Insulet Corp (PODD) 2011 Q4 法說會逐字稿

Good afternoon. My name is Misty and I will be your conference operator today. At this time I would like to welcome everyone to the Q4 2011 Insulet Corporation's earnings conference call. (Operator Instructions) Thank you. Mr. Brian Roberts, CFO, You may begin your conference.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and full year 2011 conference call. I'm Brian Roberts, Chief Financial Officer of Insulet and 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 Annual Report on Form 10-K for the year ended December 31, 2010 and the Company's quarterly reports on Form 10-Q for the periods ended March 31st, June 30th and September 30, 2011. 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. 2011 was a year of significant progress for Insulet across all fronts of the business. We grew rapidly, solidified our infrastructure, strengthened our financial position and made continued strides towards the approval and launch of the next generation OmniPod. Nearly 35,000 people living with diabetes now enjoy the simplicity, discretion, and freedom of the OmniPod.

As we turn to 2012, we are prepared for a year that will likely transform this business operationally and financially, as we convert our customer base to the new OmniPod. We are confident that the next generation OmniPod will set the bar even higher for any competitor considering entry into the patch pump market, a market which Insulet pioneered.

Revenue grew nearly 60% in 2011 to $152.3 million, as compared to $97 million in 2010. Growth was achieved across all markets as our U.S. team continues to deliver strong results and our international partners drive higher levels of demand through new patient introduction.

In the U.S., we invested in our commercial team. We added sales leadership and expanded from 5 to 10 regions, implemented plans to improve underperforming sales territories and refined and strengthened our marketing programs. The resulting boost to overall productivity enabled us to achieve a nearly 10% market share of the insulin pumpers in the U.S., up from 7.0% a year ago.

With over 70% of our new customers having never before used an insulin pump, we are expanding the market of those taking advantage of continuous insulin infusion therapy. However, we remain just 2.0% of the overall Type 1 market in the U.S., which demonstrates the enormous opportunity in front of us as we continue to increase our sales reach.

Internationally, our partner, Ypsomed, a 25-plus year veteran of the diabetes industry, continues to drive strong quarter-over-quarter growth in key European markets such as Germany, the Netherlands and the UK.

We are pleased with the progress Ypsomed continues to make and believe there's a tremendous opportunity in Europe, since only one out of six people living with insulin-dependent diabetes are taking advantage of pump therapy.

In September, we were excited to bring the OmniPod to Canada through our partnership with GlaxoSmithKline. The response in the OmniPod has been enthusiastic and sales are on-plan for this key market.

Our strong growth was also augmented by the June acquisition of Neighborhood Diabetes, a profitable and highly regarded distributor of diabetes products. We acquired Neighborhood to strengthen our core infrastructure by adding key reimbursement, distribution, and pharma capabilities to complement our sales of the OmniPod Insulin Pump with an expanded the product offering and to bring a higher level of customer service to our approximately 100,000 combined customers.

Neighborhood Diabetes has differentiated itself by leveraging their high touch service model focus on training and client education. This approach has promoted a higher level of patient adherence, compliance, and reduced cost of care. With this model, Neighborhood has partnered with several managed care plans to launch strategic programs, which will be an important growth driver for the Neighborhood business moving forward.

Following the acquisition close, teams from both companies have worked diligently on integration efforts to streamline our G&A, distribution and reimbursement capabilities to ensure that we will provide our combined customers with the best possible experience. I am pleased to report that our core integration activities across these functions are complete.

We have also commenced limited cross-selling across the commercial teams and we continue to efforts to modify payor contracts to ensure that we provide our customers the highest level of customer support.

We took important steps in 2011 to solidify our overall financial position. In June, we successfully executed a transaction to refinance our convertible debt. This transaction extended the maturity by three years to June 2016, reduced the interest rate by more than 150 basis points, and increased the conversion share price by over 20%. With the refinancing of the convertible debt complete, we are confident that no additional cash is required to achieve profitability.

While we're proud of our accomplishments in 2011, we're even more excited about what we expect in 2012.

We continue to prepare for the anticipated U.S. launch of the next generation OmniPod around the time of the American Diabetes Association meeting in June. The new OmniPod retains all the features our customers enjoy, such as no tubing, automated painless insertion, and the discrete waterproof design, in a package that is over a third smaller and a quarter lighter.

Post launch, we will begin to transition our existing customer base with a goal of all OmniPod users in the U.S. and Europe enjoying the benefits of the new OmniPod by the end of 2012.

Let me update you on our regulatory progress.

We received CE Mark approval for the next generation OmniPod in the third quarter of 2011. In the United States, we filed for 510(k) clearance with the Food and Drug Administration in May and received an initial round of 49 questions in August.

On November 21st we submitted our response. Since then, we have had several discussions with the FDA, including in late January, to provide additional clarifications to our November response. At this point, we are awaiting further instruction and clarification from the Agency and continue to expect that an approval could come as early as this quarter. As you know, however - and I want to stress this - we do not control the actual timing.

On the manufacturing front, we are now producing the next generation OmniPod in limited quantities in China, while continuing to make adjustments to the manufacturing line in order for it to scale as efficiently as possible. These refinements are on schedule and we expect the line will continue to ramp production as the quarter progresses. We expect to make our initial shipment of the next generation OmniPod to Ypsomed this quarter.

The implementation of the second manufacturing line is underway and we expect this line will be operational late in the second quarter. Our plans continue to call for a third line to be implemented in the back of 2012, such that we will end the year with the capacity of approximately 750,000 to 1.0 million pods per month.

The next generation OmniPod will provide the Company with significant financial benefits. It is about a third less expensive for us to produce. We continue to expect gross margins of 60% to 65% on the new device.

Of equal importance, we expect that the new product will be a key driver of future growth. We believe the new smaller pod will appeal to a broader group of people and we're confident that no one will be able to commercialize the device smaller and easier to use than the OmniPod for the foreseeable future.

In addition, the financial flexibility gain with the new OmniPod will allow us to expand our commercial team. As we discussed last quarter, we are in the process of hiring approximately two dozen new commercial team members to broaden our reach in calling frequency with key healthcare professionals. A number of these new team members started just this week and we expect all to be onboard by the end of March.

In summary, we are proud of our accomplishments in 2011 and are very excited about the prospects for a strong 2012. We are estimating full year revenue of $210 million to $225 million, which equates to roughly 40% to 50% year-over-year growth. Throughout 2012 we will continue to drive towards profitability, with an expectation that we will be operating cash flow profitable in the back half of the year.

With that, I'll turn the call over to Brian to provide additional details about the fourth quarter and full year 2011 results and our expectations for 2012.

Thanks, Duane. As noted, we're pleased with Q4 and 2011 performance. We delivered strong results despite the continuing pressures of a challenging economic environment.

For the quarter, revenue increased by 70% to $47.2 million, compared to $27.8 million in the fourth quarter of 2010. For the full year 2011, revenue totaled $152.3 million, an increase of 57% from $97 million in 2010.

In June 2011, we acquired Neighborhood Diabetes. We've included its results in our consolidated numbers since the acquisition date. Excluding the impact of the Neighborhood acquisition, revenue grew by approximately 30% year-over-year.

Gross profits for the quarter improved to $20.1 million, compared to a gross profit of $13.8 million in the fourth quarter of 2010. Gross margin for the U.S. OmniPod business was approximately 50%, as manufacturing production levels returned to normal in early November.

For the full year 2011, gross profit increased by 53% to $66.7 million, as compared to a gross profit of $43.7 million in 2010. Gross margins are likely to remain in the 42% to 46% range for much of 2012, as we plan for the transition of the customer base to next generation OmniPod in the back half of the year.

Keep in mind that during the quarter in which a patient is upgraded to the new OmniPod, we expect to provide them with a new PDM. The cost of this new handheld device will offset approximately the first three months of savings from the lower cost OmniPods. With the base transitioned by the end of '12, we'd expect to see the jump in gross margins beginning in Q1 2013.

Operating expenses for the quarter were $30.6 million, compared to $23.6 million in the fourth quarter of 2010. The increase is primarily related to the acquisition of Neighborhood Diabetes and additional expenses in the quarter related to the approval process for the next generation OmniPod.

For the full year, operating expenses were $109.2 million, as compared to $82.4 million in 2010. Again, the increase is largely attributable to the acquisition of Neighborhood Diabetes, including the addition of their normal operating expenses, amortization expense of acquired intangible assets, and transaction fees.

Going forward, we expect overall operating expenses of approximately $30 million per quarter, as we prepare for the launch of the next generation OmniPod, including continuing R&D and regulatory work, the development of sales and marketing materials, and the addition of approximately 25 commercial resources over the next couple of months.

We reported an operating loss for the fourth quarter of 2011 of $10.5 million, compared to an operating loss of $9.7 million for the fourth quarter of 2010. Our fourth quarter operating loss includes approximately $6.5 million of noncash operating expenses comprised primarily of depreciation, amortization, and stock-based compensation. Excluding these expenses, our cash operating loss for the quarter was about $4.0 million.

For the full year, our operating loss increased by approximately $4.0 million to $42.5 million, from $38.6 million in 2010, as we incurred amortization expenses and onetime transaction fees related to the acquisition. Excluding these expenses, the operating loss would have been $35.4 million for full year 2011, an 8.0% decrease from the prior year.

We are targeting to be at or near operating cash breakeven in the back half of 2012. We define operating cash breakeven as earnings before interest, taxes, depreciation, amortization, and stock compensation expense.

Net interest expense of $3.8 million in the fourth quarter and $14.7 million in the full year includes interest expense related to the refinancing of our convertible debt back in June. In 2012, we expect approximately $4.0 million of interest expense per quarter, of which $1.5 million relates to cash.

We reported a net loss for the fourth quarter of 2011 of $14.3 million, or $0.30 per share, compared to a net loss of $20.9 million, or $0.50 per share, for the fourth quarter of 2010. For the full year 2011 we reported a net loss of $57.2 million, or $1.22 per share, as compared to net loss of $61.2 million, or $1.54 per share in 2010.

As of December 31st, cash and cash equivalents totaled $94 million, as compared to $113.3 million at December 31, 2010. We believe that we have sufficient cash on hand to achieve operating profitability.

As of December 31st, we had approximately 47.5 million common shares outstanding.

Finally, turning to guidance, as Duane noted, we are forecasting 2012 full year revenue of $210 million to $225 million, representing nearly 40% to 50% growth from 2011. We expect an overall operating loss of $25 million to $35 million, as we work towards the anticipated launch of the next generation OmniPod in mid-2012.

Included within the operating loss guidance is approximately $25 million of noncash expenses, implying a cash operating loss of approximately $0.0 million to $10 million.

As you know, the first quarter tends to be our slowest quarter, due to the impact of resetting insurance deductibles and the deferral of trainings into Q1 from people who purchased the OmniPod System in the latter half of Q4. Given that, we would expect our revenue for the first quarter to remain relatively flat with last quarter - in the range of $47 million to $48 million.

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

Thanks, Brian.

2011 was a strong year for Insulet. We grew the topline by nearly 60%, as our U.S. team continues to produce at a high level and accelerate our penetration to key international markets such as Germany, Netherlands and Switzerland.

We made significant progress towards the approval and launch of our next generation OmniPod and we are positioned to ship the product to Ypsomed by the end of the quarter.

We added significant capabilities with the acquisition of Neighborhood Diabetes and completed a two-year effort to restructure our balance sheet with the successful refinancing of our convertible debt in June.

As we look into 2012, I've never been more enthusiastic and confident about our prospects as we change the game again with the anticipated approval and launch of the next generation OmniPod.

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

(Operator instructions) Kim Gailun, JPMorgan

Hi there. Thanks, guys.

Hey Kim.

Hey Kim.

Hey. So a couple questions, I guess the first on the guidance range for 2012 on the topline, a hair wider than your normal guidance range. Can you just talk to us about the factors that are kind of framing that top and bottom end with the $210 million to $225 million?

Yes. I think, Kim, I think from our standpoint, right, the uncertainty here is while we are compensating the sales force and pushing them to go forward and continue to sell the current product, we also wanted to bake into guidance some of the uncertainty where people knowing about the new product getting closer and closer and what that could all be. And like I said, I think from our standpoint, we're pretty excited about it.

But we also wanted to be cautious enough, a little bit, on the topline in terms of what could possibly happen in terms of people delaying or what goes on in this whole transition period here. It's a first, kind of a first time for the Company.

Yes. Okay and I guess turning to manufacturing. It sounds like you guys are very much on track planning to ship to Ypsomed later this quarter. What can we read into when you do ship to Ypsomed from the standpoint of where you are into when you do ship to Ypsomed, from the standpoint of where you are in terms of manufacturing readiness?

So, once we started shipping to Ypsomed, I think what you can read in is we're comfortable with the quality and then quantity has all become predictable off that first line and we know we can satisfy all that and we'll push. We'll continue to push forward, so, and I think we're there. We just -- it's the same thing. It's we want to do it day in and day out so it becomes a very predictable number for us in order to what we're doing. And like I said, Charlie's pretty much spending two weeks there and two weeks back here, continuing to push this whole project forward.

Okay and Duane, before I drop, can I push you on that a little bit and so in terms of them manufacturing? Where are you in this whole process? How close are you guys, realistically, to being able to ship to Ypsomed and maybe talk a little bit about even just progress that you've seen over the last couple weeks in Charlie's reports? Thanks.

Yes, sure. Sure. I think, look, I think we're going to exit the quarter -- the projected production of that first line is a couple of hundred thousand and we know we can make improvements to get it up higher than that, but I think we'll be in that ballpark there. Pick a number, from 50,000 to a couple of hundred thousand coming off that thing a month.

Okay, thanks.

Sara Michelmore, Brean Murray, Carret & Co.

Hey. Thanks for taking my questions. Maybe I can just ask for some clarification on Neighborhood Diabetes? The revenue that you sort of inferred, if I can back out roughly what you did, it looks about $12.5 million, plus or minus, maybe a little bit lower than our model.

But I was just wondering if you could comment on that, relative to your expectations. And what are you assuming for that business in 2012? I think previously you had talked about it, in rough terms, as a 15% revenue grower, so just wondering if you can talk about it in terms of what you're assuming for next year. Thanks.

Hi Sara, its Brian. Yes, that's all pretty accurate. I mean, I think they came in right around that $12.5 million number for the quarter, overall I think pretty much what we expected. We did go through a lot of the integration in the last couple months of the year, integrating their distribution center and the like, so I think pretty much in line what we thought.

For their growth going forward, still believe that they're going to be in that kind of low teens-type of grower for organic growth in 2012, so you pretty much hit it on the head.

Okay and then just a clarification, Brian, on the noncash expenses. I think you'd talked about sort of $5.0 million to $6.0 million a quarter previously. It was obviously a little higher this quarter. Looks like what you're assuming for 2012 is a little higher also, so just wondering if you can clarify that for me as well. Thanks.

Yes, sure. The full year of amortization expense now would be the intangible assets to be acquired as part of the deal. That's approximately about $8.0 million or so per year, a couple million bucks a quarter. Stock compensation expense probably in that $8.0 million to $10 million range, as we kind of forecast out what we think our equity needs will be for employees and new hires, as well as just obviously what's vesting over time and then the rest is primarily depreciation expense. So that's really the breakout of the three.

That's great. Thanks so much.

Ben Andrew, William Blair & Company

Duane, good afternoon.

Hey Ben.

A question for you guys, if you think about the process of FDA. What sort of questions or nature are they looking for? Are they asking for more bench data? Are they looking for -- is it clinical? I mean, what's the nature of the communication? It sounds like you think you could get approval. In six weeks or four months?

Okay. So let me state this. I'm not going to predict when we'll get approval, but I would tell you the nature of the questions does not involve any more work. It's more clarification of reports and we submitted some data they want. They want a synopsis report on this thing, so we've got to get that out to them. So it's not going back to square one, at the moment and like I said, and I think I told everyone we got that first round of questions.

The thing that was pretty encouraging to us, it was pretty thorough. So, when we looked at those questions, there's not a segment of our submission that you said, "I can't believe we didn't get a question." I mean, they had gone through this thing pretty thoroughly and we were pretty happy with the responses. We think we gave them a thorough response.

The nature of the interaction with the Agency at the moment is more clarification and looking for a particular report. Not that we -- the data, I think, the testing data is all there, but they're looking for kind of a summary and synopsis on what this testing data, in particular, means. So it's more along those lines. It's not go out and put it on another 100 patients. It's none of that.

Okay. Thank you. And then, Brian, you talked about gross margin kind of being in the 42% to 45% range for the year. Is there any progress through the year within that range, or we can just sort of expect it to fluctuate? And as we go into '13, how quickly would it step up towards that target range as you ramp volumes?

Sure. So, again, I mean, at this point here, as you've seen really throughout 2011 and we've been kind of in this range right now of 42% to 44% or so. As we integrate in these full quarters of Neighborhood Diabetes, we start to ramp up a little bit on the international side as we start to launch the next generation Pod over there, and then just what we've been doing in the U.S. business.

As you guys know, we're not really doing anything additional, at this point, to try to drive a lot of higher margin cost improvements around the current Pod. We're focusing all of those efforts onto the next gen product. Certainly, in the back half of the year, we think we're going to start to see some of that gross margin ramp come through. It's just a function of how many customers, how fast convert over.

As we said in the prepared remarks, we're expecting to be able to move all of those customers over the last six months of the year. It's hard, at this point in time, to really know exactly what that timing will be and exactly how that'll step through. So, certainly, as we go through 2012 and we get more and more clarity on that, we'll be able to provide it.

But again, given the fact that in that first quarter we transition someone, we basically eat the savings by giving them a new handheld. I think it's prudent to be able to expect that the margins will kind of hang in that range for at least the majority of this year and then, as we really get to the last quarters, so we can update that if necessary.

In '13, assuming we're able to hit the goal of having everybody converted over in '12, then we should see that step up that we've talked about, which is kind of 10 points or so out of the gate. And then, as we sunset the current Pod away, being able to get closer up to 15 points, which is really the equation, if you will, on a consolidated basis of the 60% to 65% margin profile here in the U.S., coupled with the Neighborhood business and international.

Okay. Two last questions, then. What's the bottleneck on converting patients? It's not the handset. Is it just training?

Yes. I mean, it's working all of the different endocrinologists' clinics and making sure that they understand that we're converting patients over and just making sure that, again, as Duane pointed out, once we've converted somebody over the last thing we ever want to do is have to have them come back. So, with that second line coming up at the end of Q2, we're just trying to make sure that we have an appropriate amount of time to be able to convert all of them.

And Ben, just so everyone believes that they're going to be treated fairly, I think the way we look at it is, if you think about it, sometime in the quarter your reorder comes in. So sometime in the quarter, if we were to launch it right at the beginning of the quarter, you can make the argument that you could probably get everyone converted, because everyone would probably place an order in the quarter.

But we're kind of looking at these quarterly reorders as a clean way to explain to people how they're going to get the next generation Pod, right? What we don't want is two people living across the street from one another and one gets it and the other one doesn't get it and they think that there's some duplicitous plan here to keep them on the old one.

So that's what we're trying to time and like I said, we want to do it clean. We want to do it orderly and we want to do it simply, so we can clearly articulate that. So, if that means we've got to hold off a few weeks until we're comfortable that the manufacturing can support that plan, we'll hold off a few weeks. I mean, for us, the real key is to exit 2012 with this group converted and then we can sit here and start dialing in these 10 to 15 point margin savings that we believe are there with the next generation product.

Okay and then, finally, on the sales force, you gave us some insights into the amount of expansion. Maybe tell us where that puts us at the end of that, in March, in terms of the field organization, if you would, please? And then second, you talked about Neighborhood Diabetes being low, kind of teen's growth. Does that assume much in the way of cross selling in the course of '12, or is that a longer-term goal that we should be thinking about versus near-term? Thank you.

I think in terms of the sales force - and I'll let Brian articulate on the Neighborhood piece - but in terms of sales force I think that the commercial selling organization will go -- I think we're talking about that thing going up by more than half of that group that we're adding here. I don't have the exact numbers.

So, but I think that will put us -- I think we got 102 people between CS's and not including management, between CS's and direct selling and we're talking about somewhere in the neighborhood, as far as commercial selling people out there, we're talking about more than half of that growth coming from that, so.

On the Neighborhood side, yes. I think what you can assume from that number is that it's basically kind of their organic growth rate, so that's what we expect that business to do, kind of sans cross selling. We've made a lot of progress on the cross selling efforts of getting these different contracts modified to be able to allow us to do the strips.

I think part of what we're just trying to figure out now is we're testing a couple of plans. We're testing the sale and make sure it works here in the first quarter versus a couple of months of the year to be able to then start rolling that out a little bit more broadly. So we'd expect that to be a little bit more of a back half of the year effort to start seeing some results.

Great. Thank you.

Danielle Antalffy, Leerink Swann

Hi. Good afternoon, guys. Thanks for taking the question.

Hi Danielle.

Hi. Just drilling down a little bit more on the rollout of the next gen Pod, I know you talked about transitioning patients by the end of the year. But can you talk a little bit about sort of once it's approved and officially launched? How do we sort of think about the ramp while you're transitioning patients for volume?

And then, also ahead of the launch, how do we think about volumes, especially, I guess, in the second quarter? How could they be impacted, if you think they'll be impacted at all if people do wait for the next gen Pod to come?

I mean we're certainly doing everything we can to make sure that people don't wait for the next generation OmniPod, right? I mean, again, it's pretty simple. When we go to our sales force -- and we had our national sales meeting a few weeks back and talked to them at length about this. If a doctor, if the endocrinologist believes that insulin pump therapy is right for their patient, there's no reason to wait, because, ultimately, you're going to receive this product and so getting yourself on, getting yourself trained, being on the product for a period of time, it makes a tremendous amount of sense.

And so that's how we're continuing to focus the sales force of how they go to the doctors, as well as we we've try to do a little bit, within the compensation structure, to make sure that they're continuing to drive that way as well. So it's an unknown for sure, but certainly we think we're going to have good, solid growth in Q2 like we normally see in any other given year.

In the back half of the year, with the transition, again as Duane pointed out, it's really a function of the manufacturing and making sure that we are at a point with both of those lines, the second line coming up towards the end of Q2, that we're comfortable with the level of quantities, obviously the quality to be able to transition everybody over. So, to his point, I think we just to -- we want to make sure that we've got that ready to go before we commit and think every single person is going to be transitioning, for example, in Q3. I think it's going to take us more of kind of that back half of the year to get everything done across both Europe and the U.S.

Okay and then, just drilling down on the manufacturing again. Sorry to harp on this, but what if something does go wrong and you can't get the second line up and running? Do you have the capacity on the first line to at least transition your existing patient base? Or how do we think about what could happen there, or do you feel totally comfortable that with the first line up you'll be able to easily bring the second line on pretty quickly?

So, look, I think there're multiple pieces to this question. I think, from our standpoint, if we received FDA approval tomorrow, I mean, that's just a milestone. The real critical thing before we transition anybody is we have to have a good handle on the manufacturing.

So, to use your example, if the second line doesn't come up on time, then we're just going to delay the transition. We'll put a date out there saying, "Starting with reorders and if it was really messed up, starting with reorders on October 1st we're going to transition people", whatever that date is, because what we don't want to do is do this and say, "Uh, yeah, we can't do it." Right?

So I think our level of confidence is pretty high. I mean, we are now, every day that goes by we're getting more and more experience on these machines and I would tell you I think, if Charlie were here, I think he tells you he feels pretty good about, but it's still an unknown.

Look, until -- one of the key -- the key item and we have a lot of IP. I think we have a lot of knowhow. The thing that's the toughest thing to do for anybody getting into this business is making millions and millions of something. We have a lot of experience. We think we simplified the manufacturing process, but as we've proven, since the time we started selling product back in 2006, is every time you rev the engine another time you're going to sit there and you're going to make sure nothing falls off here.

So I think we have a plan that will have that line up and working in sufficient time so we can stress test the hell out of it and that's the plan, so that's why we feel pretty comfortable about it. But until you do all that, I can't sit here and tell you we're 110%, but we have a very high degree of confidence, because, well, I mean, we're making 22,000 to 25,000 Pods a day on the old line and we think this line's simpler, easier to use. But until you make them, it's just theory.

So that's how we'd play it. If we did have an issue, we'd have it. We'd give a date that's a little farther out and then we'd go forward. The other thing we're obviously going to do - and you'll see that in the back half of the year -0 we're going to build some real inventory before we start the launch, so I always have a cushion. So, if I think -- if I'm -- no matter what, even if I'm 110% confident in Charlie and the team, we're still going to have -- we're going to carry more inventory than we typically carry just to buffer any hiccup that we have here. That's the other solution for us. It'd be a good use of cash, in the short-term.

Okay, great. Thanks so much.

Thanks.

Jonathan Block, SunTrust Robinson Humphrey

Thanks, guys, and good afternoon.

Hey, Jon.

Duane, maybe just a first question. You mentioned, obviously, the Neighborhood integration is complete and here we are a couple quarters post the acquisition. When you look at the synergies are they largely the same opportunities today as when you first perceived six or so months ago? Or have some shifted a little bit and some a bigger opportunity today than what you may have thought several quarters ago?

So, a great question, so and I've talked to the board about it. I mean, we're really pretty excited about what we think we think can do with Neighborhood and I'll tell you this. Their disease state management and the potential outcomes of what they do, we believe we can drive clinical outcomes. And the loyalty that their customers have to them by just pinging them once a month and how they about doing this, we're pretty excited about it.

We're also pretty excited about working with -- we're working with a couple physicians' offices now on, because we have home delivery, we can run some tests on these patients. We can help the doctors immensely in terms of treatment and therapy and where these guys are going, so we've done a deep dive in all the clinical data they had.

We think we have a couple of potential white papers that are pretty compelling on what we can do in terms of reducing healthcare costs for some of these people. So I would tell you I think I'm very, very excited.

I think, on the flip side, I think it's like anything else, right? I mean, doing the integration was probably more complicated than we all hoped, but we managed to get through it, but it took, on the flip side of the coin it probably took a little more time and effort than we had every anticipated, but like I said, that's now in the rearview mirror. So we're pretty excited about the opportunity and we think we can roll it out, outside the U.S., and continue straight across the country and really make it kind of an outcome-driven business.

Okay, great. Very helpful. Then, just Brian, over on the operating loss, I mean, it came in a little bit above where we thought you may shake out for 2012 and maybe if you can just speak to some of the other areas of spend in '12? Clearly you've got the two dozen or so reps coming onboard, but what are the other pockets of spend? Is there anything in there that's somewhat onetime in nature to get the approval, etc., across the finish line that may not sort of reoccur when we get into'13? Thanks.

Yes, sure. I mean, actually, if you look at the level operating expenses, we said basically we think will be about $30 million a quarter, which is really pretty much where we've been here in Q3 and Q4. So we're not forecasting much growth in OpEx, really, from what the run rate it's been over the last six months.

The little bit of change does include the fact that we got the couple dozen commercial folks coming into the building, as well as I'd say that there's a few million dollars of onetime-related expenses to really just kind of launch the product. As you can imagine, the development of marketing materials, building up some sample inventory, all of those different types of things that you need to do to be able to promote the product appropriately once approved, is kind of onetime in nature, so that's baked into the plan as well.

Beyond that, as we talked about and we've had a little bit of an uptick in our noncash expenses, when we just talk about the amortization and the stock comp being kind of two drivers of that,. So when you kind of back all that stuff out, I think, from an efficiency perspective, we're actually getting more efficient in our overall spend of our OpEx dollars.

Okay, great and maybe just one or two more. On the international side, I mean, is there any sort of an international range that you may be able to give you for 2012, just sort of bracket where you think Ypsomed/Glaxo may shake out?

Yes, I mean, again, in deference to them, we're really not disclosing any of those numbers yet, but what I would continue to kind of point folks back to is our first couple of years here in the U.S. was a ramp from 4 to 13. You know the international market is probably, the Ypsomed market, is kind of half or so what the size is and they're now getting into year two, right. So maybe half to two-thirds the size is kind of the European market, so I think similar levels of growth, as we probably saw in the U.S., is realistic for that business.

Okay and just a last one, again on international. You rattled off a bunch of the markets where they're already launched. Is there anymore heavy lifting in terms of other European markets, if you would, that they need to break into and is there an update on China? Thanks, guys.

Yes. So China, we're still working through the regulatory process at the moment, so we don't really have a good updated timeline of exactly when that will launch, but we're still working hard on it. We'd love to get it done here in 2012.

In Europe, as we've talked about, I think overall it's been a great job of kind of being on or ahead of plan. In all of the markets they've launched in, with the probable exception of France, which wound up with a couple of reimbursement challenges that were unexpected originally. We actually had some folks over there last week working with the Ypsomed team to be able to try to knock those barriers down and get that going here over the next few months.

Great. Thank you.

John Putnam, Capstone Investments

Yes, thanks very much. Duane, I wondered if you might comment on starter kits in the quarter and retention?

Yes. I think we typically don't give starter kits, but I'll let Brian comment on the retention. I think we're still running -- we've been -- the attrition rate's been somewhere between 9.0% and 10% and not a lot's changed there.

Yes, attrition effectively remained flat with Q3. We're in that 9.0% to 10% range, but I'll tell you we're rounding down to 9.0% and for Abbott revenue, we don't talk about customer comp numbers more broadly than talking about on this call that we're nearly 35,000 now, globally. But I would tell you that the Abbott revenue in the quarter is between $1.5 million and $1.6 million.

Okay great and I was wondering. What's the opportunity to improve the margin with Neighborhood? How do you kind of go about that and see that situation, Duane?

I think there's a couple of pieces here. Once we start cross selling and you start taking a look at the potential volume discounts and what we can do for some of their suppliers. We think we can improve the buying here. They have a bunch of stuff here in the next couple of months that are contracts that are coming up for renewal here, so we think we can put some leverage on that based on the increased volume.

The other thing we're really, really looking at, and this probably wouldn't be in terms of percentage of margin, but really margin opportunity. They have this pharmacy, which for Neighborhood has been an incredibly underutilized asset, and we're spending a lot of time looking at all the potential avenues we can have with this pharmacy and the other things we can potentially pick up. So I think we have a couple of real interesting opportunities.

And then I said, in terms of kind of bottom line operating profit, if you take a look at this, once we start cross selling and the Pods start going out with a box of strips or insulin or whatever else a Type 1 diabetes patient may have, the incremental cost to us is nothing. For instance, if I put three months' worth of strips in a box, it doesn't even change the postage, so the guy has to walk a couple more aisles down and throw it in.

So, I think, from a leverage standpoint, we think we can improve there, very, very dramatically. Like Brian said, we have a couple of plans that we did all the contracting. We're going to do the cross selling, billing here and we're going to watch it for a couple of months, because what we don't want to do is -- you know the devil's always in the detail with managed care. So you don't won't to roll this all out on a big basis only to find out that you didn't dot the i and cross the t and you can't collect on all this.

So we're rolling that out now. We'll watch that for the next couple of months here and then we'll start accelerating from there.

Great. Thanks very much.

Suraj Kalia; Rodman & Renshaw

Afternoon, gentlemen.

Hey Suraj.

Duane, of the total Neighborhood Diabetes customer base, would you care to shed some color? How many are Type 1 diabetics? Because I know you have mentioned insulin-dependent diabetics, but my question is how many are Type 1 and how many qualify for insulin pump therapy as defined in guidelines, in your opinion?

So, I mean, Suraj, this is Brian. Of the 65,000-70,000 customers they have today, probably 18,000 to 20,000 of those kind of fall into that insulin-dependent category. I don't have the specific number of Type 1's, but I'd tell you it's probably 90%-plus of that number.

Overall, I mean, I would think that just about all of that group would effectively be eligible for pump therapy. The only caveat is just some percentage of those people and I don't know the number offhand, but some percentage of those people would probably be of Medicare age, which obviously wouldn't be something that we're covered for at this time.

Okay and Brian, when I look at SG&A for Insulet, it's still stubbornly high, around 50% of sales and one of the things you all have been very consistent about saying is, "Hey, we're going to launch the next generation OmniPod, margins are going to expand, we are going to reinvest the margins and getting us sales guys and expanding that", which is pretty much as I have understood it, based on what you all have said for some time.

I guess the question is what would change the trajectory for getting SG&A down to - I don't know, pick a number - 40%, 35%, there - you know you really start producing cash flows. What would change, from a selling cycle perspective? I'm curious on that front.

Well, I mean, again, I mean, if you think ultimately you're going to push through 10-15 points of additional margin. The addition of some sales, which we're just going to ultimately get that leverage, or a good chunk of that leverage, based off of that.

I mean, frankly, it's no big secret. I mean, the struggle at the moment to be able to kind of push it over the goal line is just the consolidated margin of the business gross margin, but this is in the 40%s and to be able to push that into the 50%s, it's going to give you a significant piece of leverage.

I'm not sure that there's much around changing the selling cycles, per se, except for our teams are certainly doing a lot more around trying to concentrate on I would say the top 50-60 endocrinologists within their territories. Because obviously that's where we know that we can push through a lot more volume in a much better way and we've seen plenty of data internally, for example, that shows as we continue to penetrate clinics versus the one offs, we can convert at a much higher rate. So that's the goal, but I mean, ultimately, as you find folks and you get those referrals in, we want to convert as close to 100% of them as possible.

Great, guys. Thanks for taking my questions.

I would now like to turn the call back over to Duane DeSisto for closing remarks.

Thanks again, everyone, for joining us today. 2012 should be an exciting year for Insulet and we'll look forward to updating you on our continuing progress. Thanks.

This concludes today Q4 2011 Insulet Corporation's earnings conference call. You many now disconnect.

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