Insulet Corp (PODD) 2011 Q1 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the first quarter 2011 Insulet Corporation earnings conference call. My name is Thelma and I will be your coordinator for today's event. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today's presentation.

(Operator Instructions).

As a reminder, today's presentation is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Brian Roberts, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, everyone and thank you for joining us for our first quarter 2011 conference call. I'm Brian Roberts, Chief Financial Officer of Insulet. Joining me on the call today is Duane DeSisto our Chief Executive Officer. 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 stations contained in 27-A of the Securities Act and section 21-E of the Securities Exchange Act and are making this statement for the 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 end of December 31, 2010. 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'll find a link to the webcast of this call as well as today's press release at myomnipod.com in the investor section. And, now, I'll turn the call over to Duane.

Thanks, Brian. Since the OmniPod System became commercially available in late 2005, we have been focused on making the lives of people with diabetes easier by expanding the use of pump therapy to those with Insulin dependant Diabetes. In 2008, we partnered with Flextronics to move our manufacturing to China releasing the capacity constraint on the business and by early 2009, we had hired a sales force to bring the OmniPod across the United States. With the strong manufacturing backbone and national sales coverage, we see the business gaining traction with each passing day.

More than 25,000 people, a third of them under the age of 18, better control their diabetes daily with the easy to use OmniPod, representing approximately 7% of the pumpers in the United States today. And, while we continue to be the only tubeless Insulin patch pump available in the market, we have not rested on our mission of continuous improvement in innovation. With that in mind, I'm pleased to announce we recently filed a 510-K submission with the Food and Drug Administration on the next generation OmniPod System.

We believe the new OmniPod raises the bar to new heights, as the device retains all of the user benefits our customers expect and enjoy, such as a three-day wear, a 200-unit Insulin reservoir and, most importantly, an easy to use design with just two parts. The next generation OmniPod accomplishes all this in a package which is more than a third smaller, 25% lighter and approximately a third less expensive to produce than the current product. The road to this regulatory filing has been arduous with several unexpected twists and turns.

And, I'm proud of the team's efforts and dedication to reach this important step in the process. However, we know this is the first step as we work towards the approval of next-generation OmniPod. We will continue to collaborate with the FDA over the coming months to provide them with additional data as necessary. We remain hopeful that we'll gain approval by the end of the year. Additionally, we continue to make progress internationally as we work towards seeking market approval on the next-generation OmniPod in Europe.

We have received an initial response back from the Agency and are currently working towards addressing the questions that they raised with the submission. We believe that we remain on track for an approval in the next few months. Turning to Q1, we are pleased with our first quarter results as we reported $28.3 million in revenue, a 36% improvement from 2010. As we previously discussed, the first quarter is traditionally our slowest quarter as customers who purchased the OmniPod system in November and December are typically not trained until the new year, thus missing a reorder.

Additionally, similar to last year, we have observed customers deferring their Insulin pumping decisions, as they adjust to resetting of higher annual deductibles, as employers continue to shift more of the burden of healthcare costs to their employees. Initial shipments picked up to expected levels by mid-March, and we entered the second quarter with a strong pipeline of referrals. Momentum continued to grow in April and we expect that trend to continue throughout the remainder of spring and as we head towards summer.

As expected, sequential gross margin dipped slightly to 48% driven by two factors. First, we produced less Pods in the quarter due to annual February shut down of the Flextronics facility for the celebration of Chinese New Year. Manufacturing returned to normal levels of production in March. We are also making steady progress with the validation of line for the Next-Generation Pod and expect to commence manufacturing product available for sales subject to regulatory approvals in June.

Second, we provided our partner Ypsomed with product to support the OmniPod system across additional markets in Europe. We have now shipped to Ypsomed versions of the product for seven markets including Germany, the UK, France, Sweden, the Netherlands, Norway, and Switzerland. With over one million people in these markets living with Type 1 diabetes, we believe the opportunity overseas is significant. We are also making progress with Ypsomed to gain necessarily approvals for Australia and China and are hopeful for launch in these markets in late 2011 or early 2012.

In addition to the sustained progress of our Ypsomed relationship, we were excited to announce back in February that we had entered into a partnership with GlaxoSmithKline to exclusively distribute the OmniPod system in Canada. Teams from both companies have been working diligently over the past three months on securing reimbursement and preparing for launch. We are excited that, within the coming months, people with Insulin dependent Diabetes in Canada will experience the unique benefits of the OmniPod. We are committed to grow both internationally and here in the US.

As we gain clarity on the expected approval timeline of the Next Generation OmniPod, we are making plans across our sales, marketing, contracting, reimbursement and billing teams to support the rollout of the new Pod and to approve the overall reach and frequency of our sales force. Over the last three years, we have proven our ability to leverage our operating expenses into higher return investments. We will continue to apply this level of focus as we look to invest in the aforementioned areas, by reinvesting a portion of the gross profit savings from the new Pod back into our sales teams.

Additionally, as we gain approval on our Next Generation products, we will shift the incremental dollars required for regulatory filing process back towards both engines. As our partner DexCom noted on their conference call last week, we are in the early stages of development of an integrated system that utilizes our Next Generation Pod and their fourth generation sensor. We anticipate that an FDA submission could occur sometime in the first half of 2012.

In summary, 2011 is off to a very promising start for Insulet. We had a solid first quarter and continue to execute well across the organization. We have crossed the initial bridge with the filing of the 510-K and look forward to continuing dialog to gain approvals of the Next Generation Pod both here and in Europe. We are excited by our international expansion to date and look forward to welcoming our first Canadian customer to the OmniPod family through our new partner, GSK.

We expect to see revenue continue to grow to between $123 million and $133 million for 2011, and we will continue to drive the company towards profitability. We expect to be at or near operating cash break-even by the end of 2011, even without the cost benefits of the Next Generation Pod. And, with that I'll turn the call over to Brian to provide additional details about the first quarter.

Thank you, Duane. We reported revenue of $28.3 million in the quarter, an increase of 36% from $20.8 million in the first quarter of 2010, and 2% sequentially from the fourth quarter. As we've seen in prior years, the resetting of annual insurance deductibles and delayed trainings for Q4 shipments combined to make the first quarter our seasonally slowest of the year.

By mid-March, initial shipments had returned to expected levels and we believe this momentum will continue as we move into the spring and summer. Gross profit increased by more than 60% year-over-year as we improved to $13.5 million or 48% of revenue, compared to a gross profit of $8.4 million or 40% of revenue, in the first quarter of 2010. As we highlighted on our year end call, gross margins increased slightly in the quarter due to the annual Flextronics shut down for Chinese New Year and the timing of shipments to Ypsomed.

The terms of our Ypsomed relationship are such that we receive a lower level of gross profits on shipments than we do in the US. However, because they act as our entire commercial organization, most of the gross margin falls directly to the operating profit line as our expenses to manage the relationship are minimal. We expect that our gross margin will remain at approximately 50% throughout 2011 as domestic margins in the low 50's are offset by the lower international margin.

We're confident that margin expansion will resume once the new Pod gains its approval and is introduced to the market. We remain diligent in managing our operating expenses to ensure that we're receiving the best return for each dollar spent. Q1 operating expenses were $20.8 million, compared to $19.1 million in the first quarter of 2010, and $23.6 million in the fourth quarter of 2010. We expect operating expenses to remain between approximately $21 million and $22 million per quarter for the rest of the year.

This level of operating spend is primarily due to continuing costs associated with gaining the regulatory approvals for the new Pod, development costs associated with new a integrated TGM product with DexCom, and additional sales, marketing and reimbursement expenses in preparation for the commercial launch of the Next Generation Pod. We reported an operating loss for the first quarter of 2011 of $7.3 million, compared to an operating loss of $10.7 million, for the first quarter of 2010. Representing a 32% improvement.

As Duane noted, we are targeting for the at or near operating cash break even by the end of the year. We define operating cash break-even as earnings before interest, taxes, depreciation, amortization and stock compensation expense. Net interest expense of $2.6 million in the first quarter of 2011 decreased from $3.8 million in the first quarter of 2010, as a result of the repayment of the facility agreement in December.

Our net loss also decreased year-over-year by 32% as we reported a net loss of $9.8 million as compared to a net loss of $14.5 million for the first quarter of last year. On a per-share-basis, we lost $0.22 per share in Q1, a 42% improvement from a loss of $0.38 per share in Q1 2010. As of March 31, cash and cash equivalents totalled $104.5 million, as compared to $113.3 million at December 31st. We believe we have plenty of cash on hand to reach operating profitability.

Finally, turning to guidance, we reiterate our full-year 2011 guidance with expected revenue of $123 million to $133 million, and an expected operating loss of $20 million to $28 million. We expect revenue of $28 million to $32 million for the second quarter. This range is a little wider than normal reflecting some uncertainty as to the exact volume and timing of OmniPod shipments to our international partner.

Depending on the exact timing of CE Mark approval, we may or may not ship next generation product to Ypsomed by June 30. Additionally, the timing of CE Mark approval may reduce previously planned international shipments of our current Pod as we fine-tune launch scenarios to allow for the most expeditious rollout of the new Pod as possible. As always, our highest degree of confidence is towards the midpoint of the range. With that, let me turn the call back over to Duane.

Thank you, Brian. 2011 is off to a solid start. We continue to expand the business here at home and internationally with our partners Ypsomed and GSK. We believe the approval of the Next-Generation Pod is within reach as we push towards seeing Mark approval with the filing of the 510-K.

We are confident that the Next Generation Pod will set a new standard, creating a new barrier to entry for any competitor considering entry into the patch pump market. We are committed to bringing this exciting product to our current and prospective customers as soon as possible to continue our mission to make the lives of people with Diabetes a little easier each day. And, with that, Operator, please open the call for questions.

(Operator Instructions)

Our first question comes from the line of Raj Denhoy with Jeffries. Please go ahead.

Hi, good afternoon, guys.

Hi, Raj.

I wonder if I can ask a bit more about the gross margin. It sounds like there was a couple of factors maybe played. The domestic market was a little bit perhaps slower for the reasons you mentioned but then also sounded like international was perhaps a bit stronger. And, first, is that correct, that international might have been a little bit better than maybe we were thinking or you were thinking going in?

Yes, I think it is pretty consistent with what we talked about back in February, Raj. I mean, there were a couple of factors. One, we knew that Ypsomed was preparing to launch these additional markets here in the first quarter. So product for France, Sweden, Norway, Switzerland, for example, all would go, and with that there is additional PDM's that we send for sampling and have a different margin profile.

So that's certainly part of it. The second, we talked about just the normal shutdown that happens in February with Flex. Really they're shutdown for a full two-week period and then if you can add on both sides the ramp down and the ramping back up, it's probably another week to week and a half of time that gets factored in there.

So nothing uncommon or unexpected, I think. If you go back to what we talked about last quarter, we said we would be 50% this year, really kind of plus or minus 2 points from the 50 really in any given quarter, and this quarter here, because of the shutdown mainly is probably the most challenging.

Okay. Just staying on Europe for a second question. You mentioned there was some questions from the agencies there on the CE Mark. Can you explain what they're asking about, or is it anything that might require a little bit longer?

No, so Raj, this is Duane, that's a good question. But I would tell you, it was in the typical normal course of business, it is explanation that some of the information submitted. I would tell you there were probably more questions that came back that surrounded the blood glucose meter and the new Abbott strip, than that had really to do with the pump itself.

But like I said, I think from our standpoint it is not expected. It really is in the normal course of them reviewing the document and getting up to speed on it. We didn't see anything that I would tell you that we think is going to impact anything we're doing.

And just lastly, one important clarification. Does the Next Generation Pod require a new PDM or can patients use the existing one? It requires a new PDM.

So do you think you might be seeing some European customers perhaps wait for the next generation? Is it perhaps a gating factor for that even accelerating quite a bit faster here?

Yes, I think, the interesting thing for us is working with our partner Ypsomed right now, in those European countries. I think the reason we gave kind of a wide guidance range in terms of revenue for the second quarter, is depending on when we see CE Mark coming in, it would behoove us to withhold shipments if we thought they were going to come in, if we thought we could ship the Aeros product, the next generation product with the higher margin, it would make sense for us to hold that back, get the new product in some of these markets.

So we're trying to work, we're working with the Ypsomed people to really try to fine tune this timing. What makes it a little tricky is that we don't control the single biggest piece of it, which is when we get the approval. From our standpoint it really is a timing issue. If we had our preference we would like to ship all the new product as soon as we could possibly do it.

That would be our preference, I think that would be Ypsomed's preference. But we have to work our way through it and we have to continue to work with the CE Mark people to get a feel for when we think that approval might come down. And then, we have to get that lined up and working which would probably be at the end of this quarter here over in Asia.

Fair enough. Thanks a lot.

Our next question comes from the line of Kim Gualin from JPMorgan, please proceed.

Great. Thank you. Congratulations on the filing of the Next Generation Pod.

Thank you, Kim.

So, I guess the first question is on that. You indicated that you completed the filing recently. And just as we kind of start our clocks in anticipation of the FDA approval, can you tell us, can you be at all more specific around the timing of the filing? Was this a May event?

This was definitely a May event.

Okay. Well, great. And anything else that you can, so obviously this was just recently filed, but anything else that you can tell us, since we all last spoke, in terms of your conversations with the FDA, anything that they're asking for, that has surprised you, or changed at all?

I think we tried to articulate that we try to work with them and keep an open mind, but, Kim, to give you some level of the complexity, I mean, keep in mind this 510-K, 2B, I think it officially comes into place in August. But if you look at just for kind of giggle factor, I saw the document. I went back and looked at the initial 510-K we filed five years ago, it was about 1,100 papers, this document is probably about 8,000 pages.

So it will give you the kind of level of complexity in detail that the agency is looking for. We feel good about it, but I think we're probably one of the first companies that are going into this Q with a 510-K that, I've been told that we have to submit three copies, and the size of a nose tackle, is over 300 pounds evidently, is what was shipped. So to give you some indication of the volume of transactions, detail is there.

Yes, understood. And I guess the other question is just, as we think ahead to the fourth quarter of this year, and if we assume that the product will be approved sometime around the end of the year, should we expect any softness in front of the approval in the US business, like you're talking about in the o-US business, understanding the nature of those businesses are a little different?

Yes, I -- look, I think we, as I told you, I think our guidelines towards sales force, our guidelines to the market, is we truly believe that the next -- our next generation product will be a 2012 event, and they ought to sell the product that we have. I think as we get a little more definitive on the timeline, we will articulate to the market that we'll have an upgrade strategy. And the upgrade strategy, we have the capability of forcing the upgrade strategy on the market, and what we will do is probably do it in first come-first serve fashion.

So get in the queue, get on the product. Is it a possibility? Maybe. It is a little different in Europe, because everything is going through a distributor. So it does make it, they have a supply chain that they know what is going on in the individual countries, plus the backlog.

So that one we're trying to time a little bit better. But the US market we will articulate as soon as we get a clear understanding of timeline, and we will clearly articulate to the market what the upgrade strategy is. But in order to avoid the behavior that you described, it will probably be more -- the first people on our product will be the first people who get the next generation.

Okay. Great. Thanks, guys.

Our next question comes from the line of Rick Wise with Leerink Swann. Please go ahead.

Danielle? Rick? Hello? Operator, we can't hear them. So maybe go to the next question and put them back in the queue.

Yes. Our next question comes from the line of Mimi Pham. Mimi, you may proceed.

Hi, can you hear me okay?

Hi, Mimi.

Okay. Sorry. For the 510-K did you submit all the data or is there any additional data that you're submitting in any kind of later phases?

The only piece of the data is there is a shipping and packaging test that for a six-month dating on it, that takes X number of days to 12 months, 18 months and 2 years. So there is still little bit of information that would be required there.

That doesn't extend the time line ideally.

At the end of the timeline. We don't control the timeline but I think from our standpoint we felt the submission was complete. There was no point hanging on to it any further. We submitted it. And I think we get in the queue, we start the dialog with the FDA and we're going to learn more.

And then for the CE Mark, can you remind us on your prior experience, the next time you hear from them is it technically we have to wait another 90 days, or could that be shorter?

It could be shorter. CE Mark is, they have a series of questions, they submit them, we respond to them, and then if they have some more. But I will tell you that timeline is probably shorter than the 90 days. Mimi? Mimi? Hello? Operator? Operator?

I'm here. Our next question comes from the line of Bill Plovanic, please go ahead Mr. Plovanic.

When -- so you filed with the FDA I think the commentary is kind of this starts the dialog and I didn't catch the last part. The whole submission was complete except for maybe some of the packaging data on extending the life for that? Is that what that answer was?

What happens is to get data, you say the product is good for 6 months, 12 months, so we have 2-year dating. So the 2-year dating, obviously, it is an aging test. So to get to the 2-year dating obviously takes significantly longer to get to the 6 months. Its the same test, but its accelerated aging that you have to do. So we will back fill some of that. But other than that it is complete.

So did you submit, what, 6-month or 12-month dating.

6.

Okay. And then you said once you get it in there, that you'd maybe get a dialog going. Are you, it sounds like you don't put very high odds on this going through in 90 days.

Bill, I would be stunned, and like I said, we have a, almost an 8,000-paged document that we shipped to the agency. The likelihood of there being no questions on those 8,000 pages is probably pretty small and remote.

Okay. But--?

Don't get me wrong, we feel very good about this submission. We think we complied with all that. But, I mean, we know the product intimately. Our reviewer probably has an understanding of the industry and the product. But, I mean, it is 8,000 pages that someone has to plow through, or multiple people have to plow through and I'm sure that will generate a series of questions.

And then for Brian. What was the other revenue for the quarter.

A little over $1.2 million.

Okay, and that includes the amortized revenue, as well. Right?

Yes, every quarter it includes it. That's right.

Okay. And then just international, I mean, I was wondering if you could just frame this for us. Was this a $0.5 million, $1 million, $2 million? That would really be helpful.

Sorry. We will certainly break out Ypsomed revenue or international revenue in total once we hit that point. But to date we're not, as we've talked about beforehand, it was very minimal last year. It will be little bit more this year. But not significant enough yet to break up.

Okay. And then the attrition rates, has that increased or decreased?

It popped up I think fourth quarter is about 9% and now it is closer to 10%, which is pretty typical at the beginning of the year when everybody gets their new surprises from their healthcare provider or their employer. So the hope is we'll grind that back down again, but typically the first quarter is one of the times we see it pop up no matter what.

Okay. And then just as you talked about the Aeros product, what is your current, what is your manufacturing capacity for the gen 1, and then what is the capacity for the Aeros at this point in time?

So the generation 1 product we can produce up to about 0.5 million pods per month. And if we needed to go beyond that, we've got some strategies that would allow us to do that. But we think we have plenty of runway on the current one.

On the second generation products, the next generation product, each line right now looks like it will be about 300,000 Pods per month, so we're shooting to have, in place, effectively three lines of product, so 800,000 to 1 million Pods per month of capacity by the end of the year, early 2012 so that we have enough runway to flip over the base.

Okay. And then when you do that now when you start shipping, will Abbott pay for some of those upgrades? Or how is that going to work?

I mean, are they going to kind of cover that cost for you? Or is this going to have to be the patient will have to upgrade, or if they bought the last 12 months, they are into an upgrade program? What are you thinking at this point?

What we're planning on doing is we ultimately want everybody to have the benefit of this new product. And certainly there's some financial benefit for us to do so. So we will ultimately over a period of time, likely a 6 to 12-month rollout once we launch. Here in the US, for example.

Effectively move everybody over to the new product. So we will supply the customer with a brand new hand-held to accompany the new product. Keep in mind that the savings that we will generate on that first reorder is enough to effectively offset the cost of the hand-held. So in the first quarter of launch there won't be any margin improvement as those will net each other to zero. But beyond that we will receive all of the margin improvement that we have been talking about. So certainly from an ROI perspective that is a pretty quick pay-back.

Got you. Okay. So the gen 1 at $500 a month is maxed out at a 50% gross margin basically?

Yes, I mean, 50% blended, its low 50% in the US when you use our $28 ASP but again the international mix is lower.

And then with the gen 2, so you're still saying you think that can get to a 65% gross margin?

Correct.

And its at $28 ASP in the US?

That's right, that's right. So internationally we'll be lower on that, as well. We've always based the 65% margin based off of a $28 United States average selling price. But clearly it is going to gain us overall somewhere between 10 points and 15 points of additional gross margin once we've transitioned everybody.

And then, I haven't really seen a big pop in the inventory. Do you have a lot of gen 2 Aeros inventory out there yet?

No, not yet. I mean we're still working through the validation process and qualification process of the line in China. So we have not yet started to produce product that we would hold in inventory for sale.

Okay. And then last question is we, I think Charlie came onboard, what, about three months ago, what do you have him working on?

Charlie is working on a capacity for the existing line to make sure that's good. Always, we're always trying to improve the quality of the existing product. And then obviously his main focus, though, is the capacity working with Flextronics in China to get these lines up and going. So he is focussed like a laser beam on all of it.

Got you. All right. Great. That's all I have. Thank you very much.

Thanks, Bill.

Thanks, Bill.

Our next question comes from the line of John Putnam with Capstone Investments, Please go ahead. Please stand by for me, gentlemen. Please stand by for me, gentlemen. You may go ahead, Mr. Putnam.

Okay. Thanks. Duane, the numbers that you spoke about in terms of number of users and market share, sounded very much like the numbers you gave at the end of the year, and I wondered if there is really any update there. And I'm also wondering what the competitive landscape looks like here if there's been any change, really.

Yes, so those are numbers we had at the end of the year, that was the last time we updated so we did it. Obviously we added new customers throughout the quarter. And we haven't updated. We're not doing a quarter by quarter update just because everyone does the math and it never works out. We learned that a couple of years ago.

The second piece needs to be the whole competitive update we don't see anything really new. It is kind of the same, obviously we're always paying attention to the guys in Minneapolis, but other than that, Roche is still working on their product. But we really haven't seen anything new or unusual popping up. I mean, like I said, we feel pretty good about this next generation product. We really think this is going to set the bar pretty high for people.

And, like I said, when you look at the size, just the sheer volume of this submission, a lot of little start-up companies, they're going to struggle to get through, everybody is going to struggle to get through all this. I mean, it was not inconsequential for us, and obviously the smaller you are the bigger the deal this has become. We feel real good about the product.

We feel real good about how we are going to be able to position it. We have to get it through the regulatory process, which will take what it takes. But I think we're still in a very good spot.

Yes, thanks, that's great on the 510-K. Congratulations on that.

Thank you.

Thank you. Our next question comes from the line of Rick Weiss. Please stand by, gentlemen. You may go ahead, Mr. Weiss, thank you.

Can you hear me this time?

We were having some technical difficulties here.

Exactly. Well let's hope my question was worth the wait. Operating expenses, Brian, you've been very clear, $21 million, $22 million per quarter that came in at the lower end of that. Maybe help us understand what drives it one way or the other, and the mix of R&D and SG&A was the opposite of what we thought SG&A, R&D higher or lower this quarter, is that something to do with the time of the filing and the mix will shift back the other way just as we think about modeling the flow of it during the year?

No, I think for the Q2, specifically R&D expenses will probably remain high. I mean, there is still a fair amount of work that we will incur just as we go through the process with the FDA itself. So, my expectation is that we'll probably see similar levels in Q2 to where we were in Q1, and the mix. The mix will probably stay about the same.

Clearly as we roll into the second quarter and in the third quarter, those are usually stronger quarters for this business from a shipment perspective. So that will drive our sales and marketing expense a little bit higher than what we had seen in Q1 when the year starts off slow in January and February.

All right. In talking about FDA approval I appreciate the complexity and the uncertainties. And I'm maybe misremembering but I sort of feel like you said frequently in the past late third quarter or early fourth quarter and it seems like Duane you're now saying by the end of the year. Just trying to understand, clearly, does your current guidance assume a FDA approval, US FDA approval and launch this year, or, if it doesn't quite make it into this year, should we be concerned about the full-year numbers?

Our current guidance does not reflect any impact from the next generation product. So I think it has the potential for the upside. When we did the math, we counted out 180 days and we're hoping that that would be, that that would fall in the fourth quarter. But, like I said, we really only control obviously one half of this equation.

And when you see the enormity of the submission, you put it in light that we're probably one of the first, we went out there to try to find out how many people are entering 510-K type products under these new guidelines, and we couldn't find many. Just try to benchmark ourself against someone. So it's a little bit of a brave new world here as the FDA transitions this process. If we get it, great, if we don't get it, we're not changing any of the guidance numbers so--.

Got you. And just one last housekeeping item. Brian, shares were 45.6 million this quarter. Up a lot from the fourth quarter. Is that just an option exercise, or is that the--?

Yes, two things, one is, you have a full quarter impact of the raise that we did back in December to repay the facility debt. And then, second, it would just be normal course option exercises.

So this is the number for the year.

Yes, and I'm sure we'll have some more option exercises throughout the course of 2011, but that would be the plan.

Thanks a lot.

Thanks.

Thank you. Our next question comes from the line of Mimi Pham with Weeden & Company. Please go ahead.

Hi, can you hear me okay?

Now Mimi, I want to go on record we had nothing to do with you getting cut off. Whatever service we're using is struggling.

Thanks. Now can we just go back to your guidance range for second quarter, the $28 million, bottom of that range of $28 million, can you provide more color. You talked about new adds picking up mid-March into April, why would it, why would there be this bottom range as a possibility considering the new adds picked up?

There is a couple of components, obviously, to the guidance range. As we've consistently said our highest level of confidence is to the midpoint of that range.

Yes.

Keep in mind there's clearly some international revenue that's in the first quarter here of 2011 as we've talked about around the margin. And as we've pointed out, depending on exactly where we are, with CE Mark approval, the level of visibility we have to that, it could determine how much, if any, international revenue we have in the second quarter. So that's why we broadened the range to be able to kind of account for the various scenarios that could happen internationally.

Mimi, as Brian said, when we give the guidance, our highest degree of confidence continues to be at that midpoint. You don't have a midpoint unless you have a bottom.

No, I understand. Would you say in terms of your US new patient adds, those referral productivity, sales force productivity, those trends improved also third -- mid-March and should improve through second quarter?

Yes, I think if you look at it, we have been, we've had kind of a national sales force in place here for about nine quarters. The productivity numbers have been pretty good. I mean, pretty predictable. So there is really nothing I think happened in the first quarter that surprised us.

If I pull out the first quarter for the last two or three years it looks a lot like the same. I think the challenge in the first quarter continues to be, and will continue to be, as companies like ourselves, or your company, struggles to try to keep healthcare costs down, they're signing up new, let me give you a little insight, they'll sign up a new managed care provider.

When we have a whole group of patients who now have a new managed care provider, you have to go through the whole -- we have to take these patients even on the reorder side that may have been with us for five years and you have to go back through that whole process again to verify their insurance. So the first quarter is people struggling with the reset of their healthcare and then the second piece of it is we as a Company have to go back through, you go to verify Mimi Pham's insurance and she's no longer at Blue Cross but she's over here. So we have to go through that process even though you've been a customer for four years we have to go through that process and verify the insurance. So the whole process in the first couple of months of the year really kind of bogs down.

That is the way the business is. That is the way it will be for the next 20 years. But we feel good. We feel good about what we're seeing. But it's, like I said, the first couple of months, this has been no different than any of the rest of them. I think we're getting better at it, but I would tell you, I think, there is a sense among customers that, obviously I know our own Company we're trying to push more and more back, wherever we can push back, to hold the health care costs down.

And then just last question, I know you don't want to break out international sales at this point, but is there any metric you can just give us, to give us more information that things are attritionally or directionally moving up, forward?

We ask you guys to understand that we obviously have an international partner here who is also a public company in Switzerland. So I'm hesitant to break out any additional specific information on them. I would say is I think that if they were on the line here they would tell you that they are ahead of plan, doing very well. I think they are very happy with the progress we've been making so far and I think that they are eagerly anticipating and are excited about the fact they are going to be likely the first markets to be able to launch the Next Generation Pods.

So from our perspective, the relationship is going very, very well. I pointed us all in the past towards thinking about the growth chart that we've gone through here in the United States, and that being a pretty good flavor for how to think about the European relationship, and I guess I would probably point you back there.

Okay. Great. Thank you.

Next question comes from the line of Suraj Kalia, Mr. Kalia is representing Rodman & Renshaw. Please go ahead.

Good afternoon, guys.

Hi, Suraj.

Duane, forgive me, you have spent a pretty decent amount of time explaining this, and somewhere I haven't connected the dots so, again, forgive me. So you very articulated pretty clearly insurance box down Q1, and as a result numbers were soft or trend wise they were a little softer. Okay. Got that. How would you--?

Suraj, not to stop you right here, but those are your words. I think from our standpoint, we pretty much where we thought we -- we were where we thought we would be. So, but go ahead. I don't want you putting words in my mouth.

No, I wasn't trying. Fair enough. Duane, I guess what I'm trying to understand, really is, look, on the Q4 call you said there were going to be some initial stocking orders for Ypsomed and for international markets. Okay. Great.

There are going to be some, to whatever extent stocking orders were there, that means just pure math, sequentially US was down. If I buy the argument that insurance, people are switching insurances, and this led to some headache somewhere, and as a result this can be explained, could you help us reconcile, look over the last three or four years, that trend is not visible in the Q4 to Q1 shift. Was it an anomaly in this? Or I am just trying to get, or I am paying too much attention to something that is just a blip in the whole trend line?

Suraj, so to correct you and to be very clear for everyone, you have Q1 sequentially in our US business was not down from Q4, it was up. You got to keep in mind that every quarter there are various pieces of revenue and various timing differences that ultimately come through. For example, we absolutely had some international revenue in the fourth quarter of 2010. We've been clear that we have been selling in Germany and the UK for the last six months, and our partner overseas has been doing well in those markets and have been ordering Pods.

What we talked about here in Q1 is that they have now expanded into additional markets which also then include more hand-helds, and other things that require larger amounts of PDM's. It's worth noting that the largest markets that Ypsomed is serving, two of the three of them are Germany and the UK. So they have been active there for a couple of months or couple of quarters, excuse me.

There is other timing differences that happen normally over the course around our distributors, and the timing that they place orders here in the US as well as when we go through our process of looking at all of our receivables and determining if we are working with managed-care providers, and if we had any poor-payer issues, or any of the like. So in any quarter there is some percentage of revenue that is in some ways unique to that quarter. What we try to do is to provide you, when we look through all of that information, as we look into a current period or the upcoming period, factor that in, and when we give you the guidance overall.

Okay. One last question, again, maybe I haven't understood this correctly, Duane, what I heard was the gross margins are obviously down, there is an international component that is partially explains that. But also Flextronics shutdown.

For the Flextronics part, Duane, is my understanding correct that it's a contractual agreement, hey, if we order 10,000 Pods, this is your price, if you order 30,000 Pods, this is your batch price. And there is a certain volume cutoff base pricing mechanism in place. I'm just trying to understand, so Flextronics shut down, how does that affect--?

Suraj, there is a couple of pieces to that. So Flextronics shut down for Chinese new year. So it's an event that will happen every February where the facility shut down for two weeks and like I said you can figure a half a week on both sides of that to ramp down and ramp back up. It is cultural.

It is part of doing business, if you will, in China, and it's going to happen every February going forward. To your point around to how we purchase from Flextronics, you're correct. But keep in mind as we produce a different volume of Pods in any given period, there is varying levels of what, from an overhead costs, of how you spread those overhead costs.

If we produce a 1.5 million Pods in a quarter, the overhead which is relatively flat, is spread out over 1.5 million Pods, as compared to if we produce 700,000 Pods in a quarter, I'm just making up numbers. The overhead would be different and that's going to drive a price difference. And when you think about the terms of a gross margin point, that could move the needle a point or two one way or the other. So its small changes that can ultimately make those differences.

Okay. Brian, I confess, I haven't followed it, but I'll take it off-line. Thanks for taking my questions.

Our next question comes from the line of Greg Choaczek with First Analysis, please go ahead.

Thanks. Hi, guys.

Hi, Greg.

I had about 20 questions, but I think Bill asked about 18 of them so I just only have a few. With regards to the first quarter with insurance deductible resets, and everything else, was this year any larger than last year? Or was it about the same? And when I say the same, I'm talking about dollar amounts and not percentage.

Yes, overall I would say from what we're hearing from customers, and I think it is consistent with what we've seen other companies are talking about as well. Deductibles have gone up a little bit. So I think customers are looking through that, and a lot of Q1 timing issue, with the cash flow issue, there is small amounts of patients, for example, who we see try to maybe get a second reorder in the back half of the fourth quarter, and effectively miss the first quarter to be able to manage their insurance appropriately. But on the whole, yes, I would say that the deductibles have probably risen, kind of on average, as compared to 2010.

Okay. And with regards to international, how do you recognize the revenue?

When we sell to Ypsomed.

Okay. All right. And, last but not least, here's a tough one for you, Duane, how many pages was that 510-K submitted?

The 510-K submitted was actually about 7800 pages. We have to send three copies. So, like I said, I remember seeing the weight bill. It was about 300 pounds. So.

Yes, I can say this, and you can't, it's our wonderful Federal government, doing it for the people. And I'll leave it at that. Thanks, guys. Great quarter.

Thanks, Greg.

Our next question comes from the line of Johnson Block with SunTrust. Please go ahead.

Hey, guys, good afternoon. Maybe just two or three questions to wrap up. On the international side, I just want to be clear, did you already turn around sort of answer and submit the additional questions that you got from the international regulators?

I think there's one open question that we have to send back. It relates, and I'm pretty sure, don't hold me to it, but I'm pretty sure it relates to the actual strip. So we're working with our partner there to get the answer on that.

Okay. Got it. And then Duane, this is more of a clarification, I just want to make sure I heard you correctly. When you get the next gen through from the US, do you plan on taking some of the incremental gross profit and reinvesting that in sales and marketing? Is that correct? And I'm guessing just based on that commentary you're talking when we look out to 2012?

Absolutely. And you are correct.

Okay. And the last one Brian, this is for you, just in terms when you look over the balance sheet and you look at deferred revenues, that was down about $2 million sequentially, maybe two-part question, if you can remind me what the deferred revenues really consist of and was that according to your plan when you laid out 1Q guidance?

Yes, certainly according to what our expectations were coming into this year in full disclosure we had the benefit of being 6 weeks into the quarter before we did our Q1 release. Right? So that certainly helps around timing. There was really a couple of components that make it up. One is deferred distributor revenue, typically.

So there clearly was some Ypsomed revenue that we would have shipped at the end of Q4, didn't meet our revenue recognition at the end of quarter and recognized in Q1. The second piece is really just balance sheet reclass, if you will, between receivables and deferred revenues as we go through that and find certain claims that were kind of old in nature that we figured out basically wouldn't be, would likely not be collected. And so we wrote them off both sides of the balance sheet, the receivables and deferred revenue.

Okay so it sounds like the biggest delta then was from the Ypsomed revenue where you completed the work and the product went out?

I would say both parts. Relatively equal.

Okay. Great. Thanks, guys.

Ladies and gentlemen, that concludes our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

I want to thank everyone for joining us and we look forward to updating you in the future. Bye.

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