Insulet Corp (PODD) 2011 Q2 法說會逐字稿

Good afternoon. My name is Rashida and I will be your conference operator today. At this time, I would like to welcome everyone to the Quarter Two 2011 Insulet Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your CFO, Brian Roberts. Sir, you may begin your conference.

Thank you. Good afternoon, everyone and thank you for joining us for our second 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.

Before we get started, I'd like to remind everyone that our discussion today may include forward-looking statements as defined under the securities laws. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act and are making this statement for purposes of complying with those Safe Harbor provisions.

These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us, and on assumptions we have made. There are risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

Information concerning the Company's potential risks and uncertainties is highlighted in the Company's press release issued earlier today and in the Risk Factors section of the Company's SEC filings, including the Company's Form 10-K for the year ended December 31, 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 to today's press release at myomnipod.com in the Investor section.

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

Thanks, Brian. Each day people tell us that the OmniPod System has changed their lives for the better by giving them the freedom to live without tangled to being without the complexities of a conventional pump and without painful injections. They also tell their friends with diabetes about their passion for the OmniPod.

Recently, Close Concerns, a leading market research firm focused on the diabetes industry, conducted a survey which asked the question "Based on your personal experience, how likely are you to recommend your pump to another person with diabetes?" The result was OmniPod users were over 70% more likely to recommend their pump than people who use the market leader's conventional pump.

In a second independent survey, approximately 94% of the OmniPod users responded they would recommend the product to a friend. This impressive vote of confidence from our customers is part of what aspires all of us at Insulet to continue innovating and growing.

The past few months have been one of the most exciting periods in Insulet's history, as we continue to make -- continue making strides every day to advance our mission to improve the lives of people with diabetes. We have made significant progress across all fronts of our business, strategic expansion, regulatory approval, new product development, continued topline growth and balance sheet restructuring.

Let me first turn to our strategic expansion with the acquisition in June of Neighborhood Diabetes. Neighborhood Diabetes is a leading durable medical equipment distributor specializing in direct-to-consumer supplies, pharmaceuticals and support services for people with diabetes. With over 15,000 insulin-dependent customers and over 60,000 total customers, Neighborhood Diabetes has been able to build a profitable, differentiated model focused on training and educating their clients. By investing in these support services, they have demonstrated to healthcare professionals and insurers an increased level of client adherence to therapy resulting in a reduced cost of care.

The acquisition of Neighborhood Diabetes brings several important strategic benefits to Insulet, as we prepare for the launch of the next generation OmniPod. First, it will accelerate the commercial experience into the OmniPod. We have gained an experienced 25-person sales team and expect to expand the Neighborhood Diabetes model into other key markets throughout the country. This will drive improvement in our reach, frequency and quality communications for key endocrinologists.

Second, we are able to provide cross-selling opportunities for both customer bases. For OmniPod users, we are adding the capability to provide test strips, insulin and CGM sensors. Providing this easier one-stop shopping experience to OmniPod customers will also increase our revenue and operating profit opportunities. In addition, we will be able to offer the benefits of the OmniPod System to Neighborhood Diabetes customers currently using multiple daily injections.

Third, the addition of Neighborhood Diabetes dramatically expands our back-office infrastructure, which is critical to supporting the launch of our next generation Pod. It also brings us additional capabilities in pharmacy adjudication and Medicare and Medicaid expertise. Importantly, we have gained these opportunities, infrastructure and capabilities to a profitable, growing and accretive transaction.

On the integration that the Company has just begun, we are pleased with the early impact of the deal. Response from the majority of suppliers, insurers and healthcare professionals has been positive. We have commenced the process of amending contracts on both sides that will allow for cross-selling opportunities.

Additionally, we are working on the back-office integration, which we expect to be complete by year-end. The timing of this acquisition was driven by our anticipation of regulatory approval of the next generation OmniPod in the US and our desire to have the integration completed prior to launch.

As you know, from our Q1 earnings call, in May we filed the 510(k) submission with the Food and Drug Administration for the next generation OmniPod. The new OmniPod maintains all the features our customers enjoy, such as no tubing, automated painless insertion and a discrete waterproof design. The next generation OmniPod accomplishes all this in a package, this is over a third smaller, a quarter lighter, and a third less expensive for us to produce.

Just last week, we received our first formal set of questions from the FDA in response to our 510(k) submission. The majority of the questions focused on providing additional detail and clarification across several areas, such as the PDM software, the integrated glucose meter, the user guide and other testing-related questions. Overall, we are encouraged by the agency's engagement with our submission and we remain hopeful that we'll gain approval before the end of the year.

In Europe, we've also made great progress. I'm pleased to announce that late last month, we received CE Mark approval for the next generation OmniPod. We are now working with our partner Ypsomed our commercial plans and expect to launch next generation OmniPod in select European markets later this year.

Additionally, in June, we made our initial shipments of product to GlaxoSmithKline in Canada as they prepare to launch the OmniPod there in the third quarter. While much of our clinical, regulatory, and research and development teams have been primarily focused supporting the approval process of the next generation OmniPod, we also continue to innovate in several other areas.

In June, we attended the American Diabetes Association conference in San Diego. One of the key things from the conference this year was presentations, discussions and ongoing research from several institutions on the closed-loop artificial pancreas project. The OmniPod is at the forefront of much of this research. Since 2006, the OmniPod System has been used in more than 50 closed-loop clinical trials in 11 sites around the world.

Last month, a consortium of nine leading research institutes from the US, Europe, and Israel received IDE approval to initiate a closed-loop [controlled ring] study as part of the overall artificial pancreas project. This is the first pivotal study designed to evaluate an artificial pancreas for use in real-world scenarios. We are thrilled that all sites are using the OmniPod as part of this groundbreaking research.

In June, we completed the restructuring of our balance sheet by issuing $143.8 million in convertible debt maturing in June of 2016. Of the proceeds received, we used approximately $86 million to repurchase $70 million face value of convertible notes, which would have matured in 2013. With this financing of the convertible debt complete, we are confident that no additional cash is required to reach profitability.

Even with all this additional activity across the business, we did not lose sight of delivering a strong second quarter. We reported $32.2 million of revenue, representing approximately 30% year-over-year growth, excluding the Neighborhood Diabetes acquisition, and a 40% increase on a consolidated basis.

As in prior years, momentum continued to grow throughout the three months as the seasonality insurance deductibles issues, which impacted first quarter, normalized in Q2. Product margins for the OmniPod System remained flat with last quarter at 48%, as we continue to utilize Pods produced in the first quarter with a slightly higher cost profile due to manufacturing shutdown of Flextronics facility for the celebration of Chinese New Year.

On a consolidated basis, our gross margin was 45%, reflecting a month in Neighborhood Diabetes activity. Finally, we continue to expect that we will reach operating cash breakeven by the end of 2011.

With that, I'll turn the call over to Brian to provide additional details about the quarter.

Thank you, Duane. Before recapping the quarter, let me take a moment to summarize the various transactions that we completed in June. First, we completed the acquisition of Neighborhood Diabetes for total consideration paid of approximately $62.4 million. This was comprised of $31.4 million in cash paid at the close of the transaction, $6.6 million of cash held in escrow for one year, and approximately $24.4 million in Insulet registered common stock representing about 1.2 million shares at the time of the transaction. The shares were subsequently sold by the Neighborhood Diabetes' shareholders as part of a follow-on offering on June 29.

On the balance sheet, we recorded total intangible assets of approximately $59 million, comprised with $27 million of goodwill and $32 million of other intangibles, primarily consisting of customer assets and trade names. The other intangible assets will be amortized into the income statement at a rate of $1.7 million per quarter.

Second, on June 29, we completed concurrent public offerings of $143.8 million of convertible debt and the sale of the 1.2 million of shares held by the Neighborhood Diabetes' shareholders from the acquisition. The new convertible debt matures in June 2016 and bears interest at a rate of 3.75% payable semiannually. The strike price in the convert is $26.20 per share and Insulet maintains various call options in years four and five. With $85 million of the proceeds, we repurchased $70 million face value of convertible debt, which would have matured in June 2013. That debt paid interest at a rate of 5.375% and had a strike price of $21.35. Approximately $15 million of the convertible debt maturing in 2013 remains outstanding.

Turning to the second quarter financial results, we reported revenue of $32.2 million in the quarter, an increase of 40% from $22.9 million in the second quarter of 2010. Excluding the June acquisition of Neighborhood Diabetes, growth would have been about 30% year-over-year.

As we anticipated last quarter, virtually no international revenue in the quarter was recognized, as we awaited CE Mark approval. Additionally, we saw insurance deductible issues normalize in the quarter to level similar to 2010. Referral momentum entering the third quarter continues to be strong.

Gross profit increased by 47% year-over-year to $14.5 million or 45% of revenue. The OmniPod gross margin remained steady at 48%. Going forward, we expect the OmniPod gross margin to remain in the 50% range, as we await the US launch of our next generation Pod likely in early 2012. Factoring in the full impact of the Neighborhood Diabetes acquisition, gross margins for the third and fourth quarters should be in the 43% to 45% range.

Total operating expenses for the quarter were $29.5 million. This amount includes approximately $3.3 million in one-time expenses related to the June transactions, $0.5 million in amortization expense of the intangible assets, and an incremental $2.5 million of one-time expenses related to the next generation Pod. The balance also includes $1.5 million in Neighborhood operating expenses for the month of June. Going forward, we expect operating expenses of approximately $28 million per quarter for the remainder of the year.

Included in this balance is approximately $6 million per quarter of non-cash expenses comprised of depreciation, stock-based compensation and amortization expense. Excluding these non-cash expenses, we expect to be operating cash break-even, defined as EBITDA and stock comp expense, by the end of the year.

Net interest expense for the quarter was $4.8 million, reflecting cash interest paid of $1.1 million and non-cash interest of $3.7 million. Going forward with the new convertible debt, we expect cash interest per quarter of $1.6 million and non-cash interest expense per quarter of $2.2 million for a total of $3.8 million in quarterly interest expense.

As a result of the one-time expenses related to the acquisition and the concurrent public offerings, our net loss increased to $19.4 million for the quarter, as compared to a net loss of $13.7 million in the second quarter of 2010. On a per share basis, we lost $0.42 per share in Q2 2011 and $0.36 in Q2 2010. Shares outstanding as of June 30 are 47.3 million.

As of June 30, cash and cash equivalents totaled $106.7 million as compared to $104.5 million as of March 31. We believe we have sufficient cash to reach profitability.

Finally, turning to guidance. We are tightening our full-year 2011 revenue guidance to an expected range of $152 million to $158 million. For the second half of 2011, we expect to incur an operating loss of $13 million to $18 million. Again, this operating loss includes approximately $6 million of quarterly non-cash expenses for items such as stock-based comp, amortization of the acquired intangible assets and depreciation. For the third quarter, we expect revenue of $44 million to $46 million.

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

In summary, 2011 is proving to be a very exciting year for Insulet. We continue to grow rapidly, execute capably and deliver strong financial results.

We received CE Mark approval of our next generation OmniPod and moved a step closer to securing approval from the FDA. We acquired Neighborhood Diabetes, a business which complements our sales of the OmniPod System with an expanded product offering and a higher level of customer service to our nearly 90,000 combined customers.

We expect the combined businesses to deliver revenue in the range of $152 million to $158 million for 2011. We completed restructuring of our balance sheet such that no additional capital raises are necessary. Finally, we expect to be operating cash break-even by the end of 2011.

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

(Operator Instructions) Kim Gailun, JPMorgan.

Hi, guys.

Hey, Kim.

Hi, Kim.

First question is on the FDA process for your next generation Pod, it sounds like you just got your questions in -- about a week ago now. Is it fair to say, based on your commentary, that there is likely no more clinical data that will be required with this filing?

So based on this set of questions, the questions -- it's fair to say that, but the questions center around various aspects of the product, various aspects of the user evaluation study that we had. So, there is at this time no indication that we'd have to expand that.

Okay. And do you guys have a feel for how long you think -- based on what you've seen now, how long you think it will take you to turn around, some answers to these questions?

I think I'd be premature, unfortunately both our regulatory people were on vacation last week and we got the questions last week. So they've been back in the building now a little over a day. We had a meeting today. So we're going to start assessing that. But I think what's clear from the questions, I think that we're very thoughtful on behalf of the FDA. And I think from our standpoint, we want to make sure we answer them thoroughly and completely and the indication we have from the agency is, they don't want a partial response, they want a full response. So, I think, like I said from our standpoint, we think the questions are pretty well thought out and we feel pretty comfortable with them, but now we just got to assess how much work that involves.

Okay. And are you still at this point planning on an approval or hoping for an approval around year-end?

Keeping in mind that I only control one-half of the equation, we have not, in fact there is nothing in the set of questions that we received and what we believe we're going to have to do for a response that would indicate that year-end is not a realistic target, no.

Okay. And last question, this is for Brian, so am I right in backing into a US OmniPod number of about $29.8 million roughly, [$29 million], $30 million?

Yes, roughly that's correct. I mean, with about 30% growth that implies Neighborhood was about $2.5 million and the other one was about $29.5 million give or take (inaudible).

Okay. And there was virtually no OUS revenue in there. So, is that the number essentially for US --

You mean no international revenue?

Yes. Sorry. The $29.5 million was the US number?

Yes, very much.

Yes.

Okay. All right. Great. Thank you.

Rick Wise, Leerink Swann.

Hi. Good afternoon, guys. This is Danielle in for Rick. How are you?

Hey, Danielle.

Hi. Two quick questions here. First, just to drill down a little bit on the margins, can you talk a little bit about the puts and takes now at Neighborhood Diabetes and how the gross margin profile is going to change longer term versus operating margin profile? And then specifically for the third quarter, I mean that's a little bit of a lower number than we were thinking, can you talk about what's really driving that? Anymore color there would be great. And then I have one follow-up.

Yes, sure. So, I mean, again I mean I think from the overall, we're looking at the -- if I just break the pieces out. If you look at OmniPod, we think we're going to continue to probably be in this 48% to 50% range for the third quarter, it's basically where we've been kind of bouncing around and there's nothing to say that's probably going to change too much over the next three months as we think about Q3.

With Neighborhood, we cleaned up a couple of things in June through the P&L that needed to be taken care if that would have hit the margin lines. So, their margin is a little bit lower in June than probably originally thought. But we still feel they're going to probably be in that 30% to 33% type of a range for the back half of the year. So, those are the main pieces of it. As you kind of blend those together, it's how we wind up depending exactly where the OmniPod falls in that 43% to 45% overall.

Clearly, part of the goal here is to be able to drive our operating margins higher by doing this acquisition. And a lot of that is predicated on exactly when we're able to start the cross-sell opportunities for our OmniPod base specifically. We're working pretty hard right now on getting contracts amended. We've got a few of them already done and we're in active discussions with an awful lot. So that process is ongoing. It's probably premature to think that's going to have any real impact in the back half of '11, but certainly can tee us up for 2012 as we continue to drive those margins.

With all that said, again excluding out these non-cash expenses that we talked about and certainly one thing that's a little bit different from when we talked back at the beginning of June is we've now done all of the valuation work related to the Neighborhood acquisition and we [wanted for the] more sizable customer asset than we thought, which needs to be amortized in at this $1.7 million per quarter rate. If you think about the $6 million of non-cash expense that we have, we feel like we'll be at break-even before the end of the year.

Okay. That's super helpful. Thanks. And just a follow-up on that question. So when we think about the gross margins specifically and when you could hit break-even, I mean I know you guys have talked about 65% to maybe even 70% with the next gen Pod. Does that number look more like 60% to 65% longer term and you can hit break-even then given the better sort of operating expense and operating margins from Neighborhood and the cross-selling opportunities. How do we think about that?

I mean to be clear, again, we're projecting that we'll effectively be at kind of again operating cash break-even, so we won't cover all of those. Non-cash expenses by the end of the year, we're in the ballpark here. That being done off the current OmniPod, there is no expectation still of EROS effectively in the second half of 2011 numbers. So we think we're basically there, up from where we are, absolutely no change from our expectations with the next generation Pod, we still feel that's got a 65% margin profile based off of our US dollar, $28 per Pod rate. Obviously, we're not going to have those kind of gross margins internationally, but here in the US we absolutely still feel like we're on track for that.

Okay, great. And then one more follow-up if I could. Given the recent sort of economic data coming out, I mean, clearly the common economic recovery seems to be at a standstill or maybe even getting worse. How do we think about the potential impact of the economy going forward? You talked about referral momentum heading into Q3, should we be worried about anything there and impact from a potentially worst economy second half '11, early 2012? Thanks, guys.

This is Duane. I think a lot of the economy obviously doesn't help. I would tell you, as we're going into Q3, I mean we think we're on track to what we've seen in previous years and the progress we think we ought to be making. So, I'm not going to sit here and tell you the economy is impacting our business at the moment. Obliviously, if it doesn't get better, I assume long term it's going to impact everything. But we have not -- I can't sit here and say, referrals are down and I mean, we still feel pretty good or -- we still feel pretty bullish about where we are and what's going on. But like I said, obviously, a long-term negative economy impacts everybody. So no one's going to duck that bullet.

Okay. Thanks, guys.

You're welcome.

Ben Andrew, William Blair.

Hi. Good afternoon, guys. Brian --

Hey, Ben.

Hi, Ben.

And Duane, just wanted to clarify one thing, kind of going forward, are you going to be giving us specific guidance next year relative to your thoughts on OmniPod or are you going to be giving just one revenue number?

I guess our initial reaction is this is kind of a little bit of a test period for us. But as we start merging these contracts, we've already merged like one contract and it's starting to get -- very quickly, it's starting to get blurry. So, the safe bet for me to tell you today is that come next year, we'll probably be doing one number period, and we'll give you some guidance on the margin in terms of what that blending looks like. But I could see how this -- we're trying to get to one -- kind of one payer number, we're trying to do a bunch of different things. So, the safe answer for me, [it would tell you I believe it'd be one].

Okay. And then, Brian, in terms of your full-year guidance, is there any change to your expectation for Neighborhood Diabetes revenue in the back half compared to where you were when the deal was announced?

No, I mean we -- as you recall back in June, we upped basically the bottom and the top of the guidance by I think $27 million on each side and they're eventually looking like they're right there for the settlement period.

I mean what were the one-time things in the quarter, maybe if you can grow through them both the Gen2 gross margin and you said you cleaned up some stuff on Neighborhood.

I mean, it's a little bit of just cost of sales cleanup with Neighborhood. But ultimately the other transaction expenses were certainly big. I mean if you look at the detailed P&L, you can see that we push an awful through the G&A line here in Q2, which is comprised of the transaction expenses relating to the Neighborhood acquisition, some expenses related to the concurrent public offerings that we did, the professional fees related to those things, as well as the first month worth of amortization expense for this customer asset that we were talking about. So, really part of the reason, if you think about -- what I would try to want to be very specific here is we talk about the back of the year.

We look at our operating expenses ongoing to be right around this $28 million number. And roughly that would break down somewhere between $4 million and $4.5 million of R&D expenses. We continue to think about getting the next generation Pod approved. Probably around $10 million at the G&A line with the full quarters' worth of Neighborhood in there and somewhere between $13 million and $14 million on the sales line. So [just to give] you some pretty good color.

So that's helpful, thank you. And then as you think about some of the other things in development, any change to time frames on your integrated product with DexCom? It sounds like your regulatory process here is gating that, but no change there?

No, right now, no change. I mean we're still looking for the first half of 2012.

Right. And then, Brian, I guess one more record-keeping thing. Is there any Abbott revenue in the quarter at all?

Yes, there is -- again there's -- specifically talking about the Abbott revenue related to the integrated PDM, I think it was around $1.3 million in the quarter.

Okay. And then I guess last question. If you think about either year-over-year or sequential patient add numbers, what was your information content there? I mean did you see a nice pickup sequentially coming off of the weak Q1?

Yes, it was a step-up -- I'm struggling to remember the exact numbers, but it was a clear step-up at the referral swaps. So, I mean, like I said, it was a definite uptick on where we were.

I'd say the level of growth from Q1 to Q2 in overall patient comps, it's probably pretty similar to the level of growth that we saw last year from kind of Q1 to Q2. So, we really got out of that seasonality hole, if you will, come the end of February and then March is starting to pick back up. For us, we really saw all the insurance deductible issues that impacted the first quarter, absolutely impacted the first quarter. Those did seem to normalize for us in Q2. I want to tell you there is none, but it didn't seem like any much of a different type of percentage than we saw a year ago.

So, that for us was relatively positive, we're happy to see that.

Great. Thank you very much.

John Putnam, Capstone Investments.

Yes. Thanks very much. Brian, I was wondering if you could quantify what it -- the cost of the convert and buying back the other one, can you give us a more specific dollar amount?

Well, so we effectively repurchased $70 million of base value convert. We did that at a rate of effectively $121 million or $121.5 million. So to retire that $70 million cost us $85 million in total. Obviously, the things that we get, [part if I do in that] were three years of extended maturity. We dropped the interest rate by about 1.5% a little bit more and we upped the strike price by about $5. Beyond that, the overall expenses, which get blended into the P&L, as well as then captured as part of the debt discounts, have probably been in the overall range of about $6 million in total. Couple of million of that going through the P&L and then the rest of it going through the balance sheet and coming in over time.

Great. And with respect to the third quarter revenue, we're looking at a pretty large sequential increase. Am I assuming that other than the normal kind of growth domestically, the rest of it is international now that the CE Mark has been granted?

Probably three parts of that in total. The first is we'll obviously have a full quarter worth of Neighborhood versus just one month. So that's a significant piece of the overall uptick from Q2 to Q3. Certainly still think that the US business is doing very well here and, as Duane pointed out, referrals are strong and we're feeling pretty bullish about the US. So that's a piece of it. And then international as well. We're working with Ypsomed, as Duane noted, on exactly kind of commercial launch plans and as such. I know both teams are going to continue to kind of get together over the coming couple of weeks to be able to hammer that all out. So, unknown exactly of how much will shift between Q3 and Q4. But we fully expect that we'll have countries launched before the end of the year.

Great. Thanks very much.

Bill Plovanic, Canaccord.

Great, thanks. Good evening. Can you hear me?

Hey, Bill, yes.

Hi, Bill, how are you?

Great, fantastic. A couple of questions to beat the dead horse on the clinical -- on the 510(k) in the US for the EROS. Do you think that you're going to need any more clinical trials? Are you going to have to enroll anymore patients or is this just answering questions?

Based on what we have received today, once again for me to put words in the FDA's mouth, but based on what we have seen in this list of questions, it's all about answering questions.

Perfect. And then just a little color on attrition rate ASP?

Yes, sure. So, attrition rate basically [we're at 10%], so right between kind of 9% and 10%. I think it's probably six or seven quarters in a row that we've had an annualized attrition in that range, so really no movement at all. Same thing on the average selling price side, still seeing a US average selling price per Pod of about $28.

Okay. And then on NDI, have you had any change in the outlook? I mean, I think originally -- I know you answered this, but we are looking for like a 15% reduction in revenues. Is there any reason to believe that maybe as we head into 2012 that that might not be the case, that you'll hold on to that business?

Around the comps you mean, right?

Right.

Yes. So, I mean, we've had conversations, I'll let Duane kind of provide a little bit more color and we've met with the other pump manufacturers and worked it through with them. I would tell you that not surprisingly, pretty much the day that we announced the acquisition was the last day that we saw referrals for a while from various companies, but I'd say slowly we're starting to see a little bit of that referral volume pick back up. And we'll kind of see where it goes and I'll let Duane add more color [if you want us to].

Yes. No, Bill, look, I think one player is pretty comfortable with looking at another opportunity and the other player -- we're still kind of in the trial period with it. So I think we have some potential upside in there. Let's put it this way. I think the guidance and how we looked at the world was the worst-case scenario, I think it will be better than that. How much better, I still -- it's tough to guess.

Okay. And then just -- you got a lot of moving parts here. Just curious like what do you think the D&A will be on a quarterly basis going forward and what kind of your stock comp is for Q3, Q4? I'm just trying to kind of run an EBITDA number.

Yes. So again, I think in total, those things will be about $6 million. My guess is they still split pretty much $3 million and $3 million. So depreciation and amortization combined will be about $3 million. Like I said, the trade name intangible asset, certainly that valuation work hadn't been done at the time of the acquisition was a little bit larger than we expected. Sound on cash, it's not really any big deal, but that will flow through the P&L at about $1.7 million per quarter. Depreciation has been running off the cash flow between $1.2 million and $1.5 million. With the next generation Pod coming online, that will pick up a little bit. And then the rest will be stock comp.

All right. Great. That's all I had. Thank you.

Greg Chodaczek, First Analysis.

Hey, guys.

Hey, Greg.

Hey, Greg.

Couple of quickies. Just a couple of cleanups. Brian, you mentioned $10 million G&A, including Neighborhood, for next quarter that's just an estimate. What was the sales number again?

It's probably somewhere between $13 million and $14 million.

$13 million, $14 million per quarter, including Neighborhood?

Yes. So, all in $13 million to $14 million on the sales line, about $10 million on the G&A line and probably we're figuring $4 million to $4.5 million on the R&D line as we work through the next gen approval.

Okay. And looking at your revenue guidance, does that include any outside of the US revenue, any international revenue at all in your guidance right now?

Yes, absolutely. I mean, we had international revenue, albeit immaterial last year. And we'll have -- and we have international revenue now. We certainly as we talked about last quarter, we had a little uptick from Ypsomed in our Q1 number. As we launched those new markets, GlaxoSmithKline should hopefully be launching here in the third quarter. We shipped them some product in Q2, didn't recognize any of it, because they don't have the reimbursement approval yet. But yes, absolutely there's international expectation baked into the $152 million to $158 million.

Okay. When you say insignificant, less than 5% of revenues?

Yes, definitely.

Okay. And regarding Canada, is that a new OmniPod or an old OmniPod?

That is the current version of the OmniPod will be what they launch in Canada.

Okay. I think that's about it. Most people got line and Duane, I'm losing my mind. Duane, (inaudible).

And (inaudible). Thanks.

Yes, well, I'm not going to go there. Thanks guys, we'll talk later.

Thank you, Greg.

Thank you.

Jonathan Block, SunTrust.

Thanks, and good afternoon. Maybe just two or three questions. Obviously, congratulations on the approval, the CE Mark. Just maybe a question on the timing. You got that done, but I think in your comments you mentioned a late 2011 launch and maybe you can just walk us through why later this year and what did you have to get done until you launch the next gen internationally?

Sure. So I think, the first thing is we're working with Ypsomed to determine which countries they want to launch in and then that's going to dictate, because what we don't want to do is have a bunch of different products. So we want to go into the country, we want to convert the installed base, we want to kind of go and clean as quickly as we can. The margin profile of the product is such that we get all their margin back to second quarter that we're in the country, so that's number one.

Number two, on the manufacturing side, we got to get the plant in China up to a point where we're comfortable that it can produce sustainable quantity and I would tell you we're probably 30 days behind where we thought we'd be. Charlie and his guys are all going to be moving over there in a week or two to get it back on track. So, we're a little behind, and I think it's a twofold process. One, we want to make sure we have the right strategy and the right messaging to the various countries. And two, once we go in the country, obviously, we want to be really confident that we can sustain it with good quality product and the volumes that we need. So, we're just kind of hedging our bets a little bit. There was nothing required from a CE approval process that we need in order to get it. It's all in our court now.

Okay. Helpful. And then, Brian, to your point on guidance. Really your guidance reflects any of those maybe startup cost of getting the next gen going from a manufacturing perspective, but any revenue associated with that would be upside for the balance of '11?

Correct.

Okay, great. And then I know it's early on Neighborhood, but maybe when you take a step back, when you announce a deal there was a lot of different opportunities on the cross-selling, I mean anything from a customer list to selling pumps and strips, et cetera. And maybe you are at least a couple months later, maybe if you can just detail for us what get's you most excited long term on the cross-selling opportunities when you look out into '12 and '13?

This is Duane. Look, great question. I think we're still very, very excited about the opportunity to make our patients' lives significantly easier by buying everything. We've done a little survey, most of our patients are thrilled with the idea that they could kind of do a one-stop shopping with the caveat. And it's a caveat and this is just a part we have to get right that they don't want to pay more, and they don't want to get 14 different bills, because we're using different payer numbers. So, we're very excited I think this will bring our -- we kind of gave you the patient referral numbers that people -- that kind of responds to a survey on when they recommend this product and I think this is going to make their number even stronger. So I think that's a significant opportunity.

I think what we're also pleased with, what Neighborhood has is we believe they have some really kind of interesting and exciting clinical work, that says we can help drive by using some of their methods and training. But we have the ability to help drive better outcomes. And I think as time progresses, for any healthcare company, any device company, that outcomes ultimately are going to be the golden test on how successful ultimately [they're being]. And we like what we see, we like the basics of what we see.

We think there's opportunity that we can bring to them in terms of negotiating some of these contracts that over time we might be able to get a little bit better margin for them on some of the supplies and other things they're doing. So, look, we haven't seen anything that would lead us to give even a second-guess, our decision. And we're pretty excited about it and we really want to -- for us the real key things, we really want to get this integration done, put everybody on the same kind of payer number, make it smooth and easy. And then, I think we'd be in a really, really good spot to push this thing forward.

Perfect. Thanks for that. Duane, maybe one last one and, Brian, maybe we'll follow up offline on this one, but just when I look at the OpEx, previously -- correct me if I'm wrong, but previously the guidance was $21 million and $22 million, sort of all in OpEx and that included, I believe, the non-cash component of the one, two, three. Now you're moving into roughly $28 million, but I think in the incremental $6 million, you're moving sort of non-cash into this $6 million. [Where I'm going with is] did you increase the underlying cash OpEx by $1 million to $2 million from your prior guidance, if that makes sense?

Effectively , yes. I mean, we -- the way we looked at it -- when we look back to June [we refrain that that] we weren't going to change that op loss range that we had, but we excluded our transaction expenses. From the June thing, two things changed. One, we finished on, like I said, all the valuation work and we came up with this amortization expense that was an incremental for us. I mean I'd tell you $1.7 million per quarter was just a lot bigger number than we were thinking that was going to be. Again, it's all non-cash, but it is what it is.

The second thing is we obviously did the convertible. So we added the second transaction on at the end of June and that caused some incremental expenses to go through as well, that some of those were absolutely cash flow [events]. So again, I think if you think about this going forward, what we're effectively seeing is about $12 million in non-cash expense, effectively means somewhere between $1 million and $6 million of cash expense over the back half of the year.

Perfect. Thanks, guys.

Raj Denhoy, Jefferies.

Hi, guys. It's Amy in for Raj. How are you?

Good.

Hi, Amy.

I was just wondering if you could touch on the sales force just a little bit and then, if you will, could detail out any plans on back half of the year, if you are going to look to add I guess to your -- organically to your Insulet sales force or if you're really going to be relying upon that Neighborhood Diabetes sales force to provide a little more voice moving into the next gen Pod?

So, I think the answer to that is both. When we get into the end of the third quarter here we're hoping we have the next response from the FDA, I'm not guaranteeing it, but we hope we have the next response from the FDA. And based on those questions, I think we will -- if they give us a clear indication that we're on track that we will immediately start recruiting to increase the sales force probably about 50% of what we have, so we go from 50 sales people to about 75. And then you dovetail in the Neighborhood sales force should bring this up to a number of about 100 salespeople. We think that's right number.

Now in the mixing and matching of this, we believe it's going to be a) creating more territories or b) it's going to be taking existing territories instead of having a team of a salesperson and a Certified Diabetes Educator, we may bring a third person in there who becomes a Relationship Manager. So, we'd have one person hunting, one person maintaining the territory, and then the Certified Diabetes Educator taking care of all the clinical need to that particular territory. So, it's going to be a mix and match on how we hold it, but there is absolutely no question on that. I think we feel very comfortable that we're on the right track here. We will increase the sales force.

Great, thank you.

And I'd just add, [we're baking] a little bit of that thinking of Q4 starting to do a little bit of that recruiting and hiring into the numbers that I gave you. So, (inaudible) of our OpEx in any given quarter. We started to factor in that we might have some partial quarter or so of some new people joining us in the fall or the late fall, early winter.

Great. Thank you. And then one other question, just with as you all work through the integration, do you all have a time frame in which you think you will be able to start supplying your existing patients with scripts and whatnot through one-point ordering?

Yes, our goal -- we hope to do it sooner. But our goal right now in our timeline is come January 1, we want to be in a position to do that seamlessly. Not to say we won't have some plants that will able to do that, but we'd like to be as an organization and have everything in place. So, come beginning next year hopefully with the launch of the next generation product, we have a whole suite of products, we have one seamless message in ordering process and customer service process for everybody.

Great. I think everybody else covered all my other questions. Thanks so much.

Thank you.

Thanks, Amy.

Steve Lichtman, Oppenheimer.

Thank you. Hi, guys.

Hey, Steve.

Hi, Steve.

Duane, you've talked about moving the Neighborhood model across the country, can you talk to us now with a couple months in, when you think that process can start and what would it look like, what would sort of implementation of that look like in different regions of the country?

So, here -- not to tip money into anybody, but we have a region of the country in which we've just gotten our product approved for Medicaid. And so we think that'd be the perfect region to start some very large diabetes-related institutions and we think that is going to be the perfect territory, so we'll have Medicaid, we'll have a presence in several institutions to OmniPod.

Our current sales force is being limited because we've been successful on a couple of key institutions and it's taking a significant amount of their time. So, this Triad models that I described to you, we'd like to take the Neighborhood model, land them in some of these key institutions, show the hospitals how we can save them money, how we can better serve the customers and that will have a twofold purpose and the fact that we have Medicaid in all the states, it really makes it easy for us to accept just about any single patient, right?

I mean we'd still struggle with the Medicare, both Neighborhood [as ways] around we believe that could satisfy that. But we'd be in a position where we could offer these institutions, just give this any of your diabetes patients, type I, type II, whatever (inaudible) we'll help you with the paperwork, we'll take some of the burden off you and it will also have the opportunity for our kind of hunter sales guy to be able to get out from under his own success.

So we hope to have that in place here by the fourth quarter. We have one specific area with the contracts lining up nicely. Like I said, we have Medicaid, so I think -- I'm hoping here in the fourth quarter we'll be -- we'll have rolled that model out to a significant geography. When I say about rolling out, just to be clear though, we're going to count a rightful shot how we roll out to Neighborhood. I'm not looking to go across the country, I'm looking to go to major diabetic-centric areas, you could take Colorado as an area, if you look at the types of institutions that are there. And it has the benefit of offering all the Neighborhood services, frees up endocrinologists' time, hopefully drives better outcomes, we believe we can do that and then it also frees up my salespersons' time to go out and get outside some of the success that they've had.

Because we do have I'd tell you the top 20% of our sales forces, they start the way under the burden to being successful. I mean, you start getting a significant amount of patients out of an institution or a particular physician, the expectation is you can spend more and more time there, and so part of what we're trying to do is expand that team. So like I said, it'd be a rifle shot approach, but we have three or four areas that we believe are right to try at, this one I described to you, we do have all -- we believe we have all the right contracts, we're still getting them all signed up. But we've been granted the hunting license here, we just got to get all the painful work in place. And we think once we have that, that will be the first real kind of test for us and it should be pretty exciting.

Okay, great. And then here's my question, just on international. Just from a modeling perspective, Brian, I guess, in the third quarter, should we assume relatively flat revenue as we wait sort of the full launch of next gen? And also are you still expecting a sort of a 10 to 15 point increase in gross margin internationally as well from the base there with the next gen?

So specific to Q3 international, we've effectively baked it into the overall revenue guidance of $44 million to $46 million. Again, depending on exactly what those roll-out schedules look like and exactly when we shift, that can move the number a little bit within that range. And we do expect that Glaxo will launch in the third quarter, albeit it will be the first few days of a launch. So it's not going to be anything material by any stretch to start out.

With the gross margin for the second generation Pod, we share a little bit of the benefit of that Pod with Ypsomed. They've certainly been investing in the relationship from the beginning with the level of operating expenses that they've incurred in the beginning part. So, we give a little bit of that back to them, but again, consistent with what I think we've said since the day we signed the deal, the way that deal is structured is gross margin ultimately in the 20s and ultimately driving operating margin in the 20s.

Okay, great.

And then ultimately moving towards 30%.

Okay, great. Thanks, guys.

Suraj Kalia, Rodman & Renshaw.

Hi, guys.

Hey, Suraj.

Brian, forgive me if you guys have mentioned this. But maybe you can shed some color. The Neighborhood Diabetes contribution was roughly $3.2 million or so in the quarter. And if I look at the press release last, it was about a $62 million run rate. I'm sure there is a connection here, but if I extrapolate to what the current run rate is, it has come down. I'm probably missing something. Is it a reason why the Neighborhood run rate is a little down?

Yes, absolutely. So two things. So the first I think, you earlier in the call had mentioned that the Neighborhood revenue is about $2.5 million in the quarter. What we had effectively guided when we had updated our range back on June 1 is we thought it'd be somewhere in that $2 million-ish kind of a range or so. And basically, as we discussed back on the June 1 call, when we look at their overall $60 million run rate business or $62 million run rate business, approximately 15% of that business, a little more was ultimately related to pumps and some pump supplies that were going with new referrals for our competitive products.

And so the question that was going to -- that was pretty clear was on day one especially and we saw this happen was that that stream of revenue was effectively going to end or at least end for a period of time. And so we could go through and talk to the folks at these other companies and tell them that for them at least business as usual and we have no problem filling their product with a customer and we're not going to be trying some crazy kind of a bait and switch. So I think as we talked back then, had put the run rate of that business back into kind of the low-50s type of a range. So they're exactly on track with where we had previously discussed.

Okay. Fair enough. Brian, can you shed some color on at least to the extent that you can right now? On Neighborhood what are -- obviously, we have made some assumptions on G&A, sales and marketing and R&D. Can you shed some directional color in terms of how they stack up relative to organic Insulet right now?

Well, so again and we said that the operating expenses for the month of June for Neighborhood were around $1.5 million. So you can extrapolate that out for a full quarter that's going to be probably in that $4 million to $4.5 million per quarter range. And as I talked before, I kind of gave you the breakout of the $28 million. So I think that's certainly where we think we're headed. As Duane pointed out couple minutes ago, our expectation is that, as we gain -- get closer to the next generation approval for the Pod, then we will add somewhere in the neighborhood of 25 sales folks between the Insulet and Neighborhood models. My guess is starting in Q4 and that probably continues into Q1 and even early Q2 before all those bodies would be hired.

Okay. Thanks for taking my questions, guys.

Sure.

Bill Plovanic, Canaccord.

Great. Thanks for taking my follow-up. Just a point of clarification. You mentioned that the manufacturing on the EROS was a little behind, maybe 30 days behind. Just curious as to why, what's the challenge and how do you fix that?

Sure, Bill, great question. So I think it's kind of twofold. Some of the equipment didn't arrive on time and some of the equipment did arrive was not calibrated the way we assumed it to be calibrated. So I think given that we have a full-blown facility over there and we've had a pretty good relationship with our partner, we kind of backed off a little bit and have come to the conclusion, we think we need a little bit more direct supervision of that. So nothing -- there's no showstoppers.

Like I said, I think some -- we were under the assumption some of the POs have been placed, it turns out they've been placed later than we thought. And then some of the stuff that they come in was a little out of whack. So like I said, Charlie and his group are, I think they're going over there either the second or third week of August and they're going to land there and they're all bringing chopsticks and they're going to be there for a while.

And then for Brian, on the EBITDA positive, I think you mentioned, is that in almost Q4 or as you're exiting the year?

I'd say by the end of the year, but consistent with how we talked about gross margins last year, I mean I'm hopeful that the number in Q4 will be positive or pretty darn close.

Great. Thank you.

Greg Chodaczek, First Analysis.

All right. Just a couple of quickies. Brian, with the sales numbers for the quarters, for the next two quarters, I'm assuming come 2012 when the new Pod is out there, those numbers go up. So the '13 to '14 is without a big sales ramp, is that correct?

I think you might have lost me a little. I mean we obviously -- I mean --

You're doing some hiring.

Yes, we're going to do some hiring. So certainly we think that more feet on the street here in the US is going to help us accelerate the growth with the next gen Pod, absolutely. We're not [prepared to give out those numbers].

Okay. And when does that hiring start?

We're going to start -- well, so again assuming that we're progressing through the FDA processes we thought, then we'll probably kick off some of that hiring in Q4.

Okay.

And just to give you some clarification, so if you kind of look at salesmen's kind of compensation, most of these guys will all hang in there to get whatever their year-end bonus was. So we're hoping -- our kind of time frame is we're hoping we'd have the staff where we wanted to be early in Q1, we'd kind of be sometime in Q1, but it's always tricky with the timing on year-end bonuses for a lot of these guys.

Okay. And with the Neighborhood acquisition, you said you picked up about 25 salespeople, did any of those salespeople, I know it was only for a month, but did you see any incremental sales coming from these guys or is it just too new right now?

Absolutely too new.

Okay. Would you see them picking up the pace in the third quarter or is this later in the year and more first of next year?

I think to the extent we're talking about (inaudible) here, I think the way we're looking at this is we are teeing everything up, we feel pretty comfortable about the back half of the year kind of be in the status quo when we're working our way through all this. And then the real game plan is I think when we sit down and give you guidance for next year, I think it will reflect what we believe we can turn this into.

Okay. Thank you for the clarification. See you, guys.

See you, Greg.

Paul Nouri, Noble Equity.

I was wondering if you could give us the breakdown on Pod sales in the quarter versus starter kits sold?

We don't break out typically that way or give kind of specific quarterly customer count numbers, but again the two pieces, one, we've said in the past we're way over -- we're over 25,000 customers. So you can think about that base from a reordering perspective and kind of probably back your way into it a little bit. But beyond the breakout that we gave of US or Neighborhood versus Insulet, we probably don't break out any further detail than that.

Okay. Thanks.

Sir, you have no further questions.

Well, I'd like to thank everybody once again for joining us, and I kind of want to reiterate we made strides in all facets of our business over the last three months. With CE approval, our ongoing work and feedback from the FDA in the Neighborhood Diabetes acquisition, we're really excited about the back half of the year and then 2012. And we look forward to updating you on our progress. Thank you everyone.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect.