Insulet Corp (PODD) 2012 Q1 法說會逐字稿

Good afternoon. My name is Misty and I'll be your conference operator today. At this time, I would like to welcome everyone to the Quarter One 2012 Insulet Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions) Thank you. Mr. Brian Roberts, Chief Financial Officer, you may begin your conference.

Thank you. Good afternoon everyone. Thank you for joining us for our first quarter 2012 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.

The 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, 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 will find a link to the webcast of the 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.

2012 is off to a strong start as the first quarter was another period of solid execution for Insulet as we continued to make significant process across all aspects of the Business. Revenue increased by 69% to $47.8 million in the quarter representing about 25% organic year-over-year growth.

Nearly 10% of the people using an insulin pump today in the United States have chosen [these] to use OmniPod system to better control their diabetes. The reason is simple. The OmniPod with its unique features such as no tubing, automatic cannula insertion, and discrete watertight design give people the freedom to do what they want, when they want, without the hassles of conventional style pumping.

Despite the typical slow start to the year due to the timing of trainings and the resetting of deductibles, we have seen solid sales performance. Referrals were up over 15% in Q1 as compared to the prior year, and the momentum we saw in March has continued building into April and May. Since January 1, we have added several new members to our commercial team in the form of territory reps, clinical service managers, and inside sales.

Just last week, we officially launched our new inside sales capability to improve our sales lead handling efforts by guiding prospective customers more efficiently through the sales process. We believe that this new capability will boost overall sales productivity as we better qualify leads before handing them over to our field -based team. As our new team members get up to speed, we believe that the productivity will continue to improve in time to support the launch of the next generation OmniPod.

Our solid revenue growth was supported by ongoing process improvements in our operating capabilities. We manufactured a record 1.4 million pods in Q1, and are pleased that the improvements made to the Pod in the fourth quarter of last year have resulted in better overall Pod quality. Calls in to our customer support team decreased in April to their lowest levels in a year, and our average cases-per-patient metric is at an all-time low.

The manufacturing team has also been focused on our next-generation OmniPod. As we previously discussed, our plan calls for three manufacturing lines each averaging about 250,000 to 300,000 Pods per month by the end of 2012. The first line is operational and manufacturing product, while the implementation of the second line remains on schedule for completion near the end of the second quarter. The third line is also on track to be completed around the end of the third quarter.

On the regulatory side, we continue to make progress towards receiving 510-K clearance from the Food and Drug Administration. Since we last spoke, we have had several conversations with the agency and orally answered questions as part of these discussions. Recently, we received a small written set of questions from the FDA. We have formally responded to these questions and await further direction from the agency.

While we believe that we have made significant progress towards clearance, we ultimately do not control the actual timing of such an approval. We remain confident that FDA clearance will be received in the coming months and our goal of converting the customer base to the next-generation OmniPod by the end of 2012 remains achievable. We continue to move forward with our plans to unveil the new OmniPod at the American Diabetes Association Meeting which commences on June 8 in Philadelphia.

We achieved a significant milestone on the international front in the first quarter. In March, we made our initial commercial shipment of the new OmniPod to Ypsomed produced in the UK. We continue to make shipments of the new OmniPod in the current quarter, and expect that we will convert all Ypsomed's customers over the next few months.

Ypsomed has proven to be an excellent partner for Insulet and we have been pleased by the progress they have made in key markets such as Germany, The Netherlands, and the UK. As a result, just last month we expanded our partnership to include an additional 11 markets across Europe, Asia, and the Middle East for a total of 22 countries. We also extended the relationship for another year through June of 2016 and included purchase incentives which could add up to two additional years to our agreement. This gives both companies an appropriate amount of time to gain traction in these new territories. We are working closely together to develop timelines for launch in these additional locations. We expect all the new territories to launch with the new OmniPod.

With the design and development work of our next generation OmniPod completed, we have commenced work on several new research and development initiatives. In the quarter, we announced the signing of a global agreement with LifeScan Inc. a subsidiary of Johnson & Johnson. As part of this agreement we will integrate LifeScan's One-touch glucose monitoring technology into our hand held personal diabetes manager starting in 2013. We're thrilled to partner with LifeScan as their One-touch platform is recognized as a market leader throughout the world.

Recently we had several productive discussions with DexCom and are pleased that both companies are ready to move forward with the development of the integrated hand held. The new combination PDM will leverage both company's newest technologies, our next-generation OmniPod and DexCom's fourth generation sensor.

Finally, well let me provide a brief update on subsidiary Neighborhood Diabetes. Next month marks our one year anniversary of acquisition, and I am very happy with the progress to date. We have commenced cross-selling activities, and while the revenue contribution is immaterial at this point, we're pleased with the early results. Neighborhood Diabetes continues to win strategic accounts and we have launched their services around certain managed care plans in new geographies, such as Texas.

In March, we also welcomed Todd Durniak to the team as the new general manager for Neighborhood Diabetes. Todd has an extensive resume of relevant experience and will be a strong leader for the Neighborhood Diabetes team. More than ever, I am convinced the opportunities that exist between these businesses and remain excited about the progress to come.

In summary, 2012 is off to a strong start and we are very optimistic as we look out through the rest of the year. We've extended our Ypsomed relationship and are thrilled that they have the new OmniPod in hand. We are eager to be working on exciting development projects with LifeScan and DexCom. Our commercial organization has been strengthened and is poised to drive and capture the demand for the new OmniPod. We remain confident that we will achieve our goal of converting the customer base to the next generation OmniPod by the end of 2012.

And with that, I'll turn it back to Brian.

Thanks Duane.

Revenue increased by 69% to $47.8 million in first quarter of 2012, compared to $28.3 million in the first quarter of 2011. On an organic basis excluding the impact of the June 2011 acquisition of Neighborhood Diabetes, revenue grew by approximately 25% year-over-year. As we've seen in prior years, sales rebounded in March after a seasonally slower January and February. This momentum appears to be continuing in to the second quarter. In terms of deductible issues and their impact on patients, the first quarter of 2012 appeared to be very consistent with what we saw in 2011. We do not expect insurance deductibles to be a significant concern in Q2.

Gross profit for the quarter improved to $20.3 million, compared to a gross profit of $13.5 million in the first quarter 2011. Our gross margin was approximately 43% in the quarter, consistent with the fourth quarter gross margin and down from approximately 48% in the first quarter of last year. Margins in our US OmniPod business remained flat at approximately 50% in first quarter of 2012. Operating expenses for the first quarter were $31.2 million compared to $20.8 million in the first quarter 2011, and $30.6 million in the fourth quarter 2011. The year-over-year increase is primarily related to the operating activities of Neighborhood Diabetes including amortization on acquired intangibles. Sequentially the increase is primarily related to the ongoing FDA approval process, the additions to our commercial team, and timing of payroll related expenses.

We reported an operating loss for the first quarter of $10.9 million compared to an operating loss of $7.3 million for the first quarter of last year. Our first quarter 2012 operating loss includes approximately $6.4 million of non-cash operating expenses comprised primarily of depreciation, amortization, and stock -based comp. Excluding these expenses, our cash operating loss for the quarter was about $4.5 million. We continue to believe we will be at or near operating cash breakeven in the back half of this year.

As a reminder, we define operating cash breakeven as earnings before interest, taxes, depreciation, amortization, and stock compensation expense. Net interest expense was $3.8 million in the first quarter of 2012, compared to $2.6 million in the first quarter of 2011. The increase is a result of the refinancing of our convertible debt last June. Of the $3.8 million in interest expense, approximately $2.5 million was non-cash.

For the first quarter we reported a net loss of $14.8 million, or $0.31 per share, compared to a net loss of $9.8 million, or $0.22 per share for the first quarter of last year. As of March 31, cash and cash equivalents totaled $83 million, as compared to $94 million at December 31. We believe we have sufficient cash on hand to achieve operating profitability. And as of March 31, we had approximately 47.7 million common shares outstanding.

Finally, we reaffirm our previous full year 2012 revenue guidance of $210 million to $225 million representing nearly 40% to 50% growth from 2011. We continue to expect an overall operating loss of $25 million to $35 million. For the second quarter, we expect revenue in the range of $50 million to $53 million. And with that, let me turn the call back over to Duane.

Thanks Brian. We had a strong first quarter as all aspects of the business continue to execute well. We manufactured a record level of Pods, and the quality of the product has never been better. We shipped the first next-generation OmniPod to the UK and a have extended our Ypsomed partnership to bring the benefit to the OmniPods to even more countries. We continue to make progress towards gaining 510-K clearance in the next-generation OmniPod, and we remain confident we'll launch later this year. 2012 is shaping up to be a transformational year for Insulet.

And with that operator, can we open it up for questions?

(Operator Instructions)

Danielle Antalffy with Leerink Swann.

Hello guys, good afternoon. Congrats on a good quarter.

If I could just touch on the next-gen OmniPod, obviously everyone's waiting with baited breath. Could you guys talk about what the -- so it's looking tight here for ADA. I know you've talked in the past, hoping to get it by then. What's the drop dead date, so to speak, that you'd need to get approval by, in order to achieve your goal of transitioning patients by year end?

Danielle, this is Duane.

I think the drop dead date, and to reset everyone's expectations -- I think the drop dead date is all centered around the manufacturing capability. As long as -- I think the manufacturing capability is really the gating factor to be there, and we're pretty excited that we think we have a pretty clear picture on where and that we should be able to achieve that. And within that time line we -- and once again, I've got to be careful -- but we have no -- based on the recent round of questions -- we have no reason to believe that we won't have FDA approval well before we have those lines up and working.

Okay great. So if it's fair to think about how reorder rates go with the OmniPod, is it fair to say, manufacturing aside as far as approval goes, you'd need approval by end of Q3, have a quarter where you can get transition all of those patients? Or is it earlier than September 30?

Yes, no that's correct, Danielle. We need effectively the reorder cycle, which with a great majority of our patients is quarterly, to be able to really convert them over to systematic way. I think it would be challenging to try to take within a reorder period like -- if we only had a month or two I think that would be more of a struggle. But basically we need a reorder period to be able to get everybody converted over.

Okay. Awesome, that's really helpful.

And then on the manufacturing side, it actually sounds like -- and correct me if I'm wrong -- you're moving the timelines up a little bit, which is encouraging. If I remember correctly, the third line was supposed to be by year end. Is it -- A, am I reading that wrong? And B, is there anything to read into that -- i.e maybe this could actually happen sooner or faster?

Danielle, this is a Duane again.

Look I think from our standpoint, a couple of things have gone right in the quarter. We started making product so we're kind of excited about it. We still have to get over all the normal stuff when you go from making a thousand a day to a million a day. There's still -- I don't want to trivialize this -- Charlie will kill me -- but we feel pretty good about it. I think we have some really good visibility and I think we gained a great deal of confidence by starting to produce the product. So we know where we are, and we still have to execute. I'm not -- like I said, I'm not making little of that because it's always a big challenge to get all the pieces there. But now that we're starting to produce, we know what the touch points are and we have people all over it.

Is it fair to say at this point, that, based on what you know so far with the manufacturing -- first line up and running; second line should be up and running shortly -- really, once you get approval, you guys are ready to go; and do you feel confident there won't be hiccups?

Okay, I think what we want to do is, it's back to the same thing. If you're making 1,000 a day, you learn things. If you're making 5,000 a day, you learn some more. We just want to be cautious. But I would tell you, we're feeling pretty good about where we are. Like I said, I'd err on the side of caution, because once I convert someone, I'm not going to be able to convert them back to the big one. So that -- in the back of my mind that's the thing that's always [cading] everything we do. We went to make sure we're pluperfect, because once I switched it to the little one -- as good as the current one is, once I switch you to the little one, you're not going to want to go back to the big one. So I just want to make sure we got it right so we're not in the ugly predicament of trying to explain to people, well, try the big one back on for a little while.

Okay, that's so helpful. Thanks so much.

Kim Gailun with JPMorgan.

Thank you. Hello guys.

So, first question is on the FDA manufacturing process. And could you maybe describe for us the content of your back and forth with FDA? It sounds like you had some verbal back-and-forth and then you had some written back-and-forth. Can you give us a little bit more color on the nature of the questions that were flying around on both of those?

Sure. I think on the verbal back-and-forth, the agency reached out on a couple of things that we submitted; they just needed some clarification. They didn't quite fully understand either where certain things were or what we were referring to. So that was straight forward.

And on the written back and forth, I would characterize most of the questions as spun out of the previous responses that we made. So that what's really -- I would tell you there's nothing new. Some of it was, we included a couple of summary reports, they wanted to see the detail behind the summary reports. Some -- one we forgot to include a label so there was some of that. It was -- I think in the first round of questions we had 40-something and this one was more than a dozen. But they referred back -- they were spun out of the 40-something responses that we sent in.

Okay. That helps. So really nothing came across that was new or surprising relative to the prior set of questions?

No, I would tell you -- the best way I can do is to give some -- I think within -- don't hold me to the exact -- but within 8, 10 days, you're getting the questions we responded to. To give you some indication more on the nature of them. Right? So there was no run in to a lab somewhere and doing some testing. We got the questions in, like I said, within 8, 10 days I think we responded.

Okay, and is it fair to think that you probably responded even though timing of that was probably in the last week, week and a half?

Yes, in the last couple of weeks. Yes.

Okay, and just a follow-up, a separate question, excuse me, on manufacturing on line one. It sounds like every time we've spoken over the past three months it seems like things are really moving in the right direction. Can you tell us how many Pods per month you're making right now on line one?

Well, overall, at this point I think we have the capacity to make in the neighborhood of 150,000 to 200,000 Pods per month. We're not running it every day full speed; don't really have the need to yet. Right? But we absolutely are starting to produce product, and there's some of those Pods that are now part of our inventory. As we sit, you can look at the balance sheet and see that our inventory balance has started to increase and some of that is related to the aeros product.

Great, fantastic, thank you.

Bill Plovanic with Canaccord.

Great, thanks. Good evening gentlemen.

So walk me through, if you could -- we have a couple things going on, we have the upgrade to the gen-2 Pod. And then we have the J&J agreement, which if I read things right, Abbott ends in the end of February, J&J begins in March. How is that swap-out going to go? You're going to swap one hand-held and then six months later you swap out a new hand-held? Or can you help me understand this please?

So where we are with that is, we're going to swap out everyone to the new product, because we want to get them out. And then to go to the LifeScan product, there will be a cost associated with that, until people come out of warranty. When people come out of warranty, then they'll come back in and they'll buy it. But we're not going to immediately swap everyone out unless we're compensated. For the LifeScan money. So LifeScan, starting in 2013, LifeScan will get all the new business that we're doing.

Starting in January or in March?

In March. So starting in March, everything going out will be a J&J embedded glucose meter. And -- but with regards to the installed base, there is a mechanism to swap that out if we're compensated. So -- but if we're not compensated, then we're not going to swap it out.

Bill, if said another way I don't think it's fair to assume at this point that we'll ultimately only wind up with one blood glucose meter partner. Right? So certainly, we're very excited to have LifeScan as a partner and effectively have that option, soon to be available for our customers. It doesn't necessarily mean that we're just going to wholeheartedly go from one to the next at this point.

Okay, and then Brian, what is the cost of a handheld for you?

Today, roughly, excluding warranty costs and some other things, a little over $100 a PDM, right? So, as we've talked about beforehand, when we swap people in the back half of this year to the next-generation OmniPod, it's effectively a three-month payback. Because we save somewhere in the neighborhood of $3 to $4 per Pod. We'll ship you about 30 Pods in your initial reorder. And the cost of the PDM happens to be between that $100 and $120 mark, so those effectively offset each other.

Okay, I asked the question -- if you're not going to be upgrading to the gen-2 Pod until the back half of the year, November, December; October, November, December -- whatever it may be, and then you literally right around the corner two months later have this whole new handheld, why wouldn't you just wait a couple of months and then push everything out then?

I think, again, one of the big things, we think it's important for our customers to be able to get them this next-generation OmniPod as soon as we possibly can. Certainly there's some financial benefits to the business as well by doing so, but we think ultimately it's going to be a great product, and it's going to provide the customer with a great experience. So our push is the same as it's been, which is, we're moving everybody to the next-generation OmniPod, frankly, as soon as we're able to.

And then I was wondering if you could just frame the response you gave us in regards to moving forward with DexCom and just give us a little more on that.

So Bill, this is Duane.

I think where we are with DexCom -- it was pretty simple. I think from day one, if you remember, kind of give you -- and not to bore everyone with that history -- but we put their gen-3 sensor in our current handheld, and we went through that whole process and we submitted it to the FDA, and we had 80 pages of questions, and they said this is not the end, so we postponed that. So now both companies feel pretty good about next-generation product.

I think from day one, we think the process of doing this is pretty straightforward. What was the difficult part of the previous one, was that both companies had to re-qualify every single product they had. So we had re-qualify the Pod, we had to re-qualify the handheld, and they had to re-qualify the sensor. So I think the actual engineering of putting these two together is going to be pretty straightforward. DexCom is deep into their process, we are deep into our process, we can see the light at the end of the tunnel. We think the engineering -- we're going to sit down and bang this thing out and put together, and then go from there.

I'd just add to Duane's comments that I think both companies have looked at this as a winning product combination that we both want to move forward with. And one of the benefits that we have, is with the Neighborhood acquisition, which allows us a better opportunity to be able to serve customers in a more efficient manner. So those are some of the things we have worked through with the folks on the other side.

And your stake in the stand on timing of commercialization of the combination or sensor-augmented pump product?

Not yet.

None. Lastly, just to go back to the first question I asked -- a drop-dead date for ADA? It just sounds like you'll show the product at ADA, but you won't have approval; you're expecting approval sometime after ADA -- is that fair to say?

Again, let me qualify this. I cannot speak, obviously, on behalf of the FDA. We got a set of questions that, within a very short period of time, we turned around. We are very encouraged by the set of questions, and we are very happy that we could quickly answer them. We have our fingers crossed. Having said that, there's nothing to say that one or two may not come back here, but we're in the queue. The Agency has been pretty responsive, and we are going to do whatever we can do to help them along. And I think the real trick for us is, as soon as we get any feedback from them is to flip it ASAP.

So, like I said, I think we were happy with what we saw coming back, and we went from 40-something to 14 or 15, I think was the number, probably. And it was very quickly turned around.

Great. Congratulations on a good quarter.

I am not going to sit here and say we will have it by then; I'm also not going to sit here and tell you we won't have that by then; because I don't control that piece. Like I said, we know, the type of questions we had, we were able to turn them in literally 8 to 10 days; we were able turn those responses; and we are assuming, to the extent we get something, hopefully, it's a much, much smaller subset of the one we have, and then we should hopefully be there, worst case.

All right. Thanks, and good quarter.

Your next question comes from the line of Ben Andrew with William Blair.

Two questions for me. Brian, you said it was ex-Neighborhood, diabetes growth was about 25%. Was that the Pod growth?

It is the legacy on the Pod business growth, if you will; yes.

Okay, and then you talked about Jan-Feb being weak with March recovering. And you said it was typical to last year with that continuing through April and into May. Can you characterize the breakdown in the quarter? Is it 40% of the revenues, or 45% that's coming in, in March? Is that something we should continue to expect, based on what you're seeing, given that you said you don't see any new issues with deductibles and co-pays?

We're always a little hockey-sticked in the third month of the quarter, just given part of it's a sales cycle where January and February every year is slow. Also, it is a normal habit of companies the last month of the quarter, the urgency maybe ratchets up a notch. And our reorder cycle works off of that, so the 40% or 45% is probably a good barometer to use. That said, when you get into Q2, Q3, or Q4 you don't have that same seasonality effect that you have in January and February. So from an initial shipment side, it is not as much of a hockey stick in the remaining quarters of the year.

Okay, and just on that point -- if the patient is aware gen-2 is coming, are you seeing anybody, not maybe yet deferring purchases, but is that a possible short-term impact? And you get those back, obviously, but is there any likelihood we can see that over the next few months?

I can't tell you that it is going to be an absolute zero by any stretch. Who knows for sure? We certainly think there are patients who are going to be very excited about the next generation OmniPod, who for whatever reason don't want to have the current one and haven't come on the product before. I think we all have anecdotal stories about that. That said, the sales team has done a tremendous job and continue to do a tremendous job to meet with potential customers, as well as healthcare professionals; talk to them about the benefits of being on pump therapy.

Keep in mind that 70% to 75% of our customers have never been on a pump before. If a pump makes sense for those people, there is no reason whatsoever to wait. It's to get them on product now, and ultimately the upgrade path will take care of itself with no additional cost or burden or any of those other things. So given that, we think we have done a real good job of trying to mitigate the risk of people deciding to wait for something that, frankly, is still an unknown target. Can I tell you with a certainty that's everybody? Of course not.

Finally, Duane said, you had thought you would have the approval in hand within months. If we say we are sitting out at the end of August and you've got approval at that point, would there be any need for you to change guidance for the year? Thanks.

No.

Okay, thank you.

Your next question comes from the line of Sara Michelmore with Brean Murray.

It is actually Max on the line. Thank you for taking my question.

I had a quick one, more on the launch update and everything. I know you were gunning for ADA in June, but I just want to get some details or clarity about what kind of backup plan you would have, and how you would go about that if it didn't come in time? Thanks.

So, I think from our standpoint, if you have been to our booth, we have a whole international section, so there will be -- the next generation Pod will be at the booth. It's CE Mark-approved; the Ypsomed folks will be there, so we will be showing that to people. To the extent that we don't have FDA approval -- if our lawyer was here, he would give you the litany of laws on pre-marketing. I think it is simple -- if we don't have it there, half of the booth is going to have new product and the other half of the booth will have probably the product that basically says not-yet 510(k) approved. So there may be a banner over the thing.

We have a couple of contingency plans, just in case we don't have it. Like I said, it is just a nice industry event; it would be nice to have. If we don't have it for there, as Brian articulated, it really doesn't impact where we want to be as a business by the end of the year; but it would just be nice, for no other reason, to have everybody in one room and unveil it.

That is great. That's very helpful. And then if I could ask -- last call you talked about some reimbursement stuff going on in France, and the whole push for China. And can you give us any updates or color on that?

We are pretty much status quo with where we were three months back. We are still working around the French reimbursement. Now with the CE-Marked Pod and the plan would be to figure out how to gain it around the next-gen product as compared to the older version. In China, we are still going through the SFDA regulatory process there, as well.

Great. That is all for me. Thanks.

Your next question comes from the line of Raj Denhoy with Jefferies.

I wonder if I could ask just a bit more on the manufacturing. I know that has been asked quite a bit -- you still seem a little bit, I don't know if skittish is right word, but you still seem to have some doubt in your ability to manufacture at scale. I think you have called that the gating factor in terms of your ability to swap patients out. I guess I am curious what you have seen or what still causes it, now that you have the first line up and running, to still have a little bit of concern on your ability to manufacture these at scale?

Raj, I would tell you, history has proven to us from the original line and in the new line -- I am not skittish, to use your words -- about our manufacturing capability; but the supply chain has to be pluperfect to get up to those kind of volumes. And that's the process -- we have to get our line up, we have to get our line working; and now we are working our way back through the supply chain. As an example, if you go back to the old days of the OmniPod, we started off with single-cavity tooling, then we went to multi-cavity tooling. Well, we are starting out with multi-cavity tooling, but what you find is, when you start ramping up, all cavities in multi-cavity tooling may not be created equal, and you got to weed through that.

For us, it's an iterative process. We feel pretty comfortable about it. I have no doubt that we'll get there. Like I said, you learn things, and there's a reason that you don't see a lot of people making Class 2 medical devices that make 1.4 million Pods in the quarter. It's a process. But we're pretty excited about it. Like I said, I think we've taken a big step forward in our manufacturing. Like I said, when you go to ramp this thing up, and you find out that two out of the three cavities are perfect and the third one is not so good, so you have to go back and do that, tweak that to make sure you can maintain the volume. I think the manufacturing side we feel really good about. The supply chain side is what we are digging into now to make sure we can support what we are doing.

That was perfectly clear.

Just a couple of other questions as well. As you now started to supply the next-gen Pod into international markets through Ypsomed, what has been the initial feedback? I think in times past you have talked about how half of your patients in international markets come from competitive pumps. Have the availability of the next-gen Pod changed that dynamic at all? Are you capturing more potential competitive pumps?

I think next quarter, at the end of the next quarter call, we will have a much better indication. Right now, it is too early. We shipped the stuff at the end of the quarter. Ypsomed is going to do more of a formal roll-out at their --

The DDG conference.

The DDG conference. They're using that as the big coming-out party. So we have a little bit of anecdotal, but it would not be fair to characterize any of it yet.

Okay, fair enough. And lastly, Neighborhood Diabetes -- as you mentioned, a year now we're into that integration, and yet you're still commenting that there is very little synergy happening there. What is the issue there as well? When do you expect to start seeing these synergies start to take hold?

I guess I would characterize it a little bit differently. I think we have been pretty clear since we did the acquisition back in June, that it was going to take us the fair part of two or three quarters to work through all of the true integration efforts, to make sure that we could be in position to be able to do a good job on this. I think we could have rushed it, and been able to maybe make some short-term impacts sooner; but at the same time, we might have sacrificed in the long run to be able to do that. So a lot of effort went into the people side, the managed-care plan side, the system side -- all of those pieces to make sure that we are up and ready to go.

I think that work is done. Really, we spent the first quarter and even the beginning part of the second quarter fine-tuning the process of how we are really approaching customers around the cross-sell. The good news -- I think the feedback has been excellent so far. I think I mentioned previously, we did some marketing work back in the back half of last year that showed you that 8 out of 10 customers had interest in this service, assuming that you can keep them economically level with where they were. So I would not read into it that there has been a delay, I think we have actually been pretty much on track. I think, appropriately, we are taking our time to make sure that we don't stub our toe along the process.

Fair enough. Lastly -- attrition rate still 9% to 10%. Any change on that front?

Sorry, one more time, Raj?

The attrition rate. I think you commented in the past, 9% to 10% has been where it has been running. Any change?

Good news on that front. We're still a solid 9%, but I'd tell you, we've actually creeped to the other side of 9%, as compared to being on the side between 9% and 10%.

Good to hear, thanks.

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

Maybe a first question -- and a lot have been answered -- but Brian, can you give us any feel for the amount or range on what was the Ypsomed shipment in the quarter?

Overall? We shipped them probably in the neighborhood of 100,000 Pods or so in the quarter. Somewhere around there. Again, they're making good progress as they continue to add patients overall.

Got you. This builds on an earlier question; I just wanted to make sure -- the 25% organic growth that you gave, that compares to the 30% number that you provided last quarter and think of it as what you were reporting as insulin as a stand-alone entity before you acquired Neighborhood; an all-in revenue, not just a Pod number. Is that correct?

We have never broken out between Pods and PDMs or any of that stuff. Think of it as, if Neighborhood did not exist, that is what the growth would have been.

25% in 1Q and 30% in 4Q.

And then, maybe asking the synergy question a little bit differently -- but what synergies are recurring right now? What has been the easier work to get out of the gate, and what do you think is the next challenge to come on board?

I think the main focus of the synergies so far have been around the cross-selling efforts that we have talked about. So there's two main channels there -- how do we bring OmniPod customers things like testing supplies? And that can happen through either the pharmacy side of the house or the DME side of the house -- the more managed-care plan side of it. Both have parts where they're easier than the other, and probably both have the parts that they're a little more challenging. So that has been the main focus on it.

Secondarily, for a while now, we've had some synergy that is happening at the doctors' offices across the sales teams, so we've tried to help support each other a little bit and making sure that we are managing a doctor's account, and if there is something that the doctor needs from the OmniPod side, but the Neighborhood rep is there, we can try to cover those things for each other. So that has been a big positive over the last couple of quarters.

And third, the big area probably to come is really focusing around how can we start to look through their base of customers, especially with the next-generation OmniPod on the horizon, and be able to bring some of those MDI patients, for example, to pump therapy.

Perfect. Maybe just last two quick questions for you.

Just a clarification on the combo product with DexCom. Let's just say, if you were to get the approval in a week, would you turn around and go ahead and proceed with the filing before gen-4 gets approved? Or is your take, we are going to wait until our next-gen is approved; we're going to wait until gen-4 is approved, and then we will go ahead and work on the filing?

This is Duane.

I think from our standpoint, We're going to wait for our product to be approved, because we think it is relatively close -- and I am not the expert on this; that would be a good question for DexCom. I don't know if you can have a couple of PMAs at the same time. My guess might be not, but I am not, by any stretch, the expert there. So that would be a good question for the guys at DexCom. But from our standpoint, we want to do it with our next-generation handheld and our new Pod, obviously, because we want to convert all of those people anyhow by the end of the year, so we want everything running off of that.

Perfect. And very last one -- on the sales guys that you have been bringing on board, how do you view that? Where do you see the ramp, and when do they turn the quarter on being additive, if you would, in terms of making back their costs? Thanks.

That is a great question. I think if you look at the really good ones, I think we are starting to shorten this down to a two- or three-month potential, where they are paying for themselves; and some of the other territories -- a lot depends on the territory you stick them in -- but some of the other territories, probably it's closer to five or six. One of the things we are doing, with the inside sales force, what we are trying to do is -- is there a way to shorten this ramp, and is there a way to additively increase the productivity of our existing guys? We have only had that in place about 10 days now. So far, I would tell you, it is promising, but once again, it is too early to tell.

Perfect, thank you.

Your next question comes from the line of Ben Haynor with Feltl and Company.

A quick clarification -- when you say compensated to swap the units out when going into the new LifeScan PDM -- would that be compensated by the patient or by LifeScan?

Yes.

Which one?

Both.

Oh. I got you. And then -- last call you mentioned a couple of potential white papers you might have in the works on reducing healthcare costs using the Neighborhood model. Is there any update on that?

I think on the Neighborhood, what we did is we brought in -- I mentioned in the script -- we brought in Todd Durniak, and Todd is in the process of putting together a whole sales pitch on how we're going to roll this out. But we are pretty excited about the possibility. Just to give everyone clarity -- it is pretty simple. 65% of the cost of a diabetes patient is when they either walk to the emergency room or are brought in by the ambulance; and what we've seen from this Neighborhood model, by just talking to these people, touching them out, they have reduced; and these couple of plans, they have reduced hospitalization. We are putting the final touches on that.

Like I said, we didn't want to roll that out until we had a general manager to go forward with this, because we need someone to put all those pieces together. But we're pretty excited about it, and we think it is real. We really think it is real.

Would that be something you would put out there at ADA?

That is something we may be putting out there at ADA.

That is all I had. Thank you.

Your next question comes from the line of Thom Gunderson with Piper Jaffray.

Just following up on the last question, do you have two or three things that you think we or investors should focus on at ADA? Are there posters or sessions or seminars that will advance clinical data or quality of life or cost or any of those kinds of things?

I think we have highlighted it a little bit, the couple of white papers we put together. I would have to get back to you on whatever else is out there. I know they are working on a couple of things, but I do not have it at my fingertips at the moment.

And a quick clarification from a previous question -- I got a little bit confused by the question and answer. Gen-3 is off the table for you guys, right? It is gen-4 on DexCom, and you will do it by whatever the way FDA is most amenable, but gen-3 is off the table?

Absolutely. But Thom, just to give you perspective, gen-3 is on a bunch of these various closed-loop sites. When you hear people talking about our product working in the closed loop in conjunction with the DexCom sensor, that is all of that clinical work is being done with the gen-3 product.

Got it, thanks. And then, polling or market research -- have you gone to your users to see, do you have a sense of how many are using LifeScan now, and how many are using DexCom now, and maybe even how many are using both?

We do have a sense -- I'm not sure we probably want to share it today. We have said in the past, at least on the blood glucose meter side, that over 90% of our users use the current meter that is integrated into the device, into the PDM, just because of the simplicity and the ease of having it at your fingertips in that one device. I would tell you that when you get into the few folks that are not using that meter, OneTouch is the largest meter of choice of the remaining group. And fair to say, again given our population, where a third of our patients are kids, DexCom is used pretty frequently and pretty prevalently across that group, but we probably would not have a percentage to share at this time.

Got it, thanks. Last question -- just clarification for me, I appreciate it. When you are talking about supply chain, and you're talking about three new lines starting up very quickly and at extraordinarily high volumes for medical devices, how are you managing the raw materials and the work in process as you go into those lines, when you're going to have a hockey stick of output. When we see the Q, are we going to see a big increase in inventory?

What you will see as we approach the back half of the year, absolutely is going to be the increase in inventory. And from our standpoint, with all of the lines up and running, we also, what you will see is, we will make sure we build an adequate safety stock. Because, as I said, the scenario we are not going to get ourselves into as a Company is, I'm not going to convert you, put you on the smaller Pod and then four months later tell you, go find your old PDM and use the big one for the time being. So you will see, the ultimate cushion is inventory.

The reality of it is, like I said, unlike when we did this the first time, we built all kinds of multi-cavity tools. We're in the process of qualifying all of that. We're working our way through the supply chain. Very early on, we have enough experience that we know the two or three critical vendors that we're going to make sure have to get up to speed very, very quickly. So, Thom, it is a great question. That is the challenge ultimately -- having every single piece -- if you have a product with 25 pieces in it, having 24 right and one missing means you don't have a product, and that is the challenge. But it's also the huge opportunity we have had as a Company, and I think we have done a pretty good job with it.

And just to clarify one thing on the financial side of it, you will start to see a little bit of uptick in inventory. The way inventory works, we effectively buy finished-in product from Flextronics. So ultimately, part of the service that Flextronics provides us in outsourcing our manufacturing capability to them, is that they are the ones effectively procuring raw materials. So we work very carefully and closely with them on the supply chain to make sure that they have appropriate amounts in hand, and suppliers have appropriate safety stocks within their businesses and the like, to make sure that we are good, because I think everyone gets this is a very important medical device product and nobody wants to run out. But within our balance sheet, when you actually look at it, just to be clear, it is effectively just finished good product.

Got it. Thanks for that, Brian. And that is it for me. Thanks.

Your next question comes from the line of Anand Vankawala with Avondale Partners.

Quick follow-up on Ypsomed -- what's the expectation for additional country launches by the end of this year?

We would love to be able to get to that position with China; and again, it is a regulatory process that we don't control. And we're working our way through France, which are two of the primary ones. Beyond that, with the next generation Pod, Ypsomed is effectively in seven markets, with Germany, Switzerland, Netherlands, UK, Sweden, Norway, and I am probably forgetting somebody. But that is their core group today, and we are working through a few others to be this year.

So a country like Austria, for example, that leverages some of the German PDM already, is one that we would be able to probably launch in relatively short order. A couple of the other ones which get into new languages and new territories will take us a little bit longer. To give you a flavor for it, I don't have, at this point, an actual country by country list. We are still working through that with the Ypsomed folks to make sure we have the right prioritization, the right schedule, and the right timing.

Thanks for that. On the manufacturing side, just trying to understand -- what are the single points of failure for the supply chain as far as raw materials go?

This is Duane, and Charlie will be much better equipped to take that question.

But from our standpoint, it is just a question of, this is a medical device; they have to be within spec, and like I said, I think it is a process of, you qualify one of the cavities, you qualify the second and you qualify the third. Like I said, there is two or three components. In the old product, it was always the chassis that was the key to the whole thing. This one, I could tell you about springs and rings and other things that wouldn't mean anything to you. But there's two or three components that we think are clearly on the critical path that we are focused on.

Charlie, as we speak, is in China. So we know where they are, we think we have a pretty good handle on what we have to do. You just have to pay attention to it. Like I said, to make 1.4 million medical devices in a quarter is no small feat.

Keep in mind that most of the vendors, most of the supply chain -- it's the same. So it's not like there's a lot of new folks here that have no idea what we're doing. We're ultimately just making sure that we have a good seamless transition to be able to move volume from one product to the next.

Perfect. Thanks very much. Great quarter.

Your next question comes from the line of Greg Chodaczek with First Analysis.

Just a couple of quickies; everyone asked the important questions. Number one -- does the FDA have to sign off on a line prior, or can they sign off on the line prior to the 510(k) approval?

This is PMA, the 510(k). The FDA has to sign off on the manufacturing. So it really is based -- it's their review of the submission, and the supporting data has nothing to with the manufacturing line.

Okay. Number two -- what was the percentage that you mentioned right at the beginning of the call, Duane, of pump users using the OmniPod?

10% in the US. Basically, we have a 10% share in the US of US pumpers.

You did not give out total international revenue numbers, Brian?

I did not. Sorry.

I had to ask.

Also, based on the DexCom call, to quote them, they are talking about the Vibe, they were talking about the FDA appears to be moving at a rapid pace, for them; and if this continues, we want to avoid causing any unnecessary delay or confusion by filing a PMA supplement on top of a pending PMA. So for all of those listening, that was the DexCom comments. And the most important question, Duane, is -- were you in Kansas City when Mariano went down? I'm afraid you may have something to do with it.

I wish I had that much leverage on anything.

Thanks. We will talk to you later.

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

Duane or Brian, how many Neighborhood diabetes customers have been converted to the OmniPod?

Onto OmniPod pumps, you mean? I don't have an exact number -- not a lot, because again, it has not been the primary focus. Ultimately, a lot of that comes back down to managed care plans and other things. Some, but we have not put together very formal active programs to do so.

And how should we look upon for the rest of the year? Considering a pretty sizable Neighborhood diabetes customer base, I know that was one of the things that was mentioned in the prior calls. Should we look upon the remaining of the year as a core area of focus? Or you would say this is more 2013 and beyond?

As we've previously talked about, the primary focus is right now around some of the synergies that we're after from the revenue side, have been around some of the cross-selling efforts. We think there is a lot of benefits to be had there in a relatively short period of time, and to really improve our customer service effort for a lot of our OmniPod customers by doing so. And secondarily to that is this idea of, with the next-generation OmniPod hopefully in hand, which has been part of our driver for it, is to be able to plan it around then, is to be able to more aggressively and actively go after those customers. To characterize it as somewhere in the end of 2012, beginning of 2013, is probably the right timing, but I'm not sure exactly when.

Suraj, what we didn't want to do is, we did not want to go out and start soliciting them, giving them the old product and then launch the new one. We just thought that would probably create more bad will than good will. Just so you know, your timing is probably, as Brian said, the end of the year. We want to go at it with the new product.

Fair enough. And Duane, this might be an unfair question, but I will still ask -- when do the Flextronics contracts come up for renegotiation? And can you shed some color on how you will see rising Chinese labor costs flowing through, directly or indirectly, through your renegotiation efforts? Is it -- do you have a fixed cost for the next two or X number of years? How should we look upon, for whatever time frame you can give us some color?

I think if you take a look at it, I think there is probably a year or so left on the current contract. The good news for us is the labor is a tiny cost for us, so we even -- and it's all baked in, so we haven't baked in the increases. So, it really is not a material change to our cost of product. Quite the opposite -- with the increase in volumes, part of our negotiation with Flextronics is we believe we ought to be seeing costs -- even with the labor increase, we ought to be seeing cost reductions coming on the existing product.

And then obviously, the next-generation product right out of the box is cheaper. I think we're going the other way. It's there with -- Flex has made us aware of all that's going on there in terms of labor, but it's pretty much baked into every piece of guidance we've given you. Like I said, the good news for us, from a materiality standpoint, the largest single number in that bill of materials continues to be the actual BOM material costs.

Duane, finally, just for clarity purpose -- and this might be mundane -- but I know you brought up multi-cavity tools on more than one occasion. I am curious -- if you mentioned springs and cams, or I am not sure of other words that you used, even if you have a stainless steel or aluminum tool, with however many cavities you have, you are already doing it for the OmniPod, and you are replicating it, or shrinking it, if I may, in terms of size for the cavities. Maybe you are adding in more cavities. But if your intrinsic structure of the tools has changed, whether that's some cam mechanism, some sort of built-in motors, am I fair to say that the method of attachment of the body has changed?

No. To give you some sense -- if you popped open the cover of the two devices, first of all, the adhesive and everything else, obviously everything gets smaller and that is the reality of it. The drive mechanism is the same, the reservoir is the same material, the insertion is the same material, but when you shrink that all down, obviously you can't use the same tools.

And so like I said, from our standpoint -- and what we did is, I think if you follow the Company and you go back four or five years, we went through this whole big plating process with everything that was going on -- we have eliminated all of what we believed were the highest areas of potential failure, so there is no plating in this next-generation one, so we made some tweaks to that.

There are some tweaks, and if you pull them apart, you look at it. But the fundamental way this product works, attaches to the body, is exactly the same. We kid around here, we have to go through this FDA approval process and we are basically going from a fat pump to a thin pump. Other than that, not a lot has changed.

It is a head scratcher why the FDA, with already a commercially-cleared product, and if you reduced the form factor, what is taking so long? I was trying to get a handle on, is it related to the molding process, is it related to the machines?

What it is -- and far be it for me to put words in the FDA's mouth -- but let me give you a 10,000-foot level. The way the FDA, I believe, looks at this entire process is that, prior to a couple of years ago, the Agency believes that the approval process for 510(k) devices was flawed. And I can't describe what those flaws are, because I don't know. But they felt, the FDA felt, that process -- so even though you have a predicate device, even though you go in with all that, they are starting back at ground zero. And our first inkling of what was changing at the Agency is when we went with DexCom, with their approved gen-3 sensor and our approved OmniPod, and they went back and said you have to do animal testing, you have to do insulin stability testing, and they went through all of this stuff with the DexCom guys. And that is when we realized that, technically, there are no predicate devices.

If your device was approved prior to the last 24 months -- and don't hold me to it -- but if your device was approved prior to the last couple of years, there really isn't, even though there is a predicate device in the submission, in the Agency's eyes there is no predicate device. So you pretty much start all over as if this is the first time the world has ever seen the product. It helps that you have product out there, and that they can track complaint reporting and all of the other good stuff, so that all helps your cause, but you are back to square one, doing everything from -- I think we described it, from insulin stability tests being on human factors, on everything. Even though the product is out there, it's -- look, I don't make the rules, my job is to make sure I stay inside them, and do it as efficiently as possible.

But that really is, and I think we talked to the DexCom guys and some of the other people in the space, that is the fundamental change. There really aren't a lot of real predicate devices, prior to the last two years. So anything coming out that points to something that has been out on the market is deemed interesting but not necessarily of merit. So you start at square one.

Fair enough. Thanks for taken my questions.

(Operator Instructions)

Your next question comes from the line of Vivian Wohl with Federated Kaufmann.

Just a quick point of clarification. The DexCom product you had integrated is the 4, not the 5, right?

Absolutely.

It's the 4, yes.

Okay, and on their call, they mentioned that you might be doing some marketing activities, and I was wondering if that's in advance of the approval?

We are exploring some different ways that the companies can work together. I mentioned earlier, now that we have the Neighborhood Diabetes subsidiary, it's a way to potentially be able to bring things to customers in a more efficient way. Early days, looking through some different ideas, but we're exploring them.

One last question -- in the past, most of your business has been the people who are new to pump therapy, and I assume that is still the case, right?

Correct. Still 70% to 75% of our new starts, very consistent for the last few years, have been people coming from multiple daily injections that have not been on pumps before.

30% and 35% are under the age of 18, so it's -- while they may not be newly diagnosed, in terms of yesterday, that still remains the fastest-growing subset of our business.

So on that group that is taking a pump for the first time, what would you guess is your market share in that group? Obviously much higher than the 10%.

Yes, if you start taking a look at, and it depends on whose numbers you want to know, but people start -- I've seen numbers as low as 30,000, as high as 45,000, quote/unquote newly diagnosed patients, we are getting more than our pro rata share of that group.

Right, okay. Thanks. Good luck.

At this time, there are no further questions. I would like to hand the call back over to Duane DeSisto for closing remarks.

Thank you all for joining us on the call today. We look forward, we have a lot of things going on here. We are pretty excited about 2012 and we look forward to updating you for Q2. Thanks everyone.

This concludes today's quarter one 2012 Insulet Corporation earnings conference call. You may now disconnect.