Insulet Corp (PODD) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q2 2014 Insulet Corporation conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator instructions)

As a reminder this conference call is being recorded. I would now like to turn the conference over to your host for today's call, Mr. Brian Roberts. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter 2014 conference call.

I'm Brian Roberts, Chief Financial Officer of Insulet. Joining me on the call today is Duane DeSisto, our Chief Executive Officer.

Before we get started I'd like to remind everyone that our discussion today may include forward-looking statements as defined under the securities laws. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in section 27A of the Securities Act and section 21E of the Securities Exchange Act, and are making this statement for purposes of complying with those Safe Harbor provisions. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us and on assumptions we have made.

There are risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Information concerning the Company's potential risks and uncertainties is highlighted in the Company's press release issued earlier today. And in the risk factor section of the Company's SEC filings, including the Company's annual report on Form 10-K for the year ended December 31, 2013.

These risk factors apply to our oral and written comments. We assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

I'd also like to remind you that the guidance we're offering today represents a point-in-time estimate of our future performance. You'll find a link to the webcast of this call as well as to today's press release at MyOnmiPod.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. Our second-quarter results, highlighted by record levels of revenue and gross margin, demonstrate the strong progress we continue to make across all aspects of the business.

For the second quarter we reported consolidated revenue of $72 million, representing 20% growth over the same period last year. Demand for the new OmniPod remains high as evidenced by 35% OmniPod revenue growth year-over-year as our easy-to-use waterproof tubeless design continues to appeal to customers, especially in key demographics such as children. Over 35% of our new patient starts this year are children under the age of 18, with nearly 40% of them aged 10 and under.

Just as important, the OmniPod continues to make positive strides with health care professionals. Since launch in February 2013, nearly 40% of prescribing physicians are new to the OmniPod with over 75% now repeat prescribers. In addition to the discrete size of the pod, ACPs continue to cite the updated insulin on board calculator, the simplicity of the system that is ready-to-wear without assembly, and lifestyle convenience as key reasons why they prescribe the product. And they say that these features are especially important when prescribing the OmniPod to people who have not previously used an insulin pump.

Approximately 70% of our patient starts continue to be people who are new to insulin pumping. When these people are asked why they choose the OmniPod the answer is simple: better glucose control without sacrificing freedom.

Ensuring that we're able to meet the service needs of both our customers and our prescribing healthcare professionals is critical to our long-term growth. Since completing the process to transition our patient base to the new OmniPod last fall, we have worked tirelessly to rebuild confidence in our customer service functions that came under pressure from the demand of the launch.

I'm incredibly pleased to note that we have returned our satisfaction levels to those seen pre-transition. Today over 95% of our patients would refer the OmniPod to a friend and 9 out of 10 patients consider themselves satisfied or very satisfied with the OmniPod as a whole.

To ensure we are meeting the increased demands for a larger prescriber base, we embarked earlier this year to expand the commercial field sales team from approximately 110 to 130 people. To do this we established a new role, the Key Account Manager, who would join existing territories and be tasked with ensuring the high level of customer service to critical existing accounts.

Our initial new resources were hired by April, trained and in the field by early May. The remaining part of the class has been in the field since June 1.

With these new reps in place for about half the second quarter we are very pleased with their early success. Territories with a key account manager have generated a 10% increase in referrals as compared to a standard territory. We are seeing even better results in the beginning of the third quarter with referrals outpacing our second-quarter results.

With referrals increasing and productivity improving, we enter the third quarter with our largest customer pipeline since the launch of the new OmniPod. That said, new patient starts, which have increased by approximately 20% year-over-year, were impacted in the second quarter by a unilateral change made by a significant managed care plan to their reimbursement policies.

Citing unexpected reimbursement costs due to code usage by type 2 products and lower-priced cost alternatives, the managed care provider stopped all new patient shipments and existing customer reorders to reestablish medical necessity for patients. This managed care plan typically accounts for approximately 15% of our new patient starts in any given period and is serviced through a distributor partner as we do not hold a direct contact with the provider.

Once we became aware of the problem, our commercial team assisted our distribution partner in resolving the issue for existing patient reorders. We continue work with our distributor and the managed care provider in finding an appropriate solution for new patients.

We are currently backlogging new patient starts until the issue is resolved. I'm confident that we will resolve this issue in the next few months.

The impact to the business from this issue was approximately $1.5 million of revenue in the second quarter, and will likely continue to affect the third quarter as well. In total we anticipate this issue could result in up to a $10 million reduction in 2014 revenue.

Our international business with Ypsomed and GlaxoSmithKline had another strong quarter and remains on pace to double revenue year-over-year. Ypsomed continues to take share in key markets such as Germany, the Netherlands, and Switzerland, and just recently officially launched in Italy as well.

Turning to our manufacturing operations, for the third straight quarter we manufactured approximately 2.5 million OmniPods, providing a level of stability and predictability we haven't had in our history. At a consistent level of 40,000 OmniPods per day, we have been able to improve quality and reduce scrap costs resulting in expanded gross margins.

I'm very pleased that we achieved two significant milestones in the second quarter, as our US OmniPod margins increased to over 60% and our consolidated gross margin reached 50%. While on a consolidated basis gross margins continue to be impacted slightly by pricing product mix within our Neighborhood subsidiary, we are confident that we will see continued gross margin expansion of approximately 200 basis points to 300 basis points per quarter for the remainder of 2014.

Although proud of our progress with the new OmniPod, I'm very excited about the many products that we have in our pipeline. We expect that these products will keep Insulet at the forefront of innovation for years to come.

Let me provide you with some updates, starting with the exciting news we announced earlier this week. We are very pleased that we've been able rekindle our development partnership with Dexcom.

Over the last couple of months we have announced two collaborations which we believe will provide our combined patients with easier access to the data they need to more efficiently manage their diabetes. The first, announced in June at the American Diabetes Association Conference in San Francisco, is the integration of certain OmniPod data into Dexcom's first of its kind mobile application.

The second collaboration, announced on Tuesday at the American Association of Diabetes Educator Conference in Orlando, is the integration of the Dexcom glucose data into our new Bluetooth-enabled PDM, which is currently under development. Our goal with this project is to be able to develop software similar to what Dexcom has under development which will be able to be displayed on our PDM.

For both projects we will each be responsible for our own development costs, with much of Dexcom's investment focused on their new mobile application and most of our investment focused on the integration with the new PDM. We feel strongly the time is right for these collaborations to move forward.

While we are very excited to be partnering with Dexcom again, we do continue to move forward with our own the CGM-enabled OmniPod project with a separate partner as well. As I mentioned last quarter, we have made significant progress over the past couple of quarters with the completion of insertion study as well as resolving our sterilization challenges. Over the back half of the year we will be working on prototype development and additional testing to prepare for human trials in early 2015.

We also continue to partner with LifeScan on the integration of the variable blood glucose meter platform into the PDM. In May we received initial questions back from the FDA, with most of the questions centered on additional testing to be completed by LifeScan.

At this point the extra testing has been finished with reports being compiled. We anticipate responding back to the FDA by quarter end with hope for an approval in the fourth quarter.

We are also making great progress on our U-500 product in partnership with Eli Lilly. We completed our first round of human factors testing this past quarter, and expect to start our second round in the coming weeks.

We still anticipate the 510(k) submission of our product to the FDA by the end of the year. The number of people living with type 2 diabetes in the US is staggering, and this increases each and every day.

New cost-effective treatments need to be introduced to help combat this growing epidemic. We continue to receive positive feedback from many health care professionals about this collaborative offering. The OmniPod has the potential to be an effective, easy-to-use alternative for improved compliance with proven A1C benefits for these highly insulin-resistant patients.

We also remain enthusiastic about several opportunities in the non-insulin drug delivery space. We believe the opportunity in the drug delivery space is important.

Our Amgen partnership has a chance to be a game changer and we look forward to the approval of the product by the FDA. With both the Ferring and the Amgen products in the commercial phase, we have proven that our OmniPod is the solution for subcutaneous drug delivery.

Outside of these relationships we have a number of other initiatives in the development phase. We look forward to discussing additional opportunities in the future.

Finally, let me mention a couple of additional items to note in the quarter. First we entered in the settlement and license agreement with Becton, Dickinson and Company to resolve the outstanding patent litigation.

Given the uncertainty, distraction, and continued expenses that come with a jury trial, we determined that this was an appropriate time to reach a settlement. As such in June we agreed to a $5 million one-time payment and have taken a charge of approximately $7 million in the P&L to account for the settlement and the associated legal fees incurred.

We also took advantage of the financial markets in the second quarter and refinanced our outstanding convertible debt. Through this refinancing, which Brian will discuss in more detail, we were able to extend the maturity by three years to June of 2019, reduce our cash interest rate nearly in half to 2%, and increase the conversion price by over 75% to $46.51 per share.

And with that I'll turn the call over to Brian.

Thank you, Duane. Consolidated revenue increased by 20% year-over-year to $72 million for the quarter ended June 30, 2014, from $60.1 million in the same period last year. OmniPod revenue grew by more than 35% from the second quarter of last year.

Consolidated revenue for the first six months of this year was $141.2 million compared to $117.4 million for the first six months of 2013, an increase of approximately 20% year-over-year. Gross profit increased by 33% in the second quarter to $35.8 million, as compared to gross profit of $26.8 million in the second quarter of 2013.

As Duane noted we achieved record gross margins in the second quarter, as our US OmniPod gross margin eclipsed 60% while our consolidated gross margin of 50% represents a 500 basis point increase over the second quarter of 2013. Since the transition to the new OmniPod commenced in the first quarter of last year, we have gained nearly 700 basis points of gross margin.

The increase in margin is a direct result of continued reductions in the overall cost to produce each OmniPod based on a lower bill of materials, higher manufacturing volumes, and reduced scrap charges. We continue to expect to add approximately 200 basis points to 300 basis points of gross margin in each of the third and fourth quarters of this year as we take further advantage of the efficiencies gained from the new OmniPod.

Gross profit for the first six month of 2014 was $68.6 million, an increase of $16.6 million, or 32%, as compared to $52 million in the first six months of 2013. Operating expenses increased by $8.4 million, or 26% year-over-year, to $41 million in the second quarter from $32.7 million in the prior year. This increase is primarily a result of approximately $7 million in settlement and legal costs related to the patent litigation with Becton, Dickinson and Company.

Sequentially, operating expenses increased by $6.4 million from the first quarter of 2014 again due to the lawsuit settlement. We expect operating expenses in the range of $36 million to $38 million per quarter for Q3 and Q4 reflecting the investments into the sales and marketing functions.

Operating expenses were $75.7 million for the first six months compared to $64 million for the first six months of 2013. Operating loss was $5.3 million compared to $5.8 million in the prior year.

Excluding the one-time settlement charges, we would have generated an operating profit of approximately $1.7 million in the second quarter, an improvement of approximately $7.5 million over the second quarter of last year. We expect to be operating profitable going forward.

Interest and other expense was $23.8 million in the second quarter compared to $4.6 million last year. In June we issued approximately $201 million of 2% convertible senior notes maturing in June 2019, and used $160 million of the net proceeds to repurchase $115 million of the outstanding 3.75% notes due June 2016.

In connection with the repurchase we recorded a one-time loss from the extinguishment of debt of $18.9 million. We also called the remaining $28.8 million of outstanding 3.75% notes for redemption in June.

These notes were extinguished just last week in exchange for $28.8 million in cash and approximately 350,000 shares of common stock. Net interest and other expense was $28 million for the first six months compared to $8.9 million for the first six months of last year.

Going forward we expect to record total interest expense each quarter of $3 million, comprised of $1 million in cash interest expense and $2 million in non-cash interest expense. Our net loss for the second quarter of 2014 was $29.1 million, or $0.53 per share, as compared to a net loss of $10.5 million, or $0.20 per share, for the second quarter of last year.

Excluding the impact of the patent settlement and the extinguishment of the 3.75% convertible notes, our net loss would have been approximately $3.2 million, or approximately $0.06 per share, representing a 70% improvement over the second quarter of 2013. Net loss for the first six months was $35.3 million, or $0.64 per share, compared to $21.2 million, or $0.40 per share, for the first six months of last year.

Our cash and cash equivalents balance was $175.5 million at June 30 compared to $149.7 million at December 31. As of June 30 we had approximately 55.5 million common shares outstanding.

Finally, as Duane noted, we remain confident in the business and are pleased with our first-half results. Gross margins continue to expand and our manufacturing operations continue to excel.

The investments in the commercial team should produce a return in the second half of the year, and our international business remains on pace to double in 2014. With the patent lawsuit settled and the convertible debt refinancing complete, we are poised to show operating profit going forward.

That said, taking into consideration the payer issue which impacted the second quarter and our expectation that it will likely continue to affect the back half of the year, we have adjusted our 2014 revenue expectation to $290 million to $300 million. This change represents a 3% reduction in revenue at the midpoint.

For the third quarter we expect revenue of $73 million to $77 million. And with that, let me turn the call back over to Duane.

Thanks, Brian. In summary, we're pleased with our second-quarter results. Despite the recent payer challenge, which I am confident we will resolve, we demonstrated outstanding revenue growth of 35% in the OmniPod business and 20% overall.

We are well-positioned for continued robust growth as the addition of 20 new commercial team members make a positive impact throughout the back half of the year. Our pipeline is strong, our referrals continue to increase month-over-month, and the team is excited and engaged.

Our manufacturing operations continue to show a level of stability and consistency never before achieved by Insulet, and we remain on track to add capacity in the form of a fourth manufacturing line in the next few months. We continue to be an innovative leader in the space with several exciting initiatives in development, and I am pleased to see new opportunities going forward.

I'm confident and excited about the strong second half of 2014. With that, operator, please open the call for questions.

(Operator instructions). Danielle Antalffy, Leerink Partners.

Good afternoon, guys. Thanks for taking the question.

Hi, Danielle.

Just wanted to follow-up on the payer issue. Number one, what gives you guys the confidence that you will resolve this issue?

And then a follow-up to that, what's the risk to the business if other payers follow suit? Or do you think that's even a possibility?

It's a great question, Danielle. So A, we're confident because as soon as -- the thing that makes this a little different, just so everyone on the call is clear, is all these programs, all these payer contracts come up for renewal so this is an ongoing issue.

What makes this a little different, it was -- and we're in the middle of negotiating with the distributor and the payer, all three of us together here. So I don't want to go too far obviously because we're working our way through it.

But this was a little bit of a knee-jerk reaction to what the payer saw going through some of the various codes and categories. And so they just shut them all down. Which that you're putting people at risk, it's a big deal. So as soon as we were made aware of it we got involved, we got the reorder business turned back on.

The payer has already offered up a potential solution in terms of how to handle this on a go-forward basis. We are not exactly thrilled with it. I don't want to -- once again I don't want to go through all the details on what the solution is. Suffice it to say it just makes the process more complicated.

It's not a price action at the moment. It's none of that. It just makes the price more complicated. But it does appear that things were going to the category, most notably stuff that really kind of affected type 2 patients that they were not happy about. And so as a result they dug in and their first solution was to shut the door.

So having said that, could it happen again? Yes. This is a little bit of a really harsh reaction. Like I said there's not a year that goes by that we are not continuing to talk and negotiate with payers. So this was a little bit unusual.

Took us by surprise A, because we really weren't the first guys contacted. We kind of noticed the distributors business being impacted. We started putting them on to it. They started digging into it. It took us a little while to get to the bottom of what was happening.

But our customers gave us the heads-up and we started driving that process. So a little bit off the norm. And like I said, what is clear is insulin pumping is better therapy than anything else that's out there for type 1 diabetes patients, and there continues to be more studies proving that. So I don't think that's going to be a long-term issue.

But suffice it to say this is what it is. We don't have it resolved today. That's why we're tempering our guidance on the back half until we get it resolved.

Hopefully we'll get on the call the next quarter if we get it all resolved we can give you a little clearer view of it. But it is resolvable. It's just like I said, we're in the middle of it so I don't want to get too far in detail as to terms of what's going on.

Okay, that's helpful. And then just wanted to get your thoughts on the partnership with Dexcom, how you see that. How do we think about that from a growth perspective? Is that a big driver for new patient adds? Or is that just sort of incremental? So how big of a deal should we be thinking about that from a topline growth perspective?

I didn't have the opportunity to listen in on Dexcom's call yesterday. But I think it's going to help, it will continue to help both companies in the long term.

I think the real thing is when we start trying to figure out how it's going to be dialed in. Really comes around the timing here and we're working out those details; it's with Dexcom's Gen 5 sensors. So that really is kind of the driver in terms of when it's going to impact the business.

All right. Thanks so much, guys.

Thanks.

William Plovanic, Canaccord Genuity.

Great, thank you. Good evening. So just clarity. So the reorder has been cleared up, so the utilization reorder rate should not be impacted going forward. Correct?

That's correct.

And then so it's only on the new patients. And then would that also affect your NDI business?

What do you mean? Our NDI? Sorry, the Neighborhood business?

Yes.

These aren't patients that go through the Neighborhood subsidiary. It's with a separate managed care. It's a managed care payer that goes through a third-party distributor, but it's not Neighborhood.

Okay. And then, just as I looked at inventories in the quarter, they are extremely low or very low. Are there any manufacturing issues or concerns or -- I mean it tells us demand is high but your inventory has burned down a little. I'm just curious on your thoughts on that.

Okay. I think, Bill, it's a great question and I think from our standpoint what you don't see there is all the stuff that's in China moving forward. But having said that, are the inventory levels where we want them? No. I think Q3 you'll see an incremental uptick in the inventory number, and hopefully by Q4 we'll be kind of closer to where we want to be.

Okay. And then you have a fourth line that's up and coming? Is that still on track or where are you with that?

Yes. Fourth line is on track and it should be producing product for us before year end.

Okay. So that's what will help you resolve it in the fourth quarter?

Yes. We continue to make really good progress. Obviously just the level of consistency that we've had in production going back the last nine months now has been I think unique to our business over the last six years, at least that I've been around, which is great. The operations team is doing a fantastic job.

I think we've seen a little bit of an uptick here in the third quarter in production from them. We should be hopefully near 2.75 million to 3 million pods in the third quarter of this year.

And then growing even beyond that hopefully in Q4 with the addition of line four then producing as well. So knock on wood, but production is going very well.

Okay. And then last question if I may. Just if you strip out the $2 million and the $7 million in charges, your G&A would have been at a level we haven't seen since 2012 on an absolute nominal basis. Is that the right number to go off of? You were spending that much on litigation, so that's kind of our new core base rate? Or how do we think about that? That's all I have, thank you.

Sure, Bill. I think that's right. Again, in total we're talking about $36 million to $38 million of operating expenses per quarter for Q3 and Q4.

Q3 is really the first full quarter where we've incurred all of the charges related to the sales and marketing hires that we did. But on the G&A line, yes, I think that's accurate.

We certainly have worked our way over the course of the last 12 months through the Medtronic litigation last fall, the Becton litigation, a couple of these other odds and ends. And that's hopefully all behind us at this point.

Thank you.

Raj Denhoy, Jefferies.

I wonder if I could ask one about the managed care situation as well. I think Danielle asked this as well, I don't know if you answered it, but just in terms of the -- what gives you the confidence that you won't see this at other payers as well?

Well, I guess where we're at, we've been at this, we've had products in the market since 2005. This is the first time we've seen anything like that.

And part of this, I think what makes it a little unusual is we go through about three distributors in the US that have this one big health care contract. And so this is one of the few that we don't have a seat on the table, seat at the table.

Like I said, I think what makes this a little unusual, we were hearing from our customers, we had to get engaged with the distributor, the distributor had to get engaged with the managed care. So, again, I think all the other stuff, we have good relationships with these managed care providers. If there's changes in coverage or anything going on we are usually involved in the discussion. So I think that makes this a little bit of kind of one-off.

It's a major provider, so it made it problematic. But like I said, I think everywhere else we have a pretty good relationship to the extent people are thinking about changes policy, there's ongoing discussions, you can kind of anticipate it, you can understand where they're coming from, and there's always give-and-take.

This was, like I said, by the time we got engaged they had just kind of shut down the whole insulin pump category in general, and that was their solution and they're started to turn them back on one at a time. So a little different.

I'm not saying it would have been different if we had a direct contact, if we had a direct contract with this customer. But I would tell you this is way out of the norm for what we typically see.

Raj, this is Brian. I'd just add a couple things. One is it's been well known really over the last year or so since Medtronic launched their 530G that there were plans that were -- not wanting to reimburse for that product and were holding it back, and that's been well documented.

Our understanding is that this provider, it impacted not just insulin, it impacted others as well. I think that would be one of the ones that was impacted was the 530G.

So it's not unique. As Duane pointed out, what is a little unique in this one is we don't hold a direct relationship. So it just took us a little bit longer I think to be able to get involved in it. Hopefully at the and it's just some noise and we'll work our way through it over the next couple of months and we'll just be done with it.

Okay. And, sorry, just one more question on that as well. I think you described it as being related to type two diabetics perhaps getting reimbursed. And again, you didn't give us a lot of detail, but what I understood was that perhaps type 2 diabetics were getting reimbursed for these pumps? Is that correct? And that's what triggered this?

So Brian described kind of a little bit on the higher end, higher-priced pumps. One of the other things they were looking at is why were type 2 patients, the insulin-dependent type 2 patients, being reimbursed for a pump.

So once again keeping in mind, Raj, I think you got to put it in perspective, we're kind of the third man in on this. So this is -- and obviously we'll step in the driver's seat if it doesn't get resolved the right way.

But we heard that was another piece of what they reacted to. They couldn't understand why type 2 patients, given that there are other low-cost solutions for insulin-dependent type 2s, they were not happy with the fact that some type 2 patients were being reimbursed.

To be clear they're not our patients. These weren't our charges going through. These were other companies using codes mainly for getting type 2 reimbursement that the plans I guess were surprised by.

Okay. That's helpful. Maybe just I'll ask one about the drug delivery business that you commented on. Still waiting for the FDA approval on the Amgen pump, but do you have any updates on that in terms of when we might expect that product? And I think your level of enthusiasm might have ticked up a little bit, too. But maybe you could update us on your expectations for what we can expect once that gets approved?

Yes, for us it's unchanged and we've been in constant dialogue with the Amgen folks. I think they're working through their process, I don't want to talk on their behalf.

But overall I think we're all feeling pretty confident that the timelines we've laid out are still holding true. So I think overall everything we seem to be hearing is positive and we're moving forward as planned.

Okay, helpful, thank you.

Tom Gunderson, Piper Jaffray.

Hi, guys. Let's talk about the payer problem. So far, what I understand --.

You don't want to talk about the 35% growth or the 20% year-over-year? (laughter)

And it really gets down to that. Because if this is just a speed bump for a company that's growing its main product by 35%, then we're just going to work on through it.

But what we need to do is just understand all the details of it to see that this really is a speed bump. So from a next level of detail that I'm looking at, based on what you were saying to Raj earlier, is it affects all pumps. You have -- it's the distributor's contract as far as OmniPod goes. Right? Is that what I'm hearing?

It's the distributor's contract. I'm not sure it affects all pumps. I'd want to be cautious about that. But it does affect other pumps.

But to correct this, do you need to correct it for all the pumps that are involved by this? Or can you focus and get this taken care of just for you so that you're dealing in the things that you can control?

Yes, no, I think we're dealing in the parts that we can control. The benefit we have is obviously we have a separate coding structure than all the other guys, primarily all the other guys. Although there does seem to be a little bit of activity on our codes by others, which probably caused a little bit of their angst. And was unexpected.

So we can work through our codes and our part and ultimately figure out frankly how do we just get them a little bit more comfortable that the patients that are being pushed through our distributor partner are the right patients to be going on the product. And as Duane pointed out, I think one of the questions they are holding is really just around medical necessity.

And I think within the type 1 community, medical necessity is pretty well documented. So we just have to make sure we're clearer with people and clearer with this specific provider I think of who these folks are, why they need the product, and what do they need to be able to make those approvals in a more timely manner.

And that's the part that's a little bit of a head scratcher. DCCT has been around for over 20 years and there is medical necessity. That's virtually irrefutable for type 1s.

And I'm just wondering, are you running across -- did you get kind of thrown out with the bath water kind of thing here? Or is there somebody who's got their numbers mixed up? I'm trying to get at what it takes to correct.

So I think Brian adequately described what it takes to correct. I think the situation as you described it, there's some higher-priced products coming into the market that seem to be slipping in to various codes.

There seems to be some kind of lower end type 2 products that once again, we're not at the table at the moment, but from what we're being told there's some lower end type 2 products that try to slip in under some of our codes. So the type 2 and the higher-end products both I think sent this provider to say okay, the solution is we shut the door and then we'll get everybody to come to us as opposed to asking the questions.

It seems to be the approach they took. Wouldn't be my preferential approach, but it does seem to be the approach they took. As I said, getting the reimbursement, it cost us a few weeks here in the quarter. But getting the reorder stuff turned back on was a pretty straightforward process. And we think once some of the stuff gets cleared up here, we think we'll be able to get this turned back on.

Like I said, the only thing that was kind of really unusual about this for us is because we didn't have a seat on the table, we started getting customer calls which led us to call our distributor partner, which led them to call the managed care provider. And just based on the way I described it to you, that just took up time in the quarter. And we're working as fast as we can now to straighten this other thing out.

Okay, I got it. Thanks for the extra details. Good job on the 35%.

Thank you.

Ben Andrew, William Blair.

Hey guys, thanks for taking the questions. I think you said there was about $10 million of impact on the full year. Is that roughly split Q3, Q4, the residual after the $1.5 million?

Yes I think it's kind of pretty much all-inclusive, Ben, and I think what we said is it could be up to $10 million. We are hoping today the guidance we are giving you obviously reflects that. We're hoping we get this thing kind of cleaned up here and hopefully next quarter we can come back and tweak it one more time.

Ben, just to add to that. Basically obviously these are new patient starts. If you delay new patient starts you delay the timing of when the reorders come through, and that's the impact. So it compounds a little bit. So impact in Q2 is about $1.5 million. The impact in Q3 is probably about $3 million if you look at it.

And then Q4 could represent the other $5 million or so in kind of the worst case scenario, if we really wound up to the whole $10 million. So hopefully we're able to solve it in time to defer some of that Q4 hit. Obviously new patients that don't start until later we can't get that timing back, but we can affect it for the others going forward.

Sure. And it may be hard to know, but if you lose some of these new patient starts do you lose them for good to maybe one of those other pumps that weren't impacted? Or can you tell?

I think at the moment I think it's tough to tell. We know who these patients are now so we've open up a dialogue with them. We're keeping them in the loop and we're trying to keep them as warm as you can keep them.

And I think if it goes on a couple more weeks I think we feel good. If it goes on eight more weeks obviously some people may lose a little bit more interest. I think the one thing that we have going for us is it's a pretty -- people have chosen this product. They chose it for the obvious reasons.

So to go do something else may not be -- what we do worry about is if they say, you know what, let me just keep taking my shots and maybe I'll go back and make this up, revisit this the end of the year right before all my deductibles reset. So that's the kind of thing we are concerned about.

They just kind of say, you know what, don't need it now. I'll look at it late in the year right before my insurance plan resets and I'll deal with it then. I'm not sure we'd lose them to another pump, but we may just lose them back to their current treatment.

Okay. And can you give us a little more granularity on when in the quarter you became aware of this and when you kind of started to be able to try to deal with it?

What seems to be clear -- because again, part of the way we figured this out is as you seen ordering patterns from a distributor. So it looked like it happened really in the beginning part of May. But I would say we really didn't become aware of it until the earlier part of June. So kind of really second week or so of June.

Okay. A few housekeeping things. You said gross margin 200 to 300 bps per quarter. Is that corporate or OmniPod?

Consolidated. I mean it will wind up being both because the OmniPod side is certainly driving it, but on a consolidated basis between 200 and 300 bps per quarter.

Sure. Any change in Pod pricing or utilization per patient separate of this issue in the quarter?

No, not really. Pod price continues to kind of hang in there in that 27 to 28 range where it's been for the last probably six to eight quarters. Utilization seems -- within the exception of this group of patients who clearly got delayed out a few weeks -- seems pretty normal.

Okay. You got $175 million in cash, just turned operating profitable and sustainably will. What do see doing with that? Obviously that's a fair chunk of cash to have sitting around.

Yes, subsequent to June 30 we effectively used about $35 million of that cash. $28.8 million of it to retire effectively the last part of those 3.75% notes that happened on July 28. And the $5 million Becton payment happened in the first week or so of July. So the number balances back to about $140 million, which is really where we kind of began the year.

And we've got a bunch of initiatives and things on the plate. I put this in the good problem to have category. So I think we'll kind of see how the business continues to evolve and develop, and obviously do have still debt outstanding and we'll kind of continue to monitor and manage against those things.

Okay. And then last for me, any update on when we might see some human data on your CGM partner?

We're full systems go still. We're trying to get ready for human trial here in the beginning part of 2015. So that's a reasonable timeline to think that some of the data will go alongside that trial.

Okay, great. Thank you very much.

Jason Bedford, Raymond James.

Mike Rich calling in for Jason. Thanks for taking the questions. I'm not going to ask you about the payer dynamic yet (laughter).

You're going to ask me about the 35% growth?

No, I was going to ask you about the expanded agreement with Dexcom. It sounds like it's somewhat depending on their Gen 5 timeline. But when are you expecting to file approval for the next gen PDM? I know you were saying you'd have it displayed at ADA next year.

But when do you think you'll file that? And does that become a PMA because it will be able to display CGM data? Or does a cell phone create redundancy that keeps that 510(k)?

So obviously we got to take that trip with the FDA to your second question. I think from our standpoint, and talking with the Dexcom guys, their app is a PMA.

But our argument would be quite simply that, well, if you can display that app on a cell phone, which is obviously not an FDA regulated device, there seems to be I guess in our logic no reason why our hand-held wouldn't be -- remain a 510(k). And I think from our standpoint, I think we've spent some time, we've talked to a lot of people down at the Agency. As you can imagine, all these apps and everything going on, the FDA had people at the ADA listening to all this stuff.

Unfortunately because we had this call I wasn't at the AADE, but I'm sure if there was anything being displayed there that the FDA would have people there. So I think it's changing fast and furious. I think they're trying to embrace the new technology. So I think we feel good that we've got a very strong argument that why would the hand-held be a PMA?

And in all honesty if the hand-held does turn out that it has to be a PMA it's not really the end of the world for us. It only becomes a big problem for us if the Pod were to be a PMA.

And that's when we talked about integrating sensing technology into our Pod, that's why when that time comes we got to have it pluperfect. So like I said, our belief is we think it may be a 510(k) because if you can display it on a cell phone then our next-generation product is not all that different from that.

So that's kind of how we're looking at it. And so I think to your first question, I think the big update for us, and I think we'll have a very good handle of this, is the ADA next June in Boston is going to be where we will be able to give you a really good timeline, hopefully be able to display this next generation product. And we'll have a much better idea where we are in terms of regulatory process and that.

So the ADA in Boston next year is in Boston next year, so we're kind of excited about that. So being a Boston-based company that would be kind of a nice coming out party for us.

So we don't have the timeline. Obviously the FDA is a big piece of it. I think we'd be in a position to show kind of what we're doing in our product strategy there and then the regulatory path will be what the regulatory path is.

Okay. That helps, thanks. And then the 20% new patient adds, even with this issue in the back half of the quarter, is pretty solid. But are you seeing anything new on the competitive landscape?

Tandem had a pretty good quarter. They also mentioned increased activity from another new player in the space. Anything new you can comment on there?

Okay. I think from our standpoint, and this sounds like a broken record, but we fight for mind share at the doctor's office. If we're given a fair shot I think it's pretty simple. You either want tubing or you don't want tubing. If you don't want tubing we're the product.

So we really don't -- we compete with the 800-pound gorilla in the space and we fight for mind share at the doctor's office. It really isn't product related. The rest of these guys are in the space and they're doing what they're doing. But that's really not -- the competition is really mind share at the doctor's office.

And to the other part of your question, Mike, I'd add that as Duane noted in his remarks, with the addition of these 20 new sales reps this was really the first full quarter that they're out here in the field now and driving new referrals. We're seeing an uptick in the pipeline.

I think the sales team overall is very engaged. I think they're excited about the new resources. They're excited about still the new Pod in their bag, and I think overall we feel pretty good.

So it's unfortunate this payer issue is causing a little drop in our patient conversion at the moment to just get some of those people over the goal line, but we believe that's temporary and the pipeline is still very full. So I think we are still feeling very bullish about the second half of the year and 20% new patient adds, even with this issue given the size of the payer, I think we're still pretty happy about.

Okay. And then just to clarify, sort of piggybacking on that, it's fair to assume then that the change in guidance reflects really only this issue and that the underlying strength of the business is unchanged or on track with what you expected?

That is 100% accurate, yes.

Okay, great. Thank you for taking the questions.

Mike Weinstein, JPMorgan.

Thanks. This is actually Robbie Marcus in for Mike. Hey guys, I was wondering if you could tell us what the new patient starts would have been this quarter if you exclude the payer issue?

Again, I'd rather not get into taking these numbers and subtracting that and adding this. Again, we're so far year to date, we're still up about 20% in total.

We were on track I think for a solid Q2 as I had talked about at previous conferences. And we're expecting that we'll be able to kind of continue to hang right at least around this 20% number a little bit better throughout the back half of the year.

Okay. So we should assume that the 25% number is now kind of off the table for 2014?

Well again, I think we'll have to see exactly how this issue resolves and exactly when it resolves. But we've adjusted the guidance down the amount that we think is appropriate to account for this specific issue.

Okay. And then even with the issue you guys are coming very close to profitability. How are you thinking about profitability in 2014 versus 2015? Are there any benefits for pushing it to 2015? And how should we be thinking about shares and the tax rate once you guys become profitable?

Well we've got 55.5 million shares outstanding. There's certainly some options and other things out there which are all disclosed in the SEC filings. The only other big thing that's out there is obviously this new convertible debt issuance that we did in June. So those numbers are all up there.

One of the nice things about the convertible debt issuance was that we effectively were able to take dilution down by about 20%, as compared to -- if you look at the number of underlying shares compared to where the old one was versus the new one. So at some point this thing actually did convert, which is really not the goal of these.

It still would have saved about I think a little over 20% of what the original amount of shares were. In regards to profitability, again I'll put these into the high class problems, right? And turning profitable is ultimately a goal.

We will get there. We were operating profitably in Q2 if you back out the Becton lawsuit. We'll continue to be operating profitable for the back half of the year. There is some of this non-cash expense that goes through, we'll see exactly where it lands, and then be as it may. So we have a lot of NOLs.

We won't be paying Uncle Sam specific -- writing a check that much for quite a while to come. But more to come I guess around tax rates and other things as we get further down the line.

Okay. Thanks a lot.

Steven Lichtman, Oppenheimer.

Thank you. Hi, guys. I guess first question on the pipeline opportunities. You guys have talked about additional indications potentially with Amgen specifically. Any update on when we could hear on that? And then also potentially other partnerships. When could we potentially hear on that front as well?

Sure. Steve, it's Brian. So on Amgen, like I mentioned earlier, is going very well.

I think it's fair to assume, and I think we've said this probably previously, but it's fair to assume that until this first one gets over the goal line and complete and we actually get it into the marketplace, we're not going to really move forward with additional projects until that point in time. Several conversations with those guys; we feel like there's some good opportunities there and believe the partnership will expand. But obviously getting off the start line here on this first one in a positive manner will go a long way to making sure that that happens.

That said, since really the press release announcing the Amgen partnership we've had a lot of inbound inquiry to us asking about our product. Several meetings, several calls, several different I'd say exploratory agreements in place where we're working on other initiatives now, and have some other interesting things here in the pipeline.

And I think as Brian described here, it's to the point now that we're actually out actively recruiting a business development person for that business. So we now have, like I said, I think we described this before, if the phone rang we answered it.

The phone is ringing a lot. So we're actually taking the next step, we're going to invest some money in terms of a business development person to help us start looking at these opportunities, sizing them up. So we're excited about it. There seems to be a significant amount of interest.

Corporately we're ready now to invest in terms of another person. The guys that have been doing it have been doing a great job, but now we need more feet on the street to really start qualifying this.

Got it. And in international obviously showing great growth. Where have you guys been successful so far? And where do see some of the biggest opportunity geographically? Maybe just comment overall in terms of where you're seeing that international business looking forward.

So I think our partner internationally is Ypsomed. They're throughout most of western Europe, they continue to take market share, penetrate the markets, the obvious big ones. The Scandinavian countries, Germany.

They kind of to their way -- and they just launched in Italy. While that's not a major market, it is of size. I think the two opportunities that we continue to press forward with them on is we're going through the process in France, which is a very big market, very good reimbursement. So we haven't had dime one out of France yet. And then the other obvious one I think is in China. That has a kind of a very healthy insulin pump business.

I think if you look at a company like Novo and some of the insulin suppliers and see how much money comes out of the Pacific Rim, it's pretty surprising how big that business. So we do think those are the two big opportunities.

Both of which, in France we're in the whole, hopefully -- and I say hopefully here because we thought we'd been in it a couple of times -- but we think we're in the final stages with Ypsomed in terms of getting reimbursement. And in China we continue to work our way through their SFDA. So that's kind of where we're at.

Okay, great. And then just lastly on the new sales people you brought on board in the first half, the 20 new people. When did they sort of hit the ground? And when do you start expecting them to start producing some returns? Should we start seeing some effect here in the back half of the year?

Of the 20 people basically half of them hit the ground the first week of May. The other half hit the ground first week of June. So again, they averaged half a quarter.

Basically just the amount of time to probably learn how to drive to the various places they were going to. But even with that, we did see a little bit of an uptick in these key account manager territories versus if you will standard territories.

There were up about 10% in the one versus the other, which is a positive. And we're still seeing that momentum going into Q3. So yes, I believe we will see some positive impact out of these folks in the back half of the year.

Okay, great. Thanks, guys.

Mimi Pham, ABR Healthco.

Good afternoon. On the managed care issue, is there any implication or related impact for your pending type 2 launch with Lilly next year?

Mimi, that's a great question. And I think if you remember what we said time and time again is I'm not sure just having a type 2 pump and going into that marketplace that you'd ever get reimbursement for.

When we go with Lilly with the drug, we'll have full-blown clinical results. And this is a subset of type 2 patients that are highly insulin resistant and typically have failed with everything else.

So we feel confident. We think the hurdle, the medical necessity hurdle, there will be lots of paperwork, there will be a lot of that. But we are pretty confident that this is kind of the last stop on the train for these patients and it'll be very well received.

But I think you have to go at it, once again if you think about how big diabetes is, how expensive it is. It has the potential to bankrupt the United States as well as the rest of the world. I think you have to go at with a real clinical angle, and that's kind of how we've approached that from day one.

Okay. And then regarding -- Becton last week during their earnings call said that they were ending their CGM program because of technology failures in human testing.

So it seems like this might add more risk to your all-in-one Pod and CGM. Are you thinking about working with Dexcom on the all-in-one Pod now that you're working with them on these other developments?

Look, I think for us we would take nothing off the table. We would work with anyone that obviously has a sensor.

We're I think in lockstep with Dexcom on what we want to do short term, and we continue to talk to everybody about what we want to do long term. Having said that, I think where we are, just so you understand what our mindset is, we really do believe the sterility issue, now that we think there are products out there that can survive the sterility issue.

We do think that this all-in-one app, if you think about where medicine is going, we are talking about basically having a sensor added to our product where we have the base, we have the insertion system, we have the power, we have the communication. We think this will be an incredibly cost-effective way to incorporate continuous sensing in core insulin-dependent patients into a pod, and we are approaching it cautiously.

We're not running down the street telling you we think we got it all worked out. But we are listening and talking to everybody. We have tested everybody's sensors. We are moving forward and talking to all those guys who we think that this could work with. And we still think that standard of care someday is going to be one thing on the body and one thing either on your phone or in your hand.

And then last with Medtronic, at their analyst meeting saying that they're not going to pursue a disposal pump anymore. Is that helping at all in the field for maybe some endos who wanted to stick with Medtronic given they can provide durable today and down the road disposable the way they talked about it?

Once again I think it depends on the particular endo. I'm not going to say it does, it does not help. I think from our standpoint, I think what's pretty competitive in the marketplace is fighting for mind share with these guys in the office.

They will morph into whatever the new message is and they'll go back into those offices with whatever the new message is. And so like I said, I think from our standpoint we heard them. Okay, I'll take them at their word for the time being. But we're going to keep driving hard, and as far as we're concerned they're still the guy to beat.

Okay, thanks.

Jan Wald, Benchmark.

Good afternoon, everyone. A couple of short questions. Most everything else has been asked and answered. I guess one thing is you're looking for margin improvement in the second half of the year. What makes you feel comfortable that you're actually going to be able to achieve the goal that you've set for yourselves?

Most of it is at this point from our perspective relatively locked and loaded. We continue to work with our supply chain on the bill of materials, as we continue to work our way up the volume curve. We've got a very clear path on kind of reduced -- continuing to take cost out of the product which should drive us the additional call it 400, 500, 600 basis points of gross margin that we should see in the back half of the year.

Okay. And just on the sales force and key account managers, it looks like you had a pretty nice bump in wherever they were located and working. How should we understand that going forward?

Is the 10% bump kind of a bump or is it something that you could continually leverage over time? Do you see the key account managers getting into a larger proportion of the accounts that you have? Or how do see that program building?

It's a great question. I think from our standpoint right now we're sitting back watching the testing. We like everything we see.

What I think we had said was what drove us to this particular decision last year we had tested it in one particular area just to make sure that this was the right approach. And so what really kind of drives it with some of these key accounts is when you see the sales reps that have had a great deal of success and they can no longer expand beyond their current installed base, because there is a correlation between spending time in the doctor's office and really developing a relationship with them.

So we're going to watch it, we're going to continue to watch it, and it is a program that I think over time we will continue to expand if we keep seeing the results we're seeing.

How are you using the key account managers? Are they going into your largest, most important accounts at this point? Or ones where you've seen sort of a growth slowdown because the salespeople there have already gotten to the point where they can't get much further?

So the way we're working them is we have had sales reps going to a territory, been wildly successful. All of a sudden 50% or 60%, or 40% of their business is coming out of three accounts. What you see is the territory that the sales rep has to back off and spend more and more time in there.

So what we are doing with those accounts is we're bringing in this person to maintain that relationship, maintain the Insulet relationship with them and free it up. So it really is we have a clinical specialist, which is key to all this. Because nurse educators want to deal with a clinical specialist.

Then the key account manager really becomes the farmer and the sales rep goes back to being the hunter in the territory. And we can do that because I think we've been at it long enough. In every territory we have 20 top accounts and then the next 20 accounts. We evaluate where the business is coming from. We evaluate how much time the salesperson is spending in those particular accounts.

And so we've kind of developed a little bit of a model that we think we can see the relationship between time spent, orders coming out of the office, what the potential of the office is. And that's how we kind of drove the firsthand pulled key account managers.

And like I said once again, we're monitoring it. If it continues to be a successful program obviously we'll roll it out in other areas.

Thanks a lot and congratulations on the 35%.

Thanks (laughter).

William Plovanic, Canaccord Genuity.

Great, thanks. Just two detail questions. One is, and they're more modeling. One is you kind of gave generalities for the international growth year-over-year. Was it up 100%, 50%, 75%, or a nominal dollar amount? Can you give us an idea of where that is?

And then my second question, and it's all modeling related, is roughly what was the old NDI business in the quarter? That's all I had, thanks.

Yes I'd say the Neighborhood business was effectively flat with where they were in Q1. And the international guys, international is absolutely on pace to double for the full year. So that's where they're kind of continuing to track. I probably shouldn't get any more specific than that.

Okay, great and see you next week.

You bet.

Thank you. There are no more questions in the queue at this time.

Thanks everyone for joining us today, and we look forward to updating you with our Q3 results. Have a good night.

Take care.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.