Insulet Corp (PODD) 2011 Q3 法說會逐字稿

Good afternoon. My name is Christy and I will be your conference operator today. At this time I would like to welcome everyone to the Insulet Corporation third quarter 2011 earnings conference call. (Operator Instructions) Thank you. I would now like to hand the program over to Mr. Brian Roberts, Chief Financial Officer. Please, go ahead.

Thank you. Good afternoon, everyone and thank you for joining us for our third 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 as to today's press release at myomnipod.com in the "Investor" section.

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

Thanks, Brian. Good afternoon, everyone. The third quarter of 2011 marked a significant period of progress for Insulet, as we continue on our mission of making it easier for people to manage and live with their diabetes by using the OmniPod System. Customers frequently tell us that they put their trust in confidence in the OmniPod and we take that responsibility seriously. It is what inspires us to continue to innovate, grow, and improve what we do each and every day.

In the third quarter, we recorded revenue of $44.6 million. This represents a 75% increase over the prior year's third quarter and approximately a 30% increase excluding the impact of Neighborhood Diabetes. Growth came from all markets, as our U.S. sales team had an excellent quarter and our international partners continued to drive demand.

Over the last few months we have added regional sales managers, expanding from 5 to 10 regions and replaced sales representatives in some underperforming territories in order to boost productivity. These changes have delivered immediate results, with increased referrals and shipments in these territories in Q3.

Additionally, we launched an online patient information feature on our website. This allows potential customers to submit information directly to our reimbursement intake team as a means to ascertain their level of benefits coverage. This "Am I Covered?" feature helped drive an increase in referrals and has quickly become an excellent marketing lead engine.

Growth has also come from international markets. First, we're pleased to announce that the OmniPod is now available in Canada through our partner GlaxoSmithKline. Final approvals were received from Health Canada in the quarter and we welcomed our first customers north of the border to the OmniPod family in September.

Last week the launch of OmniPod received an enthusiastic response at the Canadian Diabetes Association conference. Yesterday, GSK issued a press release formally announcing the launch. Both companies are excited about the potential for the OmniPod in the Canadian market.

We also continue to be pleased with the progress of our European partner, Ypsomed. In each of their launched countries, we are seeing significant month-over-month growth as they increase their sales penetration in key markets such as the UK, the Netherlands, Switzerland and Germany.

While our Q3 growth was solid, we know we know we could have achieved even better results. In the last week of September, we experienced an unexpected disruption in OmniPod availability, which resulted in our being unable to ship approximately $2.0 million worth of reorders in the final days of the quarter.

The disruption was caused by a supply issue with a specific component, which resulted in a temporary reduction in manufacturing shipping. Our manufacturing, engineering and quality control teams, along with the component supplier and Flextronics, worked tirelessly to resolve the supply issue. As of this week, we have cleared the reorder backlog and our manufacturing line in China is back running at the normal levels of production.

Let me now turn to our next generation OmniPod. The new OmniPod maintains all the features that our customers enjoy, such as no tubing, automated painless insertion, and discrete waterproof design. The next generation OmniPod accomplishes all this in a package that is over a third smaller, a quarter lighter, and a third less expensive for us to produce.

In September we participated with our partner, Ypsomed at the European Association for the Study of Diabetes Conference held in Portugal. At the conference we introduced a newly CE Mark-approved next generation OmniPod to the diabetes healthcare community. We were overwhelmed with the positive responses received.

At the event, we spent considerable time with Ypsomed on defining the launch strategy for the new OmniPod. Given the Q4 holidays, we jointly determined it best to plan for the launch to occur in the first quarter of 2012. We are working with Ypsomed closely on the commercial rollout strategy, product needs, and other details to ensure a smooth transition. We plan to make our first material shipments of the next generation OmniPod early in the new year.

We continue to make solid progress in the qualification of our manufacturing line in China for the next generation OmniPod and we're encouraged by the results. The production will commence this quarter as planned.

Turning to the United States, we filed a 510(k) submission with the Food and Drug Administration back in May and received our initial set of approximately 50 questions from the FDA in August. The great majority of these questions focused on providing additional detail and clarifications across several areas, such as the PDM software, the integrated glucose meter, the user guide and other testing-related questions.

In recent conversations, we determined that some of the additional testing is required. We commenced the testing and anticipate filing our next response by Monday, November 21st. While this process has taken us a few weeks longer than expected, we are confident that the further clarification of the agency's questions will help us reach the ultimate goal of an approval in a more expedient manner. Although we do not control the FDA's timing, we expect an updated response from the agency by the end of the year.

Turning to our acquisition of Neighborhood Diabetes completed in June, Q3 was our first full quarter including their results and to date. Neighborhood Diabetes is proving to be a great strategic fit for Insulet. As a key distributor for diabetes products, their business compliments our sales of the OmniPod insulin pump, with an expanded product offering and brings a higher level of customer service to our approximately 90,000 combined customers.

Neighborhood Diabetes has primarily differentiated itself from other distributors by leveraging a high-touch service model focused on training and educating their clients. By investing in these support services, they've been able to demonstrate to healthcare professionals and insurers an increased level of client adherence to the therapy, resulting in a reduced cost of care.

In two recent managed care studies, providers compared the number of inpatient hospital admissions for people using the Neighborhood Diabetes services versus those who do not. In both studies, the Neighborhood Diabetes customers had approximately 30% fewer inpatient hospital admissions than the non-Neighborhood Diabetes group.

Based upon these studies, Neighborhood Diabetes partnered with an insurer focused in Central and Western Pennsylvania to launch a strategic program where Neighborhood Diabetes will contact the plan's customers, offer their services, and explain the benefits of adhering to a prescribed therapy. In just the first 90 days of the program, Neighborhood Diabetes added more than 1,500 new customers.

In addition, they have recently received approval from two other significant insurers to launch similar plans in early 2012. These plans will expand the Neighborhood Diabetes footprint into new geographic markets, including Texas. We believe these strategic programs have the potential to dramatically increase the number of diabetes customers served by our new Neighborhood Diabetes subsidiary in the coming quarters.

We continue to focus on the integration process with the aim of assuring that we are giving our customers the right experience. We are working to streamline our back office capabilities to provide us the ability to offer Insulet customers additional diabetes products such as testing supplies. We are modifying payer contracts, creating the infrastructure to support these efforts and ensure that we provide our customers the highest levels of customer support.

Our integration efforts remain on schedule. The majority of the infrastructure work will be completed in the coming months and we expect to commence the selling of additional products to Insulet customers early 2012. I've been very pleased to see our OmniPod and Neighborhood Diabetes sales reps in overlapping territories start to coordinate efforts to improve efficiency. We believe this increased collaboration will enhance our reach, frequency, and quality communications with the endocrinologists.

As we previously discussed, we intent to increase our sales force to more adequately address the top 5,000 prescribing endocrinologists in the U.S. once the next generation Pod is launched. This acquisition, with its high-touch model will enable us to support that expansion. With our confidence in the approval of the next generation OmniPod growing and the integration efforts on track, we expect to hire approximately 25 additional sales staff beginning this quarter. We expect that most of these folks will join Insulet no later than the first quarter of next year.

Finally, with our current and next generation OmniPod our primary areas of focus, we continue to be a leader in innovation in the diabetes industry. Last week the Juvenile Diabetes Research Foundation announced success with the first automated real-world artificial pancreas study for people with Type 1 diabetes.

This artificial pancreas project study, which used the OmniPod system as an insulin pump of choice, was the first of its kind in which patients were able to control their diabetes using an artificial pancreas system in real-life settings, including eating a meal at a restaurant and spending a night at the hotel.

The study was conducted in parallel experiments by Montpellier University Hospital in France and at the Universities of Padova and Pavia in Italy. We're excited that the OmniPod continues to support these groundbreaking research efforts worldwide.

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

Thank you, Duane.

For the third quarter, we reported revenue of $44.6 million, an increase of 75% from $25.5 million in the third quarter of 2010. The third quarter represents the first full quarter including Neighborhood Diabetes, which performed as expected. Excluding the impact of the acquisition, Q3 revenue increased year-over-year approximately 30% and about 10% sequentially.

As Duane noted, we experienced a disruption in Pod availability in the last days of September, which resulted in our inability to ship and recognized upwards of $2.0 million in incremental reorder-related period revenue in the quarter.

Gross profit increased by 60% to $18.6 million, or 42% of revenue in the third quarter, compared to $11.6 million, or 46% of revenue in the third quarter of 2010. The decrease in gross margin percentage is primarily the result of the Neighborhood Diabetes acquisition. Driven by the testing supply business, Neighborhood margins were near 30% for the quarter, as expected.

Additionally, the manufacturing disruption at the end of Q3 resulted in approximately a 2.0 percentage point drop in overall gross margins, as the lack of supply impacted our overhead absorption rates on the OmniPod.

Total operating expenses for the quarter were in line with expectations at $28.3 million. This includes noncash charges of about $5.5 million, comprised primarily of depreciation, amortization and stock-based compensation. Operating loss for the third quarter was $9.8 million. Excluding the noncash expenses from our operating loss, our third quarter cash operating loss was approximately $4.3 million.

Net interest expense for the quarter was $3.8 million, reflecting cash interest of $1.5 million and noncash interest of $2.3 million. Net interest expense reflects the first full quarter of the new Convertible Note Issuance completed in June 2011 and the associated accounting to old and new convertible notes as a modification to debt. Net interest expense should remain relatively flat at $3.8 million in the fourth quarter.

The net loss for the quarter was $13.6 million, up slightly from a net loss of $12.1 in the third quarter of 2010. The increase primarily reflects the noncash amortization expenses associated with the acquisition of Neighborhood Diabetes. On a per-share basis, the net loss was $0.29 per share in Q3 versus $0.30 in Q3 2010.

As of September 30, 2011, cash and cash equivalents totaled $103.8 million, as compared to $106.7 million at June 30. We continued to demonstrate our focus on reaching positive cash flows with a net reduction in cash and cash equivalents of less than $3.0 million during the period. We believe we have sufficient cash on hand to reach operating profitability.

Finally, let me turn to guidance for the final quarter of 2011.

While we have now resolved the September component supply issue and are back to normal levels of production, the shipping delays will impact our financial expectations for the fourth quarter as customer reorders, deferred from September to October, will not repeat by the end of the year.

We have also revisited our expectations in regards to revenues from Ypsomed. Given the updated timing for the European launch of the next generation OmniPod, we anticipate lower international shipments in the fourth quarter than originally planned, as we work with Ypsomed to manage the amount of on hand inventory ahead of the launch.

After considering these factors, we now estimate fourth quarter revenue of $45 million to $49 million. This equates to approximately $150 million to $154 million for the full year 2011. As always, our highest degree of confidence is to the midpoint of the range.

We expect consolidated gross margins for the fourth quarter between 42% and 44%, as we anticipate absorption issues to continue in the first half of fourth quarter while the production level is normalized.

Operating expenses should remain relatively flat in Q4, in the range of $28 million to $29 million. We expect to record an operating loss of $7.0 million to $10 million in the quarter. Again, this operating loss includes approximately $5.0 million to $6.0 million of quarterly noncash expenses for items such as stock-based comp, amortization of the acquired intangible assets and depreciation.

For the full year 2011 we expect an operating loss of $39 million to $42 million.

With that, let me turn it back over to Duane.

Thanks, Brian. We feel very good about our overall business and the progress we are making. We had another quarter of strong growth in U.S. and have initiated expansion of our sales force.

Our partner GlaxoSmithKline, launched in Canada and Ypsomed continues to see positive momentum in Europe.

We have seen Neighborhood Diabetes get off to a strong start with some exciting strategic programs on the horizon, which will expand their footprint to new geographies and we're on track with our integration efforts.

Our manufacturing efforts in China are back on plan to produce the next generation Pods this quarter and we look forward to submitting our next response to the FDA in a couple of weeks.

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

(Operator Instructions) Danielle Antalffy, Leerink Swann

Afternoon, guys, how are you?

Good.

Good, Danielle.

Just a quick question on the macroeconomic trends you're seeing. So, understanding that this quarter was largely impacted by the manufacturing disruption, you had Dexcom reporting last night and talking about the macroeconomic impact. Did you guys see any impact from the economy?

Do you see any now into Q4? Could that have anything to do with sort of lower OUS sales, particularly in Europe? Can you talk about that a little bit and then how we should think about that with clearly no major recovery, or really any recovery, heading into 2012 how we start to think about 2012 shaping up?

Sure. So, obviously a great question. So, Danielle, I would tell you we're pretty happy with our business and while we thought, I think internally, we guide to the midpoint of the range. That's usually where we feel best. We really thought this quarter we had the opportunity to kind of knock it out of the box here and we had this little hiccup in the manufacturing process. So we kind of came in at the midpoint of the range.

I would tell you it's probably one of the best quarters we ever had in terms of referrals. So we're not seeing it. Look, we're very cognizant of it and we're very cognizant of the health initiatives going out there and reduction of costs. I would tell you at no point in time would I say that we saw any of that in the quarter. We hear it, we see it, but it hasn't impacted our business.

With regard to the international piece, I think it's pretty simple. I mean, we're trying to manage this transition with the guys at Ypsomed appropriately to go from the old product to the new product, the people that saw that our new product, in the EASD were very, very excited about it. So, in that case, and kind of where we're just kind of tweaking the guidance a little bit.

Just so everyone out there understands, that the way most managed care plans work is it's pretty simple. You can have one shipment in the quarter. So the fact that we kind of, unfortunately, shipped a couple million dollars' worth of business from Q3 to Q4, you can only have one shipment in the quarter. So, I mean, that's a real difference. Granted, you ship on January 2nd, but obviously that falls out of the quarter, so that was a couple million just kind of the tweaking that we did here.

And then on the international piece, it really isn't from a demand standpoint. We're just trying to do it so we don't have lots of excess inventory and lots of issues with our partner there, so like I said, I would tell you we are cognizant of the macro stuff. We're watching all the managed care plans, all the discussions going on out there, but there's nothing directly impacted us in the quarter.

Okay, great and then just following up the next generation Pod. I mean, obviously everyone's waiting with baited breath for that. I mean, you've talked about it in the past, your confidence in a potential before year-end approval. Can you touch on that? I mean, has that timeline now, has that slipped at all?

Sure.

And how that would impact how we think about the 2012 ramp in referrals. Thanks.

Sure. Sure, so let me jump to the second piece first. Our game plan from day one, I think we articulated to everyone, is by the end of 2012 our plan would be to try to transition our entire install base onto the next generation Pod. I would tell you, based on everything we have going on with the agency today I do not see any reason to back off from that.

So, where we are with the agency and like I said, the little bit of slippage of time is we submitted in May. We got the response in August and at the end of June or early July the FDA issued new 510(k) IIb guidelines. So we engaged them in a conversation. I'll give you one example, but there's some new twists and turns to what they were looking for. I would tell you I think we're now, based on these conversations, highly confident.

We think we've done all the work. We're just waiting for a couple of reports, but let me give you one example of a little bit of work that we had to do as a result of these new guidelines coming out. And you know our first question was given that we submitted prior to the guidelines, which set of guidelines do we have to adhere to. So we had pretty good dialog with the agency.

And as an example, the definition of a pediatric patient kind of in the old days was 14 and under and then under 14. The 15 and above was considered adolescent. So when we did all the user evaluations, we broke all the studies down in terms of number of patients into those groups. That adolescent group now has -- under these new guidelines it basically has an infant, which is one month to two years. It has a child, which is two years to 12 years. It has an adolescent, which is 12 to 21 and then they have 21 and above.

So we had to resort the data we did. We had to do a few more user evaluations, because there's minimum numbers in each of these groups that you have to do, so given that we weren't driving towards this particular subsegment. So, we had to do a little more work, but like I said, it's all done. We're waiting for a couple of reports. We'll submit it and like I said, I would tell you while it's never ideal we are engaging them as much as we possibly can here and we feel pretty good about what we're sending to them.

Okay, great and then one more question, if I could, on the manufacturing line. I mean, so this manufacturing issue that you guys experienced is obviously with the current generation Pod. If you could just confirm that doesn't spill over into the manufacturing lines for the nex-gen Pod? And if you could reconfirm the timelines that you're sticking to for the nex-gen Pod, that would great. Thank you so much.

Sure. The issue we had was with a five and a half cent part and keep in mind these types of parts at that level we literally buy hundreds of thousands of them. So we noticed it was a non-safety related issue. It was kind of -- we noticed a little uptick in the out of box failures associated with the product, so we stopped the music and went investigating and like I said, we kind of slowed the whole process down.

Not ideal, in terms of short-term shipment numbers, but I think we're all pretty happy. We did the right thing. We found out what the issue is and we moved on. It has absolutely nothing to do with the next generation product. And once again, where manufacturing, we will be manufacturing the product here in the fourth quarter. The error is on the first line and then the next line's coming up Q1-Q2 with the anticipation. Our goal still is by the end of 2012 that we can sunset the old product and have everybody on the new.

That's great. Thanks, guys.

Thanks Danielle.

Kim Gailun, JPMorgan

Thanks. Hi guys.

Hey Kim.

Hi Kim.

So I guess the first question is a follow-up on this manufacturing discussion as it pertains to the nex-gen Pod. So, it sounds like you guys are optimistic that you'll be up and running manufacturing here in the fourth quarter. Can you just tell us where you are today in terms of production on the nex-gen line?

Sure. We are producing components and subassemblies, haven't produced the last final product, because we have to qualify and to the PQQ runs, which was the final qualification. But we are -- the best way I think I can describe it for you, Kim, is we are no longer in the discovery process with anything we're doing. We're just in the refinement process, I mean, so we feel pretty good about it and we're tweaking.

We continue to tweak to optimize what we're doing and the thing that we are doing -- and this is kind of very longwinded answer, but just to give everyone some comfort what Charlie is putting to discipline he's putting in on the next generation product. If you think of the early days of Insulet, we started off with five patients, so we were making -- we can make 100 and then you can make 1,000 a week and do that type of thing.

We do not have that opportunity with this product. So Charlie is holding everyone strictly to a six sigma design and as a result of that, it results in more tweaking than you ever would have done. If we were in the early days of Insulet, we'd be making product now. I mean, that's how far along we are, so like I said, it really is not discovery anymore. It's just refinement.

Okay and so at what point do you guys think you'll be making final product on that line?

It'll be this quarter for sure, absolutely for sure. I just -- with the holidays and stuff my guess is it'll probably be the back half of the quarter, but we will definitely be making it. That's not an issue at all.

Okay and then, I guess, on the FDA piece. So it sounds like I think the last kind of discussions that we had indicated that the hope was to get the first round of responses into FDA in the first half of October and then obviously that's moved out to the second half of November now. And is that due to additional testing on top of what you were working on in early October? Or is it just the timing of the same test that you were working on?

So what it was is at the end of June the FDA issued additional guidance, which didn't exist when we submitted, so what we did is we engaged them in a conversation and said, "Okay, we submitted before this guidance came out. Are you holding us to this guidance? Are you holding us to the guidance that we submitted at the time we submitted that?"

And so the new guidance had -- and I use the example of the various categories of what we would define as an adolescent, right. We defined it as 15 and under, under the old guidance, but the FDA now has like there or four subcategories. So we engaged them in the conversation. While they won't specifically tell you, it was our impression very quickly that we ought to adhere to this new guidance that was coming out.

So we expanded. In that case, we expanded the testing and the only other thing that we had to expand is they have -- in these conversations they brought up, and I do not believe, I could be -- my regulatory guys could tell me I'm wrong on this. But the requirements for the extractable testing, while it doesn't appear they're in writing anywhere, have expanded a little bit. So we've done that testing, too.

So, I would tell you, Kim, our approach has been pretty simple. We've engaged them in a conversation. We want to complete submission and we want to get as much as this done at one time. So when we get the second round of questions and we're not going back, you know all the questions and say well the guidance is this and you didn't do it.

So a couple more tests is really what drags this out and if it was completely under our control, it would have been easy, but you have to go to a couple of these test houses. You have to get in the queue and you have to run this process. So we're just waiting on -- I think we're waiting on two reports.

Okay.

And then we'll submit it. So I would tell you, out of the 49 questions I think we've had in the can, 47 of them answered for a while here, but we wanted to get the other two done, because didn't want to take the chance that we sent in an incomplete submission and they decide not even to look at it or kick it back to us saying it's not complete and we waste time on it. So, like I said, we have them on speed dial.

Okay, so that all said, no change to the pathway, really, here, just a delay.

Nothing. We have not seen and we have no reason to believe, based on the list of questions and like I said, I cannot speak for them, but I would tell you it was a pretty comprehensive list of questions that seemed to cover all aspect of the 80,000-case submission. Okay? And I think the stuff that we're kind of doing that was above and beyond, like I said, kind of came out of these new guidelines that were published the end of June and we asked for some clarifications.

So, but once again, they're the proactive guys; I'm the reactive guy, so but I think we feel, I mean, we feel pretty good about where we are. The next round of response will be a good indicator, but we're working pretty hard. Like I said, I think we've got a pretty good handle on where we are.

Okay, great. Thanks, guys.

Ben Andrew, William Blair & Company

Good afternoon, everyone.

Hey Ben.

Hey Ben.

So a couple of questions. I mean, you talked about the macroeconomic and having a great set of referrals in the quarter. Duane, is there any signal at all, either in new patients or existing, of a reduction in utilization of Pods per patient?

Ben, this is Brian. No. We, again, just given the nature of our model, but it's a three-day wear product and people need to wear it all the time, it's staying pretty predictable. I mean, on average, somewhere between 12 and 13 boxes or so, per year, per the average patient, depending on exactly their usage model.

Understand.

And Ben, this is Duane. The only thing we see on the horizon here is as we get closer to the next generation product that may be the only thing down the road, as we give clearer and clearer timelines, but if there was something. Right now it's not a macro thing from our standpoint. That's the only thing I think we see short-term. That -- if we were to announce tomorrow that we got FDA approval, that could impact peoples' reordering patterns, but other than as Brian described them and it's been pretty consistent.

No, I understand and that would be pretty darn surprising if people tried to save a few bucks by using pens for a couple days month or something like that.

Oh, yes. Yes.

Yes. I mean, what you see is I'm sure patients, over the course of time, I mean, wind up accumulating small little backlogs in their closet and no one wants to necessarily be down to their last Pod, although with our supply destruction that we talked about, we've actually dealt with some of that issue over the last few weeks.

And so our feeling is that some people who have a little bit of extra product on hand for however they've done it will use that up, obviously, in anticipation of the nex-gen Pod coming. But we haven't really seen too much slippage in that.

Okay and then, as we think about kind of the range of responses from FDA, around the end of the year I think it was the timeframe was suggested, what could that be? Could it be a) an approval, b) here's another data request, or c) here's the kind of pathway to a formal approval in x period of time? Is there anything else or can you maybe characterize those three in terms of likelihood or what you expect?

Look, I think, Ben, I think you got it absolutely right. I mean, it's going to be one of those. It'll be one of those three. More than likely, given we're submitting, we'll be submitting some new kind of extractable data and some of this other stuff. I'm sure there will be probably a couple of questions.

But I think as long as -- and the key for us was the human factor is this extractable testing stuff that you have to go outside the building for. I think anything else within that we can respond very, very quickly and like I said. The one thing we are and once again, don't hold me to it because I don't control it, but the one thing we're pretty pleased about is the range of questions that we received from the agency gave us, gives us every reason to believe that they looked at all 8,000 pages, right. They didn't just get bogged down in user interface and say let me just sent this off to them and I'll look at the rest.

No guarantee of that, but it is pretty encompassing. It appears that they looked at every section and they have a series of questions. So, I mean, in a perfect world they'd come back and say you gave me all the right answers. We're going forward. And then it's probably the smallest possibility out of all of them, but to the extent it's more clarification, more understanding, more labeling issues, as long as it stays inside this building we can respond very, very quickly.

So our hope is by reading all the new guidance, talking to the agency about potential guidance that they may be thinking up coming down the road and incorporating that into our response, I mean, we responded to stuff that doesn't even exist today. So, incorporating all that in, hopefully we're in front of the curve and it's just up to the people inside this building if we do get any more questions.

Okay and Brian, if I'm doing the math right, it looks like Neighborhood Diabetes is maybe $13 million in the quarter and I think we has talked about a number closer to $12 million, backing out the pump guys and whatnot. Is that a good base to grow off of into what's typically a strong fourth quarter and then keep growing it sequentially in Q2 as you try to start shipping some products via them into your own customers? Or do we really need to think about that being seasonal and lumpy and whatnot as we go into '12?

Yes. So, you're right there. I'd say their number in Q3 of 2011 was closer to $12 million, not $13 million, not above $12 million. They did have a good quarter. I think it's, again, right on line with the expectations that we've been talking about for what their quarter would be, as far as thinking going forward, Q4 is a good quarter, I think, for both businesses, just by using up of flex spending and all the rest of the stuff when you talk about the deductibles.

Our expectation for Q1 is that it will probably be a little bit lumpy forward. I mean, deductibles will reset, costs will increase, right. We all know that those trends will occur probably starting at the beginning of next year and so I think that's probably worth taking into consideration when we think about kind of the beginning of 2012.

Again, on the cross selling efforts that we're doing to be able to sell additional supplies to our Insulet base, we expect to kick that off sometime in the beginning of the next year. I don't think it'll be in Jan 1, but it'll be close.

Okay, great. Thank you.

John Putnam, Capstone Investments

Yes, thanks and good afternoon. I was just wondering what you're seeing in terms of average selling price and also what are you seeing in terms of people dropping out? Has there been any change in that point?

John, its Brian. So, on those questions, you know average selling price has stayed pretty consistent now, really, for a better part of a couple years. Our starter kit's about $600 and Pods right around $28, really no different in those numbers. Attrition actually ticked down slightly in the quarter. I'd say we're rounding down to 9 at the moment, as compared to rounding up to 10 as we had in the last couple of quarters, so pretty flat.

Great. Okay, thanks.

Bill Plovanic, Canaccord Adams, Inc.

Thank you. Good evening. Can you hear me okay?

Hi Bill.

Hi, Bill.

Hey, fantastic. So I just want a point of clarification. So the base business was up over 30% year-over-year, excluding the $2.0 million impact, so if we actually would have had that in there, you're talking we would have seen 37% growth year-over-year, which is an acceleration from Q2. I'm just curious as to why the business would be accelerating at this point in time. What are the drivers for that?

Well, there are a couple of drivers. I mean, one was we did launch Canada in the period, so that's certainly a help and I think that the GSK folks have been doing a good job of kind of priming the pump there over the last few months, since we've signed that deal. So they had some customers that were ready to go, which is, I think, a nice help to us to get that off on the right foot.

Second, as Duane noted in his remarks, we have done a little bit of incremental work in our commercial organization in anticipation of hiring the 25 or so sales staff that Duane talked about. We've taken our territories or our regions and gone from five to ten. We're brought on some great new talent into those roles. We changed over a few of our sales territories where we didn't think they were performing as strong as they had in the past. And I think all of those things contributed and again, Ypsomed had a good quarter of month-over-month growth.

Hey, Bill, this is Duane. So and I'll tell you in U.S. business it's kind of -- it's not like that our top sales guys have gotten incrementally better, but the middle to the bottom is starting to improve and that's what we're pretty exciting about. And I think we articulated a little while back that the fundamental issue we think we had was as we continued to grow, as we looked at these territories, we just needed more management, kind of one -- these guys spend more one-on-one time with the managers to help them plot out the territory.

So we're pretty excited about where we're going and we're pretty excited about the opportunity. If you think about it, we've had the same size sales force for almost three years now, so we've kind of done all this with the same number of feet on the street. So we're kind of excited about what this incremental step up could mean to us down the road.

Okay and then, as you transfer to the EROS pump in Q4 and into next year, what type of maybe onetime charges or negative hits to the gross margins could we see or would you expect in the initial ramp, just to kind of prepare us for this changeover?

Yes. So, I mean, if you kind of work it through, again kind of using the timelines we've been talking about, the first quarter we convert someone over from old to new Pod we expect it to be expect it to be effectively gross margin neutral for us. Right? And that's basically we're going to provide every one of those new customers or those customers with a new handheld unit.

The cost of that unit is free of charge to the customers, the plan, so that cost of the new handheld unit will be absorbed or offset by the reorders worth of Pods. A typical reorder is three boxes of Pods. So all of that event happening at the same time, it effectively slide work out to be gross margin neutral.

And then the second quarter, that follow-on reorder, is when you can start to see the margin growth.

Can you define gross margin neutral? Like, if it was 40%, it'd still be 40%? Or it goes down significantly to like 0%. What is gross margin neutral?

Yes, no, it's what the margin is today, right, so if it's 40%, then it's 40%.

Okay. That's helpful. So, actually, we shouldn't see any impact. If anything, it's the quarter after the conversion you start to see the benefit.

Correct.

And are you still comfortable with getting the gross margin to what level and maybe by the end of 2012 how should we think about it?

Well, I mean, again, obviously there's multiple components of the business between international, the Neighborhood business and then the core U.S. business, if you will. Speaking specifically about the U.S. business that will be converted from the current generation Pods to the next generation Pods, we still think the gross margin of that next generation product gets into that mid-60% type of a range. Then you obviously have to factor in the Neighborhood business and international.

Both are lower gross margin businesses. Better operating margin businesses on both sides, at this point in time, right. So that will obviously blend into an overall number. We're not prepared to provide guidance on that yet for 2012.

Okay, but it's still a mid-60% gross profit in the U.S. on the EROS pump?

On the pump, absolutely.

Okay, great. That's all I had. Thank you.

Thanks, Bill.

Jonathan Block, SunTrust Robinson Humphrey

Thanks and good afternoon, guys. Maybe just more, a couple clarifications and then a question on the filing. The first one, Brian, I think you mentioned 30% year-over-year growth ex-Neighborhood and I just want to make sure I'm thinking about that correctly. So that's literally inclusive of international revenue. That's inclusive of any sort of Abbott revenue, if you would. It's literally just removing only the Neighborhood piece.

Yes.

Okay. Got it and then when you talked about the midpoint of revenue moving down by, it looks like about $3.0 million from previous guidance to new guidance. So I want to make sure I'm understanding that correctly. Is that solely the international shipment picking up and moving from 4Q to 1Q? Or is some of the international picking up and moving, plus the $2.0 million that didn't go out, that like you said essentially you lose?

That's exactly -- it's the latter. It's both, right, so it's the $2.0 million of reorder that we didn't get in September, which now becomes October, which means instead of having another reorder of that $2.0 million in December, it's now in January. So that $2.0 million for the full year comes out of the number and then it's the international push from Q4 to Q1 to better time the launch of the nex-gen Pod.

Okay and I think you sort of answered this in response to a question, but it doesn't seem like there was an impact at all, negatively, on attrition, right? I mean, in terms of those shipments not going out, obviously there was a temporary solution for insulin delivery, if you would, but there really wasn't a lot of disruption amongst the customer base. Is that accurate?

Yes. I think that's pretty accurate and I give our shipping and distribution team an awful lot of credit. Our reorder team did a good job of making sure that as we were talking to customers, we were understanding exactly how much inventory they still had on hand so that we can try to "best time" getting the shipment while we worked through the backlog.

Okay and then a final question, Duane, just for you on the timing. Like you said, you submitted initially in May. You got the round of questions back in August. So it seemed like the FDA largely utilized the full 90-day clock and you're going to turn around in November in a few weeks and go ahead and submit, so that's another 90 days. And I feel like you alluded to (inaudible - multiple speakers).

No, no, no, no. So the initial submission is 90 days and while there's no hard and fast rules, once again, they can do whatever they want to do, I would tell you I'd be surprised if they didn't get back to us within 30 days on these questions. Because, if you think about it, the first submission was 8,000 pages submission.

Yes.

This is basically 49 questions with answers.

Yes, that's where I was going with it. So, clearly, you expect the dialog or the back and forth from here on out to shorten substantially from here to approval.

Absolutely and like I said, the only caveat I'd put in this whole quarter is with the holidays coming up, we're going to dance around all that stuff with them, but I would tell you I think I'd be surprised if we didn't see a response in the quarter. Not that I can guarantee it, but I think our regulatory people, we'd all be a little disappointed if we didn't get some feedback.

Okay, sounds great. Thanks, guys.

Jose Haresco, Jose Haresco; JMP Securities

Hi guys, good afternoon and thanks for taking the questions.

Hey Jose, how are you doing?

Doing well. So I just want to follow-up on some of the earlier questions. Is it just fair to assume that international sales from Ypsomed were a de minimis amount? Is it like $0.5 million or is it even less than that this quarter?

Yes. I'm not going to break out the specific number, but, yes, again it was a relatively low number. I mean, it was boosted a little bit because we launched GlaxoSmithKline in the quarter.

Okay.

But clearly we're working closely with our partner overseas to be able to try to manage the amount of inventory on hand so that they can continue to actively sell and grow the business, but not wind up with a big flux of product on their shelf.

Also, keep in mind what we've been telling here is that the end of September we didn't have any, right, so we were trying to manage the product to make sure that customers here in the U.S. that actually needed it that received it, as compared to shipping it overseas and let it sit for a couple days.

Okay. On the Neighborhood Diabetes front, did you add any headcount to that organization in the quarter and what's the plan there for the next six months for both Neighborhood as well as the other core Insulet, the U.S. Insulet business? Should we still expect to see 25-50 people added in the first six months of 2012?

Yes. I think on the sales force what we're doing is we started the process looking for 25 sales people on the Insulet base business. On the Neighborhood business, I think we haven't -- we're in the process right now of going through the transition here and we're in the process right now of pretty much laying out the strategy. Because I think what'll happen is with the strategic programs that we're talking about with some of these major managed care providers, if we get a couple of those, we're going to have to add some people.

For instance, right now, if you think about Neighborhood, the geography is the East Coast, but if we launch in Texas and the Midwest we're going to have to put some feet on the street. So, but those - that growth in the Neighborhood business will be tied, really, to these strategic plans and what we're doing and then, like I said, we're going to try to mix and match with the OmniPod salespeople. But without a doubt, we started the process for the sales people here. We'll bring in about 25 here over the next few weeks.

And I'd add to that, because it's usually a question that pops up. One of the things that we're very thrilled about with the integration so far is that we haven't had any attrition, unplanned attrition, I would say, of their managers and other key folks. So all of the people that we're bringing on and we want their expertise to help them to really drive these distances going forward. They've been doing a great job integrating these things and moving both businesses along.

Okay. Touching on rep productivity, I think if my math's right, you guys really ticked up in the quarter. Were you say your rep productivity in terms of referral rates are similar to the levels that we saw perhaps in mid-2010 when you had really high referral rates at that point in time?

Yes, I think those (inaudible - multiple speakers) --.

(Inaudible - multiple speakers) numbers, but --.

Yes I think, Jose, what I would tell you is the thing that we're encouraged about is the bottom half of the sales force is really kind of picking up. I mean, the top guys and part of our matrix here for going into 2012 is how do we make the top guys more productive, how do we find more time for them.

I would tell you the improvement that we're seeing right now is in that kind of bottom half of the sales force, is those guys are starting to produce better rate that I would tell you I think we're much more pleased with than what we have seen in the past.

Have you changed (inaudible - multiple speakers).

So the overall rate's going up, but it's not like the top guys were doubling business. It's really that the lower half is becoming -- is getting closer to the top.

And was that a function, then, of you switching some people out of certain territories or did you do something with the incentive structure that lit a fire under them?

I would tell you I think switching some people out lit a fire under some of them and I think the other piece is we divided the territories. If you think about it, I basically had 50 sales people and 50 nurse educators on the ground in five territories.

We now have ten territories, so we're allowing -- what we found in the process is when the regional manager traveled with the rep and focused on him, we could see the uptick. The problem was there weren't enough days in the week and weeks and the month to do all this, so by dividing these territories we gave them smaller geographies. There's more one on one with the regional managers and the territory reps.

I think the other thing we have done as a Company, we have brought in someone to start helping us with training materials and efficiency models to really start helping us out here and like I said, when we were a little Company it was easy. You'd just go out there and sell and if you had a good racehorse you knew you'd get to the finish line.

As we continue to grow, we have to be a little more strategic about it and I think we're happy. We got a real good group of regional managers and we're pretty excited about what we think they can do.

Okay, last question. Not to beat a dead horse on this FDA business, but obviously it's important. Is there anything that suggests in the language you've had with the FDA, with the 49 questions they've asked that would make you at all think that they'd require another full blown trial?

No.

Okay. Thank you.

No, I would say we feel good about where we are. The answer, in a word, is no.

Okay, thank you very much.

Yes.

Ben Haynor, Feltl & Co.

Good afternoon, guys, thanks for taking my question now.

Hey, Ben.

Most of them have been answered. Just regarding the DexCom, having to do new PMA as opposed to a supplemental, do you see that impacting the timeline for the combination product? They seem to think that it won't materially impact the timeline.

Well --.

Do you guys agree with that, or --?

Look, my understanding from the agency, and this will be strictly from my point of view, is - and I'm not going to comment on their timeline - I do not believe we can submit -- I do not believe you can have a PMA, more than one PMA open at a time.

So, it says they basically have to get their Gen4 Sensor approved before we can submit, so we can do all the work. The timeline to develop and do all the work, none of that, I mean, that's pretty straightforward. We feel pretty comfortable with it.

I do not believe that we can even submit until they get their Gen4 Sensor approved. So, to the extent that timeline gets pushed out, I think our whole project in terms of submission gets pushed out. The actual engineering's pretty straightforward, so that's not -- I'm not worried about the engineering. I'm not worried about the user interface, but I do not believe we can even submit until they get their Gen4 Sensor approved.

Okay. That's really all I had. Thank you very much.

Thanks, Ben.

Greg Simpson, Wunderlich Securities, Inc.

Good evening, guys.

Hey, Greg.

Okay, so I'm going to be in the beat the dead horse category as well.

(Inaudible - multiple speakers)

But I'm going to go a little different direction.

(Inaudible - multiple speakers)

Yes. I know. I'm going to go in a little different direction than Jose. So, if I put everything --.

Congratulations on the Cardinals, by the way.

Oh, hey, thank you very much. If you'd had tickets to game seven for me I'd be probably happier, but.

Sorry, go ahead.

So, if I put everything together that you said, Duane, is it fair to say that it's conceivable, though admittedly very highly unlikely, that approval before the end of Q4 is still, again, within the realm of possibility, highly unlikely, but within the realm of possibility?

I would go with highly unlikely, but within -- we should hear back from them and if what we hear back is it's all good? Then we're there.

Yes.

I would just tell you I'm looking more and more, I think, it'll probably be kind of a Q1 type event.

Yes. So my follow-up was, based on your hiring plans, based on everything you're saying about converting the existing user base, it looks like Q1, I hate to say worst case scenario when it comes to the FDA these days, but is that (inaudible - multiple speakers) the right way?

Yes, look, I -- and so just so you get comfortable on it, the way we're going or the way we're approaching this whole thing is we think, based on where we are, it's highly unlikely that we get it this year. Even if we get it this year, we wouldn't launch it until the first half of next year anyhow, because we want to get the other two lines up.

We are not going to do a full blown U.S. launch until we know we can swap out everybody. So, therefore, we can manage our way. We think we can manage our way through a quarter of disruption for people. You know you don't want to announce it and charge ahead here and not have the manufacturing to back it up and try to manage your way through nine months of disruption.

So we think where we sit today, based on the questions we see and once again I got to put the caveat on it that I don't control this process, but we'd be disappointed if we didn't hear back from them before the end of the year and then, based on that, it can be one of three things. Highly unlikely, but they tell us it's all good. They can come back and say give you a clarification on some on the points that we submitted. Or they can come back and say we want you to do this or this, right.

I would tell you the midpoint is what we think we're hoping, based on all the conversations and everything we have with them is the most probable, but, once again, we don't control it. And if that's the case, then and it stays -- once again, if it stays inside this building for us to take an issue from the FDA and respond within 30 days is pretty reasonable.

Once you have to go outside and do additional tests and like I said, this extractable test and expanded testing, then you have to get in the queue with these various laboratories and you have to do it on their timeframe. So, as long as we stay within that box, I mean, I think we feel pretty good, that Q1 and if I was a betting man, I'd put my money on Q1 and I'd only bet a dollar on the highly unlikely there.

Right.

So long odds, though.

Yes.

You could make a lot.

Absolutely. Okay, very good. And then, on Neighborhood, admittedly very early. I know you guys aren't going to really push the whole cross selling thing until 2012, but you guys seem happy with the integration. Can you maybe talk about that? Have you seen any early signs on that front that gives us greater hope, lesser hope, any anecdotal commentary on that front?

Yes. I mean, I think there are a couple things. I mean, I think from the core kind of nuts and bolts type integration work, all the back office work, it's going along very well. You know we're on time. I think both organizations have spent a lot of time trying to plan and make sure we do it very well and while I'm sure we've had our little bumps in the road, all of that's pointing in the right direction, which I'm very pleased about.

On the -- when it comes to like the commercial side, Duane noted in his prepared remarks that we're seeing, in some of our territories, when we have overlapping reps today, some collaborations starting of helping to get more efficient around collecting paperwork and those types of things, which is great. And we haven't formalized anything that way. But informally, that's a good thing to be able to start to see coming out of this and I think, when we look at our cross selling efforts and so for next year that we're -- I think we're on track.

So, like I said, Q1 typically has deductibles and all those other things, but we've done some survey work of our base here over the last few months and have received very, very positive responses back from our base that they'd be interested in having the conversation with us about us providing them their testing supplies, their insulin and getting it all in one box, which was part of our premise for this thing from the very beginning.

Okay, great. That's all I have. Thanks, guys.

Jose Haresco, JMP Securities

Hey guys, just a follow-up on the manufacturing disruption (inaudible - background noise), any subcomponent issue and you really got these things (inaudible - background noise) five-and-a-half cent part and so did (inaudible - background noise) and you've traced it all way the back to a (inaudible - background noise) or was it something else?

So, Jose, I think in your -- you're breaking up a little bit, so let me take a (inaudible - multiple speakers) at it.

(Inaudible - background noise)

I think what you asked is where do we find and how do we trace it back. So what we saw is we saw a slight uptick in the out-of-box failures out in the field and so we started an investigation. We worked it all the way back and we came to the conclusion that it was an individual component.

So, depending on where it was in the process, we basically replaced -- and once again, it was five-and-a-half cents, so it wasn't one of the biggies that we have in the thing. But in any event. So, what we did is we stopped the production, found all those components, rounded them all up and put in the new batch here, which just caused us -- it caused a slowdown. We also, what we did is we basically, even some of the finished goods, given that we saw this out in the field, we immediately went back and examined all the finished goods that we had in our warehouse.

So, while we may have had some product here, we chose to make sure. We went back through, reinspected it, and made sure we differentiated good from bad.

Got it. Thank you very much.

Okay, Jose.

And there are no further questions at this time. I'll hand the program back over to Mr. Duane DeSisto for any further comments or closing remarks.

Sure. Thanks, everyone, for joining us and I'm sure over the next few weeks we'll see a bunch of you at these various conferences, but to the extent that we don't I wish everyone a happy holiday season and we look forward to updating you in 2012. Thanks.

This concludes today's conference call. You may now disconnect.