Insulet Corp (PODD) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2010 Insulet Corporation's earnings conference call. My name is Francine and I am 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 presentation over to your host for today's call, Mr. Brian Roberts, Chief Financial Officer. Sir, you may proceed.

Thank you. Good afternoon, everyone. And thank you for joining us for our third 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 statements 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 can 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-A 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's section. And now, I'll turn the call over to Duane.

Thanks, Brian. Good afternoon, everyone and thank you for joining us today. On our last call we talked about a significant milestone in the history of Insulet as we celebrated our 10th anniversary as a Corporation. On this call, we are celebrating another important achievement, the launch of the OmniPod System outside the United States. In July, our partner, Ypsomed launched the OmniPod in Germany and the United Kingdom to an enthusiastic audience of customers and leading diabetes experts. For the first time, people living with type I diabetes in Europe can experience what more than 20,000 people in the United States understand every day.

The freedom and simplicity of the OmniPod, the only insulin pad pump system, available in the world. Customers can enjoy its unique features, such as its waterproof design, automatic insertion and no tubing, helping them to better control their diabetes. Over the next couple of months we expect the OmniPod to launch in five additional markets, France, The Netherlands, Norway, Sweden and Switzerland. Focus will then switch to other key global markets, such as China and Australia in 2011.

As we launch OmniPod across Europe we are making great strides here at home as we continue to grow rapidly, execute capably and deliver solid results. For the third quarter we generated revenues of $25.5 million, representing a 36% increase over a year ago and 11% sequential increase from last quarter. This level of organic growth is proof that even in challenging economic climate, we are able to gain share and expand the market for pump therapy, as approximately 70% of our patients starts in the quarter made the switch from multiple daily injections.

Equally as impressive is our continued improvement in gross margin. For the quarter, gross profit doubled to $11.6 million from the third quarter last year. This translates to a 46% gross margin, a 300 bases points sequential improvement from last quarter. We produced over a million Pods for the second straight quarter and remain on track to receive a 50% gross margin by year end.

Key to our continued success is our ability to remain the leading innovator in this industry. As you know, we have spent much time and effort over the past year in the development of two new products. Our next generation OmniPod and our sensor augmented pump in partnership with DexCom.

First, let me update you about our next generation OmniPod. As a reminder, the new Pod is a third smaller in size. 25% lighter in weight, and a third lower in cost to produce.

With that said, over the past several quarters, it has been apparent that the Food and Drug Administration has changed its guidelines for approval of various Class II medical devices, including insulin and home infusion pumps. You'll recall that back in the first quarter the FDA held several open meetings with the medical community and industry on devices such as infusion pumps, insulin pumps and blood glucose meters. Over the summer the Agency proposed a new sub-classification for certain Class II medical devices, the Class II-b. This new categorization requires additional testing, in most cases, a clinical study for approval. Requirements focus on limiting risk and on approving the ease of the use of products.

We believe that we're clearly positioned as the leader in the industry in this area, given our single component, no assembly required platform. Knowing that our timeline will make us one of the first Companies to try to gain an approval under the new class II-b designation, we have taken a proactive approach with the FDA with a goal of insuring that we are meeting the Agency's revised requirements. As a result, we have had on-going dialogue with the Agency over the past several months about what they would like to see in the submission.

On our last quarter conference call, we stated that we expected to meet with the FDA in September to further the conversation for our next generation Pod. Instead, that meeting was delayed until mid-October as the Agency completed a three week, full GMP audit of both the Flextronics facility in China and our facility here in Massachusetts. We are proud that even in the more rigorous regulatory climate we currently occupy we're able to successfully complete the audit without any findings from the FDA.

With the audit process concluded, we met with the Agency concerning our next generation OmniPod in a pre-IDE meeting on October 18, where the FDA provided us with excellent feedback as to their thoughts on testing we've completed, as well as provided us with guidance on what would be required as part of a clinical study. Because of the proactive conversations we continue to have with the Agency, we are hopeful that this will allow the 510K submission to be approved in the timely manner and allow us to be in the commercial market with the next generation Pod in third quarter of 2011. We are also progressing with CE Marks submission and are optimistic that we may have CE Mark approval by the time of the ADA conference in late June.

Additionally, we are also working closely with Flextronics to establish the new Pod production line in China. We are pleased with our progress on this front as most of the equipment procured for the new line has arrived at Flex's Chinese facility. We have complete set up and validation in new line and begin building inventory of our new smaller Pod early next year in anticipation of a 2011 launch. Because of our strong financial position, we have the ability to build appropriate levels of new Pod inventory ahead of launch. With this inventory, we are confident that the exact time of the approval from the Agency will not significantly impact the number of customers we'll be able to transition to the new Pod by the end of 2011.

Now, let me update you on our partnership with DexCom. As they discussed in their conference call last week, they recently received the comprehensive formal written response to the DexCom Insulet combination device. The FDA requested substantial additional information including, additional insulin stability testing and clinical trial data concerning the safety of the device. Given our discussions with the FDA, we are not surprised by the extensive request made by the Agency and the response received by DexCom.

We were hopeful, however, that given that both products are approved devices and the level of integration was limited to incorporating DexCom's receiver into our handheld personal diabetes manager, that some of this testing would not be required. In reviewing the response from the Agency, it was clear that we would not be able to avoid any of this additional testing, and that it would likely take several months to complete the FDA's request and resubmit the PMA Supplement. Given that length of time and our ability to leverage testing just completed on our next generation OmniPod, we have concluded that any resubmission should include the new smaller Pod.

Our next step is to continue to work with DexCom to determine which of their sensors should be used in the revised combination. Over the next several weeks we hope to learn more about the timeline changes and hardware changes to their Gen 4 device, and make this determination and collaboration with DexCom. Although, it is disappointing that we will not have this product approved in the near-term, we always anticipated that a second submission would be required to incorporate both Companies newest technologies. So ultimately, this will result in a better product for the customers. In the interim, customers can continue to enjoy the benefits of both products, although they will continue to carry two handheld units.

We continue to believe that there is a value in the first generation combined device and hope to leverage the work already completed by submitting an IDE of the existing combo device for research purposes. This would allow the combination product to be leveraged in many, various, artificial pancreas studies and provide us with valuable data for future products.

In summary, we are pleased with our progress to date this year, we continue to drive outstanding financial and operational results and have welcomed our first international customers to the OmniPod family We continue to make excellent progress on our next generation OmniPod and believe that our strategy of working collaboratively and proactively with the FDA, with respect to our next generation Pod will prove to be a sound position. While the FDA landscape has resulted in a longer path that originally anticipated to submit the 510K for the new Pod, we believe that we'll provide the agency with a much more robust and complete submission which will facilitate approval.

While we can't guarantee when approval will happen. We remain optimistic that the second generation Pod will launch in the United States in the third quarter of 2011 and maybe even sooner in other countries. With that, I'll turn the call to Brian to provide additional details about the third quarter results and our expectations for the remainder of 2010.

Thank you, Duane As Duane noted we're pleased with our third quarter performance as Insulet again delivered a quarter in line with expectations. For the quarter, revenue increased by 36% year-over-year to $25.5 million compared to $18.7 million in the third quarter of 2009, and grew 11% sequentially from $22.9 million in the second quarter of 2010. Gross profit for the quarter doubled to $11.6 million or 46% of revenue, compared to a gross profit of $5.8 million or 31% of revenue in the third quarter of last year. Gross margins increased by 3 percentage points sequentially from the second quarter and we remain on track to reach 50% by the end of the year.

Operating expenses for the quarter were $19.9 million compared to $19.3 million in the third quarter of 2009, and $19.8 million in the prior quarter. We expect operating expenses to remain at about this level for Q4, as we continue the regulatory efforts related to the next generation OmniPod and finish work with Ypsomed to successfully launch the next five European countries.

We reported an operating loss for the third quarter of 2010 of $8.3 million, compared to an operating loss of $13.5 million for the third quarter of 2009, representing a 39% year-over-year improvement. These financial results of 36% increase in revenue, 100% increase in gross profit and a 25 percentage point drop in operating expenses as a percent of revenue, as compared to the third quarter of last year, demonstrate the leverage that exists in our financial model, as we grow the customer base, open new markets, and expand margins. We reported a net loss for the quarter of $12.1 million or $0.30 cents per share, compared to net loss of $16.9 million or $0.60 cents per share for the third quarter of last year.

As of September 30, 2010, cash and cash equivalence totaled $103.9 million as compared to $128 million at December 31, 2009. In October, the remaining $1.6 million of warrants issued with the facility agreement between Insulet and Deerfield Management Company were exercised resulting in the Company receiving approximately $5 million in cash proceeds. Including the exercise of these warrants, we will have about 41.8 million common shares outstanding.

Finally, turning to guidance, we're tightening our ranges to reflect the final quarter of 2010. For the full year 2010, we expect revenue to be in the range of $95 million to $98 million, and expect our 2010 operating loss to be between $35 million and $38 million. With that, let me turn the call back over to Duane.

Thanks, Brian. To summarize, we're pleased with our third quarter results as we continue to rapidly grow our business. For the first time the OmniPod System is now available in markets outside the United States and we are excited to bring the OmniPod to five additional countries in the coming months.

While the FDA climate has become more challenging over the past several quarters, we believe that we have taken the right steps to navigate this changing landscape through a spirit of collaboration and transparency with the Agency. We are confident that this will pay off in a strong submission and in the ultimate approval of our smaller Pod. The more rigorous the FDA climate and our next generation product will set the bar even higher for any competitor, large or small, considering entering this market. Given our continued progress, we are confident of our future as we look towards 2011 and beyond.

Finally, I'd like to close with another real story of why we're so focused on what we do. Emily is a 12-year-old gymnast, when she was diagnosed with diabetes she didn't get allow it to get in the way of achieving her dreams. After living with five injections a day, every day for a year, she and her family began looking for a better way. They found OmniPod. She went from 15 shots to just one automatic OmniPod insertion every three days. She now has the freedom to eat what she wants, when she wants, she can control her diabetes by giving herself insulin when needed, at practice, at school or when traveling to gymnasic events. She has the flexibility to wear the Pod in many places so it's not in the way when she's competing. Through our hard work and better diabetes control, Emily has won several gold medals in the Junior Olympics and is one of eight girls chosen for the US National Team. Her mom, Mary, told us that, "OmniPod has made her life so much easier, both as a gymnast and in managing her diabetes." With that, operator, please open up the call for questions.

Yes, sir.

(Operator Instructions)

Our first question comes from the line of Kim Gailun from JP Morgan.

Hello, guys.

Hello, Kim.

Let's see, first of all I wanted to start on the next generation Pod, probably not surprisingly. Thanks for all the color there. That's helpful. I just wanted to see if we could go a little further and hear from you guys, what gives you the comfort that you'd be able to launch this product in the third quarter of '11? You mentioned that you got some good feedback on the work that you've done so far and some guidance on the clinical study. So, it might be helpful if you could tell us what that clinical study might look like and when you saw it you might be able to actually submit for the approval?

Sure. Great question. And not surprising in light of everything that's happened in the past few days, here. So, to give you some insight, we went to the FDA with what we believed was an appropriate clinical study, they've given us feedback. So, the study's gone from, in our mind, 30 plus patients to 100. We believe we have the sites lined up. We feel good about what we've done We've done a lot of the testing that's currently required, we feel real good about results of all that. So, I think from an Agency standpoint, in our sense, and I'm not putting words in their mouth, this is just my interpretation, but they want to be much more proactive as opposed to reactive as an Agency. So, you know, they were involved. It doesn't guarantee us anything but we think we now have the right size scope of the study. We think we have a clear understanding of what their expectations have to be for the outcome of the study. So, given that, right now it's back in our court to try to execute. There are no guarantees, but if you look at our time outline, look at the clinics that we have lined up, I think it allows us sufficient time that we should be in pretty good shape assuming nothing changes between now and the submissions.

The one thing that I would add as well is, when we, took a look at the response, for example, about the combo product that we received with the DexCom Insulet combo product, the types of things that they were asking for us to do are the types of things that they had been talking about with us now, proactively for the last few months and are things we've either already completed or just about finished. And so, the types of testing we've been talking about for the last couple calls around stability testing and extractables. We talked last quarter that we'd done some animal testing. Those types of things are really what was in the request, which gave us a lot more confidence that the feedback that we've received will help us be able to put together a very robust submission.

Okay. So you guys are planning then to just start 100 patient clinical trial? Will that start -- can we think of that starting in the December timeframe?

We think we'd be in a position to do that. We might postpone it, Kim, until after the holidays, to insure the success of the study. So, that's the only time we're running in. You start looking at that, we're in the process of -- we had a couple of places lined up for the smallest study, given it's a bigger study. We're lining the rest of them up. My guess is we kick off the study at the beginning of the year, it's 30 days, figure 45 days because it's kind of a rolling admission and get through it. And then, hopefully it all goes well and we can turn this submission, and then the clock starts and the feedback, the back and forth with the Agency would begin at that point in time.

So you think you could actually have -- that data is only a 30 day study, 30 to 45 days, you said? You would have the data in within one to two months.

Yes, and to give you a little bit more comfort, everything else we believe that is required for the most part, as Brian pointed out, it's done. You know, we were in a position when we originally started at the beginning of this year, we were shooting to get this submission in. I think we took a step back, when we saw all the changes and the regulations, and once again, there's a lot of rancor out there about what's right and what's not. We're not trying to figure out -- we're not trying to change the rules we're just trying to work with them. That's kind of been how we've approached it.

Okay. That's helpful, thanks, guys.

Our next question comes from the line of Bill Plovanic from Canaccord Genuity.

Great. Thanks. Good evening. Just one bit of clarity. So, it takes about 30 to 45 days to enroll and then how much follow up is the FDA requiring, is this like the 3 days you wear it, or is this a 30 day follow up?

It's a -- the way it works without going through the details of protocol, big picture, it's a 30 day wearable study. So, I'm not saying it's going to take 30 days to 45 days. I'm just saying that the actual 30 day study, you have to thinking in terms of 45 days. Because not everyone shows up the first day, right, and gets on it? So, you start thinking that a 30 day study really takes about 45 days by the time you have people. You sign all those people up ahead of time, the way a study typically works, you'd line all those people up, you have starting dates, in this case you'd have ID approval from the FDA, which is required, another new change to this 510K [2b]. And then, it's a 30 day study you typically start out, without going through the protocol in detail, but you typically start out where you'd go in, its a doctor visit up front. Then, they get you up and going and they get you trained, then you go home and then there's a couple of interim steps where you come back to the doctors office, and then you finish it up at the end of 30 days.

Okay. And then probably another 30 days to 90 days to assemble and then submit is kind of how you're looking at it?

I'd be really disappointed if it took 90. But, yes, 30 days to some other number. I'd like to think 90's on the high end, but --

Great. That's very helpful. And then on the combination device with DexCom, not to take words out of your mouth. But, it sounds like, at this point, you're going to go with your next gen device, you're just waiting to find out what DexCom's next gen device looks like, and when you have clarify from them then you can move forward on that product?

Yes. Just to get everybody to take a step back. So, our original submission was our old device with their gen three sensor. And what's happened is the Agency has asked all this testing and everything else that we're doing, our hope was, we didn't need any of that, obviously we do. So, given that we've done all that testing with our next gen device, we're going to use our next gen Pod, and all that testing that they required (inaudible). So, I think we can get there pretty quickly on that front. And then we have to find out, we just need a little clarity based on DexCom's call last week on, where all these -- we know they have the 3.0 center approved, not sure what the timeline is on 4.0, or 5.0. So, we're just going to need a little clarity on that. And then the real key for us is, what's the quickest way to get one of these to markets. What is clear is, the quickest way for us to get the product to market, is to use our next gen Pod, and that's what we're going to do.

Okay. And then just another point of clarity with Brian, you talk about gross margins moving forward. And then with this current generation Pod you've talked about mid-50s gross margin and that -- was that on a product basis or an overall basis? And how much more would volumes have to go up to hit that level?

Again, I think as we just continue to forecast, now, I don't want to get in to 2011 guidance, yet. But, just as we continue to think about the ramp of the business. We look at a low to mid-50s kind of margins profiled for the current Pod. So, that's an all in gross margin. But, as you're well aware, when you're doing 4 million Pod's and some number much smaller, PDM's, call it 10,000; 12,000; 13,000 PDM's, it's the Pod driving the bus. So, the margin of the Pod ultimately drives the margin of the business.

Okay. And then, last two questions, any updates on attrition rates and then ASP's on starters and disposables, and that's it? Thanks.

Yes. Everything pretty much the same as where we've been. Attrition remains under 10%, we're very pleased with that, given the overall economic climate that still exists out there. And no real change with ASPs, we're still at basically $28 per Pod.

Great. Thank you.

And our next question comes from the line Ben Andrew from William Blair.

Good afternoon, its actually Matt in for Ben. Given the [ABIT]revenue in the quarter being up sequentially, is it fair to assume that the number of starter kits sold, was up sequentially as well?

Sure.

Okay. And then on the international side, did you see any kind of stocking in the quarter, was it just those two countries, or was there any kind of real contribution internationally in the quarter?

As we've discussed, really Insulet -- I'm sorry,Ypsomed is in the beginning stages of their rollout. You know, we're very pleased with how they've done so far in Germany and the UK. But, international revenue for 2010, including Q3 is pretty immaterial.

Okay. So -- (inaudible - multiple speakers) Most of the --

-- The exciting part to us is that those two countries now reflect that we have reimbursement throughout and they've actually submitted and put a few people on. But, as Brian said, it's not material to where we are in the quarter. It's not material to the year. Starting next year, maybe become more material -- (inaudible - multiple speakers)

Got you. Along those lines, can you talk quickly about the reimbursement environment in those countries, in terms of where you're at with gaining full reimbursement for the OmniPod?

Yes, feel free you can direct the questions down the line to Ypsomed, but in Germany, I think the pricing is pretty close when you put it on a dollar basis, the pricing and reimbursement's pretty comparable to us, we have all of Germany covered, most of the UK covered, kind of a different system. And those other five countries that we're talking about, I think a couple of them are okay and a couple of them are in the process. So, I think the reimbursement profile were at Ypsomed would be similar to what it is in UK and the US for most of those countries.

Okay. That's it for me. Thank you.

Thanks, Matt.

We have a question from the line of Rick Wise from Leerink Swann.

Good afternoon, Duane, Brian. Let me start with the -- you tightened your sales guidance range a bit, maybe if you could give us just a little perspective on the reasons for bringing the upper-end down? Were there any difference in volumes, as you went through September, October versus July, August, uptick, downtick -- was that at all a factor?

No, and if you just look at the natural progression growth in the business that we didn't think going from a $25.5 million Q3 to north of $30 million, or whatever, exactly that would have to work out to be was probably completely realistic. Could be if ultimately if submitted decide, for example, to purchase more product in Q4 versus the early part of 2011. But we certainly didn't think that was likely, it's really just, like I said, the natural progression of the business, as we build guidance, we've talked about our highest degree of confidence as to the midpoint of the range. That's really how we target it throughout the course of the year. And with just one quarter left we felt it appropriate just to tighten both sides of the range to reflect what we think Q4 would look like.

Okay. Again, not about any kind of change in volumes or anything?

No. We've had three very good quarters in a row. We think that the fouth quarter will be another strong one. We're obviously into the beginning of November, here, and we've had a good first 40 days.

Yes. Back to gross margin. I want to make sure that that I heard you correctly. I think in the prepared comments you, maybe Duane, you said, 50% by year end? Is that by year end or is that the right place for us to be thinking for the fourth quarter?

Okay, I think what we're shooting for is -- for the fourth quarter, that 50% margin.

So I figured, I just didn't want to assume it. And just again, I know you're not ready to give 2011 guidance, but how do we think about gross margins before the next gen product is launched? We've seen -- you've done an amazing job, the volume levels of manufacturing, of showing us 200 to 300 basis points of sequential improvement every quarter. Can that -- should we assume that continues before, into the next year, before that next gen is launched? Or that would be more agressive, then?

Yes. There's a couple of components to that, Rick to think about. One is, as Bill mentioned in his question before, the margin profile for the current gen Pod is really probably low to mid-50s. Given that we're really not investing heavily in trying to take more cost out of that product, at this point.

Also, the Ypsomed relationship will certainly kick up a little bit as far as their revenue level in 2011, and just for -- to remind everyone, the way that we structured that deal was such that they're an entire commercial organization, from the sales and marketing all the way through fulfillment and reimbursement. We're taking less on the top line and therefore reduced gross margin on that relationship to be able to gain a better operating margin. The nice part about that deal for us, is that really right from the beginning here we're generating north of 20% operating margins on every shipment we do for Ypsomed. So, at the trade that I'm -- I'll gladly make.

So, long story short, when you add in that little bit of color, I think our expectations are, is that gross margin improvement in the first couple of quarters next year will probably be modest as we look towards transitioning to the next Gen Pod and depending exactly how much Ypsomed purchases.

Alright, last for me, for the moment. Inventories are up something like 30% since year end, I think, they go well above the March quarter, for sure. Is this just all build ahead of the next gen, or Europe or, where do we go from here? Thanks.

Sure, overall we've gone from, $10.1 million of inventory to about $13 million, in total dollar value of that. There's a couple of components. One is PDM build up, for the Ypsomed folks, and making sure we had enough of PDM's on hand, we're carrying right now about month and a half worth of inventory of Pods, which feels pretty good for us. We do think that over the coming couple quarters it will make sense for us to probably build that inventory up a little bit and then start building up the new Pod inventory, once that line's ready, so that we're able to carefully manage the transition once the new Pod is approved.

Thanks very much.

Sure.

And our next question comes from the line of Mimi Pham from Weeden and Company.

Hello, good evening. Going back to the timeline for the next gen Pod, if you submit -- if you make a submission early second quarter next year, are you assuming a three month or a six month review under this 510K IIb and is there any chance it could take longer for the review process?

The chance it could take longer, obviously, we don't control that so it's going to take what it's going to take. I think if you look at a three-month submission, that gets us to Q3-- that three month turnaround gets us into Q2 and if it's a six month turnaround that gets us into Q3. And that's how we're bracketing it. Could it take longer, Yes, obviously. You know we can't control it, like I said, I think the thing that we're trying to do is be pretty open with the Agency, communicate as much as we possibly can, and while, you never get approval before you do it, what we want to do is given all these new regulations what we're trying to do. And I would tell you that the regulations have changed dramatically and if you looked at what we're originally going to submit with what we're pulling together now, they look like two completely different things. So, we feel good that we received a lot of input, whether that's turns out to be adequate or not only time can tell. We feel good about, like I said, we feel good as best we can about it and we're just trying to stay between the rails here and get it done.

Have you worked out a ballpark cost for the trial, the second gen trial?

Yes, well, off the top of my head I don't know what it is, but its not -- let's put it this way, it's not material to our cash position or anything else. This is not like a pharma trial or a full blown PMA. It's basically, a 30 day user evaluation.

Yes, what it will ultimately probably translate to in our world is when you look at our operating expenses in the beginning part of 2011. My guess is we're hanging around in the last two quarters, in the high $19s million, as we work through some of these, probably a pretty safe range to assume for the beginning part of next year is that we're kind of stay in that $19.5 million to $20 million range for the first part of next year.

Okay, that's helpful. Then, in terms of the integrated DexCom product, is the clinical portion -- is that similar in terms of the order 100 patients, 30 day follow up?

Mimi, from our standpoint, don't know. Like I said, what we took away from the (inaudible) that DexCom received from the Agency is related to the pumps. We think we're spot on with our next generation. That's part of what we want to do, is now that both Companies have gotten all these calls out of the way and all the feedback that -- they received all the feedback on their various sensors. We want to sit down and go through it. So that really is going to be -- DexCom is going to help us with that a little bit.

Did you get clarity on is it a PMA Supplement still at least, or is it completely new PMA, the combined?

Once again, I'd refer that to DexCom, Ill give you my layman's opinion for a guy that spent most of his career in the 510K land, when you start looking at all the clinicals and some of the other stuff, it probably looks a little bit more, in my mind, like a PMA, but I would refer that all back to the DexCom guys, they could give you much better guidance.

Okay. Last question, could you, perhaps, quantify the growth rate in new patient adds from second quarter or third quarter, was it low single digits, high single digits?

Mimi, I don't think we're going to probably go into the detail of it. I think overall a pretty good sequential growth, given -- you can look at things like the revenue and other things to probably try to ballpark it.

Okay. Thank you so much.

Our next question comes from the line of Suraj Kalia from Rodman and Renshaw.

Good evening gentleman.

Hello Suraj.

Hello Suraj.

Duane, forgive me, I'm just trying to, maybe you've already mentioned this and I missed it. Did I hear that this is a 30 day user evaluation trial for the next generation OmniPod? And I guess subset of that question would be, the end point is so simple and this is just a scaled down version, then the renewed scrutiny that the FDA has on pumps versus this trial design, they don't add up in terms of the importance and the risk profile. Can you just --

So, let me tell you where we were prior to this, there was no clinical trial, it was basically low accuracy testing and insulin stability testing. If you, basically where we're going with this thing, is under these new regulations we're actually doing a clinical trial to prove -- we don't have to prove, the theory behind the original 510K which was does your device deliver? We're not proving that insulin works. Everyone knows that insulin works.

The original FDA submissions, when we did our first one, which was back in 2005. You had to prove that the device accurately delivered what it's supposed to deliver you had to do a user interface to make sure there wasn't confusion. I think not a lot has changed from that standpoint, except for the fact that we have to prove it now in a clinical trial as opposed to on the bench time. You know, if you really think about it, it's a big step up from where we were.

And then, the other thing in this thing -- one of the things that's driving the size of the study is the fact that we have a glucose meter inside it. There's been new regulations on how that has to be cleaned. So, there's a bunch of different pieces that are coming together. Like I said, we're probably one of the first Companies going through this process, so, like I said, we've tried to spend as much time as we can on the phone with the Agency to understand that. It really is, if you think about where we were to where we are now, it's a significant step up.

Thank you. Admittedly, this is a more Metronics related question. But, love to get your perspective on it. So, essentially Metronic delaying their patch pump and these changing requirements of the FDA, would it be -- it just seems too coincidental, I just want to make sure we appropriately risk adjust this whole submission and everything, and we're not missing anything from an FDA requirement perspective or anything else that is going on in the regulatory landscape?

Okay. The new guidelines are out there. We've met with the Agency. We think we understand it. And only time's going to tell. I mean, we feel good. Like I said, all I can tell you where we are at this point in time, we've had multiple meetings, multiple discussions, face-to-face meetings. And we feel pretty good about what we think our understanding of what's required.

Last question, guys. In terms of, I'm not asking you all to forecast for 2011, but given those (inaudible) measures in Europe, am I correct in my understanding that your -- that the minimum contractual purchases from Ypsomed are irrespective of whatever happens on the (inaudible) site?

Yes, you are correct. And I would tell you if we just do the minimums, I think both us and Ypsomed would be disappointed You know, we are not -- we didn't get in this business for the minimums, and so like I said, I'd like to think that both Companies would be really disappointed if that's all we did. Having said all that, that the early returns, I think the guys at Ypsomed are pretty optimistic and there's a lot of work going on there, but, the economy is lousy everywhere. There's no denying that.

Just as a reminder, the Ypsomed relationship is a five-year relationship from the point effectively of launch and if -- the guaranteed minimums when you add up those five years together are over $100 million now it's clearly back ended. I've said to, probably, many of you on the phone before. If you go and take a look at how this business in the US has ramped over the last handful of years, you can start to get a sense of what, this partnership with Ypsomed can do as well just adjusting for overall population differences from the markets they're in versus the United States.

Fair enough, guys. Thanks for taking my questions.

Our next question comes from the line Derek Leckow from Barrington Research.

Hello, Duane. Hello, Brian.

Hello, Derek.

You answered most of my questions on domestic regulatory pathway. But, I just wanted to get clear on the European or other countries. You said there was a chance that might be happen earlier. What's driving that?

I just think the regulatory, if you look at CE Mark versus FDA, to generalize, CE Marks is easier to get, tougher to maintain. And I think their pathway that's the way it's set up, they have multiple -- you have KEMA, you have a couple of agencies over there that help you get it. So, we just think that process really has not changed all that much compared to what's kind of transpired here in the US. So, that process is what -- is pretty similar to what we used before. There may be a small clinical study required with trying to clarify that. We don't know if the clinical study we currently have here would be adequate. So, we're just trying to get to the bottom of that. But, I think once we have that we feel pretty comfortable that that has not really changed much from what we're used to.

And then, Brian mentioned the operating expense assumptions for the first half of 2011. And Brian are these manifesting themselves, obviously, in higher R&D expense and the other two items should be growing at the rate that they've been growing this year?

Yes, again, I think we've done a pretty good job of trying to be bale to maintain our operating expenses in this range now, for quite awhile, and we're certainly focused on continuing to do that. We're knee deep, obviously, in our 2011 planning process right now. But I do think that the incremental -- for the next couple of quarters, at least, is going to be focused mainly around the regulatory efforts which would wind up in the R&D line, some of the Ypsomed stuff winds up in the G&A line which is where I can see a little bit of uptick there this quarter.

Okay. And then, just on the next generation, the cost of goods assumption, has that changed at all as it relates to this next generation OmniPod?

No. Still confident that this is going to be about a third reduction in cost of goods sold for us. Mainly driven by all the very positive changes that we've made in the bill of materials.

Okay. Thanks very much, guys.

Our next question comes from the line of John Putnam from Capstone Investments.

-- very much and good afternoon. Duane, I just want to be clear that you don't have any concern that the Agency is going to change from a 510K to either a PMA or any other kind of requirement, here, are you?

No. Given the amount of scrutiny that's been put in this space over the summer, this is kind of where they settled out, so it basically what it is, is a -- it's a 510K with clinicals. I mean, there's been a lot of folks -- the good news is we can't sit here and say maybe we snuck one though. I mean, the whole focus of a lot of what went on in the summer was infusion pumps glucose readers. There is a lot of focus. We feel very, very comfortable that this fits right in that category. It's pretty clear where it belongs. There's no doubt in our mind that that's what this is.

Okay. Great. And then Brian, I was wondering on starter kit pricing, we used to think of it as around $600. But, I was wondering, if the special offer that you guys have had out there for a while now for pumpers has reduced that average selling price?

You know, a little bit, but nothing, again, I would say is material. I think $600 is a pretty safe number still to use from a modeling side.

Great. Thanks a lot.

And we have a question from the line of Greg Chodaczek from Boenning and Scattergood.

Good afternoon, guys. Most of my questions have been asked, so I'll go a different route here. Regarding the clinical trial, I'm assuming these are new patients?

Yes.

Okay.

They're not people on our side.

Duane, I had to ask. And with regards to the new, for lack of a better term, the butterfly strips from Abbott, is there any thoughts about changing the sensor or the OmniPod or PMA or PDM, excuse me, to read those new strips?

Yes, the new submission will have those new strips, will be part of it.

Okay. So, and will they be backward compatible with the old strips also?

Whatever -- I think so. Whatever Abbott put out there is -- this will fully comply with how Abbott works today.

Okay. And then with regards to the combo product, I'm assuming you'll use the next generation sensor from DexCom. But, can I assume that a clinical trial -- you'll get approved with the clinical trial, they'll get approved with the clinical trial. That will all be done and then to do the combo product is another clinical trial of things that were just approved through a clinical trial? Is that the route that the FDA is going down?

That was the route that the FDA went down with the previous products, correct. The next ones just don't know.

And Greg, I'd add one of the things here hopefully, as DexCom talked about on their call last week, they obviously have another combo device they're working on. And they're going to go through some of the pre-IDE process and other things that we've been going through with our current -- our next generation Pod, certainly we'll be able to learn a little bit from that. So, that's part of it.

Seeing that I'm probably the last one, Duane, I have one off the topic question, can you ask Mr. Craft to get that haircut of Mr. Brady? You have that kind of pull, don't you?

As a die hard season ticket holder, I will do the best I can do.

He can keep the hair long, as long as he keeps throwing touchdown passes.

That's true and enjoy Jayson Werth when he gets up to Boston. I'll talk to you guys later.

And our next question comes from the line of Jose Haresco from JMP Securities.

Hello, guys, good afternoon.

Hello, Jose.

Since you guys are in the middle of the 2011 planning process, again I'm not asking you to guide or anything. But, perhaps you can help us understand how you're thinking about the seasonality in new patient starts, given the environment that we're in (inaudible - background noise) well, not Q4 to Q1 it was seasonally flat. Is there any reason to expect that to be different just because of the environment that we are in?

Sure, I'm happy to. If you think about our business, we typically see that, come around Thanksgiving here, so, we're nearing at Thanksgiving starts, what I'd call, the slightly slower period for us. Because, again, when you get folks that are in the holiday period, probably one of the last things they want to be doing is trying to be trained on a brand new insulin pump, right? From the Thanksgiving timeline through Valentine's day is, what I'd say, is our seasonally slow period.

And, if you look back over the last couple of year now, the data would suggest that sequentially it's relatively modest growth from Q4 to Q1. A lot of that is because people who do purchase the product in Q4 are probably primarily doing that for insurance purposes, but they don't have an interest in getting trained until some time during the first quarter. Because of that, they miss that reorder, right? So typically, you have that nice kind of sequential growth of people who purchased in Q3, for example, reordering in Q4 and then so on. Lot of Q4 purchases skip Q1 reorders and wait till Q2. So, I would expect there's nothing really in my mind that would change that dynamic from what we've seen the last couple of years now.

Okay. Again, and not to belabor a point, but going back to the trials that you're looking for second generation. I think we all understand the what, in terms of, what you will be required to do. But, perhaps, what we're looking for is perhaps more of a why. The product's been on the market for several years now. It's got a great safety profile. So, what is it, and perhaps you could just qualitatively, give us a sense of what the Agency -- not that it's concerned about, but, more inquisitive about when it comes to the safety of these products, in general.

Okay. I think the Agency, if you look at the dialogue that occurred over the summer. The Agency focused on the whole infusion pump industry, not just insulin pumps, but the whole infusion pump industry. Was unhappy, in general, with how they -- those -- all the Companies in that industry reported (inaudible), how they went about improving the product, I would tell you, most infusion pump companies were audited, probably here in the last six months, full blown GMP audits and, I think the big piece here is, is if I can sit here and try to rationalize all I want, what I think's really irrelevant to them. That's the way they laid it out.

We're going to try to keep the car the between the lines and drive the speed limit here and make it all work for us. I do think, and once again. I'm not speaking for the Agency. I do think from all the meetings down there, what they are trying to get to is a more proactive approach to the medical device fields. So, do a little more work upfront to really get a better understanding about the capabilities, devices as opposed to traditionally, it was a reactive, the device goes down the market, and then something happens and they're kind of in the reaction mode. So, I think they're trying to move closer and closer to the front of this process, be more proactive in the design and approval stage. Once again, this is just my opinion, looking at all this stuff come down, like I said, far be it for me to speak to them.

It's pretty simple. We don't -- you know, I'm not in a position to make the rules. We're just trying to abide by them, stay within the guidelines and understand the guidelines. But there is no question whatsoever that infusion pumps, as a category, have moved up in terms of their level of concern and their focus. And the end result of that is any company with a insulin pump, at a minimum, is going to be doing some trials and a bunch of stability testing. Because like I said, you can argue that over 20,000 people on the product, our next generation product, is just a smaller version of what we have. But, we could have went down there to Washington and argued all day long, eventually, we would have lost. So, we're just, we're sitting down there trying to understand the rules and we got to comply. We're going to do everything we possible do to get it right the first time. And if we don't get it right the first time, then we'll figure out what we have to to get it right the second time.

Do you think that the end points of the Agency, that your in the midst of discussion with the Agency, are clear enough from their perspective? In other words, I think the worst case scenario for any company we're looking at is (inaudible) We all know the regulatory framework is in flux. And six months down the line the Agency's going, yes, we're not sure if those are the right endpoints. Based on the data they get back, do you feel that that that clarity is there, that when they say, here is the bar, you hit that bar, we're okay. Or do you think that the conversation is so, somewhat in flux about that.

So, I think where we are, once again, not to put words in their mouth, but I think where we are, the end points are pretty clear are pretty clear on what we have to accomplish, the Agency at all times, reserves the right to -- when you submit it all, to look at it and say, we don't like that. So, we don't control them, they control the industry. I think from our standpoint where we stand today which is all I can comment on, we feel pretty comfortable, we understand what the requirements are. Six months from now the requirements may change, the one thing that gives me comfort, in all of this, is, once again, as a category we have not been just sneaking around the edges here. We've been under, and by we I mean the insulin pump and infusion pump market, has been under complete and total scrutiny from the Agency, starting in the first quarter through the summer, through all the open hearings of glucose meterings. So you can't sit here and say, well you know they didn't really focus, they focused on it, hopefully they did a very thorough job and they're comfortable with it. But, once again,I think they reserve the right to, if they see something they don't like to change their minds. We feel good about where we are today, we feel good that we know as a Agency, they looked real hard at this category. So, you know, that's the best assurance I can give you, I guess.

Will there be one more, I guess we're expecting to have another follow up or final meetings in regards to getting the IDE requirements.

Yes. We're going to meet with them one more time.

Okay. Is it going to be before the end of the year or your next quarter?

Oh yes, definitely before the end of the year.

Okay. Thank you very much.

Ladies and gentlemen that concludes the Q&A portion of our presentation. I would now like to turn the call over to Mr. Brian Roberts for closing remarks.

Thanks again, everyone, for joining us today. And we look forward to updating you on our progress. And take care.

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