Insulet Corp (PODD) 2013 Q4 法說會逐字稿

Good afternoon. My name is Laurel and I will be your conference operator today. At this time I would like to welcome everyone to the Q4, 2013 Insulet Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions).

I'll now turn the call over to Brian Roberts, Chief financial Officer. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and full year 2013 conference call. I'm Brian Roberts, Chief Financial Officer of Insulet, and joining me on the call today Duane DeSisto, our Chief Executive Officer.

Before I 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 in the Securities Act and Section 21E in the Securities Exchange Act and I'm making this statement for purposes of complying with those Safe Harbor Provisions.

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

Information concerning the Company's potential risks and uncertainties is highlighted in the Company's press release issued earlier today and in the risk factor section of the Company's SEC filings including the Company's annual report on Form 10-K for the year ended December 31st, 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'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 this call as well as to today's press release at myomnipod.com in the investor section.

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

Thanks, Brian. Good afternoon, everyone, and thank you for joining us today.

2013 was a monumental year for Insulet as strong revenue growth and expanding margins resulted in our first ever quarter of operating profitability. These outstanding financial accomplishments were driven by the launch of the smaller and lighter OmniPod in the United States and across Europe, the upgrade of all existing customers to the new Pod platform and the capacity to produce approximately one million OmniPods per month.

OmniPod revenue grew by nearly 30% year-over-year as the launch of new OmniPod in March was met with a level of enthusiasm exceeding our expectations. We finished the year with new patients additions growing at a rate north of 40% year-over-year as our easy to use design appealed to customers, especially in key demographics such as children. Initial shipments to kids under the age of 18 increased by 60% in 2013 while new patient starts for those under the age of 10 more than doubled.

The new OmniPod has also made tremendous strides with healthcare professionals. Besides the change in size, the new OmniPod features an updated insulin-on-board calculator designed to mirror the preferred approach of most of HCPs. Many practices that were unwilling to support the old version of the OmniPod are now becoming key prescribers.

Since launch over 30% of practices writing prescriptions for the OmniPod are new. These practices account for more than 20% of our total initial shipments and more importantly, these practices are coming back with additional prescriptions.

Approximately two-thirds of practices that wrote their first prescription in the second or third quarters of 2013 started at least one new patient on the OmniPod in the fourth quarter. This is a clear indication that both new doctors and patients are happy with the performance in the new Pod.

We know that a critical component to our long-term growth strategy is predicated on this expanding base of prescribers with over 70% of our initial patient starts coming from people who have never used an insulin pump before. The healthcare professional is a key influencer of a patient's decision to utilize pump therapy. As the only (inaudible) style insulin pump available on the market, we are well positioned to take share in these practices and build upon the excitement of the launch of the new OmniPod.

To maximize this opportunity we are making important investments into our commercial team to ensure that we can continue to provide all healthcare professionals, both new and existing, with the highest level of service possible from our sales force. As we speak, we're in the process of hiring approximately 20 new resources to our field sales team increasing our selling headcount to approximately 130 people.

We are also making investments into our marketing, inside sales and reimbursement teams to ensure that we're able to handle higher and higher levels of demand. We believe we will see a quick return on these activities, as we expect the rate of initial shipments to remain strong growing 25% year-over-year into 2014.

While much of our focus has been on our domestic business, we have also been thrilled with the performance in the OmniPod international. Ypsomed in Europe has seen exceptional growth in key markets such as Germany, the UK and the Netherlands. Despite the latest offerings of two pumps in Europe, Yposmed's customer base more than doubled in 2013 as capacity constraints on the new OmniPod were eliminated.

With this excellent performance, Ypsomed achieved performance incentives that provided for a one-year extension to our agreement, which will now terminate in 2017.

GlaxoSmithKline in Canada also continues to see demand exceeding expectations. We jointly renewed our agreement in 2013 with GSK and are pleased to support them as they transition their customer base to the new OmniPod here in early 2014.

This robust revenue growth is only possible if we have the manufacturing capacity to support the business. In the fourth quarter we took a giant stride forward in meeting our increasing demand as production levels increased over 2.5 million OmniPods produced in the quarter, an increase of nearly 50% over Q3.

The team managed through the Flextronic shutdown in Chinese New Year and is now building at a rate approaching one million Pods per month. Inventory levels rebounded as we ended the year with approximately a quarter million OmniPods on hand, a huge improvement over September.

The overall decrease in our production costs related to the new OmniPod was a key driver as gross margins improved by more than 300 basis points and we reached operating profitability this past quarter.

Yields are increasing and scrap costs are dropping as we continue to gain efficiencies in production. With the transition of our customer base now complete, we expect to see additional gross margin expansion throughout 2014.

With manufacturing operations on solid footing as we enter 2014, we now have the opportunity to increase our efforts on the many products we have in our pipeline. We're pleased to note the last week we filed for a 510k clearance of our Personal Diabetes Manager that integrates a LifeScan One Touch Verio blood glucose meter. We are excited about our partnership with LifeScan and believe that this new PDM offering will provide customers with a new option in the marketplace.

Further, we have commenced work on the new more modern PDM, which we hope to have submitted for approval in 2015. In addition, last spring you'll recall that we announced our partnership with Eli Lilly and Company to modify our OmniPod system to be used with Humulin U-500 insulin, a concentrated form of insulin used primarily by people with highly insulin resistant type two diabetes.

The potential market for this product is large with more than 20 million people in the US living with type two diabetes. Of this population we estimate that up to 10% could potentially benefit from an insulin pump that delivers U-500 insulin. We believe that the powerful combination of a product as simple the OmniPod, along with its ability to deliver U-500, addresses the needs of patients and doctors alike.

For the patient the easy U-system can improve adherence to therapy. For the doctor it's a new tool to help patients manage their diabetes and improve outcomes.

In the coming months we will focus our efforts on finalizing the software modifications and performing human factor testing for an expected 510k submission to the FDA in late 2014.

As we noted at the JPMorgan Healthcare Conference in January, we are pleased to report significant progress on our efforts to work towards an OmniPod integrated with continuous glucose monitoring technology.

In recent months we've identified a clear path forward towards eliminating the sterilization challenges that had delayed our development efforts in 2013. With slight changes to the chemistry we believe the sensor will be able to survive the ETO sterilization process. We continue to test additional sensors to further validate and refine the sterilization protocol we use for our product.

Overcoming this hurdle is the significant milestone in the feasibility process allowing us to move forward with more specific pain and deployment studies and prototype bills. We remain convinced that a combined device will change the game in diabetes management as it allows the patient the benefit to SGM sensing and pump therapy in a simple, easy-to-use package where the patient only needs one handheld and has to wear only one item on the body.

Outside of diabetes, we remain active in identifying opportunities to use our OmniPod technology in the non-insulin space. In December we were thrilled to announce Amgen as our newest partner with the signing of a commercial agreement to use a slightly modified version of our device to deliver one of their approved pharmaceuticals.

While unlikely to impact our 2014 numbers, we're excited about this opportunity for 2015 and beyond. Further, we continue to expand our relationship with Ferring Pharmaceuticals as we support their efforts to being the OmniPod delivered fertility drug, Lutrol F, to North America with filings in both the United States and Canada.

To eliminate language barriers, the Ferring partnership leverages an icon-driven handheld along with the new OmniPod to create a system which has had great success in helping women overcome fertility challenges. With the Ferring partnership and the Amgen announcement we have seen increased activity in our drug delivery business and expect to move forward several additional large and small partners over the coming year in categories such as obesity, pulmonary hypertension, oncology and Parkinson's to name a few.

When we entered 2013 we set a goal to become operating profitable by the end of the year. I'm pleased to report that we achieved that goal as we reported an operating profit for the fourth quarter. We're very proud of this milestone. We believe that one of our top priorities as management team is to run this business to maximize shareholder value and to us that means generating strong topline growth while also striving for profitability.

And looking at our Q4 results as compared to last year, approximately $0.60 of each incremental dollar of revenue fell to the bottom line. This proves that the investments we have made are paying off and positions us well to be operating profitable for all of 2014.

Let me also take a moment to welcome Patrick Ryan as our new Chief Operating Officer. Pat has a strong background especially as an expert in global supply-chain management and is the perfect person to take over our manufacturing operation and R&D efforts. Pat started a few weeks back and is spending this week with Charlie Liamos to gain firsthand knowledge of the OmniPod manufacturing process at Flextronics in China.

I also want to thank Charlie for all of his efforts over the past three years in the role of CLO. Charlie was kind enough to step in full time to manage the manufacturing transition to the new OmniPod and was instrumental in getting us to the solid ground that we are today. Charlie will stay on full time for the next couple of months and ensure a smooth transition and then move into a part time capacity while remaining on the Board.

In summary, I think it's obvious why we're so excited about the success of 2013 and the opportunity we see for 2014. We navigated the new product launch, a major scale-up in manufacturing and a customer base transition while continuing to also move forward on projects and initiatives that will carry us into the future of diabetes management and drug delivery.

The success that we feel now was challenging at times but our Insulet team pulled together and achieved major accomplishments throughout the year.

As we look forward to 2014, we believe we have a significant opportunity to drive strong, profitable growth. We are making the investments necessary to drive the business to even higher levels as OmniPod revenues should accelerate to levels of 30% or greater year-over-year.

We are self-funding these investments as gross margins continue to expand and we can continue to gain operating leverage from our R&D and G&A teams. Further we have filed for [510] clearance of our PDM integrated with LifeScan and expect to make significant progress with both our Eli Lilly and Amgen partnerships in 2014.

With that, I'll turn the call over to Brian.

Thanks, Duane. Consolidated revenue increased by 19% year-over-year and by more than 12% sequentially to $68.5 million in the fourth quarter of 2013. As a reminder, our fourth quarter results include a reduction of approximately $4 million in neighborhood diabetes revenue related to the impact of Medicare competitive bidding, which took effect on July 1st.

Adjusting for the impact of competitive bidding, year-over-year revenue growth in the quarter would have been more than 25%.

We had another strong quarter of OmniPod revenue growth, which improved by approximately 30% over Q4, 2012. With the completion of the customer upgrade process to the new OmniPod in the quarter we saw our reorder utilization normalize back to historical levels.

Consolidated revenue for the year ended December 31st, 2013 was $247.1 million compared to $211.4 million for the year ended December 31st, 2012, an increase of approximately 17% year-over-year.

Gross profit increased by 30% in the fourth quarter to $33 million as compared to gross profit of $25.3 million in the fourth quarter of last year. With the transition of the customer base complete, we are starting to realize the gross margin benefit of the new OmniPod.

Gross margins improved to over 48% in Q4, an increase of over 300 basis points as compared to the third quarter of 2013 and over 400 basis points as compared to the fourth quarter of 2012. We expect that gross margins will continue to expand throughout 2014 as we continue to gain efficiencies in the manufacturing process.

Gross margins in our US OmniPod business are expected to be in the low to mid 60s by the second quarter translating to a consolidated gross margin in the low 50s reflecting the impact of the neighborhood business as well as our accelerating international business, both of which have lower gross margin profiles.

Gross profit for the full-year of 2013 was $112.4 million, an increase of $20.1 million or 22%, as compared to $92.3 million for the full year of 2012.

Operating expenses increased by $1.4 million or 4% year-over-year to $32.8 million in the fourth quarter of 2013 from $31.4 million in the fourth quarter of 2012. This increase is primarily a result of increased customer service costs required to serve our over 60,000 customers.

Sequentially operating expenses decreased by nearly $12 million as certain non-recurring charges, primarily related to our patent litigation settlement with Medtronic and new product launch costs, did not repeat. As a reminder, we paid the settlement costs from the Medtronic litigation in early October.

Operating expenses were $141.5 million for the full year of 2013 and $128.3 million for the full year 2012. Excluding the one-time charges in the third quarter, operating expenses increased by less than 1% year-over-year.

As we look towards 2014, we expect full-year operating expenses of approximately $33 million to $34 million in the first quarter increasing to approximately $36 million to $38 million per quarter over the remainder of the year. The increase reflects the investments expected in our sales and marketing functions, cost of living increases in R&D and G&A and an expected uptick in stock compensation expense.

We are extremely pleased to have achieved operating profitability defined as earnings before interest and taxes in the fourth quarter as we reported an operating profit of $0.2 million. This represents a $6.3 million improvement over an operating loss of $6.1 million in the fourth quarter of 2012.

As Duane noted, approximately $0.60 of each incremental dollar of revenue in Q4, 2013 fell to the bottom line.

Operating loss for the full year of 2013 was $29.1 million compared to $36 million for the full year of 2012. We expect to be operating profitable for the full year 2014.

Interest and other expense was $2.9 million in the fourth quarter of 2013 and $4 million in the fourth quarter of 2012. Approximately $1.3 million of this expense was non-cash. Net interest and other expense was approximately $15.7 million for both years.

Our net loss decreased by more than 75% for the fourth quarter of 2013 to $2.5 million or $0.04 per share as compared to a net loss of $10.2 million or $0.21 per share for the fourth quarter of last year.

Net loss for the year ended December 31st, 2013 was $45 million or $0.83 per share compared to $51.9 million or $1.08 per share for the year ended December 31, 2012.

Our cash and cash equivalents balance was $149.7 million at December 31st compared to $57.3 million last year.

We sold approximately 4.7 million shares in January of 2013 generating net proceeds to us of approximately $92.8 million. Excluding these proceeds our net spend was less than a half million dollars during the year.

Excluding the one-time litigation and settlement costs incurred in the third quarter, we generated approximately $10 million in cash in 2013. We would expect to generate cash and be cash flow positive each quarter of 2014.

As of December 31st we had approximately 54.9 million common shares outstanding.

As Duane noted, we're very excited as 2014 begins to take shape. The new OmniPod continues to generate the buzz we need to reach another year of 30% plus growth on the core OmniPod business.

On a consolidated basis we're estimating that revenue will be in the range of $295 million to $315 million. As typical in the first quarter due to the resetting of insurance deductibles and the skipping of a reorder cycle for those patients who deferred training into this year, we anticipate that first quarter revenues will be sequentially flat with the fourth quarter of 2013. As such, we expect first quarter revenue to be in the range of $67 million to $71 million.

As always, our highest degree of confidence is to the midpoint of these guidance ranges.

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

Thanks, Brian. 2013 was a tremendous year in Insulet history. We navigated through all aspects of the new OmniPod launch and are now full speed ahead towards an exciting 2014.

The question that each potential pump user first decides is tubes or tubeless. The answer is simple. More and more people are choosing to be tubeless as compared to wearing the conventional insulin pump with up to 40 inches of cumbersome tubing. The smaller, lighter OmniPod is the only tube free choice for those customer segments such as active men and women and children who want something discrete and unobtrusive in their lifestyle.

No cutting holes in pants pockets. No taking your pump off when showering in the morning. No worrying about your blood sugars when you disconnect from your pump. In all of these everyday situations the OmniPod continues to provide its users with the insulin they need to maintain control over their diabetes.

We're excited to see what the next year will bring and look forward to providing you with future updates.

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

(Operator Instructions). Your first question comes from the line of Bill Plovanic from Canaccord.

Hey thanks for the -- a lot of detail in the commentary. But just, you know you've turned operating profit; you've kind of given the guidance we need to flush through the model but you gave us the spending as you go forward. But is this going -- the increases are -- is that mostly in sales and marketing or R&D? I mean how -- can you characterize kind of where you expect that spending?

Yes, no absolutely, I mean I think we've said previously -- I mean we're looking at kind of cost of living type increases. So I'd characterize those as around 4% or so in the categories of R&D and G&A. Maybe a little bit higher than planned originally around stock compensation expense, obviously non-cash in nature but that spreads across all the groups. And then the rest of the investment would all be within the sales and marketing function.

So safe to say if you look at our total overall sales and marketing spend in 2013, then we expect to add somewhere in the neighborhood of probably 12%, 13% to that total give or take in investment here in 2014. We're starting that hiring process now and therefore it should kick in and kind of ramp up fully in the back three quarters of the year.

Okay and then, thank you. On the gross margins I think you gave us some pretty good clarity on that as well. I think just to make sure I have it right though, you're talking about for all of second quarter or sometime in the second quarter we'll see overall gross margins for the business get to that mid-50% range?

Well, and again I mean I think it will be for all of the second quarter. I'd only characterize that for the consolidated number it will be probably be in that low to mid 50s range and that really comes down to a question of what's the level of international contribution into the overall mix.

So as we see the international business as we've talked about doubling in 2013 and with an expectation that it's going to double again in 2014. Certainly that's outpacing the US a little bit so that will pressure the gross margin a little bit but again, that's a profitable business so that's a good problem for us to have.

Okay and the last question is just, you did give us some clarity also around the MDI business. I think you're basically saying that that business was down probably if it was a standalone probably about $4 million year-over-year. Is that fair to say?

Yes I'd say on a year-over-year basis it's probably between $4 million and $5 million year-over-year from where we were. It's at a consistent run rate. It's effectively with where we were in the third quarter of 2013 and safe to say that most of our investment is pushing towards the OmniPod side so we're expecting that business to remain relatively at that run rate throughout 2014.

Great, thanks for taking my questions. Congratulations on the profit.

Ben Andrew, William Blair & Company.

Good afternoon, guys, a couple of questions for me I guess. Can you give us a sense of what the Abbott revenues were in the quarter and what you have baked in for guidance in 2014 or how that may shift over to J&J eventually when you get that approval?

Yes I mean Abbott revenues at this point are pretty immaterial so, given that the initial contract had expired in March of 2013 really and went non-exclusive at that point, effectively it's pretty small.

Certainly the expectation depending on when the LifeScan PDM is approved is that it would give us an opportunity to think about moving new customers over to that new PDM later in the year and we'll kind of see where that is. We did not bake into the model a real expectation for much revenue there, just given not wanting to bank on a 510k clearance.

Okay and then thinking more broadly about the guidance for 2014, as you look at kind of the opportunity with the new OmniPod and the additional sales people that you're bringing on board, obviously you've given us some sense of Q1 and the full year. Are these more seasoned people that you're adding and we can expect productivity quickly from these guys or are you being super conservative relative to how rapidly you expect these new reps to ramp?

Ben, this is Duane. I think the mix of that group is a little bit different than traditionally. What we're not talking about doing is taking 20 people and creating 10 new territories, salesmen and nurse. I think we've got a couple of key account people that we're going to hire so a couple of these bigger institutions we're getting a lot of business out of it and there's a lot more to be gotten.

But it really is, it's a little bit different sale now. You're not selling doctors. You're going to sell the institutions. We have a little of that. Some of the other territories that we've become very successful in with the success and the doctor prescribing more, their expectation is we spend more time in the office with them.

So as a result what we're doing is we're taking kind of a hunter sales person. We're bringing in someone that will be a little more junior but more of a farmer that's going to spend plenty of time in these offices assisting with what the offices require and then we're going to free the hunter up.

So it's kind of a mixed batch. I think what we are excited about is what we're doing is and what we continue to find is as we strengthen these relationships more business comes. So what you're seeing is a model where we're trying to figure out how to leverage the relationship we have and then how to continue to expand beyond that.

So like I said, it is a -- in the 20 people it's a mixed bag of the type of people that we're hiring.

Okay and then what are the moving pieces around international contribution? You talked about it doubling yet again. Obviously have some [incentive], some great experiences. What can you do to accelerate that or what could cause that to come in weaker than you expect in the period?

I think we're pretty comfortable with what they're doing. I think we'd be surprised if it came in weaker. I think the thing we're trying to do to accelerate it is if what we described to you is business really predominantly coming from three or four major countries there. We are still not shipping in France so we spent a lot of time working with them on the French market. We're looking at the Italian market with them so I think what we haven't dialed into the model because we don't have the answer yet but what we think a couple of things that could continue to accelerate that is if we could breat through reimbursement in France and get the Italian market going.

And we filed in China a while ago and we continue to move methodically through that process, so I think we've got a lot of interesting up side. The down side obviously is what it is anywhere. It's quality, just performance. It's having the product, sales people. I mean that's always -- it's execution I think in those countries but the real -- we do think there's potential up side. We just -- I couldn't even begin to gage the time on a couple of these countries because there's no clear path. You've got to go through the process and you've got to keep pounding on the door until you get an answer.

Okay and last one for us I guess can you talk a little bit about how patient retention is going, number one, and number two, how the kind of quality of manufacturing out of box failures is trending? Is that still consistent with what you've seen or been any change there? Thanks.

Yep terrific. I think in terms of retention I think our attrition rate is probably around 8% and hopefully we think we, if we continue, we'll get below that. I think in terms of the quality of product I think continues to improve out in the field. Part of that was education. It's a new product so in that regard we're seeing improvement in all the numbers that we track.

Kim Gailun, JPMorgan.

Thanks for taking the question. So I guess just a question on the manufacturing front and as pertains to both core OmniPod opportunity but more so to some of these partnerships, which I think are going to come into much greater focus over the next kind of 12 and 24 months. How are you thinking about planning for your manufacturing expansions relative to these partnership agreements and are you still thinking -- are you thinking about potentially diversifying the location of your manufacturing as you expand?

Sure, great question, so I think when you look at it, we've got our fourth line going up. It will be in the back half of this year. I think what that will give us the opportunity is the first line, which is probably the most manual line that we have there, that would probably be the line that we start looking to some of these -- the other drug opportunities. That's probably where we'd focus because it's the easiest to convert back and forth. None of these other drug opportunities is so big. I mean you may talk about converting that line for a couple of days or a weak quarter as opposed to where we are.

I think the other thing that we are doing and part of Pat's marching orders here in conjunction with the groundwork Charlie has already laid is where should lines five and six go? And should we be looking at -- the good news is by working with Flextronics they have places in Mexico. They have places in Malaysia, all around the world, so -- but there is no question I think lines five and six. What we didn't want to do is with line four we're gaining this momentum on the margin and we want to continue to drive that. Obviously if you have a whole another facility you take a short step back in that but we'd like to have the volumes at a certain level that the math would make that a very temporary hiccup. So that's kind of how we're looking at it.

Okay great and just a follow-up on the Ypsomed relationship, so you disclosed that you had extended that relationship out another year and how are you thinking about the level of sales associated with that relationship kind of through 2017?

So if you look at the way the program is with Ypsomed, there's certain minimums that they are required to meet and that hasn't been a problem for them. And then there's significant levels above those minimums that they do if they do achieve that, they get an extra year. So the extension we have with Ypsomed is not we said this is going great, we'll give you another year. They earned it, so that is built right into the contract here and they have the ability if this year goes really well they can get one more year I believe is what's in the contract so technically that agreement could go out to 2018. And then after that it would be everybody sit in a room negotiating how you wanted to go forward with it.

And I think from a sales perspective again, I think we've been very happy with, especially how well they've done since the launch of the OmniPod. I mean, as you know, we've talked about in previous quarters we were frankly a little on the manufacturing constraint side throughout the last probably year and a half, both with the old Pod and then transitioning into the new Pod and with the production level hitting 2.5 million Pods in the fourth quarter and realistically doing that number or even a little bit better here in the first quarter of 2014, that constraint has really come off the business and I think we're seeing them flourish.

So they're adding patients at a very rapid rate and they doubled their business in 2013 and we've talked about I think the expectation is that they'll double again here in 2014 and then we'll look at those future years out but I'd expect that their growth rate will continue to exceed what we're doing domestically for some time to come, especially if some of these other markets that Duane mentioned can come on line, be it this year or in the following years.

Okay great, thank you.

Danielle Antalffy, Leerink Partners.

Thanks so much for taking the question. Brian, just thinking about you guys had a great quarter. You beat expectations so how do we think about what could happen as far as if you continue to beat expectations on the top line will you reinvest or will you let that drop to the bottom line potentially achieving profitability sooner? How do we think about that?

Well, I guess I'd frame it a little bit differently, which is again the guidance that we gave today really we're most confident at that midpoint of our range and I think one of the things that we pride ourselves on is that we have high level of visibility into the business and just kind of characterize it for folks. If you go back a year and you look at the original guidance that we gave, for 2013 we gave a range of 240 to 255, which would put the midpoint of that number right around 247 to 248 and that's exactly where we came out for the calendar year.

So I think certainly with that reorder base it gives us a big leg up in visibility. So I think that's the way we've structured the guidance for 2014 and we're very comfortable with that. On the whole obviously we still have debt on our balance sheet and some other things and so, as we continue to kind of progress forward and we can see how quickly the business is accelerating and growing and it certainly gives us an opportunity to make these investments here in 2014 and effectively self fund them and then determine do we want to accelerate some of that rate of investment as well as where does that cash balance go so to me that's kind of an open question for us and we'll see where we head as the year progresses.

Okay great and just wanted an update on the competitive front, so obviously Medtronic has been rolling out their 530G low glucose, just then wondering if you're seeing anything from that and also Cellnovo got approval for something similar to a patch pump in Europe so wondering what your thoughts are there.

Danielle, it's Duane. I think I'll go back to the same thing. I think the interesting thing for us is where we compete with all these companies is for mind share at the doctor's office. Where we don't compete for is the patients. I mean when a patients walks into the office if a doctor presents all the options the first thing that we had in the prepared remarks, which is the business, do you want tubing or do you not want tubing, we're in great shape. If you want CGM accompanied with no tubing, then we'd recommend that you go to Dexcom and that combination we would argue is probably the best pump and the best sensor at the moment on the planet. So we feel really good about that and I think that's the key for us is to just make sure that at the doctor's office we're getting that opportunity.

I think with the Cellnovo and all these other companies only time will tell. We'll see where they all go. We feel pretty good. We really feel pretty good about our form factor. We feel really good about what we have in the pipeline and we feel really good about the opportunity and I think 2013 kind of hammered that home. I mean we, like I said, we really kind of put some structure into the sales force. Pete did a great job. The sales force stayed focused. We got through.

I mean we transitioned 60,000 people in six months so we feel good about this opportunity and, like I said, the competition is the competition. It will always be out there but I think we have the right solution for the patients and, like I said, I've been saying it now for, I don't know, the first product we shipped was in 2005 so I've been on this soap box for a while. I would admit it all takes longer than you ever think it does but I do think we have the right answer for what people really want.

Okay thanks so much.

Tom Gunderson, Piper Jaffray.

So maybe a little bit of a similar question but to Danielle's on the market dynamic and competition, but Q4 was -- there were a lot of things going on on the tube side. The [Animas] re-org is settling in. Tandem went public and Medtronic stated somewhat surprisingly that they gained 400 or they measured that they gained 400 basis points of market share, pump share, on a sequential basis and, Duane, I'm just wondering two parts to this question. Number one is are you sensing on anything out there that would have shifted the dynamic on pumps overall to go back to tubed? I don't think you are but I just want to hear your reaction to the Medtronic statement.

And number two, is there any shift in what's going on from the current tubed pump patients whose insurance comes up? I know most of your sales come from the new guys but I am just wondering if you get anything from the existing pump users.

Sure great questions. So look I think from our standpoint and far be it for me to comment on what Medtronic is saying but I think Medtronic is doing -- they have pent up demand in their installed base and I am sure they're probably churning that base. They are what they are. They're a tube pump with this five, their 530G. I would argue and I've got to be very careful but you know, I mean Ypsomed has been going head to head with the 630G, which is its next version and they're doubling -- and Ypsomed is doubling their business. I am not -- look, do I worry about it? Yes of course you worry about a multi-billion dollar company. I mean it would be stupid not to.

I don't think they have the right -- I just don't think that form factor long-term is the right answer. I think if you fast forward five years from now it's going to be all in one and, like I said, I think we have the right platform. So granted I am probably the most biased person on the planet in that regard but I will tell you that Ypsomed has seen all their new products and they are doing just fine, thank you very much. As we pointed out, they doubled their business going head to head with that, so I feel comfortable that if they can do it, we certainly can do it.

I think in terms of people switching back to tube, I mean we just don't see it. I mean we don't see it. Look, I think there's an interesting dynamic as Animas kind of did their whole restructure. I think there was an opportunity out there. Medtronic was kind of on hold for some period of time while they were waiting for the 530G to get approved so I think there's been a lot of stuff going on. I think our focus still remains on the patient that's on MDI injections and have we picked up? Yes I think we picked up roughly if a year ago probably 75% of our customers had never been on an insulin pump before. Now we're about 70% so we're picking up some share.

I think, Tom, the thing you have to understand is how that decision is made though, right. If it's patient driven we will get the patient. If their warranty expires on a traditional pump and it's working for them, the doctor typically would not recommend that they change anything because it's working for them. What the doctor really cares about is the outcome and where people's [A1Cs] are and well they're doing, so if they have a form factor that worked the doctor is in no hurry to switch them.

Having said that, we've picked up some switchers and, like I said, the mix has changed a little bit, although it is still predominantly and our focus is how do we accelerate people going off shots to a better therapy, which is CSII? And that really is where we are focused on driving the business.

And, Tom, this is Brian. I just want to add one thing to what Duane said, which I think is a pretty important metric that people should take away from this call, which is, as Duane pointed out earlier, really it is a lot of times about the mind share of the doctor and what's crystal clear is that the new OmniPod is taking a lot of that mind share of practices. Again, almost a third of our doctors prescribing the new OmniPod in 2013 were brand new doctors for us.

And of those doctors two-thirds of the ones that had written their first prescriptions in Q2 and Q3 wrote again Q4 and I'd hazard a guess that of the third that didn't a lot of them were people that probably started in the later part of the third quarter so the sales team seems to be doing a very, very good job of getting these doctors to take a look at the product, prescribe the product, watch a patient for a period of time or patients for a period of time and then they're getting more, which tells me that the new OmniPod is really resonating in the marketplace and we're seeing it as we move forward here and into the first quarter with levels of referrals and shipments that provide us the comfort to be able to say although we had a very strong year last year of new patient adds, that we're going to see that number grow by at least 25% more here in 2014. So regardless it's a big market, I'm sure that there's some share for everybody out there but on the whole I think we're doing pretty well.

Thanks. Mine was a two-part question so I am just going to leave it at that and thank you for the detail on that answer.

Mimi Pham, ABR Healthco.

Just regarding your guidance for new adds growing over 25% this year, just to make sure the math is ballpark, are you implying the new adds will grow from about 20,000 last year to north of 25,000 this year?

Mimi, I am just going to leave that metric as is and I'll let you guys do the, kind of the actual amounts for everybody's models but we've mentioned that we're over 60,000 customers now and the expectation is 25% net patient add or 25% patient adds in 2014.

And what percentage of the 60,000 is in the US?

We're not going to break it up specifically but again, we're over 60,000 patients now.

And then in terms of the all-in-one Pod and CGM, did you say you still expect the complete animal studies this year and/or when do you think you'll provide the Street with a lot more concrete details about the design and partner?

I think the next big step for us that we alluded to in the prepared remarks is we are now focused on the mechanical aspects of this particular device and how you deliver the insulin and the sensor into the body so I think once we get through some of that we have a bunch of IP that we're filing also so we want to get all that in place before we kind of talk too much in detail about where we're going and what we're doing so hopefully in the back half of this year we'll have done enough work and filed enough paper here on the IP front that we feel comfortable highlighting it a little further.

And then last, just regarding the type two product with Lilly, given [Valeritas's] expanding footprint last year, are you hearing just more from your prescriber base requesting that you modify the second gen OmniPod into a type two product?

Haven't heard a lot about that, what we really of focused on is we think to be successful in that space you're really going to have to drive outcomes so the great part about working with a company like Lilly, there's clinical work. There's a lot of stuff going on I think so I think that the doctors will embrace this. I think a lot of doctors are using U-500 now out in the marketplace in all kind of various forms. There's been clinical work done. There's been two, three clinical studies now done using the U-500 product with our product that's all being off label. I mean we kind of find out about it when read the clinical results that are being published. But so I think it's the right answer for a subset of the type two market.

Okay thank you very much.

Jayson Bedford, Raymond James.

A few housekeeping questions here to start; you mentioned new patient adds growing 40%. I wasn't sure if that was for the full year or for the fourth quarter as well.

Both.

Both.

Both and again, since launch which was effectively the very beginning of March, end of February, very beginning of March.

Okay and then I think if I recall, you exited the third quarter with $4 million in kind of unfulfilled inventory. Did you exhaust this level in the fourth quarter and kind of what does it look I guess, as you enter the first quarter?

You know, we still have some backlog that we're working through. I mean as we had talked about, we -- because of the Chinese New Year, we made the decision at the end of December to hold on to some inventory versus kind of shipping every last Pod we had. We left the calendar year with approximately 200,000 to 250,000 Pods available to us to really kind of position us through the Chinese New Year, which thankfully went very smoothly for us, so effectively the rest of that backlog is -- should be eliminated here in the first quarter or by the very beginning of the second quarter.

Okay and then last one for me, you kind of throw out the teaser of the new PDM, not to change anyone but when do you plan on filing in 2015 can you maybe talk about some of features and potential benefits of the device?

Yes I'll tell you what, we think we have an interesting way of going about it, which is a little different than stuff that's out there, so we are also filing a [bunch IP] on that so if Tony were here he would immediately gag me, so I'll keep him from tackling me here and we'll just hold off on that until we get all this stuff filed.

Okay I'll go back in queue. Thanks.

Jan Wald, Benchmark Company.

Hello, this is Erica Layon in for Jan. I just have two questions here. One of them was all these partnerships that are filling up your pipeline so nicely, is there something where we're looking to maybe an overall rate of R&D because some of these costs are going to be born by your partners?

Yes I mean we're -- what's key to all of these different partnerships that we're looking at is we're certainly trying to leverage the new Pod for all of them so the big kind of calling card, if you will, that works well for us and works well for these partners is that you're able to take, to leverage this manufacturing where we're producing effectively a million OmniPods per month today and that number could be 1.5 million by the end of the calendar year.

So unlike others who are kind of thinking about this space or so who are early, still kind of in that prototype stage, the big competitive advantage we have is that we've made over 25 million of these things to date and there's a tremendous amount of learning that comes with the manufacturing of every one of those. So we don't expect a tremendous amount of R&D as we go through some of these different partnerships. The Amgen one, for example, kind of going forward in other things but as that happens, then certainly depending on the opportunity we're looking for our partners to potentially take on that freight.

Okay that makes a lot of sense and would that then also take on more freight if say they have a PDM versus these ones like the Amgen that don't have their own PDM that's going to be distributed to these partners as well?

Yes that's right so I mean and again, like for example the Ferring Pharmaceutical partnership we have, that one there has an icon driven PDM so making changes to the PDM from a software side I don't want to minimize it. It's all work and it all takes time, but those are certainly easier changes to make than to do something with the OmniPod.

Okay thank you and just a couple housekeeping questions here; you're speaking as though you're operating profitable. You're not talking about each quarter being each quarter being operating profitable?

Yes. No I think we'll be operating profitable each quarter. Typically the first quarter is always the most challenging. As we mentioned, revenues are kind of sequentially flattish, a little up and you start to get some incremental expenses in the quarter. Payroll taxes restart, all of those things, so Q1 will be the one that will be closest. But beyond that I feel very good.

Okay perfect and then the last question here, the R&D growth you were looking for about 4%, 4 percentage growth. Is that based on quarter-over-quarter or is that just when we'd look more as an average over the full year?

Yes I think an average is fine. I mean if you kind of think of it in a six to 6.5, $6 million-ish kind of range, $6 million to $6.5 million range should -- that's where it is.

Perfect. Thank you so much.

William Plovanic, Canaccord.

Great thanks. Actually a clarification question; just, Brian, as a -- you did comment on this just in regards to filling the disposables that are out there and some of the backlog but if I look at kind of try to do math on utilization metrics would you say that Q4 was normal or would those metrics still be a little low because your still some backfill and when would you expect kind of utilization metrics to be normalized?

I think reorder utilization normalized during the fourth quarter. I mean we pretty much finished the transition of the customer base by around Veteran's Day so certainly the second half of the quarter was much more like what we've typically seen as compared to the first half. Q1, it's normal from what we've always historically seen. It's just that you have a group of people who took product in the fourth quarter, started on the OmniPod in the fourth quarter and then defer their trainings to February.

As we've talked about in the past, people don't want to necessarily learn a new way to manage their diabetes over the holidays. Those people skip their reorder in Q1 and their first reorder doesn't really happen until Q2. And then there's some people just they're managing their cash flow with deductibles and such may try to skip it in Q1 and take it early in Q2, so there's always a little bit of that disruption in Q1 but beyond those normal patterns I think we're back to where we historically have been.

And then you haven't provided this but any help or direction in kind of the year-over-year growth in disposable revenues in Q4 or full year?

I mean it's not really kind of how we look at the business or track it so it kind of goes where we are but obviously the fact that we're producing nearly a million OmniPods per month, the great majority of the business is driven by disposables so just--

Okay and then as you look at your [strap] plan what -- how much free cash flow do you think you'll generate in 2014 because I would assume most of the CapEx is behind you? You're turning operating profits. As I look at all this, just what type of cash flow from operations and then how much free cash flow would you expect to generate?

I mean typically EBITDA has been a decent proxy for cash flow for us. We will still continue to be investing in some CapEx throughout 2014. Two major things; one is obviously we're putting in a fourth line in China this year in the back half in the third quarter so that's one. The second is where we are relocating our corporate headquarters up the road a mile or two, as our lease was expiring and we need a bigger facility so there will be a little bit of capital that will be extended in just making sure we can facilitate that move as smoothly as possible.

And how much does a new line cost you these days and same question on relocating the headquarters? I mean ballpark?

You know, headquarters I am -- a few million, $6 million to $7 million on a new line.

Great, thank you very much.

There are no further questions at this time. I'll turn the call back to the presenters.

Thanks again, everyone, for joining us and we look forward to updating you throughout 2014. Have a good night.

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