Insulet Corp (PODD) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2010 Insulet Corporation earnings conference call. My name is Regina, 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). As a reminder today's conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Brian Roberts, Chief Financial Officer. You may begin, sir.

Thank you. Good afternoon everyone. Thank you for joining us for our fourth quarter and full year 2010 conference call. I am Brian Roberts, Chief Financial Officer of Insulet. Joining me on the call today is Duane DeSisto, our Chief Executive Officer.

Before we get started, I would like to remind everyone 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 the 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 under the 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 31st 2009. These risk factors apply to our oral and written comments. We assume no obligation to update publicly any forward-looking statements, whether it is a result of new information, future events, or otherwise. I would also like to remind you that the guidance we are of offering today represents a point in time estimate of our future performance. You will find a link to the webcast of this, as well as in today's press release at myomnipod.com in the Investors section.

And now I will turn the call over to Duane.

Thanks, Brian. Good afternoon everyone. 2010 is a year of significant milestones for Insulet. We marked our 10th anniversary as a corporation. Our second full year with a nationwide sales force, and we welcomed our first European customers through our distribution partnership with Ypsomed. What started out a decade ago was a father's vision to help his young son feel less tied down by his diabetes, while simply playing ball with his friends, swimming on a summer afternoon or sleeping without becoming entangled in tubing has become an amazing reality. We have pioneered a new market evidenced by approximately 25,000 people who used the OmniPod system to better control their diabetes.

With each passing day more and more people choose OmniPod for its simplicity, discretion and unique features, such as no tubing, waterproof design and virtually pain-free automatic insertion. Our customers not only tell us that we are positively impacting their lives, but they also tell their friends about their experiences with the OmniPod. In a recent independent survey of our customers, over 93% said they would recommend the OmniPod to a friend fueling our continued growth. We grew our revenue by nearly 50% in 2010, finishing the year with $97 million in revenue, as compared to $66 million in 2009.

In just two short years with the national sales force, we have taken approximately a 7% market share of the insulin pumpers in the United States, and continue to expand the overall pump market as more than 70% of our customers are new to insulin pumping. 30% of our customers are under the age of 18, an exciting statistic when one considers that this group is highly unlikely to switch to a traditional pump with tubes. With over 50% of people diagnosed with Type 1 under the age of 18, we are well positioned for this segment to remain our fastest growing group, as the OmniPod gives kids the freedom to act like kids.

As I mentioned we are thrilled that people living with Type 1 diabetes in Europe can also now experience the benefits of the only insulin patch pump system available today. Through our partnership with Ypsomed, a 25-year veteran of the diabetes industry, the OmniPod is now or will soon be available in seven markets including Germany, the UK, France, the Netherlands, Sweden, Norway and Switzerland. With an estimated 1 million people in these markets with Type 1, and pump penetration of approximately only 13%, significant growth opportunities exist in Europe. We continue to work with Ypsomed to gain regulatory approvals in China and Australia, and expect both of these markets to launch later this year or early 2012.

We are proud of our 2010 revenue growth and we are just as pleased with our continued progress towards profitability. At the beginning of the year we set an ambitious goal to achieve a 50% gross margin in the fourth quarter 2010. I am proud to say that we accomplished that goal. To achieve this level of gross margin we improved our manufacturing capabilities with key investments, such as the opening of the subsidiary in Singapore which added critical manufacturing and quality resources to support our partner, Flextronics. These investments paid off as we produced nearly 4 million pods in 2010, up from 2 million pods in 2009.

We will continue to add to our Singapore subsidiary in 2011, as we ramp up production of our next generation Pod. Just as impressive has been our focus on ensuring that we were maximizing our return on every dollar spent on operating expenses. Beginning in 2009 we challenged ourselves to work smarter and more efficiently, and to move our resources to the highest value add opportunities. Since 2008 our operating expenses excluding impairments have remained relatively flat, while our revenues have nearly tripled. Key to our continued success is 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. The next generation pod retains all the features of our current pod, including the same three-day wear and a 200-unit insulin reservoir.

As we discussed last quarter it has been apparent the Food and Drug Administration continues to evolve its guidelines for approval of various Class 2 medical devices, including insulin and home infusion pumps. Throughout 2010 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 2 medical devices, Class 2b. The new sub classification focuses on limiting risk, and on improving the easy use of products, where we are clearly positioned as the leader with our single component, no assembly required platform.

Recently on January 19th, the FDA unveiled a plan containing 25 actions and intends to implement during 2011 to improve the 510-k process. As part of this plan, the guidelines surrounding the 510-k class 2b designation, and now expect it to be finalized in the summer of 2011. Given this continued uncertainty in the regulatory process, we have taken a very proactive approach with the FDA, with the goal of ensuring that we are meeting the Agency's requirements. We have held several proactive discussions with the FDA over the past few weeks to further clarify expectations. As part of these conversations, the Agency asked us to prepare a safety assurance report for their review. We believe that the submission of this report along with the clinical work we have completed today, will allow us to file our 510-K early in the second quarter.

A second quarter filing would keep us on track for an approval later this year. We have also made significant strides internationally. We are excited to announce that we submitted our CE Mark application for approval for the next generation Pod earlier this month, and expect to hear back from those authorities in the next 90 days. We are hopeful given this recent submission that we will have seen market approval by the time of the ADA conference in late June. We have commenced discussions with Ypsomed to launch the next generation Pod in select European markets as early as the third quarter of 2011 pending approval.

From a manufacturing perspective, we have established our first production line at Flextronics in China for the new pod. The production line is in the process of being fully validated, and we expect to begin manufacturing the new smaller pods early in the second quarter. On the continuous glucose monitoring front, we have had several recent conversations with our partner DexCom to discuss the next steps in integrating their CGM receiver into our handheld personal diabetes manager. I am pleased to announce that both companies agree that the next version of the combined system will utilize our next generation smaller pod along with their fourth generation sensor.

While the teams have not yet established a detailed project plan for this next generation product, we roughly anticipate that a submission could occur some time in the first half of 2012. Finally, in January we announced the addition of Charlie Liamos as Chief Operating Officer to our management team. Charlie brings a wealth of experience in the diabetes industry from his roles at LifeScan, TheraSense, and subsequently at Abbott. Charlie has served on our Board of Directors since 2005, and his experiences are already paying dividends as we ready our manufacturing, engineering, quality and regulatory teams for the launch of the next generation pod. The management team further enhanced by Charlie's past industry experience, provides us with the depth we need to meet our future goals across the organization.

In summary, we are very proud of our accomplishments in 2010, and look forward to another strong year in 2011. We expect to see revenue continue to grow to between $123 million and $133 million for 2011. And while gross margins will remain relatively flat at about 50% in 2011, as we await the next generation pod, we will continue to drive the Company towards profitability. We expect to be at or near operating cash breakeven by the end of 2011, even without the cost benefits of the next generation pod. With that, I will turn the call over to Brian to provide additional details about the fourth quarter and full year 2010 results, and our expectations for 2011.

Thanks Duane. As Duane noted we are pleased with our fourth quarter and full year 2010 performance, as we delivered strong improvement and expansion in a year of significant economic pressures. For the quarter revenue increased by 37% to $27.8 million, compared to $20.2 million in the fourth quarter of 2009, and grew 9% sequentially from $25.5 million in the third quarter of 2010. For the full year 2010 revenue totalled $97 million, an increase of 47% from $66 million in 2009. We achieved our goal of a 50% gross margin in the fourth quarter.

Gross profit for the fourth quarter improved to $13.8 million, or 50% of revenue compared to a gross profit of $7.3 million, or 36% of revenue in the fourth quarter of 2009. This represents an 89% increase in gross profit year-over-year. For the full year 2010, gross profit improved to $43.7 million, or 45% of revenue as compared to a gross profit of $18.3 million, or 28% in 2009. Gross margins continue to increase throughout the year as we introduce cost-saving initiatives invested in our new Singapore subsidiary, and produced nearly 4 million pods. As we have previously discussed, the Ypsomed agreement was designed to provide Ypsomed with a product at a reduced price, and thus lowered gross margins for us, but to be operating margin profitable from inception.

As a reminder, Ypsomed is responsible for all commercial aspects of the relationship from sales and market through reimbursement and fulfillment, allowing us to avoid these operating expenses on our books. As Ypsomed revenues begin to grow in 2011, we expect that gross margins may decrease by a couple of percentage points depending on the level of revenue recognized in any given period. For example, we are projecting that our gross margin in the first quarter of 2011 will decrease by approximately 200 basis points, as we provide Ypsomed with product for their newly launched markets. For the full year we expect that our gross margin will remain at approximately 50%, as domestic margins in the low 50s are offset by the lower Ypsomed margin. Because of the regulatory uncertainty that exists with the next generation pod, we have not factored any financial benefit from the new pod into our 2011 forecasts.

Operating expenses for the quarter were $23.6 million including a one-time $3.4 million after impairment charge. This charge was recorded in the fourth quarter and related to some manufacturing equipment no longer in use. Excluding the impairment operating expenses of $20.2 million were up slightly, as compared to $19.3 million in the fourth quarter of 2009, and $19.9 million in the third quarter of 2010. for the full year, operating expenses were $82.4 million as compared to $77.7 million in 2009. Excluding the impairment charges operating expenses increased by less than 1% year-over-year. We are expecting operating expenses of approximately $21 million to $22 million per quarter in 2011, the increase primarily due to expected costs associated with gaining the regulatory approvals for the new pod, development costs associated with a new integrated CGM product with DexCom, and additional sales and marketing expenses in preparation for the commercial launch of the next gen pod.

We reported an operating loss for the fourth quarter of 2010 of $9.7 million, compared to an operating loss of $12 million for the fourth quarter of 2009, representing a 19% year-over-year improvement. For the full year, our operating loss decreased by approximately $20 million to $38.6 million from $59.4 million in 2009, as we grew our gross profit and continued to find leverage in our operating expenses.

As Duane noted, we are targeting to be at or near operating cash breakeven by the end of 2011. We define operating cash breakeven as earnings before interest, taxes, depreciation, amortization and stock compensation expense. Net interest expense of $11.1 million in the fourth quarter and $22.5 million in the full year of 2010, includes approximately $7 million of additional one-time noncash interest expense related to the repayment of the facility agreement with Deerfield Partners. In December we repaid approximately $33 million related to outstanding principal, accrued interest and other charges to retire this debt nearly two years before its maturity. By prepaying the debt, we will save approximately $5 million of cash interest over the next two years. Going forward we expect interest expense of approximately $2.7 million per quarter of which $1.1 million is cash related to the Company's convertible debt which matures in June 2013.

We reported a net loss for the fourth quarter of $20.9 million, or $0.50 per share, compared to a net loss of $15.5 million, or $0.44 per share for the fourth quarter of last year. For the full year we reported a net loss of $61.2 million, or $1.54 per share as compared to a net loss of $72.3 million, or $2.43 per share in 2009. As of December 31st 2010, cash and cash equivalents totaled $113.3 million, as compared to $128 million at December 31 2009. We sold 3.45 million shares of our common stock for net proceeds of approximately $45.5 million in December 2010, with a majority of those proceeds used to retire the Deerfield facility agreement. In addition, all of the warrants issued in connection with the facility agreement were exercised during the year resulting in the Company receiving approximately $12 million in cash proceeds.

As of December 31st, we have approximately 45.5 million common shares currently outstanding. As a matter of good housekeeping, we do expect in the coming weeks to update our universal shelf registration, to ensure that we have flexibility as we continue to rapidly grow. However, to be clear we are confident that we have sufficient cash on hand to achieve operating profitability, and we do not have any current intentions to sell additional shares in the market.

Finally turning to 2011 guidance, while the full year guidance reflects the anticipated costs associated with gaining regulatory approval, our expected revenue of $123 million to $133 million, and expected operating loss of $20 million to $28 million do not reflect any revenue or margin benefits from the introduction of our next gen product. As we have previously noted and consistent with the prior year, Q1 tends to be our slower growth quarter, as many of our new patients added late last year defer their training into this year. 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 $27.5 million to $29.5 million, implying flat to about 6% sequential growth. With that, let me turn the call back over to Duane.

Thanks Brian. We are pleased with our fourth quarter and 2010 results as we continue to rapidly grow our business. We believe our next generation product is now within reach with our CE Mark application submitted, and our 510-k submission expected early in the second quarter. We believe our current focus on our next generation product is the right strategy, as its benefits will resonate with our existing and future customers, and set the bar even higher for any competitor considering entering the pass pump market. We are confident of our future as we look to 2011 and beyond.

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

Certainly. (Operator Instructions). Your first question today comes from the line of Kim Gailun with JPMorgan.

Great, thanks, hi, guys. A couple questions. The first one is just we didn't get any specific update on the trial that you are currently conducting to get your filing in for the next generation pod. So if you could, could you just give us a little bit of an update there, and where that stands?

Sure, Kim. Based on our discussions with the FDA, I think what we articulated there had to be a 100-patient trial, as it was associated with the PDM, and the blood glucose meter, although it all considered a part of the product. That piece has in fact been completed, and we are in the process of putting the rest of the reports through. I would tell you as a matter of just trying to be cautious here, we have also arranged for other back up sites, other back up sites just in case we have to expand the trial in any way, shape, or form. The submission in and of itself, while like I said, we have had a lot of conversation with the Agency, I think we understand what the expectations are, and we are going to submit here early in the quarter, and then we will go from there.

Is it based on, it sounds like you guys have had some dialogue pretty recently. So based on that, is there any reason to believe you will need more than 100 patients?

The sense that we get from the Agency is, and I am leery to say this, because I think the sense we get is that we have described what we have done. The reviewer feels that that may in fact be adequate, but they want us to do, the next step is to do the submission, and then there will be a final determination. Does that help you?

Okay, so when you do submit you will submit with 100 patients?

I believe, yes, give or take, but yes.

And the timing you said is still expected to be early second quarter?

That is our expectation, yes.

Great. And one on the growth margin side, it sounds like looking at the 50% gross margin for the year, but in terms of the US gross margin, you are still expecting that in the low 50% range? So above 50%?

That is correct, Kim. Really no change there. Our average selling price remains around $28 per pod. As we work through the cost of given the pod itself it will be a low 50s gross margin for the domestic product. The Ypsomed margin is much lower as we have talked about in the past. Although operating margin profitable right from the get go. And so that is where we think it will ultimately wind up that we remain effectively flat in our gross margins give or take a point either way throughout 2011.

And one more and I will drop. This is perhaps more important on the gross margin side. Can you remind us where you think when you do have the next generation pod, where do you think gross margins can go?

We still believe that once we are fully rolled out with the next generation pod, we have a 65% plus gross margin profile. Certainly hoping to get that into the 70 kind of region. As these new pods are introduced into the market, really just about every one of them that goes out, comes with it out of the chute probably another 10 points of margin. So as we transition, each one will start out with something in the 6, starting with a 6.

Okay. Thank you.

Your next question comes from the line of Rick Wise with Leerink Swann. Mr. Wise, your line is open.

Hello? Can you hear me?

Hi, Danielle.

Hi, guys, how are you? I am filling in for Rick today. Thanks for taking the question. First, can we start with the sales guidance and also operating loss guidance? Can you talk about the puts and takes that could put you at the high end of guidance versus the low end? How obviously the next gen pod coming this year, I know you haven't factored that in, but anything else in the guidance that could push you higher versus lower? Like the European opportunity, something coming sooner, faster there, the economy, the macroeconomic environment, any color there would be great?

Absolutely, Kim, sorry, Danielle. As we plan our guidance, we do that we have the I highest degree of confidence towards the mid-point of the range. On the revenue line, certainly we think there is a lot of upside with the folks at Ypsomed over in Europe. I know they are very eager as they kind of get going in these seven markets now. So we certainly think that as the product gets out there, then there could be upside in the internationally, here at home while we are not banking on any macroeconomic benefit, I think we have kind of taken the position of status quo from really where we have been over the last 12 to 24 months.

Certainly if we saw our unemployment get better, then that will help us overall and it can help us with our adoption. Certainly we think that there is upside on the revenue line. On the operating expense line, we are certainly going to keep focused on trying to drive out every possible dollar of leverage that we can get in there. At the same time, we do know that the regulatory process associated with the pod is pretty expensive and cumbersome. So we are just trying to make sure that we have planned that in appropriately for what we expect over the next six to nine months. As well in the back half of the year, pending an approval of the pod, there is some gearing up that we expect to do in our sales and marketing lanes, to really drive that launch. We have baked all of that in there. Timing wise, depending on some of those things could impact the number a little bit one way or another. Certainly if more regulatory work was required, that could be a little bit of a negative for us.

Great, thank you for that. And then any color in the market place yet as far as are you seeing patients wanting to wait for the next gen pod? Or what is your sense there? Is this going to be a seamless transition for you guys in launching the next gen pod? And if you can talk about how that will work a little bit?

Sure, Danielle. This is Duane. It is pretty simple. We have already had our national sales meeting. We clearly articulated to our sales force that the current product is the only product they have to sell, and then I think to the extent there is any questions about the next generation pod while we haven't articulated to market any roll-out strategy until we have a clear understanding of where we are on the whole regulatory path, it really is going to be one of a first come, first serve is how we are looking at it. Haven't seen any push back. I am sure that there are people out there, I can give you anecdotal stories, but we didn't sit in front of the sales force and have them sitting there pounding on the table, saying I could sell a 100 more if you had the smaller product. From our standpoint from how we are driving the business, it is pretty clear to everyone inside and outside of the Company that is associated with sales and marketing, there is only one product, and that is the one we have.

Great. Thanks so much guys.

Your next question comes from the line of Mimi Pham with Weeden and Company.

Hi good afternoon. In terms of just a follow-up to Kim's question, when do you get feedback on the 100 patients, if that is enough? Is there a 100 day meeting post that early second quarter submission, or something sooner than that?

I think the way we have no reason to believe that it will work anything differently than a traditional 510-k submission which is submitted that the Agency tries to get back to you within 90 days. I would tell you I don't think two weeks goes by where we are not making contact, to just make sure we are stepping in the right footprints here, so hopefully there will be something sooner than that. If there is a problem with it. Right now, the way we have kind of modeled is all out is typically you can hear back within 90 days, and within 90 days we get some feedback.

And then in terms of your guidance for operating breakeven in fourth quarter, and 50% gross margins, are you implying a 40 million plus sales quarter exiting the year?

We are not giving revenue guidance for Q4, but we do believe we will have effectively a 50% gross margin give or take for the full year. By the end of the year, operating cash, again defined as EBITDA plus stock compensation expense, that we will be at basically breakeven for Q4. That is certainly what we are shooting for.

And then in terms of business development opportunities outside diabetes, what are your expectations in terms of this year closing any deal. Is that still a priority?

I think I have articulated in a couple of calls that we are in, with the pharma companies it is a five-day window and we are going into year four with some of these pharma companies. I think we continue to make progress. We continue to think that we have a platform technology, and we will continue to work with them. So there is ongoing work being done. I am not at liberty to discuss with who, but there is ongoing work being done with a couple of pharma companies that we are excited about. When we get there, I still hesitate to tell you if it is this year or next year.

Okay. Thank you very much.

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

Good evening, gentlemen.

Hi Suraj.

Duane and/or Brian, help me reconcile this and maybe I have gotten it wrong, from the various statements made on the call for fiscal 2011, gross margins are going to be approximately flat, a little over 50. They are going to be a blend of the gross margins, mid-50s in the US let's say, and lower margins, whatever they are, from Ypsomed's contribution in Europe and other geographies. If I just look at it mathematically, I am just trying to understand, the US is still, our numbers were Ypsomed would probably be around a $5 million contribution in fiscal 2011, one. Correct me if our assumption on Ypsomed was wrong, and two, can you help us reconcile mathematically why margins would still be relatively flat? I am just trying to get a better handle in case I have missed anything. And the last component as you have talked about the Singapore facility, I am guessing there are some additional incremental margins you can squeeze out of that. So a long winded question, but hopefully you get the gist of it?

Yes, sure. I think what we have tried to articulate is that the business here in the US, we absolutely still believe the current pod will get itself into the low 50s range for gross margin here in 2011. But compared to minimal Ypsomed revenue in 2010, we do expect an uptick in 2011. The margin profile on that is much lower as we have talked about. Certainly part of their start-up costs if you will, is that we are seeding them with a lot more PDMs or the handhelds in the beginning than they may normally have, just so they have some stock on hand as they start to sell. Those PDMs for us come with obviously a higher warranty charge that exists with that unit. So when we factor all of that in, the margin profile for Ypsomed is significantly lower. I don't want to talk specifically about what the number is, for our benefit as well as theirs. But when we blend all of that together, again we think the gross margin will be 50% give or take for the full year.

So based off of that we still believe that operating expenses will up tick slightly in the full year. We talked about $21 million to $22 million per quarter, to help fund the regulatory, the commercial expansion, some new work with DexCom. But with that we think with EBITDA plus stock comp add back basis, we will be basically be operating cash breakeven by the end of 2011, which was really our next goal that we had in mind once we were able to achieve the margin profile here in the US.

We are all looking forward to the next gen product. If that gets out there sooner, we talked about CE Mark approval. The application has been submitted, and if we can get that launched in some European markets in the back half of the year, then that will provide us with some margin upside with our friends at Ypsomed. Hopefully that will then reflect the right numbers as well. We certainly think that there are some potential positives out there for us. But I think we have tried to take an approach with guidance consistent with how we have done it in the past, focusing on what we can control, and not necessarily banking on what we can't.

Fair enough. How many patients in the quarter were denovo or MDI patients, and on a very macro level, can you help us understand the trend in net attrition rates of a flattening out? Is there still room? Can you help us there?

So I think if you take a look at it, we have been pretty consistent. It has been about 70%, and I don't have the specific on the quarter, but overall we haven't seen that trend very different. About 70% of the patients have never been on a pump before. So they are obviously MDI patients, either that or just diagnosed, but typically they come from the MDI. And with regards to attrition here, Brian, correct me if I am wrong, but I think Q4 was down to about 9%.

Yes, we finished the fourth quarter with about a 9% annualized attrition rate. We actually saw it decrease a couple-tenths of a percentage point from Q3 to Q4. That trend, while we are basically flat, we view it as a good positive for us in this macroeconomic environment that we are able to kind of hang in there. For the full year we were around 9% annualized attrition which is down a couple of points from where we were in 2009.

And finally, Brian, in terms of reps in the quarter and rep productivity, exiting 2010, what did it look like to the extent that you can share for fiscal 2011, what should we look for?

Sure, 2010 we finished with 51 territories pretty consistent with where we were really all year. In 2011 we do expect that we will make some additional investments into the sales force. I have talked about I think we will probably add another territory or two, but also mainly focused on some other improvements within the infrastructure of that group, to be able to make that group more productive overall. So those are the investments we are really focused on from a pure sales side. The second piece which I was referring to in the OpEx numbers is really some of the work, the prework that needs to be done to gear up for what we think is a significant launch for the next product.

Okay. Thanks for taking my questions, guys.

Sure.

Your next question comes from the line of Derek Leckow from Barrington Research.

Thanks, Good afternoon.

Good afternoon.

I just wanted to touch base again on the European contribution here. You are talking about 1 million Type 1's in that market place. I think you guys last quarter were saying you were basing your outlook on some of these minimum purchase commitments that you had made, or that you had signed in your deal with them. I am just wondering is that still a reasonable assumption, or do you think we will exceed that?

I think we have said consistently and I think if you talk to our partners at Ypsomed, while the minimum commitments over this period of time are 100 million, I think both parties would be disappointed if we don't exceed that. I think once again it is early to tell, but I think we are cautiously optimistic. We are only in a couple of the countries out of the seven that were launched in any meaningful way. I think 2011 is going to be real interesting, it is really going to be an interesting year for Ypsomed and us to really see how this all plays out.

And we have built our guidance for 2011 using the expectations for what their minimum requirements would be.

That is helpful. The second part of my question on that is, as we start to get approvals for the CE Mark, I am just wondering what does it mean for the next generation pod, in terms of any kind of minimum purchase agreement you might have on that product?

We met with Ypsomed last week based on our CE submission, to get them up to speed on that. I don't think it impacts, we are working with them as our partner here to determine which products we want to introduce in which markets first. It really doesn't change the contract from day one contemplated that the old product would be phased out some time in this contract term, and the new product would step in its place. Obviously the timing for us, once we have a clear understanding of that will determine how we launch a country, which countries we are going to first with the next generation products. We will work hand in hand with them, we met last week, there is a meeting that will occur in Europe at the end of this week, and we will keep talking to them as we go down the road with the CE people.

I would assume then there is probably not a need to build any kind of significant amount of inventory of the older generation product, is that right?

For them over international?

Internationally, and as we layer in the newer and is it going to be, you get the approval then you still have a lot of inventory to work down, or how does that actually work?

Given the fact it is early days on the relationship, with them kicking off in 2010, and as Duane noted really only Germany and the UK were the two contributing markets to the 2010 amounts for them. It is great timing for them to be able to switch. There is just not that many on product yet, and they don't have a big build-up of inventory. That all works in our favor.

So pretty much as soon as you get the approval, that winds up becoming the new, and that is at the higher margin rate, correct? We will see a step function increase in margin even under your agreement with Ypsomed?

Absolutely. We sell to Ypsomed effectively at the fixed price. So if we are selling them the current pod we have a lower gross margin profile, as compared to if we can sell them the new pod here in 2011 that absolutely is a positive for us.

And that is not currently in your thinking, or in your guidance at this point?

It is not baked into our guidance, that is correct.

Your next question comes from the line of Jon Block with SunTrust.

Thanks, Good afternoon, guys. Actually a lot have been answered. I will just go with a couple to clean up. The attrition rates that you mentioned in and around 9%, is that sort of where you guys are putting the stake in the ground for your 2011 guidance. It remains flat from the current level in and around 9%?

That is correct.

And then moving over to the 2011 guidance. It seems like you paid nothing in on the top line on the new pod being approved, but do you have some operating expenses in the 2011 guidance that give you guys subsidizing, I am assuming subsidizing some receivers once the new pod is approved, or would that more come online if and when you get the next gen through the FDA?

We actually have expenses built into our 2011 plan that we think we will incur between now and I would say full blown production. So the cost of the products themselves once we start to produce pods and PDMs, which we will start to do once the line is fully validated and ready to go in China. That will ultimately be put on as inventory to start. That will flow through the P&L once that product is effectively sold to a third party, be it a person here in the US, or be it Ypsomed overseas. Within the operating expenses, there are certainly a couple million dollars mainly geared towards the front half of the year, baked in of incremental spend for what we think we will need to be able to get through the FDA and the CE process.

And then forgive me if you have given this in the past, and I may have missed it, but when you are talking to international revenues here in 2011, is that a $1 million to $3 million to $5 million number?

Yes, we don't disclose the specific Ypsomed revenue number. As you can imagine, they are publicly traded as well, so there is always some angst on that. So what I would point you back towards is if you look at the revenue ramp that Insulet went through here in the US, you get a pretty good feel for what may be happening over there. We effectively went from a one to five to 13 to 36 back in our earlier years. A similar type of ramp you can probably figure in internationally just adjusting a little bit for the size of the market.

Great. That is it. I will follow-up with you guys offline. Thank you.

Thanks Jon.

Ladies and gentlemen, this concludes the question and answer portion of the call. I would like to turn the call over to Duane DeSisto for closing remarks.

Thanks again everyone for joining us today, and we look forward to updating you for Q1. Take care.

Ladies and gentlemen, this concludes the presentation. Thank you so much for your participation. You may now disconnect. Have a wonderful day.