Insulet Corp (PODD) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Insulet Corporation earnings conference call. My name is Keisha, and I will be your operator for today.

(Operator instructions).

As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Mr. Brian Roberts, CFO. Please proceed.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter 2010 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 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, 2009. These risk factors apply to our oral and written comments.

We assume no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. 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 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.

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

Thanks, Brian.

This month marks Insulet's 10th anniversary as a corporation, and we are extremely proud of all we've accomplished over the last decade. We've gone from concept, design to mass manufacturer and a market leader. The OmniPod System is now being used by more than 20,000 people with diabetes in the United States. More and more, people are choosing OmniPod for its unique features -- no tubing, automatic insertion, watertight design -- in order to reduce their glycemic variability and better control their diabetes. Nearly every day our customers tell us that we are changing their lives for the better. Importantly, they also tell their friends living with diabetes about their positive experiences with the OmniPod. A recent survey completed in Q2 shows that 94% of our customers would recommend the OmniPod System to a friend.

We continue to grow rapidly, execute capably and put up solid results. We delivered revenue of $22.9 million, a 57% increase over the second quarter of 2009. As planned, momentum continues to grow as our investment in additional clinical services managers begins to pay off. On a comparable basis, new patient starts increased by over 25% as compared to year ago.

While we are pleased with our overall growth, we note that our business is not immune to the pressures of the overall economy. For example, while annualized attrition remained flat in the second quarter at 9%, a significant portion of attrition was due to customers' loss or downgrades of benefits and unemployment. We continue to look for creative alternatives to assist our current and prospective patients in these challenging times to allow them to start and remain on the OmniPod.

The ongoing improvement in our manufacturing capabilities is core to our continued financial and operational execution. As we noted on our last call back in May, we returned to full production in late March after successfully navigating the shutdown of our manufacturing line in Q1 to allow Flextronics to consolidate into the new state-of-the-art facility in China. With this behind us, we were able to ramp up the line, resulting in a record production of over 1 million Pods in the second quarter. This increased level of Pods produced allows -- allowed us to normalize inventory levels on hand as well as drive additional gross margin improvement.

In the second quarter, we delivered a 300-basis-point sequential improvement from Q1, recording a 43% gross margin. We remain on track to achieve a 50% gross margin by the end of 2010.

Turning to our next-generation Pod, we continue to make substantial progress towards an eventual submission to the FDA. Our pilot manufacturing line, built in conjunction with Flextronics' design team, is up and running, and second-generation Pods are being produced as we speak. Testing of the Pods has commenced, and we are pleased with our progress to date. That said, we do know that the regulatory path continues to evolve, and we remain in contact with the agency around the requirements for a submission. The Company continues to anticipate being in front of the agency by the end of the quarter. As a reminder, our second-generation OmniPod is a third smaller in footprint and a third lower in cost. We continue to expect that our next-generation Pod, once fully rolled out in the marketplace, is a 65%-plus gross margin opportunity.

OmniPod continues to be a key participant in many exciting ongoing studies to further the treatment of diabetes. At the recently completed American Diabetes Association annual conference held in Orlando, Florida, we were pleased to see the advances being made in automating and refining the algorithms necessary for a closed-loop system. We are excited to continue partnering with key opinion leaders working on this groundbreaking scientific research throughout the world. We are the pump of choice in nine of the worldwide JDRF-sponsored research centers for the artificial pancreas project. Additionally, a new closed-loop research project taking place in various European sites will also use the OmniPod for its study.

Just this month, our partner Ypsomed announced that they have successfully launched the mylife OmniPod System in both Germany and the UK. We welcome our first international patients to the OmniPod family and are thrilled by the initial reaction from key opinion leaders overseas. We hosted Ypsomed in our booth at the ADA and were extremely pleased by the level of international interest in the OmniPod from markets included in the Ypsomed distribution agreement and from other countries, as well. We are hard at work with Ypsomed to secure reimbursement in other markets included in the agreement and expect that additional countries will gain approval in the back half of this year.

Looking ahead, we're excited about the prospects for the second half of 2010. We are eager to further our conversations with the FDA to move forward with our next-generation Pod, and we await feedback on our integrated product with DexCom. We continue to see positive momentum in the business, currently driven by the busy summer camp season, and we expect the investments we've previously made in additional clinical support resources to continue driving results. We are focused on continuing to execute against our 2010 financial goals and believe that we're on track to deliver $90 million to $100 million in revenue for 2010.

With that, I'll turn the call over to Brian to provide additional details about the second quarter results and our expectations for the remainder of 2010.

Thank you, Duane.

As Duane noted, second quarter revenue increased 57% year over year, to $22.9 million, compared to $14.6 million in the second quarter of 2009, and grew 10% sequentially from $20.8 million in the first quarter of 2010. Gross profit for the quarter increased by 212% to $9.9 million, or 43% of revenue, compared to a gross profit of $3.2 million, or 22% of revenue, in the second quarter of 2009.

Despite the impact of the manufacturing shutdown in Q1, which resulted in a more expensive Pod in inventory at the end of the first quarter, we were able to improve gross margins by 3 percentage points sequentially and are on track to reach our 50% target by the end of the year. We finished the quarter with approximately a month and a half of inventory on hand and with a cost per Pod below $16.

As expected, operating expenses for the quarter increased slightly, to $19.8 million, compared to $19.6 million in the second quarter of 2009 and $19.1 million in the prior quarter. Startup costs such as translation expenses for Ypsomed as well as increased R&D costs associated with the next-generation Pod were the primary drivers for the increase. We expect that operating expenses will remain at about this level for the next quarter or two as we finish up much of the work related to these two important initiatives.

We reported an operating loss for the second quarter of 2010 of $9.9 million, compared to an operating loss of $16.4 million for the second quarter of 2009. This represents a 40% year-over-year improvement and demonstrates the leverage in the financial model as we grow the customer base and expand margins while operating costs remain relatively flat.

In June, we entered into a second amendment with Deerfield Management Company resulting in some minor changes to our facility agreement. Concurrently, Deerfield paid us approximately $6.7 million in cash to exercise 2.125 million warrants originally issued with the signing of the facility agreement back in March 2009. As of June 30, Deerfield has 1.625 million remaining warrants.

In conjunction with the Deerfield transactions, we and our auditors took a fresh look at the accounting to date related to Deerfield. Specifically, in September 2009, upon the signing of our first amendment of the facility agreement, the Company wrote off $7.6 million in noncash interest expense, comprised of the remaining value of the warrants, transaction fees and deferred financing costs as a loss on an extinguishment of debt.

Upon review, we have determined that the more appropriate treatment of these noncash charges was to treat this as a modification of debt and expense the noncash charges ratably over the remaining term of the debt, which matures in September 2012. As a result, we will revise the relevant financial statements prior to filing our 10-Q next week. The impact of this adjustment, starting with second quarter, is an increase in noncash interest expense of about $600,000 per quarter. Based on our current debt, total interest expense going forward will be about $3.8 million per quarter.

We reported a net loss for the quarter of $13.7 million, or $0.36 per share, compared to a net loss of $20.2 million, or $0.73 per share, for the second quarter of last year. Excluding the impact of the accounting change for the noncash interest expense, our net loss per share for the second quarter would have been $0.34 per share.

As of June 30, 2010, cash and cash equivalents totaled $118.1 million, remaining nearly flat with our balance of $118.3 million at March 31 and as compared to $128 million at December 31, 2009. We used about $7 million in cash during the second quarter, which was offset by the Deerfield warrant exercise. Our cash burn was about $10 million in the first quarter of 2010.

Finally, turning to guidance, for the full year 2010 we continue to expect revenue to be in the range of $90 million to $100 million and expect our 2010 operating loss to be between $30 million and $40 million. For the third quarter we expect revenues to increase to between $25 million and $26 million.

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

Thanks, Brian.

We're very pleased with our performance in the second quarter, and with that I'd like to wrap up with a very special customer story about an amazing young man who has been dubbed "The Diabetes Dude." When 9-year-old Noah was diagnosed with type 1 diabetes his parents worried that his active lifestyle would not be quite the same. With the OmniPod he was able to get his diabetes under better control and do all the things he loves to do. He's able to swim without disconnecting and play his favorite sports without having to worry about getting caught up in the tubing. He also loves that many people don't even realize he's wearing an insulin pump.

Noah now helps raise awareness with diabetes through his nationwide Flamingo Flock campaign. The campaign started out by taking blue plastic flamingos and placing them on people's lawns. Each flamingo has a note attached describing Noah's campaign and asking people to get out and take a picture of themselves doing something fun and active with the flamingo. They then should pass the flamingo on to someone else.

We had the pleasure of having Noah visit Insulet headquarters, and we now proudly display our blue flamingos outside of our offices. His campaign has also reached some famous friends in the diabetes community, including Team Type 1 cyclist and Olympic cross-country skier Kris Freeman. Just a couple of weeks ago Noah met rock star Bret Michaels, who has taken a blue flamingo with him on his summer concert tour.

This incredible 9-year-old kid, mature beyond his years, is another example of the more than 20,000 customer stories out there who illustrate why we're passionate about what we do at Insulet. Please take a minute after this call and check out Noah's website at www.thediabetesdude.com.

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

(Operator instructions).

Your first question comes from the line of Kim Gayland, with JPMorgan. Please proceed.

Oh, hi, guys. Good quarter.

Hi, Kim.

I saw the flamingo when I was out there last month and I forgot to ask, so that's a great story. A couple of questions, so, on the guidance, for -- you're maintaining guidance for the year $90 million to $100 million, and given the third quarter guidance, if we take kind of the midpoint of that, you're basically implying a range for the fourth quarter of $21 million to $31 million. And so I'm just kind of wondering why not narrow that range?

Well, I mean, I think we just look at it certainly from the business, given that it's a subscription model and that we continue to add patients every quarter, we certainly expect that revenue is going to increase in Q4 as compared to Q3. That said, we just didn't feel the need to change the range at this point. We'll probably tighten it next quarter.

Okay. So nothing to make you think you don't see a sequential improvement from 3Q to 4Q.

No.

No.

Okay, great. And my other question was just in terms of your filings, Duane, you made the comment that you hope to be in front of FDA with the next-generation pod by the end of the third quarter, and by that you mean file by the end of third quarter, is that right?

Well, so, Kim, we met with the FDA. Given this change in regulatory environment that's ongoing, we met with the FDA back in July. We're going to meet with them again hopefully at the end of the quarter. And if all the work we've done seems acceptable to them then we will file shortly thereafter. Like I said, the only hesitancy you hear in my voice is, I mean, it's a changing, moving landscape. So we'll see. But we want to, before we go ahead and do it, we want a little bit more reassurance from the agency that we're clearly on the right path.

Yes, no, that makes a lot of sense. And the last question, just on R&D, R&D was a little bit higher in the quarter. I know you guys have some new clinicals that you're starting up. So just wondering if that's kind of the run rate we should expect going forward.

Yes, I think it'll come down a little bit from where it landed in the second quarter, but given the additional clinical testing, mostly driven by the second-generation Pod, and a little bit of R&D work associated with Ypsomed around translation of the PDM, those are really the two things that are driving the incremental operating expense from what you saw, for example, at our level in Q1. So I'd expect that level to be in the high 3s for the back half of the year per quarter and OpEx to be in the upper 19s.

Okay. That's helpful. Thanks a lot.

Your next question comes from the line of Matthew O'Brien, with William Blair. Please proceed.

Good afternoon. Sorry to ask the typical obligatory Abbott and other revenue question, but could you provide those in the quarter?

Sure. Abbott revenue for the quarter, Matt, was $1.3 million.

Okay. Any other revenue associated with Ferring or others?

Tiny kind of immaterial amounts that we probably won't split out separately, but not much.

Okay. And then, on the -- throughout the quarter did you see kind of a steady performance in terms of referrals and conversions, or did you see any kind of material drop-off in June? We've been hearing some rumblings of that kind of issue ongoing with some of the other companies in the space.

I will tell you I think it was pretty consistent. I don't remember month to month, but let's put it this way. There was not a mad rush at the end. I think it was pretty consistent. It continues to build quarter over quarter. And, like I said, we are cognizant of all the things being said out there. I mean, for those on the call, if you didn't see the front page of The Wall Street Journal today talking about people spending less money on their medical care and trying to avoid going to the doctor's. And so we've heard the anecdotal stories where people have gone from maybe going to see their endocrinologist quarterly to trying to stretch it out to four months, but I would tell you right now from our standpoint we're pretty much where we thought we'd be.

Okay. And then just one last one, this one maybe for Brian, but any sense for the impact to gross margin in the quarter from that additional cost that was associated with the shutdown?

Well, I mean, I think overall, as we've talked before, we really tried to plan it in such a way that we could manage our way through it, right? So we put up 300 basis points of improvement. Maybe you can attribute a point at this point to the shutdown. But we're on track towards 50.

Great. Thank you very much.

Your next question comes from the line of Danielle Antalffy, with Leerink Swann. Please proceed.

Good afternoon, guys, how are you?

Good, and you?

Good, Danielle, how are you?

I'm doing well, thanks. Great job on the quarter. My first question, Duane, if you could dig a little bit deeper into the potential 510(k) requirements, could you walk us through some of the scenarios and how the different scenarios could impact the submission, i.e., could they require more extensive clinical trials, what could that mean for the submission, etc.?

Look, I think -- so, [as was just kind of said], a little bit broad-based guidance range, so in the old days a 510(k) basically for a pump you picked a predicate device, you proved to the agency that that predicate device -- that you were comparable to that predicate device in the marketplace and you kind of moved on. I think the new 510(k), if there is such a thing, I think there's going to be some clinical work done, user evaluation work done. There's drug stability testing that's being done. There's various extractable testings, all kind of new things.

So we think we have a good understanding, Danielle. I think what we want to do is we want to meet with the -- so I think we have a good plan. I think what we want to do, though, is we want to meet with the agency before we submit the plan, because in the event that something's changed, we misinterpreted something, I'd rather know now rather than putting it in the queue waiting for whatever period of time before they come back and say, "You didn't do this, this and this." So our goal is to try to work as closely as we possibly can so we have everything lined up before we go.

So we have a plan. We have a plan in place. We think it meets all the current guidelines. We're working to that plan. But before we submit it, kind of throw it over the wall, we'd like to meet with them one more time. And that's the plan. And if we think we're right and it turns out that we're right then I think we're -- we'll be in there shortly thereafter. And if they come back and say, "You have to do X," then we'd rather do that upfront before we submit rather than being in that whole process where you submit, you wait 30 to 90 days, get some feedback and then you have to go out and do that.

Okay. Awesome. Thanks. And then one more question, given the current environment, everyone's trying to save money somewhere, are you guys seeing any incremental private payer pressure, i.e., private payers or physicians having more trouble getting the device reimbursed by private payers, and any impact from that? Thanks so much.

Sure. Not really, Danielle. I mean, I would say that our pricing has stayed pretty consistent at an ASP of about $28 per pod. And I think we've -- there's always the ebbs and flows with the new contracting process, but overall we feel pretty good.

Thank you so much.

Your next question comes from the line of John Putnam, with Capstone Investments. Please proceed.

Yes, thanks very much. Duane, are you still seeing the same mix of patients, new patients who have never used pumps and conversions, the 70/30 kind of numbers you've talked about in the past, or is there a change there?

No, it's still pretty consistent with that. We're still -- about 70% of our patients are we're kind of going growing the pump market and the 30% are switchers.

Okay. And I just wanted to make sure that I understand. The gross margin, you believe, in the fourth quarter will reach 50%?

Yes, that's the plan. So we'd expect that we'll have, again, sequential growth in Q3.

Right.

And then growth into Q4 and that Q4 number to be 50.

Okay. And one final question, were there any stocking orders to Ypsomed in the quarter?

There's no revenue for Ypsomed in the quarter.

No.

Okay, great. Thanks very much, guys.

You're welcome.

Your next question comes from the line of Bill Plovanic, with Canaccord. Please proceed.

Great. Thank you. Just a question on Ypsomed. How do you book those revenues? Do you book them when you ship to Ypsomed or when the patient goes on the pump?

We book the revenues when we ship to Ypsomed.

Okay. And then you said no revenues, so then there was a little last quarter [to] Ypsomed, basically, right?

No, there's nothing in Q2. They effectively launch really at the beginning of July, so we shipped some product to them right at the beginning of the quarter, of this quarter, Q3.

Got you. Okay. And then, post the Deerfield deal, how many shares will you have outstanding Q3, Q4?

About 40 million.

40 million?

About 41 million, sorry, 41 million.

Okay. And then do you have any guidance for international, kind of what type of contribution that'll give in Q3, or did you --

Yes, I mean, like we've said, they're just launching, right? So it's a small amount of product that they're taking to start here, and we'll see how quickly they can start to ramp up in the third quarter and how quickly this next set of countries come online. We've got another handful or so that we're working right now with them to be able to gain reimbursement over the coming couple of months, depending on exactly the timing of that. As you know, a lot of Europe kind of shuts down for a good chunk of the summer. So it's kind of September, October-type time frame that we're shooting for will drive how much revenue we have in the back half. But as we've said since we signed the deal it's really an immaterial amount for 2010.

Okay. And then remind us the profitability of that business?

So, it's, again, they're effectively our commercial arm, if you will. They're going to do everything from sales and marketing all the way through reimbursement and fulfillment at the patient level. So they're really handling all of that. The way that we've tried to structure that arrangement is such that it's going to have an operating margin for us profitable right from the get-go as soon as we get through these translation expenses, and the operating margin of that business would be in the 20s, obviously a lower gross margin business given that they're doing so much for us, but we don't have the operating expenses that we have to add.

Got you. And then, just with your current product, considering the FDA is challenging these days, where do you think you can get on a gross margin basis with the current generation that you have?

Probably in the mid-50s.

And when do you -- and when will we expect to kind of hit that level?

We haven't talked about guidance yet for '11, and, again, a lot of it comes down to as we're looking through and trying to get as best an understanding as possible of timing of rollout for the next generation. But that would probably happen sometime -- if we were solely on this Pod it would probably be sometime towards the middle to back half of 2011.

Okay. And then I know you haven't given any 2011 guidance yet, but any shot at giving -- expect continued growth rates, or is this predicated on the launch of the combo device? I mean, kind of what are the drivers as we move forward?

I mean, I would say, and then I'll let Duane add, I mean, I'd say we certainly continue to expect to grow at a pretty rapid rate. There's no reason to think that our growth here in the States is going to slow down from where we are now, and clearly we'll be then adding the international markets into the mix. Again, not big revenues in 2011 from Ypsomed, but certainly now you're getting into a few million dollars. So we think that gets itself -- that'll all help for '11, but we're not prepared yet to give specific numbers.

All right, great. That's all I had. Thanks a lot, and congratulations on the good quarter.

Thanks, Bill.

Thanks, Bill.

Your next question comes from the line of Jose Haresco, with JMP Securities. Please proceed.

Hi, guys, good afternoon. And, again, congratulations on the good quarter, and thanks for taking the question.

Thanks, Jose.

Couple of things. I think you'd noted during the prepared remarks about the attrition rate. While it still stayed stable at 9%, you'd pointed out that you'd seen the attritions happening because of loss of benefits or coverage. It sounds like by your tone of voice that that's perhaps new versus last quarter or even last year when we were in the middle of the recession. So can you comment on that? And, number two, did it start to pick up at any particular point in the quarter? And, number three, you talked about perhaps some more creative ways of keeping, of buffering the impact of that if it were to continue. Can you comment on those three points?

Sure, Jose. So, I think what's been interesting to us over the last few months, people are much more vocal about when they're calling up and saying, "I don't have the money." And so there may have been some of that going on before, but it was -- they weren't just calling up and saying, "Look, I'm unemployed, my COBRA's run out, I don't have the money," or they're calling up now saying, "You know what? I just got a new insurance plan and my insurance plan, now I'm responsible for 50% of the cost, and I can't afford it." And we didn't see -- I think I can tell you this -- I'm not saying that wasn't going on before, but that wasn't -- I think people weren't just as just flat out upfront with us that just said, "I can't afford this. I just flat out can't afford it anymore. I have no insurance. My copay has just significantly -- my copay has tripled."

And so the interesting thing for us, and we've seen a little bit (inaudible), where people started calling up early on, and one of the things was can we help them try to amortize that $600 upfront cost to the PDM over time? So we're looking at things and trying to be cognizant and working with people on it. And Brian, some of the stuff we're looking at is, okay, if you really do have good insurance, is there a way that we can help you through this crunch until you get into -- you get out of the out of pocket. But it's just not -- the trouble is, everything's like a one-off deal, and when you start dealing with hundreds of people on a one-off it gets real complicated.

But I think the interesting thing for us is, even more so than the COBRA and the unemployment, is I think there's been a major swing by companies in the amount of burden they've put back on patients and on their employees on how much of this insurance they have to pay. And I think that's been kind of the really kind of surprising thing on people calling up and saying, "I used to have a $10 copay, now it's $500."

Okay. So, I guess, as we start to think about heading into the back end of the year, are you -- as you've given your guidance again, reiterated your guidance, are you assuming that the attrition rate kind of stays in that 9% to 10% level on an annualized rate?

Yes, I mean, I think we entered the year with a 10.5 kind of a percent rate or so, and we pretty much modeled the 10%-type rate into our plan, so -- and we feel even with this, I mean, I think there's two things to take away from it. One is as the economy normalizes and unemployment goes down, it implies that our attrition rate, in my mind, could certainly get down into the mid single digits, which I think is a very positive thing overall. And I think with the different -- with the efforts that we have in place and really trying to help patients through crunches or so that we'll certainly be able to keep attrition hopefully under 10%.

Okay. You guys have been adding and then beefing up the clinical specialist side of your business. Should we assume that all 50, roughly, of those are now fully trained and on the ground, or are there still some people who still need to get up to speed?

Maybe one or two that still are kind of working on getting up to speed, but we're basically there.

Okay, great. Thank you very much.

There are no further questions in queue at this time. I would now like to turn the call back over to Mr. Duane DeSisto, CEO, for any closing remarks.

Thanks again, everyone, for joining us today, and we look forward to continuing to update you on our progress. Thanks a lot.

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