Insulet Corp (PODD) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter Insulet Corporation earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions). I would now like to turn the conference over to your host for today, Mr. Brian Roberts, Chief Financial Officer. Please proceed, Mr. Roberts.

Thank you, operator. Good afternoon, everyone. Thank you for joining us for our third quarter conference call. I am 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 would like to remind everyone that our discussion today may include forward-looking statements as defined under the securities laws. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, and are making this statement for purposes of complying with those Safe Harbor provisions. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us and on assumptions we have made. 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 31, 2008. These risk factors apply to our oral and written comments.

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

Thanks, Brian. Good afternoon, everyone, and thank you for joining us. Our strong third quarter results clearly demonstrate that we are well-positioned to continue driving adoption of the easy to use [Two Pre] OmniPod system, advancing our mission of our improving the lives of people with diabetes. Despite the continued challenges of an uncertain economy, we continue to see momentum in our business increase as evidenced by record levels of referrals, and near doubling of revenue, a significant improvement in gross margin, and a continued reduction in operating loss. For the quarter, we reported revenue of $18.7 million representing an 85% increase over the third quarter of 2008 and the sequential growth of 28% over the second quarter of 2009.

Although traditional insulin pumps have been available for the better part of three decades, pumps have only been able to penetrate approximately a quarter of the population of people with Type 1 diabetes. There are several reasons for this including cost, lifestyle choice, and the complexity of a traditional pump with its manual insertion and priming mechanisms. The OmniPod system greatly reduces all of those barriers with the simplicity, discreet size, and pay-as-you-go cost model. The result is clear. We are gaining share and expanding the market as seven out of 10 of our new customers make the switch from multiple daily injections to pump therapy.

We hear consistently from our new and old customers that the OmniPod changes their life for the better. That message is resonating across the diabetes market. The third quarter sets the new record for the organization in terms of referrals and initial shipments. In fact, as compared to just two quarters ago, our sales productivity has increased 50% to a point where our where our salesforce is generating, on average, slightly more than one referral per rep per business day. Even better, we continue to see increases across the salesforce from the top to the bottom, indicating that we have not yet reached a cap on our productivity. We are off to a strong start in October and are looking forward to another solid quarter.

In addition to driving new shipment growth, we have focused on maintaining our install customer base. By increasing patient outreach efforts across the commercial organization, our annualized attrition decreased to about 10.5% in the third quarter, down from more than 11% in the second quarter despite continued rises in unemployment. Key to this continued expansion is our focus on being the innovator in the disposable insulin pump market. In June, we released our second generation personal diabetes manager with improved features such as a sleek new look, color LCD screen, and enhanced download capabilities. Now a full quarter into the launch, the response has been extremely positive from both customers and doctors. This strong uptake contributed slightly over $1 million of revenue to our third quarter results.

With this expansion, comes an increase in our efficiency. As the business scales up, we see continued leverage on our operating infrastructure. In the third quarter, our gross profit percentage increased to 31% from 22% in the second quarter, an 83% sequential increase in gross profit. In addition, pods produced in the third quarter are now at a cost below $20.00 per pod. It is worth mentioning, that it was just one year ago, September of 2008, when we turned positive at the gross margin line on a per OmniPod basis. Since that point, we have continued to increase our gross profit as we are able to more efficiently produce pods in partnership with Flextronics. We are confident that we will see an additional 4% to 7% increase in gross margin per quarter over the next few quarters. That leverage also extends below the gross margin line to operating expenses. We are aggressively managing our operating costs by allocating our operating expense dollars to those areas that will generate the highest return. These initiatives have been producing results as operating expenses dropped slightly in the third quarter compared to the second quarter, despite sequential revenue growth of 28%. We will continue to identify areas of improvement across our operating infrastructure to best leverage every dollar of operating expense.

Our new product pipeline is robust, and we remain on schedule with three new products. The first is our integrated PDM with continuous glucose monitoring capabilities. We continue to expect to submit the integrated device to the FDA in the fourth quarter. Second, we remain on track with our next generation pod. The new pod is expected to be at least one third smaller than our current version while delivering the same number of units of insulin. We are partnering closely with Flextronics on the production plans for this new product. We continue to expect that the new pod will be submitted to the FDA mid-2010. Third, we recently received CE mark approval for our first non-diabetes application in conjunction with our partner, Ferring Pharmaceuticals. Current expectations are that Ferring will launch the fertility drug product in select European markets in the fourth quarter. While we do not expect this to be material to our revenue, it is an important proof of concept for the OmniPod system as the technology platform for other potential medications.

We continue with early stage studies of several other potential drugs. Regarding our international expansion opportunities, earlier this month we received our approval for Canada, complementing the CE mark approval received earlier this year. We remain optimistic that we'll have a deal, or deals, in place over the next couple of months to expand the market for OmniPod internationally, allowing to us see revenue in 2010. With that, I will turn the call over to Brian to provide additional details about the third quarter and our expectations for the remainder of 2009.

Thank you, Duane. As Duane noted, our third quarter results exceeded our original expectations for the quarter. Third quarter revenue increased by 85% year-over-year to $18.7 million, as compared to $10.1 million in 2008 and grew sequentially by 28% from $14.6 million in the second quarter of 2009. The strong revenue result was due in part to a record level of referrals and shipments and better than anticipated adoption of the new PDM. Excluding the one-time revenue associated with the new PDM, revenue grew approximately 20% sequentially.

As we look forward, we are raising our revenue guidance from $58 million to $65 million for the full year to $64 million to $66 million. Our raised guidance implies $18 million to $20 million of revenue in Q4 and takes into consideration that pump starts usually slow over the holiday season. Gross profit for the quarter was $5.8 million or 31%, as compared to a gross loss of $0.1 million, or negative 1% in the third quarter of '08. Q3 marked the first quarter where pods are produced at a cost below $20, and we expect to see further price improvement in Q4 as production volume increases. We ended the quarter with approximately 1.5 months of inventory on hand, an amount consistent with where we ended June. As expected, operating expenses decreased slightly to $19.3 million from $19.6 million in the second quarter of '09 and from $19.7 million in the third quarter of 2008.

On September 25, 2009, we amended our $60 million credit facility with Deerfield Management Company which was signed last March. Under the terms of the amendment, Deerfield agreed to eliminate all future performance-related milestones associated with the remaining $32.5 million available on the credit facility and reduce the annual interest rate on borrowed funds to 8.5% from 9.75%. In addition, Deerfield agreed to forego the remaining warrants to purchase 1.5 million shares of our common stock that would have been issued with future draws. In accordance with the amendment, we drew the remaining $32.5 million on September 30th.

Also on September 25th, we entered into a securities purchase agreement with Deerfield. Under the terms of this agreement, we sold approximately 2.9 million shares to Deerfield at an effective price of $9.63 per share. The proceeds were then used to repay the initial debt under the credit facility of $27.5 million borrowed last March. With this extinguishment of debt, we are required to take a one-time, non-cash interest charge of $7.6 million to write off the remaining value of the warrants, transaction fee, and deferred financing costs related to the signing of the initial deal. We expect that these deals will result in more than $12 million in cash and non-cash interest savings to the Company over the next three years. Going forward, we expect that our interest expense per quarter will be approximately $2.8 million of which $1.8 million per quarter will be cash.

We reported a third quarter 2009 net loss of $24.7 million, or negative $0.88 per share, which includes the $7.6 million one-time, non-cash charge to interest expense. That compares to a net loss of $21.7 million or negative $0.78 per share for the third quarter of last year. We reported an operating loss of $13.5 million for the third quarter of 2009, as compared to an operating loss of $19.8 million in the third quarter of 2008, a 32% improvement. The year-over-year change in our operating loss is a result of the significant improvement in gross profit. As of September 30th, cash and cash equivalents totaled $72.7 million, as compared to $56.7 million at December 31, 2008. We used approximately $11 million in cash from operations in Q3, down from approximately $13 million in Q2. We remain focused on reducing our cash burn as the business continues to grow. Finally, turning to guidance as a I previously mentioned, we now expect full year revenues of $64 million to $66 million, as compared to our previous estimate of $58 million to $65 million. For the full year 2009, we are now expecting an operating loss of $58 million to $60 million, as compared to our previous estimate of $55 million to $60 million. With that, let me turn the call back over to Duane.

Thanks, Brian. In summary, we are very pleased with our third quarter progress. Our strong results reflect our continued focus on innovation, expansion, efficiency, and most importantly, on our customers. We are improving the lives of people with diabetes.

Let me leave you with one example that I believe is indicative of what's contributing to our success. We recently added a customer, a farmer, who previously refused to go on an insulin pump for over a decade despite his doctor's recommendations. He thought the tubing would get caught on the farm equipment and was concerned that it would be too complicated to use. He found that learning the OmniPod was in his words 'no different than learning a cell phone' and called it 'just plain convenient'. Since starting on OmniPod, he has learned how to adjust his basal programs for different intensity of work around the farm, and his A1C has dropped consistently. There are thousands of examples just like this that give us confidence the momentum in the business will continue into the fourth quarter and will position us well going into 2010. With that, operator, please open up the call for questions.

(Operator Instructions). Our first question comes from the line of Rick Rice representing Leerink Swann. Please proceed.

Hello. Good afternoon. This is Danielle Antalffy in for Rick. How are you?

Good. How are you doing?

Good. Thanks. Great quarter. I just had a question referring to competition. One of your competitors highlighted a more aggressive stance in diabetes at an analyst meeting earlier this summer. I just wanted to see how that could impact longer term Insulet growth outlook, particularly heading into next year which I think they highlighted as a potential launch for a competitive product.

Look, I think I will go back, and I think we highlighted this on the second quarter. And it is clearly what we believe. We invented the category. We think we have a better understanding of the pitfalls that you can come across in this category. We believe that with products that we have in the queue, we will continue to be the innovator in this space. Look, we have never believed from day one that we're going to be the only guys in the space. We think we'll continue to be able to drive the business. It is a very big, underpenetrated market, and we feel very, very confident that we're going to continue to do what we're doing here.

Great. One quick follow-up. As far as penetration goes, what is your internal target for penetrating the Type 1 market. And then more broadly, maybe the MDI market?

Again, I think that if you look at our results over the course of the last few quarters, we're consistently 70%, 75% of our customers are coming from the MDI market. As we talked, the market today of the Type 1 market is only 25% penetrated, so there is a vast number of people there. We don't have necessarily have an internal target for it. We just want to go out and continue to take share both from our competitors as well as just from the overall Type 1 group.

Okay. You're not seeing momentum slow down there at all in your share gains in MDI market?

No. If you look at our results this quarter, I think our sequential growth number is as big as we probably ever put up. So especially given that this is the first quarter year-over-year we have had a national salesforce in place and comparative periods to be able to put up the numbers we did in Q3 -- we're feeling great. to put up the numbers we did in Q3 we're feeling great.

Great. Thank you.

Our next question comes from the line of Mimi Pham representing Soleil Securities. Please proceed.

Good afternoon.

Hello.

In terms of the record level of referrals this quarter, were you getting this because you were expanding to higher number of centers? Or were you taking more market share than you expected? Or just generally seeing increased patient interest in therapy?

What we're seeing -- it is a little bit of both, Mimi. The good news is the top performers pick the top 10% of salesforce has continued to grow. So that is deeper penetration in the centers. And then we're seeing the middle and the newer guys are probably getting a little more geographic coverage in their territories. But it is both.

Thanks. And in terms of distribution in Europe, when should we expect to hear an update on a partnership? And then, who drives the discussions with third party payers?

So we're working on that. We continue to work on that right now. We're hoping to have something done here, obviously,before we announce year-end earnings. We're hoping to have something done -- hopefully by the end of the year. Obviously, I think the growth we're having domestically we feel real good about. We're not going to enter in a deal that doesn't make any sense. Having said that, all the negotiations we have -- all the third party payer discussions are going to be done with whoever the partner, or partners are, on an international basis.

And then last question, your operating spend improved a few hundred thousand. Do you directionally get to below $19 million in fourth quarter? And in terms of 2010 given your new product launches, do you expect to maintain that level? Further reduce that level?

I think at a minimum we'll continue to maintain the level that we are with the operating expenses. So as we basically -- using the same amount of money to fuel the continued growth in the business -- love to try to get the number down a little bit more. We're looking pretty hard to make sure that we're squeezing out every dollar we can out of the OpEx. If there is ways to invest that money back in -- to ultimately drive more revenue growth, then certainly that's the top priority.

But your operating spend should -- with your new product launches, you're expecting at a minimum to maintain?

That's correct.

Thank you.

The next question comes from the line of Mike Weinstein from JPMorgan. Please proceed.

Hello, it is Kim here for Mike.

Hi, Kim.

Hey, there. Let's see, just a couple of questions here. You commented, Duane, that your sales productivity was up 50% from two quarters ago. Are you referring to referrals or new customers?

Well, they pretty much get tied in at the end.

The conversion rate is up a little bit, but it really is even when you look at the referral line.

It looks that way in our model. The new customer adds would have come in pretty well above our expectations there.

Yes.

Okay. And in terms of your sales reps, are you still at 50 reps in the US, or did that increase at all during the quarter?

We're still at 50.

Okay. Alright. Great. And then the last thing. Just in terms of news today, I wonder if you would be willing to comment on Medingo at all, just as a competitor? And talk if you can at all on their ability to manufacture product now that they're on the US market.

Look, I think from our standpoint -- as a competitor I think you have to have the manufacturing capability. I think have you to have the salesforce in place in order to be a competitor. What we know is what we read, and I want to thank everyone out there for sending me their press release today. I must have 100 copies of it all the way to whatever newspaper it appeared in in Israel. So, look -- don't know a lot about them. We have seen the product. We feel very comfortable competing with the product. That's not an issue whatsoever. We understand -- we believe they are going to have significant challenges to build the product in volume. They're going to have to go through the learning curve we went through. So we feel good about where we are. And like I told multiple people, I have enough trouble running this business. I am not going to try to guess on what their manufacturing hurdles are going to be. Having said that, it is not a trivial task to produce a product of the kind of quality levels on a consistent basis in the kind of volumes you need to be competitive in this marketplace.

I would add one comment which just says I think one thing that we're showing here over the course of the last few quarters is that we have a simple, discreet, easy-to-use product that works in this marketplace. And if we continue to focus on execution across all aspects of our organization, we can drive real strong results. And I think we're showing that over the last couple of quarters. I think part of our goal internally is not worry about what some of these other people are doing, and just go out and keep driving the boat.

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

Good afternoon.

Hello, Ben.

Wanted to follow up on the patient adds. I know you don't disclose numbers in the quarter, but it looks like you probably had a nice sequential pickup versus Q2. You talked on the second quarter call about the impact of Cosmo and having a backlog of people waiting for product. How did that clear through the quarter, and do you still have a further backlog?

Yes, we certainly have a good solid backlog just evidenced by the fact that we're still bringing in an ever-increasing amount of referrals. So we're still working our way through those. The cosmo piece was a nice helper for us but certainly wasn't the driver of the results. I think what we're seeing is really across the board. Again, what I would point back to is if you look at our metric, one of the key metrics that hasn't really changed that much -- you're still seeing 70% to 75% of our new customers coming in from MDI. So that's still the real driver of the business is that we're expanding this marketplace by taking people that have never been on a pump before.

You didn't really see that change this quarter because you would expect that would have moved materially lower if Cosmo was the big contributor?

That's correct.

And as you think about where we go from here, where are your lever points at this point for incremental dollar investment, Duane? Is it into the back office? Is it trying to give a different resource to the salesforce? What's the thing that's going to allow to you accelerate the rate of patient adds?

I think, Ben, I think we have yet to see it cap out, right? So what we are doing as part of our planning process going forward to next year, we're taking some of the best practices from these most successful territories, and we're trying to refine that. So I think in that particular case -- in, as you all are aware, we brought in Peter Devlin to be the Chief Commercial Officer of the Company. And his charge here is to try to figure out how we take this model, make it even more efficient than it is now. Do I think we'll add a few salespeople? Sure, I think we'll add a few salespeople. We're working on some clinical work in the background. So as it starts supporting what we believe is the simplest, easiest to use product. And if we can start supporting that with some clinical data, I think we're going to get more traction as a result of all of that. There is no one particular focus. I think what is important to us is to continue to work on the technology and be the technology leader. But our definition is pretty simple. We want to continue to make it easier for the doctors to be involved with this, and we want to make it easier for the patients to be involved with this.

Maybe briefly following up on the back office side, are you still seeing that as a constraint? And is reimbursement pretty seamless at this point? Are you still fighting through that?

I think it is an -- I will let Brian answer this because he is the one I beat over it. I think from our standpoint, we made significant improvements. Is it where we want it to be? No, and that I will turn over to Brian.

I think we're still making good solid steps of improvement around systems and processes and the things we can control. I think as we have talked, there is just some inherent inefficiencies in this process of how a Company like us connects back and forth with managed care plans and the passing of paper, frankly, kind of back and forth between the groups. But I don't look at the back office as a constraint for us. I think we're processing paperwork in a timely manner. We're shipping in a timely manner. If a patient is ready to go and has a complete referral package, if you will, coming out of their doctor's office, we can ship them in a day. So I think we're doing well there. And on the managed care coverage side, we're in great shape and have been in great shape probably really for about a year or so. Most of our guides are focused on plans at this point that are smaller in scope and scale as compared to the real large ones. We have pretty much knocked all of those off. I think we always have to focus on it. It is an area where we can always get better at it, but it is not a constraint on the business.

Is it moving above the mid-60%s as you talked about last quarter? Or is it still in that same range?

We're above that.

Can you say where?

We were a little -- slightly north of 70% in Q3.

Thank you.

Our next question comes from the line of Suraj Kalia representing SMH Capital. Please proceed.

Good afternoon, gentlemen.

Hello, Suraj.

Duane, the sales productivity you said it went up 50%. Forgive me if you mentioned more. Help me understand what contributed to that 50%? Was that a new influx of patients? Were some of the reps earlier quote, unquote completely or relatively non-productive? I am trying to get at how sustainable is this rep productivity? What are the key things that triggered -- that resulted in this huge improvement?

Suraj, I think it is twofold. If you took -- we probably churned a little bit -- bottom 10% of our reps. Redefined some of those territories. Replaced some people. Some people have left, and I think we have upgraded the quality in the bottom 10%, and I think we're seeing the benefit of that. I think the middle group -- we have refined some of the practices that they have, and that group has come up incrementally. And then, the top performers --here is kind of the exciting thing that we continue to look at. If you take our top sales rep, the guy has done a phenomenal job. He is getting better, which we probably wouldn't have thought possible because I think because we're all familiar with him, we know he is probably working 80 hours a week. But what's happening is, as we get more exposure, people are selling -- we have moms selling other moms on the product. We have people being referred to us from sources outside doctor's office. So the old fact when I first got into this was -- the theory was every diabetes patient knows five other people with diabetes. When you only have ten customers, you probably don't see that so much.

We are now getting of a mass in size that supplementing our salesforce is people that have had success on this product and telling other people about it. So there is kind of this viral marketing going on that I would like to take full credit for, but I think it is a result of people simplifying their life, having improvements to their life. Having improvements in doctor's visits, that is really starting to take hold. And do we know where that will cap out -- no. We really don't.

Like I said, I think the thing that's very, very interesting to us, and we're paying they close attention to -- isn't that the bottom or the middle sales group is getting better. It is that the top guys continue to improve. We really don't know where the top of this thing is. We're paying close attention to it. I would tell you the top group -- that's the part right there. We always know we can move the bottom guys and the middle guys up. The top guy is getting better is the thing that's really, really intriguing us that maybe that whole every diabetes patient knows five other people is really starting to play in our favor here.

Duane, is it safe to say that that's a very subjective behavioral element in there. How do you all use this information for your internal planning purposes if the 80-20 rule holds true, and let's say your top reps are producing 80%? I am just throwing out numbers out there, and then your tag on does quote, unquote, bump from viral marketing? How do you use that as -- ?

That 80-20 is definitely not the case.

How do you use this information you're getting from the field for your internal planning? And next quarter you will be giving fiscal 2010 operating income numbers, or loss for that matter. How are you ever going to factor all of this? It could move pretty significantly quarter to quarter.

Well, I think Suraj, what we're getting comfortable with is for the first time in the history of the Company, the quarter that just ended is the first quarter the quarter comparison we had 50 people. We have 50 salespeople, Q3 2008. 50 salespeople Q3 of 2009 -- so the numbers all match up. We're spending a lot of time analyzing where the business came from, which of the key centers in each area. What percentage of penetration we're having, and then we're looking at -- to me, the difference between doing a good job of planning and having upside to that planning I think is going to be the effect of this type of viral marketing.

Great, gentlemen. Thanks for taking my questions.

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

Great. Thanks. Good evening.

Hi, Bill.

Nice job. A couple questions here. First, I think you said that the upgrades were a little over $1 million in the quarter. At $149.00 an upgrade that means you have converted about 80% to your old users. Is that correct?

It is probably not that high. For a certain portion of upgrades, we were able to achieve a slightly higher than the $149.00 price.

And then at this point, should we expect more of the upgrades going forward? Or is that pretty much washed through?

You know what, I think we have a little bit in October here. We're getting near the end of it. So we do have a little bit in October that will continue through.

And then just, Brian, what percentage of the patients have upgraded at the end of this third quarter?

I would say the majority. We don't have an exact number at this point that we have talked about, or we're going to talk about. But we're more than half.

And of the folks that have not upgraded, are they still active users? Or have they dropped off?

Bill, I think there is still a bunch that are active users. We have actually had some people that upgraded and kept the old one. So it is kind of a mixed bag.

Again, just if you look -- the attrition rate has been coming down over the last couple of quarters. So just as you run the math out on it, there is still quite a few people that are on the first generation PDM. And for whatever their reason may be, they haven't chosen upgrade yet. They may have within the coming year, for example, be coming up on warranty or some other reason that says they don't want to upgrade yet.

Okay. And then just into the seasonality question a bit. Just a reminder as we go into the fourth quarter, it is typically the strongest quarter of the year as MSAs are used up and co-pays are burned off. Is that the way we should think about it, and then first quarter is sequentially slower in the diabetes world?

Look, I think the fourth quarter -- we had a very strong third quarter. October is looking very good. So we still have got to get through that. What we have found, Bill, though, and not so much in terms of referrals but in terms of shipments. Basically, what we found last year at this time is when you get into December a lot of people want to defer those shipments until after the new year. They want to get through the holidays without learning something different. That would be the one caveat. Typically, what's happened is Q1 has been -- the last couple of years Q1 has been relatively flat to Q4. We are not that far along in the planning. If it is anything like last year, that is probably where we will [hop] out.

Bill, keep in mind one thing that makes us a little bit different is obviously the amount of our upfront cost is a lot lower. So trying to squeeze it in before the end of the year to use up HR -- flex spending dollars and those things is a little different. So we tend to see come the holiday period that starts to slow down a little bit given when people don't want to deal with it as much over the holidays. And those trains and such get pushed into the beginning of next year.

Okay. And then just on manufacturing, what is the cost of manufacturing a pod today?

It is under $20. High teens.

Okay. And then as we look at the gross margins or the costs, what was your cost for the -- well, you only have a month-and-one-half inventory now. I guess you're not as burning off backlogs as much as before, correct?

That's correct.

Okay. And then what's your manufacturing -- what run rate is that at to get that high teens? How many units a month?

A couple -- a little over 200,000 a month. So call it 220,000, 230,000.

Okay. And if that ticks up to -- is there a breakpoint in which if you're doing over 250,000 or 300,000 or 350,000 that the price point comes down? Or how do we think about a reduction in COGS going forward?

Again, consistent with what I think we have said in the past, when we got to that 300,000 or so pod per month range that we thought that the costs would be in the mid-teens. Or more specifically, $15 to $17 or so.

Okay. I am just trying to think about 2010. And then can you give us any color on the disposable revenues? Just a year-over-year or sequential growth rate for that revenue number?

We don't break it out differently -- separately. But clearly for the business given the subscription-like model of this business, the pods are -- the large majority of the revenue stream.

Right. Okay. Great. That's all I had. Thank you.

Sure.

Our next question comes from the line of Kurt Kroger from Kroger Capital. Please proceed.

Hello. I think most of the questions have been asked already, but could you give us a little bit more color on the next generation product? I think you said that you had planned to submit that to the FDA 2010. Could you just remind me, what kind of -- is that a supplement? What kind of form does that take at the FDA?

The way it does, is it is a PMA supplement and -- .

Next generation pod.

The next generation pod? I am sorry. That would be a separate 510(k).

Okay. 510(k). And you plan to submit it early in 2010?

Probably right around -- we're hedging our bet here. We would like to do it early, but my guess is probably around the middle of the year.

Mid-year, okay. So that might take, what -- six months to even less than six months -- ?

It would be three to six months. We've had a lot of good dialogue with the FDA on what their expectations are. So I would like to think that's going to help us in the process. Understand what they're looking for and give them what they want.

That's great. If I could just ask about the contour of the sales growth going forward here. I have got to tell you, it was just terrific to be growing, what? 28% sequentially. Can you give us some kind of guidance into the next few quarters? As you said, that's probably going to come down a little bit in the fourth quarter. Next year, could we see 10%, 15% sequential growth rates?

I don't think we're prepared to talk about 2010 guidance yet. But I would tell you the guidance for this quarter here implies $18 million to $20 million if you back out the $1 million of upgrade-related revenue or so in the quarter. You can calculate the sequential growth there. We think it will be an uptick. Obviously based off of that and then as Duane noted, if you think about the first quarter 2010, that's when we tend to see a little bit of the seasonality impact. So we're sequentially flat to up slightly in Q1 over Q4, and a lot of that is dependent upon when people are trained on their Q4 shipments. And is there a reorder in the first quarter? Or does that first reorder really happen in the April-May timeframe. And beyond that, we'll certainly provide more 2010 color as we get to the next call.

Okay. Thanks so much. Congratulations. Great quarter.

Thanks, Kurt.

Our next question comes from the line of Vivian Wohl representing Federated Kaufman. Please proceed.

Hello. Nice quarter.

Thanks.

I am just wondering if you look at what your success rate is in some of the larger earlier thought leading accounts that you started with, could you share with us how you're doing there versus some of your competitors?

Look, I think, and it is a pretty -- I can only -- let me articulate this. I think there is four or five centers that I am not going to give their names. There is about four or five major centers that I am personally familiar with, and I would tell you that in those centers we are getting somewhere between 40% and 60% of the business in these major centers. And where we're losing out -- where we continue to lose out is the whole continuous sensing. Obviously, that's the piece we're driving for. That even if a patient doesn't want continuous sensing today but thinks they might want to have it down the road, that option is something that -- that optionality is something they don't want to forego. So we're doing very, very well in the major centers. The interesting thing to us, Vivian, is there is just still so many places we really haven't -- we have been to, but there are people out there that we haven't seen the product yet as amazing as that may sound. So that is what we keep saying, we think the opportunity is there. We think we have to keep executing. The salesforce is doing a good job of getting out there along with our clinical people getting out there and pounding the door every day. So we feel good about it. We do think there continues to be upside in this.

I think the thing that gets lost when everybody models it out is -- here is the fact. The business is spread out in a lot of places. There is not -- you don't go to Mass General -- in my previous life we were doing defibrillators, and you could get 5,000 defibrillators out of Mass General over a period of two years. The diabetes business is different than that. You take the Joslin, and I am not sure how many people they put on a pump a year. There is probably somewhere between 350 and 500, and that's arguably the number one center for diabetes in the country. So there is more, but it is that type of business a lot of places you have to go, a lot of doors you have to bang on, and we continue to do it. And we're continuing to see some success here.

That's great. And the -- are you willing to say anything about the success of either of the sampling program or the DTC programs that you have had in place?

I think the way we're doing it, the sampling gets A pluses, and we're going to continue that. The DTC program -- we're refining now because we found some of the things that we have done we have got a lot of interest only to find out it was a lot of tire kickers. So the 2010 plan, and I think one of the big opportunities we have as a Company, too, is to leverage our operating expense. As I think we're a lot smarter now than we were a year ago on how to spend this money. We think we can take the same dollars and redirect them. So there are a few of these programs we think make some sense, and there is a bunch of them that I would tell you while, first blush would say there is a lot of response. What do you is you find out when people see they get something for free, they just sign up even if they don't have insurance -- aren't interested. And so, we're in the process of -- part of the planning process to sort through that. I do think that gives us real leverage in the below the risk profit line as we go forward.

That's great. Thanks very much.

Thanks.

Our final question comes from the line of Greg Chodaczek of Boenning and Scattergood. Please proceed.

Hey, Duane. Hey Brian

Hey, Greg, how are you doing?

Pretty good. I am glad I got the final one here. A couple quickies. I am not going to assume anything when it comes to FDA, but you're saying the second generation 510(k) filing, mid-2010 filing being conservative in three to six months. With what's going on in the FDA, I am assuming that is closer to six months than three months which puts it out at 2011 into the hands of the consumers.

I have no interest in annoying them. So those are your words, not mine.

When it comes to international, the deal will basically be something that drops directly down to the bottom line?

The way we're working all of these deals -- everything we're doing, just so everyone understands. Our responsibility is pretty simple. We're going to do the filing so it is our filing in the particular countries. So in other words, it is OmniPod that's going to get approval to sell in the countries. So it is our filing, and then we'll have distributors in those countries that are responsible to get the reimbursement for the particular park and responsible for all the marketing materials. So we do have, ultimately, given we're doing the filing -- ultimately, we have to review any reporting, any quality issues, any kind of incidents. But that will all be kept on a local level, and then we have a responsibility of reviewing that. Our goal is pretty simple -- as close as we can, have whatever the margin number also will be the operating number.

And I know you have said this 15 times already. The supplemental PMA from DexCom. That's their filing, not your filing? Is that correct?

That is absolutely correct.

And you're hoping that that's at the end of this year, which gives it a six month. And then hopefully, the late 2010 on the market?

That would be the hope.

Okay. Then that means anyone who wants CGM needs a new PDM because the current generation PDM does not have that radio in it, is that correct?

That is correct.

We have another upgrade cycle coming for those who want CGM?

That would be a fair assumption.

Okay. And last but certainly not least, revenue per unit for the disposable. Can you say if it was similar to last quarter?

Yes. We're still averaging $27.50, $28.00 per pod. No change for the last few quarters. It's pretty close.

And the average COGS per unit was under $20.00?

Correct.

Okay. Alright. So something smells different there. I guess that's about it. Congratulations again. We're moving on to football season. Isn't that right, Duane?

We're in it.

We have moved on. The Dodgers and the Red Sox are both gone.

Manny is still in the shower. (Laughter) Thanks. We'll talk later.

Thank you.

Ladies and gentlemen, that concludes the question and answer session for today's call. I would now like to turn the call over to Mr. Duane DeSisto, President and Chief Executive Officer for closing remarks. Please proceed.

Thanks to everyone for joining us today. We look forward to updating you about our progress for the next quarter. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.