Insulet Corp (PODD) 2013 Q1 法說會逐字稿

At this time I would like to welcome everyone to the first quarter 2013 Insulet Corporation conference call. All lines have been placed on mute to prevent any background-noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

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 2013 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 would 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 27-A of the Securities Act and Section 21-E of the Securities Exchange Act and are making this statement for purposes of complying with the 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 assumptions we have made. There are risks and uncertainties that can 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, 2012. 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 would also like to remind you that the guidance we are offering today represents a point in time estimate of our future performance.

You will 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 will turn the call over to Duane.

Thanks, Brian. Good afternoon, everyone, and thank you for joining us today. 2013 is off to a great start, as we continued to make significant progress across all aspects of the business, highlighted by the launch of our new OmniPod, our second consecutive quarter of operating cash profitability, and our announcement just last Thursday of our plans to develop a new version of the OmniPod, specifically designed to work with Eli Lilly's Humulin U-500 insulin.

First-quarter revenue grew by 20% year-over-year to $57.4 million. In late February we transitioned all new customer starts to the new OmniPod, and the initial feedback has been excellent. Customers and health care professionals have commented not only on the reduced size of the smaller and lighter Pod, but also the ease of use and the changes made to the insulin on board calculation. The results have been impressive. Since March 1, new referrals and shipments have increased by more than 40%, as compared to the prior year, and in April, these metrics were up by more than 50% over April of 2012. As anticipated, the launch of the new OmniPod provides our commercial team with an opportunity to engage health care professionals, who, for a variety of reasons, have not been significant prescribers in the past. While the launch is in its early days, we were thrilled by the number of doors that seem to be opening at endocrinologist practices across the country.

For example, a significant practice in the Northeast region that averaged just one new patient addition per month in 2012 has added over 20 patients in just the last 60 days. In the mid-Atlantic, one of the most recent patient additions is a Clinical Diabetes Educator at a large practice. While previously intrigued by the OmniPod's tubeless design, she was turned off by the insulin on board calculation methodology, and by the size of the old OmniPod. Once she tried the new OmniPod, she was hooked. With this CDE on board, the practice has dramatically ramped up its referrals, and OmniPod is becoming the pump of choice across the practice.

In yet another example, a pediatric center in the South would not typically recommend the old OmniPod, as it believed it to be too big and bulky for kids. Now, with the new 34% smaller OmniPod, the practice is starting kids on the saline trial using the new OmniPod. The feedback to this trial program has been exceptional, as kids and parents love the size and the automatic insertion feature of the new product. The result is that the number of referrals in just the last month was more than doubled from what we usually receive in a quarter. These are just a few examples of the stories we are hearing across the country. Our territory reps are telling us stories of new practices and educators prescribing the OmniPod. In fact, over 10% of our new shipments since launch have come from practices that did not have a shipment in 2012.

We are seeing demand grow in Europe as well. Ypsomed continues to accelerate the rate of patient additions. As they indicated in a recent press release, they continue to focus their business and dedicate incremental resources to the support of the mylife brand, including the mylife OmniPod, which is how they brand the product overseas. We continue to work closely with Ypsomed, with the goal of launching OmniPod in several additional countries in 2013.

With this significant uptick in demand, we did make the decision to delay the transition of existing customers for approximately 90 days, in order to build additional OmniPod supply. While the manufacturing process continues to improve, we had an unexpected component issue that resulted in lower than planned production in the latter part of Q1. While this component issue was quickly identified and remedied, in conjunction with both Flextronics and the supplier, we determined it most prudent to build inventory and ensure the bulk manufacturing lines were operating efficiently before we commenced the transition of over 45,000 customers to the new OmniPod. At this point, we expect that conversion will start in the next few weeks, and we remain confident that nearly all customers will be transitioned by the end of the third quarter.

Insulet was initially founded to develop a better, more patient-friendly solution for insulin delivery. At our core, we are innovators focused on technology, that will make the lives of people living with diabetes easier. This mission led us to the creation of the OmniPod, which has changed lives of tens of thousands of Type 1 diabetes patients across the US, Europe and Canada. With the launch in the new OmniPod in the first quarter, we have raised the bar even higher. Most recently, we were pleased to announce, in partnership with Eli Lilly and Company, a version of the OmniPod which will be specifically designed to deliver Humulin U-500 insulin, a concentrated form of insulin used primarily by people with highly insulin-resistant Type 2 diabetes.

As we all know, Type 2 diabetes is reaching epidemic proportions in the US. In March, the American Diabetes Association released sobering news, with its announcement that in 2012, more than 20 million people are living with Type 2 diabetes, nearly double the number from a decade prior. We estimate that up to 10% of this population, or approximately 2 million people, are highly insulin-resistant, and could potentially benefit by an insulin pump designed for Humulin U-500 insulin. The number of people with highly insulin-resistant diabetes will continue to grow in the coming years, as more people are diagnosed with Type 2. Once approved, our target markets will potentially more than double, as compared to the approximately 1.5 million people living with Type 1 diabetes in the US today.

We have held our initial meetings with the Eli Lilly team, and are putting together our development time lines. Critical to the partnership is a planned clinical program to evaluate the safety and efficacy of the combined delivery system. It's our expectation that this clinical program will allow both companies to appropriately update our labeling, and will demonstrate to health care professionals and reimbursement providers the benefits of an insulin pump specifically designed for the Type 2 patient. As time lines become clearer, we will update you as to when these programs will commence.

Our pipeline remains robust, and as we discussed on our last earnings call, we have signed a development agreement with a continuous glucose monitoring partner for the development of a CGM sensor to be included in the OmniPod. By integrating directly into the Pod itself, we are able to leverage the commonality of components across both our product and the typical CGM sensor. Thus, we are uniquely positioned to be the only pump provider who can offer the customer a combined system with one product on the body and one hand-held device. Feasibility work has continued throughout the quarter. We set our detailed project plan, and worked out deliverables, with the goal of being into human trials by early 2014. Finally, we are continuing to look for our opportunities to use our product to deliver drugs other than insulin. We have partners in multiple areas including fertility, oncology, and obesity and continue to add to the pipeline. While we cannot yet identify the partner for our oncology partnership, we have made tremendous progress in the clinical phase in anticipate a commercially available product in 2014.

We are proud to note that with all of these activities ongoing, we also continue to operate fiscally responsible manner. The first quarter of 2013 represents our second consecutive quarter of operating cash profitability. In fact, during the quarter, operating expenses remained flat with Q4 2012, and our net cash burn decreased to just over $2 million in the quarter. We remain on track to be operating profitable by year end.

In summary, we are extremely pleased with the launch of the next generation OmniPod. Initial feedback across the country has been exceptional, and is resulting in the significant uptick in referrals and shipments, as evidenced by more than 50% year-over-year increase in April. We remain confident that the new OmniPod will accelerate the top line of our business, and our prescribing base of endocrinologists will continue to expand. We expect the transition to the customer base to commence shortly, and nearly all customers should be converted by the end of September. We did experience some reorder disruption in the first quarter, as many customers have delayed shipments, or moved from quarterly to monthly ordering. We expect this trend to continue throughout the second quarter, and then begin to normalize in the back half of 2013.

Finally, we are excited about our future beyond the new OmniPod, as we work towards an OmniPod integrated with CGM sensing, towards an OmniPod pump specifically designed for Type 2 patients and towards versions of the OmniPod designed to be used for delivery of other drugs outside of insulin. With that, I will turn the call over to Brian to provide additional details about the first quarter and our expectations for the rest of 2013.

Thank you, Duane. Consolidated revenue increased by 20% to $57.4 million in the first quarter of 2013, compared to $47.8 million in the first quarter of 2012. Our core OmniPod revenue improved by approximately 25% over Q1 of last year. As Duane noted, the new OmniPod was launched in late February, and since launch, we have seen a significant uptick in referrals and shipments. New shipments and referrals have increased by more than 40% since launch, as compared to the prior year. The increased revenue resulting from these higher shipments was offset in the quarter, as expected, by lower than planned reorder revenue, as existing customers delay shipments or lower quantities ordered in anticipation of converting to the new Pod. We expect this disruption in reordering patterns to continue in the second quarter, and then normalize in the back half of 2013, as the transition is completed.

Gross profit for the quarter improved by 24% to $25.2 million, compared to gross profit of $20.3 million in the first quarter of last year. Gross margins expanded by approximately 100 basis points to 44%, as compared to Q1 of 2012, and remain relatively unchanged from Q4 of 2012. Gross margins should remain at this level in the second quarter, as we provide in-warranty customers with a new PDM at the time of transition at no additional cost. With the base expected to be converted by the end of the third quarter, we remain confident that we will achieve 60%-plus gross margins in our US OmniPod business by year end, and 50%-plus gross margins on a consolidated basis.

Operating expenses for the first quarter were $31.4 million, effectively flat from last quarter, and from the first quarter of 2012. Operating expenses are expected to be in the range of $32 million to $34 million per quarter for the remainder of the year, as we invest in our sales and marketing functions to support our growth, and as we continue our development efforts with both our CGM partner and with Eli Lilly. Our operating loss for the quarter declined by more than 40% to $6.2 million, as compared to $10.9 million in the first quarter of 2012. Excluding non-cash expenses such as amortization, depreciation and stock-based compensation, we are operating cash profitable for the second consecutive quarter. Net interest expense was $4.3 million in the first quarter of 2013, compared to $3.8 million in the first quarter of 2012. Of the $4.3 million in interest expense, approximately $2.9 million was non-cash. Finally, we reported a net loss for the first quarter of 2013 of $10.7 million or $0.20 per share, compared to a net loss of $14.8 million or $0.31 per share for the first quarter of last year.

We sold 4.7 million shares of common stock in January at a price of $20.75 per share. This offering resulted in net proceeds to us of approximately $92.8 million after underwriter fees and issuance costs. As of March 31, 2013, cash and cash equivalents totaled $148.1 million. Adjusting for the proceeds received from the offering, our net cash burn was just over $2 million in the first quarter. As of March 31, we had approximately 53.3 million common shares outstanding.

As Duane noted, initial feedback for the launch of the new OmniPod has been excellent, and we are seeing the results in significant increases for both referrals and new shipments. These increases will be tempered slightly in the second quarter, as reorder patterns remain choppy, in advance of the customer base conversion. As a result, we are projecting second-quarter revenue of $59 million to $62 million, and for the full year, our revenue range remains unchanged at $240 million to $255 million. With that, let me turn the call back to Duane.

Thanks, Brian. In summary, 2013 is off to a strong start. We believe the momentum in new referrals and shipments that we have seen since launching the new OmniPod will continue, and that the OmniPod will become the pump of choice for more and more endocrinologists, educators, and patients. We are eager to transition our customer base and thank them for their patience, as we work to ensure that their experiences with the new OmniPod are as positive as new customers trying the product for the first time. And we are excited about our pipeline as we continue development on other drug delivery opportunities. We continue with CGM, and now the first Type 2 insulin pump for people living with highly insulin-resistant diabetes. With that, operator, please open the call for questions.

(Operator Instructions)

First question comes from the line of Danielle Antalffy.

Brian, I was hoping I could dig a little bit more into the gross margin expansion, as you transition the existing patient base. Does the outlook for the cadence of gross margin expansion for the year change at all, if you could talk a little bit about that, given the PDM automatic upgrade? And then ultimately, where, in 2014 and beyond, I appreciate that you can't give guidance per se. Can you talk directionally about gross margins potentially getting beyond that 60% range?

Sure, Danielle. Great question. In the short term, depending on the rate that we are able to convert folks, starting here in a few weeks, we will factor a little bit into where the Q3 gross margin comes out. You will recall from the last earnings call that we believe Q1 and Q2 would remain flat with Q4, Q1 followed that. And then we would see probably somewhere, 200 to 300 basis points of improvement in both Q3 and Q4. We may lose 100 basis points or so of that in Q3, just depending on exactly how many people are converted to May, June versus converted in the July, August, September timeline. That piece of it, we'll have a little more color on, as we get to our next earnings call and figure out exactly what percentage of the base has been moved.

Longer-term, I can tell you certainly that Charlie and the team have been doing a fantastic job, working with Flex and all of our suppliers to not only continue to move the manufacturing process here in the short term, but find additional efficiencies, to be able to continue to drive the price down. As we look out longer term, using a US OmniPod $28 average selling price, we certainly still believe 65%-plus margins here are very doable for the business. Once we have fully transitioned everybody and eliminated some of the inefficiencies that would remain with the old line that needs to be eliminated. We are not ready to go beyond that at this point, but I can tell you that the team is certainly working on a bunch of different projects that we hope will get it even further, but we will have to wait and see how those go.

Great. And then I was wondering if you can talk a little bit about Neighborhood Diabetes? Any update there on your thoughts strategically as it relates to that business, and the upcoming July 1 competitive bidding that will go into effect?

This is Duane. With regards to the whole competitive bidding, obviously we are following that closely, there's a significant amount of activity down in Washington. The guidance we gave you assumes that we are not going forward with that Medicare piece of the business. There is a whole, if you read all of the stuff going on in DC, there is a whole movement afoot to try to push that to December. How that all turns out, I guess, only time will tell here.

We have dialed in, assuming it's all gone come July 1. With regards to the Neighborhood in general, I think all of the reasons we bought it all makes sense. Obviously, the Medicare business came along with Neighborhood, but it's a small piece of the business. And we are cognizant that we get to continue to wring efficiencies out of that. We have to make each individual sales worth more money, and we continue to work with that. So we feel pretty good about it long term.

Obviously, the price that came out in competitive bidding, us as a side player, were kind of surprised how low it was going. When you look at the guys that have $1 billions at stake here, they were surprised also. So stay tuned. Like I said, all of the guidance we gave you assumes that business is going away, but we are paying attention to it as we continue to go forward.

Okay. Thank you so much.

Your next question comes from the line of Kim Gailun.

So first question is on your comments, with regard to the component supply issue that you saw. Most importantly, how confident are you that issue is fixed, and I would actually be curious what impact this component disruption had on the construction of the 2Q revenue guidance?

So, Kim, I think we are confident enough that we are shutting down the old line, that will be done here probably the end of the month, so that's all going away, and we feel good about it. I will tell you that I think, having been through this now a couple of times, it's been in the normal course of business, as you ramp this stuff up. The issue for us, quite simply, was, is we want the consistency out of that line two that our vendors have promised us, the guys that made the individual components have promised us. And so that's what we are pushing for.

So I think from our standpoint, I think the Q2 guidance, we are more worried about disruption, because as we stated here, some people now only take -- their reorder comes up in April. They only want one box, hoping that we can convert them by the end of May. So it is reflected in the numbers that we gave you, in that there will be some disruption, because it's not just they only ordered one box, and then can ship them two when you are ready. You to go through the third-party reimbursement, and you have understand that whole piece, what their insurance plan is willing to pay for it. So it's reflected -- a little bit of that is reflected in the number. I would tell you that it's not -- for us, we are not surprised.

We have built in enough time frame I think, what we told everybody was by the end of the third quarter, we would have the install base converted. We still think by the end of the third quarter, we would have the install base converted. It's taken us probably a little bit longer than we had hoped to get going. Is it pretty much -- you want to start a machine up, and you want to make 400,000 of these a month. We feel real good at the 200,000 level because that's line one. And this second machine will squeeze it out.

I guess the best analogy I can give you is, if you're going to change the tire on the car, to get it run better, you want to do it while the car is stopped. You probably don't want to be doing it while it's going down the road at 30 miles per hour. We had the window, we took advantage of it to squeeze this efficiency out of it, and we feel pretty good about it.

Okay. Great. That's helpful. It sounds like a little hiccup, but a manageable hiccup. And maybe it's fair to say that if some of the initial demand here, with the 40% numbers that you threw out, might be, if anything, outpacing some of your expectations, because my next question will be just on the annual guide. No change to the annual guidance, despite maybe just a little more conservatism on the second quarter. And what gives you confidence to maintain the high end of that annual guidance range?

It's Brian. Overall I think we are extremely encouraged, and we had, as you can imagine, we had a very slow January and first half of February, right? Everybody in the new shipment side as well was anticipating moving to the new Pod. Since the launch, I think it's fair to say that it has exceeded our initial expectations. April was up 50% referrals and shipments year-over-year. I think when we look at the volume that we processed in April, I think it's fair to say that it's the largest first month of the quarter that we have had as a business. So I think we are all very encouraged by the levels, that we have seen. And as Duane was pointing out, a lot of these component issues, and all of that stuff, in all honesty, it happens in the normal course, and it's happened throughout the course of the last few years.

As we have inventory on hand, and as we got the production ramped and run, a lot of it is happens behind the scenes and seamless. In this case here, given that it was right at the start of this conversion, we wanted to make sure, and be doubly cautious that we are taking the right approach to make sure we had enough inventory, and we were going to be able to, once we converted people over, as we talked about, we never want to be able to go back. So I think the field is very jazzed up about what we are seeing so far.

Duane gave you a couple of different stories. We were getting tons of these different examples back about practices that has come in, and again, if you think about the launch that's effectively only 60 days old, to have over 10% of our shipments coming from doctors who did not prescribe the product in 2012, in that short of a period of time, to me is pretty telling. It means doctors are taking these visits, they're looking at the product, they're excited about it, and they are putting a few people on, and we think that trend is going to continue. That gives us a lot of confidence as we look at that revenue range throughout 2013.

Great. Thank you, appreciate it.

Your next question comes from the line of Bill Plovanic.

A couple of questions for you here. First, on the component issue, I want to make completely sure. You are fully resolved, and you are building inventory. Do you have inventory levels today that will support that transition? Or do you think you will have that by the end of the month?

Bill, I think where we are, we will have inventory levels here in the next few weeks that we will start converting people in the quarter. We will feel comfortable. As of today, no, we are still doing it.

And the component issue is fully resolved? They are shipping, you're getting the components in so you can build the inventory so it's just a capacity issue?

Yes, we received -- so it's just kind of give you some slight indication that's more detail than you really need. We were talking about a component that was 0.002, basically, off the spec, which gives you some indication how precise, in order to be as successful as have been to date, how precise we are in this design. What we received now, since that component issue, a few 100,000 of these components are in, and they're manufacturing. A long-winded answer, but the answer to your question is yes.

Perfect, and then Brian, just on the NDI, $13.5 million is my math. Is that correct?

I'll just leave it as, we are basically -- not surprisingly, Q1 always has seasonality in these types of businesses. We have seen it in the past, so the level of revenue in Q1 for Neighborhood was similar to Q4.

Okay. And then, I think that Ypsomed, we saw the announcement where they talked about their mylife pump, and then they came out and talked about bringing out their own tubed pump next year. Is that just a supply of the market with every type of pump there is? I'm just kind of trying to figure out why they would come out with another pump?

So, Bill, this is Duane. From day one, they have talked to us -- since we signed the deal with Ypsomed, they have talked about coming up with a very cheap traditional insulin pump, because they believe there is a subset of this market that can not afford our price point, a typical insulin pump price point. What they are trying to do is really kind of the down and dirty. Not for to speak for them, but to give some clarity on it. It's a down and dirty pump for the person that probably could do a little bit better than shots, but probably couldn't afford the higher care that comes with our product. So they are trying to come up with a down and dirty way to do that, and that's what this will be.

Got you. And then last question and I will jump off. As you work it, this transition, does this impact your attrition rate, or maybe is it too early to tell on the new OmniPod, the gen-2, what those attrition rates look like?

If you're looking at what's happening in Europe, attrition rates in Europe have been lower than what they've been here in the United States, so that's probably the best indication. It's too early to say anything in the US except for our overall attrition in the first quarter was down slightly from where we were in Q4. Although everybody wants to get their hands on the new Pod and we certainly understand that, we are not seeing people leave.

Perfect. Great. Thank you. Good quarter.

Your next question comes from the line of Ben Andrew.

Couple of questions, Duane. I guess three, if I might. If you want to cut me off, feel free. Where in the component issue --

Ben, you're done. [Laughter]

Then I guess I'm done. So where did you find the manufacturer and the component issue? In the field, or internally in QA.

Here is how we found it. Where we found it was in QA. So line one was running pretty well. Line two, we have automated a couple of the stations from line one to help continue drive the costs out, and in that automation process, is where it popped out. The product never left the building. It was pretty obvious, pretty quickly, that something was different. And we immediately went to a couple of these stations that we automated as the ones being different from the original line that was running. And we noticed, like I said, we noticed basically an eyelash of tolerance difference in the particular product with the components going to that line, and that's how we caught it.

Internally. That's the key.

Never saw the light of day.

And then Brian, the 50% growth in shipments and referrals in April, can you tease out at all how much of that is pent up demand, versus more durable or something we should anchor off of?

Hard for me to say. What I keep coming back to, I guess, is the fact that again over 10% of the shipments over the last 60 days have come from brand-new practices, defined as doctors who haven't prescribed the product in at least the last 15 or 16 months. Before 2012. When we look at that metric, and have you seen over 10% come, that to me is not pent-up demand. That is the expansion of the prescribing base, which I would say is what we're most excited about.

Okay. My third one, to cheat, is on CGM, you talked about the path to human trials or at least human trials in 2014. Can you give us any update on what data you have in human so far, and where that path takes you in '14? Thanks.

I think it's too early to go there. I would tell you, obviously the single biggest issue for us with [Integre], and if you talk to any of the guys that are in the CGM business, the single biggest thing we are wrestling to the ground, as we speak is, we have done the testing on CGM, we like what we see, but the next big step before we invest any kind of money in this whole process here is really to wrestle down the whole sterilization cycle for the fluid path, as well as for the sensor, and that's where we are at the moment. We will keep you updated, but I think it's too early to tell in terms of accuracy versus other products that were out there, or any of them.

I think the real test for us is we really want to clear the sterilization cycle issue. Once we get there, then I think, I think we have a couple of really good ideas on the drawing board, but I would re-emphasize they're ideas on the drawing board on how to go about it, but we really want to get that thing pinned down before the end of the year.

Can you say anything more what human data there is for the sensor itself? What either is published or what you saw as part of your diligence?

Well, again, when we looked at the sensor data we had, we are based off the animal studies we've done, and then as some the sensor data that they had done, a combination of human and animal. Again, what we came away from was that we saw the accuracy of the sensor was comparable to what we are seeing on the marketplace today. That's probably as specific as we can be at this point. But again, certainly, we feel like it's a sensor that will have a level of accuracy that will be able to compete in the marketplace, for us to be able to decide to move forward with it.

Thanks.

Your next question comes from the line of Thom Gunderson.

So I think my opinion, really putting this project in your hands is a nice endorsement, so congratulations on that. Duane, I have a sense of it -- I don't fully appreciate, but I have a sense of the regulatory reimbursement marketing pathways that will have to be traversed. But I don't know much about Humulin U-500. Is it a different consistency? Are there different properties? Is there a major technical change that has to be made to the pump?

So I think from the pump side, obviously it's just -- the typical Type-1 diabetes patient uses U-100. U-500, as the name basically depicts, is five times the strength. It's also that typically U-100 is fast acting. U-500 is not in that same formulation. U-500 is being used in the marketplace today, and what we are going for in terms of, from a drug side, is obviously a labeling change, so it could be used in the pump. From the pump side, we are basically trying to build a device that accurately reflects dosing, and the other criteria that are needed for a Type-2 patient.

And then the other question obviously, as part of this study, is there a way, does a Type-2 patient needs all the things that Type-1 patient needs in terms of the various screen shots. That's what we were going through. The thing that we are most excited about is, what we are talking about doing is basically in combination with the drug, doing a clinical study with some hopefully very positive clinical outcomes. When you get this all approved, not only are you going to the market with a product and a drug specifically designed for one another, but also clinical outcomes that should reflect hopefully an improvement in the patient's life.

And my second and last question is on the new starts and the strong response that you've had so far, I realize that it's early, but you are just eyeballing it right now. Is the mix changing significantly between brand-new to pump customers as opposed to people switching pumps?

Haven't seen the change in the mix. What we are seeing, which is, in my opinion and my opinion only at the moment, is that there seem to be more pediatric-type centers that are really starting to pay attention to this, because of the size. Prior to this new product, we had the smallest Pod, period, in the marketplace. This size reduction for a lot of these pediatrics centers is meaningful. And the insulin on board calculation methodology for that, they are much more comfortable with. And so I would tell you, it will be interesting. It's too early to tell, obviously, but we are seeing an uptick across a bunch of these pediatric endocrinology centers.

Thank you.

Your next question is from the line of Mimi Pham.

We saw on the blog some users were upgraded to new Pods in April. Were those patients using specific distributors versus direct ship? It seems other of your current users we are hearing about, whether those single folks getting upgraded, and getting pretty more nervous or upset?

Yes. So I guess, when all of these blogs, I think, so specifically we weren't planning on upgrading anyone, so I don't know if a distributor may have shipped that. I don't know, Brian?

To be clear, we have not commenced the conversion yet of the existing customer base to the new OmniPod. If someone wound up receiving new Pods, it was probably somebody who was out of warranty who maybe was ultimately went through a distributor partner or so, and was able to obtain it that way, looking more like a new shipment. I would expect that if any of those, those are onesies and twosies, but not something that we have really seen at this point.

And then, at ADA, are you having any special sessions for the OmniPod just to address what you are talking about, seeing more centers that typically didn't give you an initial look with the first gen?

I don't think we are planning any special sessions. Certainly, in the booth, we will have a lot of information about the new OmniPod and where we have historically, and will continue to do, what we think has worked well for us, is to be able to gather key opinion leaders in different settings, and be able to talk through it with them, as compared to something that's real formal-like. I think that will be our approach, with all of the conferences this summer. We had folks at the ACE conference last week. And I can tell you that we were thrilled by the amount of people that attended, just like I said, an informal session we had where it was literally standing room only, we presented a couple of slides, and had a couple of people standing behind the screen, because we couldn't fit all of them in the room.

Got it, and last question, regarding your Type-2 pump with Lilly, do you think it's a three-day wear device, one-day wear, basal bolus combined, and will it have a controller? Just those three general categories.

To make it clear. It's our device, using Eli Lilly's U-500. So we're the device, they're the drug. And it will have a hand-held, we believe, for these highly insulin-resistant Type-2 patients. With U-500, one of the unique features of this is it should be, for a lot of them, a three-day device. There will be a hand-held. It will be basal and bolus because there have to be meals, it will look a lot like a Type-1 device, but without some of the bells and whistles that are unique to Type-1 patients.

And it will leverage the new OmniPods. It will continue to leverage the new Pod that we are putting into market now.

So it won't be a completely separate manufacturing line down the road then?

No.

No. No new manufacturing line.

Okay. Got it. Thank you.

Your next question comes from the line of Robert Goldman.

Thanks. I've got a question on -- a brief one on international sales, and then question on the efforts for Lilly. Brian, could you give us some sense of international sales growth in the quarter, either year-on-year or relative to the fourth quarter of '12?

Compared to Q1 of 2012, which was probably much lighter in volume, and it was probably more than triple what that number was back then, and it was an uptick over Q4 2012. Ypsomed has done a great job of accelerating demand. Right here in the US, the first quarter is historically the weakest of quarters, and I think they were very pleased with their results as well, especially in markets like the Netherlands and Switzerland, where they continue to take significant share. All systems continue to go there, and we are on pace, as we talked about, that our international revenues should be probably somewhere between 2X and 3X what it was in 2012.

And then on the efforts with Lilly, what is the filing for this device by Insulet? And then, also, when the device is ready for market, to what extent will Lilly be engaged in the marketing, and what can you say relative to the economics between Insulet and Lilly, relative to the device?

I think it's pretty simple. It's a dual path filing, Lilly filing for a labeling change on their drug, and we will file a 510(k) for the use of the product. In terms of, right now, the only agreement we have with Eli Lilly is development of this, so our plan is we will be selling the pump and the Pods and they will be selling the drug.

Okay. And on the economics, there is just some sort of a transfer price of some sort from Lilly to Insulet? Or is there some --

No. Ultimately, during the development phase, there is some certain costs around the clinical and other things that both companies will share. So that's a little bit of expense for us over the course of the next couple of years, while this is ongoing. Not material. And then, going forward, we will sell Pods, and we will sell the system and they will sell the drugs. There is no cost share, if you will, for a patient once they are on product.

Okay. Thank you.

Your next question is from the line of Suraj Kalia.

Congrats on a nice quarter. So, Duane, let me start and forgive me for harping on Lilly after so many questions, and maybe you mentioned this, but in case you didn't. Duane, I heard you say about highly resistant Type-2 patients. Obviously that's a qualitative characterization. Care to put some numbers on that in terms of patients in the US that you see? The reason I ask is, we are obviously are seeing a recent push of insulin pens in Type-2. And there is a lot of buzz about beta trophenol, although these are far out, I'm trying to get a handle on the market size, eventually when this product comes on-line.

So let me take a step back and define what we call highly-resistant and this is our definition, it's people that need over 100 units of insulin a day. It's a pretty large dosage. And I think, if you take a look at this, and these are our numbers, obviously we aren't speaking for Lilly, but we have been looking at this for a while. We talked to a lot of our physicians. And the belief is that this market is going to be as big as the Type-1 market, if not bigger over time. And if you look at what's going on in the Type-2 space, there is more and more of these oral medications that are having bigger and bigger problems. There is all kinds of -- the FDA has empanelled a lot of different panels to look at these various oral medications as it pertains to Type-2 and what the side effects are.

And there's more and more studies coming out, saying the best way to treat especially adolescent young kids, that I would define as large body mass index kids for a lack of a better term here, is to treat them early on with insulin, and try to reform the diet and maybe give them a little exercise. There is a trend, that we believe that will make this market as big, if not bigger than -- there's couple of things going on. But as big if not bigger than the Type-1 market in the US That's our opinion. But it's a substantial market.

So, Duane, to the extent that you can share, your internal market analysis must have indicated a certain price elasticity of demand. Obviously your comments are factoring in what you will see as a price elasticity of demand. Can you give us some color in what your analysis is suggesting?

So here is how we looked at it. I think it's simpler than that. About if you go back and you look at the various studies that were performed using U-500, all kind of off-label use by these various doctors over the last, I think you can go back three or four years, but there have been multiple studies. All of these are showing better outcomes in terms of improved A1cs for these patients. And the single biggest issue for many of these patients is compliance, which it is with just about any drug. If you look at the outcome there, we believe that the price points for our device, and what's going on, if you take and do a full-blown study with clinical outcomes, we think we can easily justify the current pricing that we have in the marketplace for the Type-1 product.

Last question, again, Duane. Obviously closed loop systems, everyone is talking about it. It is the fact that -- you are not paired with DexCom is too obvious to miss right now. We also know that DexCom with its Bluetooth connectivity, remote monitoring for the juveniles, so on and so forth, and they are incorporating all of these CGM systems, that will ultimately will be embedded in closed loop systems for Animas or other pumps. And I guess the question I have, Duane, again, to the extent that you can share, you'll have made a strategic bet with this so far unknown player, with a certain technology.

Help us understand, accuracy is one factor. I mean, I get it. But isn't it true that CGM, rather than point estimates, pretty much everyone starts looking at as a trend line monitor. That is more important, and what all features does your CGM partner have? That can --

Look, anyone that's seen any of these presentations that I go through. Look, I think, despite what everyone is telling you, I think the idea of a closed loop system in which the patient is not involved, no one on this phone call would live long enough to see that. That's my humble opinion. Having said that, I think the tool for patients, as I described to you is, the best tool for a patient is one that they will use. What we know is 90%-plus of people with Type-1 diabetes are willing to live with one thing on their body because they need insulin.

Our theory behind this us to integrate a continuous sensor in it. We have basically an option to license a couple of different software algorithms that are out there. What we would really like to have, our version of the right product isn't CGM to replace the finger stick. It's CGM to talk to a predictive algorithm, as you've described, taking all of this data point to keep the patient out of trouble. To only basically buzz, wake, kick, jump, whatever you have to make the hand-held do, in order to keep the patient out of trouble.

It could be, in its simplest form, it could be, you turn on the hand-held and if the screen is green, then everything is fine. If the screen is yellow, let's say that says three to five hours based on the parameters you put in, and based on what we are seeing here with the continued sensing, you will run into a problem, and then if it as simple as a red screen, it says based on the parameters you put in here, you are now bumping up against the guardrails. So, look, I think we are not going into the CGM business to sell CGM. What we believe is the combination of CGM with one thing that's easy to use on the body is going to result in better clinical outcomes, reduced hospital stays and a much, much better life for people with Type-1 diabetes, and that's how we're going about it.

Fair enough. Thanks.

Your final question comes from the line of Jayson Bedford.

This is Mike calling for Jason. Congrats in the quarter. I don't want to harp on this, just wanted to confirm, are both gen 2 lines up and running again, and on top of that, what's the new time line or is what the time line for getting the third line up and running?

Yes, it's both lines are up and running. And third line, as we talked about in the last call, we are still targeting towards some time this summer.

Okay. Great. And then looking at the plan to transition to the LifeScan PDM, what's the time line on that, and is there any chance you can get that into the mix during the conversion process?

No. It won't be during the conversion process. We've been making a lot of progress with LifeScan on it. At the moment, we are waiting for information back from them. Although it does not impact our meter, our product with them, they do have a recall that they are dealing with, that has probably distracted them slightly. We are working with them to be able to get the rest of the information needed, to be able to file with the Agency.

Is that potentially still a 2013 development? Or could that get pushed a little bit?

We are hoping it will be the end of the year that we'll have it.

Great. Then lastly, just housekeeping, Brian, did you say 25% core OmniPod business growth year-over-year?

Yes.

Okay. Great. That's it for me. Thank you.

And there are no further questions at this time.

Thank you everyone for joining us, and we look forward to keeping you updated throughout the rest of this year. Take care.

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