with more trialing. But I'm wondering, is the gestational number right now really at a point of materiality? And in terms of the trialing, couldn't we just sort of present that as a higher potential drop-off rate? Because it's going to be difficult to model the business without having a patient number essentially.

I think the issue is that with more and more -- as we're moving forward with distributors and timing of sending product to distributors and how quickly they wind up selling it through to third party patients, gestational, Cosmo, PDM upgrades, all of these different pieces, that there's a slight -- we need -- there's a slight variance to each one of them.

And so this one you have to kind of make this adjustment, this one you have to that adjustment, and that's where the more and more we looked through it, we just felt it was becoming increasingly complex to be able to try to narrow that to a number and then be able to explain what that number means. And, frankly, it could skew other statistics around things like attrition or something, for example.

So that's where our perspective -- and, frankly, the other side of it is none of -- from a competitive perspective, we started to view it as important that we start to kind of hold that information back a little bit. It's not a number that competitors discuss.

So those are really the driving reasons behind it. We think by giving you the revenue number, from a guidance perspective we can actually help a little bit, be able to try to help people kind of figure out where the business is being able to head.

Okay. Two quick follow-ups around that to help us with the model. Pricing, any change in the quarter on pricing for either the PDM or the pods?

And then also, on the distributor piece that you mentioned, did you have a rough estimate of what percent of the business is through distributors today?

Yes, so, on the pricing question, we haven't really seen any change from where we were a quarter ago.

And on the distributor side we're right now probably between 6% and 10%.

Okay. Then lastly, and I'll drop here, I don't think you mentioned any update on the timing of the next gen smaller pod. Thanks.

Sure. I think on the next gen smaller pod we are pushing to try to make that a 2010 event. We believe from an internal engineering, manufacturing process we have a real shot at that. What that regulatory process looks like when we get there, that's the wild card.

So I think we've been pretty consistent. We'd like to, in the back half of 2010, be able to start coming to market with that. But that really is contingent on the regulatory process that we'll have to go through at that point in time.

Okay, great. Thanks, guys.

Thanks, Kim.

Next question will come from the line of Mimi Pham, JMP Securities. Please proceed.

Hi. Good afternoon.

Hi, Mimi.

In terms of the timeline for the integrated systems with [Dexcom] and Abbott, can you -- you just said by year-end. Is that with both or just is that with Abbott?

Look, I think by the end of the year our goal would be that all the R&D is done, we have a product, and we're talking to the FDA about what the regulatory approval path is for this. Having said that, that makes the commercialization of this sometime a 2010 event. Having not been down the path with the FDA with the product in hand so they get a better understanding of what it really is, we don't know what that approval process is.

I don't know if Dexcom has a better understanding because technically -- or Abbott. It'd be their PMA submission if we did it, or PMA supplement. So our goal is to have all the work done, have the product, and then 2010 is doing whatever we have to do to get it approved.

That's again with both systems by year-end, submitting to the --.

That would be our hope.

Okay.

From our standpoint, we'd like to definitely have one, without a doubt.

And we heard some just noise in the diabetes community about [Navigator] and just maybe questioning their sense of commitment. Are you still -- from your perspective, are they still moving forward and committed to the Navigator program?

I think you could ask them about that. I think from our standpoint, we still have that dialed into our plans. But their sense of commitment, I think you ought to ask them.

Okay. And you gave us the attrition of 12%. But, I'm sorry, did you talk about it trended through the quarter or through April, just similar to what you're giving us, sort of your new patient --

I think we just -- what we did is if you think about it, we're running at about a 10% rate annualized and that's been pretty consistent. It did pop up in the first quarter. If you annualized that number out, it's approximately 12%. And the uptick is really tied to -- it's really tied to healthcare people, unemployment. The uptick's really money related, not product related.

Well, do you sense by year-end that that should stay around 12% or you think it could potentially increase?

You know, Mimi, we're monitoring it. I don't know, maybe if you tell me unemployment has not changed, then I'd probably be a little more to commit. But, like I said, it's interesting. We've talked to a lot of people about it. The good news is it's not like people just stop reordering. We think we've built some good ties with our customers to the point where they're calling us up, asking us is there a way we can help.

And so in addition to everything else we're trying to do is figure out is there a way with some of these patients to be able to keep them on because it's a real issue. Having been on a pump and to go back to shots is a big life changing event. But some of these people have exhausted all their managed care benefits, their unemployment and there's just not -- I mean we've had people now that want to be spokespeople for the Company, come work for us so they can stay on the product.

But it's -- it has -- that has -- that is the one direct thing with the economy that we have definitely seen.

And I know you're still working on international partnerships, but when do you suggest us dialing in a material contribution from the international side on new patient --.

Yes, I think the -- a material uptick, we still believe that's a 2010 event. We have seen -- we have a lot of great discussions going with a lot. We think we'll get a little bit of revenue from some of these potential opportunities by the end of this year. But a materially uptick, if you look at the bigger companies, Germany, France, even China, which is kind of an interesting market, it's going to take us 6 to 12 months to get through their approval process for reimbursement. So it really -- that's really going to be a 2010 event in terms of material revenue.

Thanks. And then last question, last quarter you had talked about some issues with some third party payors not being able to pay. It sounds like that issue is gone or --

No, look, let's put it this way. I want to say it's gone. I think, as Brian categorized that he doesn't want to count his chickens before they hatch, it's not getting worse. It's not getting worse and it appears that we're making some inroads. But it is going -- it's going slowly here. It's not -- it's not all behind us. We continue to work, it. We are making progress, but it is not -- I wouldn't categorize it as gone.

And eventually, I guess, if they don't pay, do you eventually -- do you cut the patients off?

Yes, I mean we're working through what it's starting to -- and this is a big generalization, so I'll be a little cautious with it. So I think on a go-forward basis, I think we're doing okay on a go-forward basis. The minefield is going backwards, right, and I think as a company, I think we do have at least an interim responsibility for getting paid on a go-forward basis that we have to take care of our customers. How we manage our way through the backside of this thing is a little bit more complicated.

Okay. Thank you very much.

And the next question will come from the line of Hamed Khorsand, BWS Financial. Please proceed.

Good afternoon, guys. I missed it. I don't know if you said it or not. But what was your split between insulin and switches?

It's still running about 70/30 in the first quarter. The interesting thing is with what's happened with the Cosmo patients, don't know if we're going to see that swing any material way here in Q2. That's going to the first kind of interesting view. But it's still about 70/30, so we're still -- and out of that 70%, the latest survey we did, I think 80% of those people it was the first pump that they've ever been on. So we're still growing the market.

Okay. And then your operating expense [patterns you're] providing, or operating loss number you're providing, what are you associating with your plans to expand internationally?

I think when you take a look at the international piece, what all our negotiations with all the companies we're talking to, whether it be a major distributor or a bigger player, it really is we're talking about providing a language appropriate CE Mark device and then whoever we're doing business with is going to take over, they're going to do the back office. So while I will tell you there's no incremental expense once we start expanding these countries, we may have a country manager at some point in time.

The way we're talking and negotiating with all these companies is for us not really to have to build what we have here in any country. In order for us to do business with it, you have to bring that to the table. So that's the asset. It's more than just having sales and distribution. It's having the infrastructure, being able to take the calls from the customer, being able to do the training. So our hope is that this becomes real significant incremental volume and potential profitability for us.

Okay. And then could you expand upon your comment about March and April being great months for you? Was that marketing effort? Was that your sales force being productive? What made it change?

I think it's -- I think it's a couple of things. I think one is, as you know, we've had a change in management. We've established some new metrics within the Company. I think we're starting to do more outreach. To be honest with you, our customer service function in the Company has always been, when the phone rings we answer it.

We're starting to do some more outreach and talking to patients. We're attending -- we're doing kind of more shows, walks, [JDRF walks]. So I think in March that was a big piece, or a piece of it anyway. And then I think in April, I think a couple of things happened. I think we continued doing all that that I just described plus, with Smith's, it's driven a lot of pumpers.

Even if they're not going to make the switch today, it's driven a lot of people on the Smith's product to start taking a look at other options here that they may have not looked at for two, three years because they were still under contract. And I think it's all -- those are probably the two key pieces there of what's driving the volume.

Okay, thank you.

The next question will come from the line of Shawn Fitz, Stephens Inc. Please proceed.

Yes, good afternoon and thanks for taking the question. Just a couple of quick questions. Duane, thinking about your pipeline, you talked about kind of the referral pipeline looking very healthy. Could you help us understand and maybe define what -- how you all define a referral or what constitutes a referral? And then maybe give us some idea of what kind of your conversion rate has looked like on your referrals historically into paying customers?

Sure. I think to walk through it, we have a funnel here. So a lead is -- the way we define it, we have leads, then we have referrals and then we have orders. A lead basically says that the customer has expressed interest, filled out a form, provided us with some information. A referral means that the doctor is now part of this process and we have a script and we have some insurance information. And then obviously what finally converts into an order is we believe that we have the managed care coverage, we can ship and bill them.

And we're running about 70% right now in that regard. The only -- the only caveat I would put in this is, as we go into second quarter with this program, with the Smith's people, it's a little bit different. It's a little bit different. We're doing some negotiating here with the managed care plans. So it's a little bit different metric that we're throwing into the puzzle. But for Q1, we're probably running about 70%.

Okay, great, Duane. Then the last question here, you all talked a little bit about reenergizing or increasing your sampling program to go after some of these available customers. Could you define the significance in terms of impact to the operating expenses in the period from sampling?

So, basically, the [connection is] in Q2, all of our docs, obviously all of the key doctors and prescribers out there want to be able to see, look, feel, kind of touch the new PDM 200. So there's a [seeding] exercise that needs to happen, which is now underway with the start of our preorder sales period with the PDM 200 this week.

We're getting that product out, so that's going to increase our sampling expense on the handheld specifically in the second quarter. The good news is I think that the continued efficiencies that we're finding on the OpEx side will offset that. So we ran at 19.5 for Q1, which is down from 20.4 in Q4. I think at worst, even with the -- all of that extra sampling in there, we're going to still be around that 19.5 number.

Okay, great, guys. And look forward to seeing you at ADA in June. Thanks.

Thanks, Shawn.

We have a follow-up question from the line of Bill Plovanic, Canaccord Adams. Please proceed.

Great. Thank you. Just two questions. Did you have any pods from the U.S., that you sold in the second quarter at all in the month of April?

I don't understand the question.

Can you repeat that one, Bill?

From a manufacturing standpoint, has any of the product that was rolling through your [COGs] for Q2, which you're in right now, does any of that come out of the U.S. or had you burned all that off by the end of March?

There may be a small amount of pods that were produced in Bedford that are left that effectively will flow through April. But we're pretty much -- we ended March with effectively about slightly more than three months of inventory, so we're pretty much on stuff that was produced by Flex at this point.

Okay. And then have you -- did you make the milestone that you'd be able to draw the 6.5 million down for the quarter?

We haven't hit a quarter yet, so it's -- they're quarterly milestones. The first quarter is effectively Q2. So it's not applicable yet.

Okay. All right, great. We'll see you next week at the conference.

Thanks, Bill.

And this concludes the question and answer portion of this conference. I'd like to turn the call back to Duane DeSisto for closing remarks.

Thanks, everyone, for joining us today. We look forward to updating you in the future. Thank you.

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