Insulet Corp (PODD) 2009 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2009 Insulet Corporation earnings conference call. My name is Emity, and I will be your operator for today. At this time all participants are in a 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 sir.

Good afternoon everyone. Thank you for joining us for our fourth quarter and full year 2009 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. 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 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 as updated by our subsequently filed quarterly reports on Form 10-Q and other SEC filings.

We assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. These risk factors apply to our oral and written comments.

I'd also like to remind you that the guidance we are 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 today's press release at MyOmniPod.com in the investor section.

Now I will turn the call over to Duane.

2009 was a year of strong execution and growth for Insulet. Our focus on efficiency and expansion paid off, as we significantly increased revenue, improved gross profit, reduced our operating loss, and strengthened our balance sheet. Despite the challenges of the toughest economy in generations, the momentum in our business continued to grow, as we surpassed $20 million in quarterly revenue in the fourth quarter and finished the year with $66 million in revenue, a year-over-year increase of 83%.

Sales productivity increased by over 50% in 2009, and we believe that we can drive further gains as we continue to show improvements across the sales force from top to bottom, indicating we have not yet reached a max on our productivity.

Our solid revenue growth was supported by continued improvement in our manufacturing capabilities. When I spoke to you at this time last year, we had just completed the transition of OmniPod manufacturing to Flextronics in China. A year later the impact and success of that move are evident. In 2009 we increased production to more than 2 million Pods, with the overall capacity to produce more than 4 million Pods in 2010.

As a result, gross margin has increased by 41 percentage points from a negative 13% in 2008 to a positive 28% in 2009, equating to nearly $23 million improvement in gross profit. We finished Q4 with a 36% gross margin and expect to reach 50% by the end of 2010.

While expansion is at the core of these improved results, we have also worked hard to become more efficient. A year ago we kicked off a review of our support functions to identify areas of opportunity. Our findings led to an upgrade of our support functions including reimbursement, customer support, and billing to streamline our processes and to improve the return on our operating investments.

The result is that we are now investing more of our operating expense dollars to value-add opportunities in marketing, clinical services, and R&D, without increasing our overall level of spend.

Of course we always have our eye on quality. On the Pod side quality continues to improve as results of block qualification testing have reached over 98%. This commitment to quality can be measured in customer retention. Despite high unemployment, our retention rate surpassed 90% for the first time in over a year.

Additionally, in customer support the number of inbound calls was 25% lower in December of 2009 compared to December of 2008. This is even more remarkable when you consider that our business nearly doubled during that same period.

In June we released our new PDM with enhanced features, which was immediately well received by both customers and healthcare professionals. Over 60% of our base is now using the new PDM, which as of Q4 is being produced by Flextronics in China.

Research continues to demonstrate the potential clinical benefits of the OmniPod system over both multiple daily injections and conventional pumps. Two recently published clinical studies highlight how the tubing-free design of the OmniPod system helps people better control their diabetes.

In the most recent issue of Infusystems USA, a retrospective study by Albany College of Pharmacy and Health Sciences and The Endocrine Group, researchers publish -- which concluded that the OmniPod system improved blood glucose control in diabetes patients who previously received insulin through multiple daily injections. Study investigators noted the benefits of a tubing-free insulin pump, which can help patients overcome their fear of insertion sets or unsightly tubing and achieve the clinical benefits of insulin pump therapy.

Additionally, in January 2010 issue of the Journal of Diabetes Science and Technology, a study by the Sansum Diabetes Research Institute and the University of California, Santa Barbara was published, which concluded that changing the height of a conventional insulin pump in relationship to its tubing and infusion set can significantly impact expected insulin delivery rates. The study noted that the tubing-free OmniPod system, with its integrated cannula, was the least affected by pumping orientation and direction.

Previous research has demonstrated how disconnecting from a traditional infusion set impacts glucose levels. We believe that these studies collectively offer insight into how the tubing-free OmniPod system helps patients replace glycemic variability and better control their diabetes.

We are building on the momentum from our 2009 accomplishments and have already hit the ground running in 2010. We expect this to be another exciting year for Insulet. The reason is clear. Our strong results demonstrate that the OmniPod system is both expanding the market for insulin pumps and gaining market share. No assembly required, automated priming and cannula insertion, discrete, watertight, tubing-free design. These are the OmniPod system's unique features, which have broken down the barriers that prevented people on shots from choosing a pump and eliminated the compromises conventional pumpers used to have to make.

Our customers consistently tell us that the OmniPod is so easy-to-use that it truly changes their lives for the better. This type of feedback is what drives our continued innovation and product development.

In partnership with Flextronics we are building the pilot line for our next-generation OmniPod. This summer we expect to file a 510(k) with the FDA for this new Pod with a 40% smaller footprint and lower profile.

Additionally, our first PDM with integrated continuous glucose monitoring capabilities is expected to be submitted to the FDA by DexCom in the coming months.

We are also pleased to report that we've shipped product to our partner, Ferring Pharmaceuticals, for the first non-diabetes application of the OmniPod system. We expect Ferring will make the fertility drug product commercially available in select European markets this quarter. While we do not expect this to be material to our revenue in the quarter or the year, 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 for several other potential applications.

We are extremely excited that in 2010 the OmniPod system will be available to people with diabetes throughout the world. In early January we signed a five-year agreement with Ypsomed to be our international distributor in 11 key markets including France, Germany, the UK, Australia and China. After an extensive review, we chose Ypsomed based on their 25-year history as a leading distributor in the diabetes industry.

Ypsomed initially developed a Disetronic insulin pump which it sold to Roche Holdings in 2003. After the sale, Ypsomed retained its European distribution network and today remains a leading distributor of diabetes products.

As an example, in Germany Ypsomed has a 40% market share of insulin pump users and access to more than 80% of the insulin pumpers in the country. To retain exclusivity, Ypsomed will make minimum annual purchases which will exceed $100 million over the five-year term.

With that, I'll turn the call over to Brian to provide additional details about the fourth quarter and the full year 2009 and our expectations for 2010.

Fourth-quarter revenue increased by 70% year-over-year to $20.2 million as compared to $11.9 million in the fourth quarter of 2008 and grew sequentially from the third quarter by 8%. For the full year 2009 revenue totaled $66 million, an increase of 83% from $36.1 million in 2008.

Referrals and shipments remained strong throughout the fourth quarter, contributing to our result at the high end of our previously announced guidance range.

Gross profit for the quarter increased by 512% to $7.3 million, or 36% of revenue, as compared to a gross profit of $1.2 million, or 10%, in the fourth quarter of 2008. Gross profit increased 26% sequentially from $5.8 million in the third quarter of '09. For the full-year '09 gross profit improved to $18.3 million, or 28%, as compared to a gross loss of $4.6 million, or negative 13%, in 2008.

We expect that gross margins will reach 50% by year-end 2010, as we are able to take advantage of continued economies of scale and price discounts. We ended the year with approximately 1.5 months of inventory on hand.

Operating expenses for the quarter were $19.3 million as compared to $28.6 million in the fourth quarter of 2008. The fourth quarter of '08 included an $8.2 million restructuring and impairment charge. Excluding this charge, operating expenses decreased by 5% in Q4 '09 as compared to Q4 '08. For the full-year, operating expenses were $77.7 million as compared to $84.8 million. Excluding the Q4 2008 restructuring and impairment charge, operating expenses increased by just 1% year-over-year.

We are proud that we've been able to keep operating expenses relatively flat while significantly growing the revenue line. As Duane noted earlier, we have been successful in identifying areas of inefficiency and have been able to channel those dollars into higher return activities such as in marketing and the hiring of an additional 10 clinicians to our field sales force.

We reported an operating loss for the fourth quarter of $12 million as compared to an operating loss of $27.4 million for the fourth quarter of 2008. For the full year our operative loss decreased by about $30 million to $59.4 million from $89.3 million in 2008. The significant decrease is as a result of a $23 million improvement in gross profit and a $7 million improvement in OpEx.

Net interest expense was $3 million in the fourth quarter as compared to $1.8 million in Q4 2008. For the full year, net interest expense was $20.2 million compared to $5.4 million in '08. The increase mainly reflects $11.1 million in cash and non-cash interest on the company's credit facility originally entered into a March 2009 and amended in September 2009, $2.2 million related to the company's adoption of FASB Staff Position APB 14-1, accounting for convertible debt instruments that may be settled in cash upon conversion, and $2.1 million of additional cash interest on the outstanding convertible notes.

For 2010 we expect interest expense of approximately $3 million per quarter, of which $1.8 million is cash and the remaining $1.2 million is non-cash.

We reported a fourth-quarter 2009 net loss of $14.9 million or negative $0.42 per share, as compared to a net loss of $29.2 million or a negative $1.05 per share for the fourth quarter of 2008. For the full year 2009 we reported a net loss of $79.5 million or $2.68 per share, as compared to a net loss of $94.8 million or $3.43 per share.

As of December 31, 2009 cash and cash equivalents totaled $128 million as compared to $56.7 million at December 31, 2008.

On October 29 we completed a public offering for 6.9 million shares of our common stock at a price of $10.25 per share. Net proceeds to the company from this transaction were approximately $66.1 million.

We used slightly under $10 million in cash from operations in the fourth quarter.

Finally, turning to guidance for the full year 2010, we expect revenue of $90 million to $100 million and expect an operating loss of $30 million to $40 million. As we've previously noted and consistent with the prior year, Q1 tends to be our slowest quarter, as many of our new patients added late last year to defer their training until Q1. As a result, these patients do not reorder in Q1, causing sequential growth to be reduced. As such we are setting Q1 revenue guidance at $20 million to $21 million, implying flat to 5% sequential growth.

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

In summary, we are very pleased with our continued progress. Our focus throughout 2009 on innovation, efficiency and expansion has paid off, and we are excited for what is to come in 2010.

With the Winter Olympics commencing later this week in Vancouver, Canada I would be remiss if we didn't wish the best of luck to Kris Freeman, a member of the US Olympic cross-country ski team. Kris, a native of New Hampshire, has type 1 diabetes and has been a user of the OmniPod system since 2008. On many occasions Kris has stated that the OmniPod has given him the freedom to live an active, healthy life while maintaining great control of his diabetes.

This great accomplishment for Kris to be competing in the Olympics in an endurance sport as tough as cross-country skiing. He is an inspiration to people with diabetes, helping them believe that despite diabetes they can do anything. Chris will compete in five events during the games, and we wish him the best of luck on bringing home a medal to the US, which incidentally would be the first US cross-country medal in more than 30 years, and becoming the first Winter Olympic athlete with diabetes to bring home a medal in an endurance competition.

With that, operator, please open the calls for questions.

(Operator Instructions). Rick Wise, Leerink Swann.

This is actually Danielle Antalffy in for Rick.

Congrats on a great quarter. I have two questions, one is a higher-level question, the other more specific. So I'll start with the higher-level question. Recently we've been hearing lots of discussion about an increasingly difficult regulatory environment, particularly for 510(k) filings. Are you expecting increasing FDA scrutiny and a longer timeline to approval once you do file your next gen Pod? I know you guys are in constant communication with the FDA, and so I just wanted to get your sense generally as to what direction you think the FDA is headed here.

I think the best way to describe it to you, I think the 510(k) process -- on the expectations on the work that has to be done on the 510(k) process has increased. And I think the best way to describe it to you, I think there's more requirements on insulin stability, there's greater requirements on extractables, and I think the best way to describe it is I think we understand the process. We are talking to the FDA, so we will not go into it blindly.

I think the single biggest factor in all of this is a process that maybe five years ago took $50,000 worth of outside testing may take an order of magnitude of five, six times that to accomplish what the FDA wants. So there's more requirements, but it's not an unknown. We are talking to them, we think we understand that. I think the process has become more expensive from a device company, but I think we are going into it with our eyes -- hopefully with our eyes wide open here.

Great. And then as far as our expectations for timeline to approval, generally it's three to six months, I guess. Is this something that's now going to become a six to 12 month process? Or do you think the timeline is pretty stable?

I think it comes down to the quality of the data. We have not been through this process yet so we don't -- that part we really don't know. But I would think it's probably -- it has to do with the quality of the data, and there's going to be a lot more stuff submitted, so it may take a little bit longer. So we really don't have a good handle on that. Our hope, anyway, is that three to six months, if we do the right things on our side, would hopefully be the kind of right timeframe, but do not -- that part's not in our control.

One more quick question, if I could on Ypsomed and the deal there. How incremental can that be to the top and bottom line? And how quickly? And then secondly, what are the milestones we should be looking for as far as launching in each country and securing reimbursement, etc.? Thanks so much guys.

Sure. So again, we've said and continue to believe in 2010 it's probably not that material to the business if you think about just as a guide what's happened in the US over time. Our ramp, if you go back a few years, was basically zero -- a couple hundred thousand of revenue in 2005, $1 million to $4 million, $13 million, $36 million, and now $66 million. So I think our expectation is a similar type of ramp, although obviously it's a smaller market so some smaller numbers -- overseas.

As far as milestones, we'll certainly keep updated, and as they launch in different countries, we certainly expect that they're going to launch in a couple of these countries by June, namely, Germany and the UK and then France probably the third.

Thanks so much.

Raj Denhoy, Jefferies.

Wonder if I could ask a little bit about the operating expense lines. Another quarter where you guys kept the number between $19.0 million, $19.5 million. I guess you've been doing it all year despite the pretty significant growth in the top line. As you look out into 2010, I know you've bracketed some numbers, but what are your expectations for that? Does there come a point soon where you're going to have to start spending again, whether it's on additional sales people or more back-office functionality? Just give us some thoughts around spending.

Sure. That's a good question. I think the way we are looking at it, as we described, we continue to see an uptick in the productivity of the sales force and the CS's that we have out in the field. We have expectations that we are going to continue to see that.

I think from our standpoint the point that -- kind of the inflection point is around midyear I think we'll have a much better feel for what that ramp continues to look like. And I think part of the reason we gave a decent sized range on where we think we're going to finish up in terms of the operating loss is to give ourselves a little bit of flexibility as we see things playing out this year, if we want to hire a few more salespeople, if that would be appropriate based on the various territories.

So while we are looking all that, we've built what I think is probably the best model we've ever had vis-a-vis the company here, we think we have a good understanding of the territories, and we think we're poised to take advantage of that. If that means we are going to hire a few more salespeople around midyear, then we will do that. If the productivity continues to ramp up, then we're going to play it out.

So you think for the first half of the year we should assume you guys keep that operating expense number something in that $19.0 million to $19.5 million range again?

Yes, and typically there's a little bit of an uptick in Q1 just because you're dealing with payroll taxes and the resetting of some of those expenses. We are also obviously focusing in the first half of the year on finishing up a lot of the R&D work associated with the next-generation Pod, so those will increase the OpEx number probably slightly in Q1 and Q2. But I think our expectation is that we will stay within the $19 million to $20 million range.

And then on the gross margin line you gave again you think you get to 50% by year-end. I know these are kind of longer-term questions, but when you look at the Ypsomed deal and then also launching your next-generation OmniPod, what are those going to do to your gross margins? Do you think that those might have a little bit of a negative effect as they'll start rolling in a bit towards the end of the year and into next year?

So there's certainly a couple of components to that. As you said, 50% gross margin is our target for 2010, and we certainly think that is very achievable based off of what we see today. The new Pod we think will have a very favorable impact on our gross margins as we begin to roll that out.

It's a third -- the nice thing about that new Pod, it's a third less in size for the consumer and has all the same benefits that it has -- that a customer has today. But for us on the financial side of the house it's about a third cheaper for us to make in the bill of materials. So we still think that's the product that ultimately will drive our margins up into the 60s and approaching 70% once that's fully launched, say three years or so -- years out from now.

Ypsomed deal -- certainly the idea of that deal is they're effectively our entire commercial organization. So we are giving up some top line and some gross margin with it to allow them to be able to invest in that way. The nice part about the international deal is that it will be operating margin positive right from the beginning. So that's a fair trade for us. Certainly when I think we look at the next couple of years, it won't be material enough on the business to really impact that gross margin dramatically.

And just one on that as well, so it's $100 million guaranteed over five years. And that's starting in January of 2010. If you're not realizing much revenue this year, I guess you're going to get at least $25 million on average for the next four years of the deal. Is that a good way to think about that?

No. Again, you get -- the way to think about it is very similar to how you've seen the United States ramp up over time. So if you think about what our revenue has done over time from the subscription model where we are selling more Pods, and then that base just continues to ramp on itself, our revenue stream effectively has gone $4 million in '06, $13 million in '07, $36 million in '08, $66 million in 2009. Again, the US market is a little bit bigger than when you talk about these markets, so you got to bring those numbers down slightly, but that's the kind of ramp you're going to see. So the $100 million is real, but it's pretty heavily back-ended.

Okay. Then just one last one just on the competitive landscape. We saw obviously Medtronic delay their product a little bit. Not seeing much from Mendingo yet, but maybe you could just describe what you're hearing or seeing out in the marketplace from these other patch manufacturers.

Look, I think what we've seen, there's been a couple of type 2 type products have been approved out there. And we really haven't -- to be honest with you, most of the input we get on guys that are in our space is from you guys. So we haven't seen a lot, I haven't heard about a lot of testing going on, so we're back to the same thing. I think ultimately it's our game to win. We created the category. And we feel good about our product, the products we currently have and the ones that are in the pipeline. So we are more than happy to compete with whoever comes in here.

Very good, thanks a lot guys.

Mimi Pham, Soleil Securities.

In terms of new patient adds, I know you don't break it out, but can you comment on whether fourth quarter adds were sequentially flat with third quarter despite the December holiday break?

Yes, I think that's a pretty fair assumption is that they were -- it was basically right around flat quarter over quarter.

What's in your -- in terms of your first-quarter guidance, what's implied directionally in terms of new patients?

Well, we are certainly implying this quarter here is sequentially flat to slightly up. So I think from that Q1 tends to be a slower quarter, which means I would expect it to probably be down slightly.

And in terms of this March 5 FDA panel that they're convening to talk about insulin pumps, have they contacted you about this at all? Are you participating in that?

They have not specifically contacted us. We will have -- a couple of our regulatory people will be down there, we are not -- as of this moment we are not planning on participating, we are planning on observing.

Okay. And then just in terms of -- for the timing for the PDM with the CGM integration, it seems -- you said the coming months. Before I think you talked about end of first quarter. Has that come off a little bit?

I think the timing -- I think what we articulated, as many of you may be aware, is the FDA was into the whole PQQ strips, and we have a strip in our product. So the first milestone we have to get is that has to get squared away. So there's a couple of pieces outside of our control. So I think our expectation is we think we still got a shot at all that stuff, it may slip a little bit. Not material, but it may slip a little bit just because we don't control all the pieces in this right now.

Okay. So coming months is -- okay. It's still a third quarter, in your opinion, launch of the integrated PDM?

Yes, that would be our hope.

Thank you very much.

Mike Weinstein, JPMorgan.

It's Kim for Mike. Just wanted to go back to the 2010 guidance. And focusing on the top line, just wondering what you factored in in terms of the slope of any potential economic recovery in 2010.

Have you seen any yet?

(laughter)

I think we have -- we are basically factoring in relatively zero economic recovery. I think you look at unemployment, it's still high, the market's obviously been very choppy over the last couple of months here, so we are just still kind of going about the business, and we obviously had a great year even with a bad economy, and I think our guys are just focusing on -- just continuing to focus on plugging away.

Okay, that's helpful. Then looking at retention rates, so you guys did a great job it sounds like in the fourth quarter. And is it fair that your drop-off rates were below 10% in the quarter?

It was -- yes, they were below 10% in the quarter, which is the first time in a while we've gotten there.

Okay. Do you guys -- do you view that as sustainable? Do you think there's room for improvement there?

It's a tough question because I would tell you the way it's worked is the dropout rate in that first 45 to 60 days has come down dramatically. The dropout rate later on related to people losing insurance and stuff has gone up to kind of offset it. So the real question is, I can't control that second piece, so we think there's still a little bit more room in the front end that we can continue to improve. But overall the economy is going to dictate the back piece.

So kind of our thinking is that 10% number is kind of how we are looking at the world right now. Love to maintain it, really love to improve it, but that's kind of how we are thinking about it

Great. And then one last one and I'll drop. It's back on the Ypsomed agreement. You've talked in the past about immaterial being about 5% of sales or less. And so if I kind of frame that along with the ramp that you've described, should we think about something less than $5 million but probably more than $1 million? Is that kind of the ballpark for 2010?

Yes. I think that's a fair range.

Okay. Great.

Just to give you some sense, if you think about the three countries that Brian mentioned, we're -- we've got to get in, we're got to get the reimbursement approved even though we're CE Marked, and then you kind of go into the summer months internationally. That would put you kind of July and August. So it's probably three, four months of selling over there, max, even if everything goes through perfect.

Okay. That's helpful. Thanks guys.

Matthew [O'Brien], William Blair.

Just a couple of quick housekeeping items. Can you let us know what the [aggregate] revenue and deferred revenue were in the quarter?

[Aggregate] revenue was $2.6 million. Of that $1.2 million was upgrade related, which is an amount consistent with our upgrade revenue in Q3.

And then also thinking about the integrated system coming out in Q3, can you talk a bit about the program you're going to have in place to convert existing patients over to that program? Do you anticipate some seasonality or some slowdown in ordering in Q3 because of that? And do you anticipate an incremental revenue opportunity due to that? And is it factored into your guidance?

I think -- that's a great question. I think where we are at the moment is we are in commercial discussions with DexCom on exactly how we're going to lay that out and what pieces are responsible. I think whatever we do, we're going to have to offer an upgrade program to people, so that will be a piece of it. But it's just not well formed enough. It's just not well formed enough at the moment to go beyond that.

And then just a last quick one on the integration side of things -- actually two quick ones. Do you guys -- given how quickly you're proceeding with DexCom at this point, do you still have a pretty active program with Abbott? And is that on the current version of the Navigator or anything else that they are working on in terms of upgrading their system?

We -- I think the best way I can describe it, we continue to talk to Abbott, we continue to think there are some possibilities, but "active" may be a little bit of a strong -- stronger word.

Okay. Then finally, I am guessing that the smaller Pod that you'll be coming out with either later this year or maybe early next year, so that PDM will be compatible with that smaller Pod and then still also include CGM, so CGM will be available with the smaller version as well?

Yes. The trick on it, and again, we are kind of working through a lot of those components yet, so I don't think we have all of the answers at this point. But today there's only one Pod that exists, so from a PMA supplement perspective, DexCom can only file with our current Pod. So when the next-generation Pod is available, I would assume a second PMA supplement would need to be filed in the future to be able to allow that Pod to be CGM compatible, if you will.

Okay, great. Thank you.

Steven Lichtman, JMP Securities.

I was wondering if the mix between the new patient adds coming from MDI versus coming from insulin pumps is still about the same as it's been. And does the new data that you've kind of rolled out here help you try to take some more share from the insulin pumps side -- traditional pump side?

I think the answer to the first part of your question is, it's still about 75/25, roughly. 70/30 probably on a kind of high end. So it's somewhere in that range still.

I think the interesting thing is, as we see more and more of this data from a marketing standpoint, we are really spending a lot of time here trying to figure out what's the best way to message and package this and really take a hard run at that business.

So right now we are still selling and marketing the same way we have been selling and marketing, which is really geared towards MDI patients, so we'll continue to grow the market. But we do think as more and more of this data comes out -- and we are working on multiple things -- I think this whole argument of glycemic variability, I think it's going to give us -- it may give us a good stick to really wade into that market and make some noise.

You mentioned that you hired 10 additional clinicians for the field sales force. Was that throughout the year? Was that late in the year? I wasn't clear in terms of the timing on those.

That was -- that's basically been in the month of January. Most of those folks are starting as we speak and should be up and running full speed ahead by the beginning of next quarter.

Great. And then is the company still benefiting from the discontinuation of the Cozmo pump? And is there still a lot of patients out there who are perhaps waiting for warranty to end and will continue to provide some potential new customers?

I think when it was first announced, there was a flurry of activity. I don't think there's a month that goes by, or clearly not a quarter that goes by, we are not getting some of those patients, without a doubt. So I think it's as you've described, I think as people's warranties are coming out and they're forced to start looking around, we are getting some of that. So it's not like a bolus in any given month, it's been kind of a steady stream. We got a real bolus upfront when Smith announced they were getting out of the business, and after that it's been a pretty steady stream.

Great, and thanks. Then lastly, are you expecting to -- are we expecting an announcement in terms of additional distribution agreements, either in -- you mentioned I think Canada recently or some other countries outside of the agreement with Ypsomed?

We have ongoing discussions with Ypsomed and some other players in countries that are excluded from the Ypsomed deal. So our hope would be here that sometime in the first half of this year we can button down a couple of these other deals. I think everything we've built into the plan is based on our relationship with Ypsomed, their timeline, and we are continuing to talk to several other potential partners in some of these other countries.

Okay. Great. And actually I apologize, one additional one for Brian. In terms of the share count for '10, what should we be using?

I think on an outstanding share, it's probably right around 38 million.

Great, thanks guys.

Bill Plovanic, Canaccord Adams.

Just for clarity, Brian, on the Abbott, was that a quarterly? Or was that for the year on the 2.6 and the 1.2 upgrade?

2.6 and the 1.2 was Q4.

Was Q4. Okay. And then just any update on the manufacturing shutdown transition in China that's forthcoming?

It is in fact shutdown. And I think it's supposed to be back up in (multiple speakers)

For six weeks. They just shut down this past weekend.

So they just shut down?

Yes. And shutdown basically means we are still able to produce some Pods as they've moved over, for example, the final test machine first. But it's more of a limited quantity than our normal runs.

Okay. So could I -- and then given the fact -- so basically you had about a month and a half of inventory as you came into the new year, you had about a month of manufacturing, what type of gross margin should we expect in the first quarter? And what type of impact does that have on Q1 gross margin because you're ramping up volume?

I think we still look at it for Q1, because keep in mind we have obviously the Pods on hand, that we should be able to grow the gross margin probably another 4 or 5 points in Q1 and then continue to grow throughout the year to get to that 50% mark. Q2, just given the timing of the shutdown and those Q1 Pods, some of them which will be at a higher cost will impact the Q2 margin a little bit. But again, we look at from 36 to 50 that we will be able to I'd say kind of straight-line that over the next four quarters.

Okay. And then just housekeeping, your 2010 CapEx, D&A, stock comp numbers?

Our 2010?

Yes.

We will probably be somewhere in the neighborhood of $5 million to $6 million, $7 million of CapEx as we get the next-generation line up and running. Stock comp number -- this year we were 4.2, so I would call it about 5. And D&A, probably similar to what we saw, we've seen this year as well, which -- depreciation is probably in the $5 million range. Amortization probably is mostly the debt discount, so that's what, $2 million.

And then just for clarification, because you said that the new patients added were flat to up slightly sequentially. And then would you say -- with attrition rates down, and I would assume that usage per patient should have remained relatively stable?

Correct.

Okay. All right. That's all I have, thanks.

Hamed Khorsand, BWS Financial.

Just one question. Just how much are offloading on OpEx with the Ypsomed deal? As far as your European expansion goes.

Well, in the fourth quarter, really nothing, because the deal was signed the beginning of January, and the first half of the year or so to get them up and running and a little bit of training, I'd said we'll spend somewhere in the neighborhood of $500,000 to $1 million total throughout 2010.

But are you going to be looking at expanding into Europe yourself? Or are you just going to keep Ypsomed and not incur any expenses?

Yes. That's correct. So the way the deal is structured is that they really are our commercial organization, so we are taking more of that manufacturing type role, such that our operating expenses are minimal.

Okay, thank you.

Suraj Kalia, Rodman & Renshaw.

Congrats on a nice quarter. Duane, first and foremost, it's a phenomenal job you guys have done in terms of patient retention and just the growth itself. Very, very nicely done.

In terms of Ypsomed, correct me if I'm wrong, Duane, I heard a $100 million revenue stream over four to five years. Did I get that wrong?

No, that's correct. So the five-year deal, if you just take the minimums, it adds up to slightly in excess of $100 million.

In terms of international pricing and levels of reimbursement, because it's going to be different in different -- how are you factoring in pricing -- again, to the extent that you can share -- for all these [patients?] (multiple speakers)

I think I'll have Brian comment on it because he's a little more familiar with the detail and model. But we are basically selling to Ypsomed, and then the margins they are making vary by country. So we have a flat -- we basically have a flat price into Ypsomed based on volumes, based on timing and that type of thing. And then they are the ones responsible for the in-country selling.

They've put together a pretty detailed matrix. We did a lot of work on our own ahead of time as if we were going to do it individually to really make sure we understood it before you started negotiating.

That's correct. Really think about it as we are kind of an OEM manufacturer, so we've got a price that we've agreed upon with Ypsomed, and we will sell to them at that price. And then they are handling the third-party [sell side].

Okay. And forgive me if this has been mentioned. Brian, what is the current cost structure for the Pod? And for the next-gen, what is a targeted cost structure?

Thank you for taking my questions.

Sure. So we're -- and by the way, on the Ypsomed thing, just be clear for everyone, it's all in US dollars. So we've kind of tried to take FX -- foreign exchange issues out of the mix.

The current Pod, we are producing it in the -- I would say the high teens right now. And again, the next generation Pod, the plan is that it's a third cheaper when you think about the bill of materials. So we will get some more economy of scale in the current Pod.

Again, to get to that 50% gross margin, that would imply that our Pod costs will get to somewhere around $14, $15 per Pod. And then the next-gen after that is about a third less in the bill of materials, so it gets you to the $10 to $12 range.

Thanks guys.

Kurt Krueger, Krueger Capital.

Could I just probe a little bit on the contour of the gross margin line? Are you just going to reach, barely reach 50 at the fourth quarter? Or -- coming in under the gate like that? Or will we see some fairly high gross margins, say the third -- second or third quarter as well? And can you give -- venture a guess as to what it's going to be for the whole -- the balance of the year, average, if you will?

I think we're -- our plan is to continue to add a few percentage points per quarter over the next few quarters. But I would leave it right now that we've got a goal that we want to have the end of the year here with a 50% margin. So that number, hopefully starting with a 5, that's the plan.

Got you. And then I guess you haven't been that clear about the arrangement with DexCom, but will the CGM alter the economics for you at all? You'll be just still selling Pods, I take it, but what -- could you just give us a little bit more flesh on that?

Sure. I think as it plays out here and we fully understand all the costs and so we will be making -- we will probably be making some more money on the handheld. Our hope is that it takes the one marketing advantage the competition has and eliminates that, so therefore we are going to sell more Pods. And the benefit to DexCom is they'll sell more sensors.

I think the point in negotiation is given that we are doing all the Pod training, whatever time we have to do vis-a-vis the DexCom training, it would be nice if we got reimbursed for that piece.

So we really think the whole point of this is twofold. It's the one competitive advantage that's being used against us, and we think we can delineate it, hopefully in a much more elegant solution, and that will drive more Pods. And we think we can make some money on the handheld. But we are not going to be in there -- we're not going to be selling transmitters and sensors.

Thanks, and great quarter.

You have no further questions at this time.

Thanks everyone for joining us today. Root for Kris Freeman. And we look forward to talking to you all for the first-quarter results. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.