Insulet Corp (PODD) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insulet Corporation Q3 2014 earnings 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 introduce your host for today's conference call, Brian Roberts, CFO. Sir, please begin.

Thank you. Good afternoon, everyone. Thank you for joining us for our third-quarter 2014 conference call. I am Brian Roberts, Chief Financial Officer of Insulet. Joining me on the call today is Patrick Sullivan, our President and Chief Executive Officer; and Allison Dorval, our Vice President and Controller.

Before we get started, I'd like to remind everyone that our discussion today may include forward-looking statements as defined under the Securities Laws. We intend these forward-looking statements to be covered by the Safe Harbor Provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act and are making this statement for purposes of complying with those Safe Harbor Provisions.

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

Information concerning the Company's potential risks and uncertainties is highlighted in the Company's press release issued earlier today and in the risk factors section of the Company's SEC filings, including the Company's annual report on Form 10-K for the year ended December 31, 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 would also like to remind you that the guidance we are 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 in today's press release at MyOmniPod.com in the investor section.

And now, let me take a minute to introduce you to Patrick Sullivan. As you know, Pat joined Insulet on September 17 as President and CEO and brings to Insulet over 30 years of Executive leadership experience, including a 13-year period as Chairman, President, and CEO of Cytyc Corporation.

Pat led Cytyc through exceptional growth as revenues increased from $4 million to more than $750 million through a combination of organic growth and strategic acquisitions, culminating in its acquisition by Hologic in 2007. His leadership and experience is a great addition to Insulet as the Company enters its next stage of growth. Welcome aboard, Pat.

Thanks, Brian, and good afternoon, everyone. Thank you for joining us on the call today. I'm very excited and honored to have the opportunity to work with such an innovative and progressive Company. Over the last 50 days, I've had the opportunity to gain a much deeper understanding of our Company, the industry, and the opportunities that lie ahead. As I learn more, my enthusiasm for this business and its future continues to grow. I am looking forward to finishing out 2014 and driving our strategic initiatives in 2015 and beyond.

As we look towards 2015, it is clear that we are building off a very solid foundation as the existing business continues to perform. We delivered $70 million of top-line revenue in the third quarter, representing a 23% increase year-over-year. In my short time here, I've been impressed with the passion of our commercial team as they continue to build our presence with both existing and new healthcare practices to drive adoption of the OmniPod.

Our product helps people improved control over their diabetes, providing them the freedom to enjoy life. In fact, about 70% of our initial patient starts are new to insulin pumping. These customers report that the easy-to-use, waterproof and tubeless design is appealing as they gain the benefits of insulin pumping without the hassle of conventional pumps.

This is especially true in the age 18 and under group. Approximately 40% of our new patient starts in the third quarter were in this important age group. While our annualized attrition continues at a rate of about 9%, we know that the rate of attrition in those 18 and under is only about 5%. Once kids and their parents experience the freedom of the OmniPod, they do not change.

Critical to our ability to convert multiple daily injectors to the OmniPod is for us to deepen our relationship with endocrinologists and Clinical Diabetes Educators. In addition to the discreet size of the Pod, healthcare professionals continue to cite the updated insulin onboard calculator, the simplicity of a no-assembly system, and lifestyle convenience as the key reasons why they prescribe the product.

They clearly expect our sales professionals to be readily available to assist them as required in adopting the OmniPod. To that end, earlier this year, we added approximately 20 new commercial team members to increase our presence and ability to serve healthcare professionals.

We've added a new role that we refer to as Key Account Manager, or KAMs, who are primarily tasked with ensuring a high level of customer service to critical existing accounts, which will allow our territory sales reps to spend more time with new prescribers.

The early returns for these new resources are positive. Territories with KAMs have experienced a 15% average increase in referrals since we added them in Q2. As these resources continue to gain experience, we believe overall productivity will increase further and expect that we will add additional commercial resources early next year.

Last quarter, you'll recall that we discussed an issue with a significant payer who made changes to the insulin pump coverage guidelines which, while not eliminating reimbursement for the OmniPod, did cause a lot of confusion across the country. Over the past few months, we have worked diligently with this payer and our distributor Partner who serve this payer to rectify the problem.

We are pleased to report that we believe the issue is behind us and will not impact new patient starts in 2015. The payer has revised its process in a manner that we believe will both eliminate the confusion surrounding OmniPod reimbursement eligibility and keep OmniPod consistent with traditional insulin pumps in terms of required documentation. The payer is currently rolling out the revised process and forms. Given the timing of the rollout, we expect new patient starts to be impacted through Q4, but with a declining impact each month.

On the international side, our business continues to grow as well as we remain on track to double for calendar-year 2014. As many of you may have seen, our European Partner Ypsomed released their six-months results ended September 30, 2014 last week. Those results showed a 60% sales increase for the OmniPod system driving nearly all of the growth in the direct diabetes business.

In looking at this success, we see continued share gains across Europe with countries such as the Netherlands, Austria, UK, and Switzerland in the mid to upper teens. As we look forward, we believe the opportunity for growth remains high as Ypsomed continues to add share in other markets such as Germany, Sweden, Finland, and opens new markets such as Italy, which we launched last quarter, and France, which we hope to launch early next year once reimbursement is secured.

Although we generate lower gross margins on our international partnerships, this business continues to drive our operating margin improvement as increased revenues require only minimal incremental operating expenses. In Q3, we manufactured more than 3 million pods for the first time in a quarter. More importantly, the quality of the product from Flextronics has never been higher as yields have improved to greater than 98%.

This improved quality has translated to reduced calls to our customer support team and higher confidence in the field. We are in the process of finishing line for Flextronics and expect to put it in service early next year.

Additionally, our record production drove incremental gross margin improvement in the quarter as US product margins are now in the low 60%s, and consolidated gross margins increased by more than 100 basis points to 51%.

On a consolidated basis, gross margins continue to be impacted slightly by product mix within our Neighborhood subsidiary and increasing international market share. Overall, we have improved gross margins by more than 700 basis points since the new OmniPod was launched. Gross margins will continue to improve in the fourth quarter as additional OmniPod cost savings further reduce the cost per pod.

I'm very impressed with our manufacturing capabilities and view it as one of our core competencies. And, in R&D, we need to continue to enhance our existing product and development, new products to meet the customer needs. I've spent a significant amount of time to date at Insulet gaining a full understanding of our research and development efforts. At the top of the priority list is our new PDM initiative.

The goal of this new PDM is to provide our users with more modern-looking touch screens -- devices, with a cleaner user interface as well as incorporate Bluetooth capabilities to allow us to solve some of the data management challenges facing the industry today.

We see the Bluetooth capability as one of the most important enhancements as it will allow two-way communication with other platforms such as Dexcom's chair platform recently approved by the FDA. Once the PDM is approved, we look forward to sharing data with Dexcom to allow our common users improved data viewing capabilities.

While the work on our PDM moves forward, we are also making progress in our activities to integrate a CGM sensor into the OmniPod. I'm particularly interested in this long-term initiative. It is clear that a one item on the body and one hand-held solution is very attractive for our customers, healthcare professionals, and Managed Care payers alike.

We are the only Company with the capability to bring these two tremendous technologies into one, easy-to-use platform. We have recently completed additional testing around proximity of sensing and dispensing that gives us increased confidence in our integrated CGM solution.

During the quarter, we also received feedback from the FDA regarding our planned approach in partnership with Eli Lilly for our OmniPod system, specifically designed for use with U-500 insulin. Our initial approach with Lilly was for us to file our 510(k), gain approval, and then complete a clinical trial [with Lilly] for them to update their labeling. The FDA, however, has informed us that they now prefer the clinical trial to be completed prior to our 510(k) submission.

We are working closely with Lilly to revise the timeline for our clinical study and to file for clearance. We anticipate the clinical commencing mid-next year. Since the number of highly resistant people living with type 2 diabetes is increasing daily, the need for this product continues to grow, and both Companies remain committed and enthusiastic about this project.

Finally, last week, Amgen publicly discussed for the first time the Neulasta on-body delivery system that leverages the OmniPod technology. This one-of-a-kind system will allow a patient to leave the doctor's office with an activated delivery device programmed to deliver Neulasta the following day. We are working closely with Amgen for the approval and subsequent launch of this product.

In addition to Amgen and our ongoing partnerships with Ferring Pharmaceuticals, our newest Partner, Capricor Therapeutics, announced last month the start of a clinical program for their drug, Cenderitide, to treat post-acute heart failure using our drug delivery system.

We will provide product development, product management, and design control activities in partnership with Capricor in addition to providing clinical product for their clinical trial. We look forward to assisting in this exciting opportunity. With those comments, let me turn the call back to Brian for additional details on our financial performance.

Thanks, Pat. Consolidated revenue increased by 23% year-over-year to $75 million for the quarter ended September 30, 2014, from $61.1 million in the same period last year. For the nine months of 2014, consolidated revenue was $216.2 million compared to $178.6 million for the first nine months of 2013, a year-over-year increase of 21%.

Gross profit increased by 39% in the third quarter to $38 million as compared to a gross profit of $27.4 million in the third quarter of last year. Consolidated gross margins of 51% represent a 600 basis point improvement over the third quarter of 2013.

As we look toward the fourth quarter and early 2015, we expect further improvements in our consolidated gross margins through a combination of additional component price reductions and incremental overhead leverage with the start of the fourth manufacturing line. Gross profit for the first nine months of 2014 was $106.6 million, an increase of $27.2 million, or 34%, as compared to $79.4 million in the first nine months of 2013.

Operating expenses decreased by $3.8 million, or 8% year-over-year, to $40.9 million in the third quarter of 2014 from $44.7 million in the prior year. This quarter's operating expenses include approximately $7 million of compensation charges related to the CEO transition in September, most of which is non-cash. Excluding those charges, operating expenses would have been about $34 million in Q3. Last year's third-quarter operating expenses also included approximately $10 million of one-time charges relating to the settlement of the patent litigation with Medtronic.

Fourth-quarter operating expenses are expected to be in the range of $36 million to $39 million, including approximately $3 million of remaining stock compensation charges associated with the CEO transition. Operating expenses were $116.7 million for the first nine months of 2014 compared to $108.7 million for the first nine months of 2013.

Operating loss was $2.9 million compared to $17.3 million in the prior year, an improvement of over 80%. Excluding the one-time compensation charges, we would have reported an operating profit of approximately $4 million in the third quarter of 2014.

Interest and other expense was $7.9 million in the third quarter compared to $4 million last year. In June, we issued approximately $201 million of 2% convertible senior notes, maturing in June, 2019, and used approximately $160 million of the net proceeds to repurchase $115 million of the outstanding 3.75% notes that were due in June of 2016.

In July, we retired the remaining outstanding 3.75% notes in exchange for $28.8 million in cash and approximately 350,000 shares of common stock. We recorded a loss on the extinguishment of debt of approximately $4.3 million in the third quarter, relating to that transaction.

Net interest and other expense was $35.9 million for the first nine months of 2014, including a total of approximately $23 million of expense related to the early extinguishment of the 3.75% convertible senior notes. That compares to $12.9 million for the first nine months of 2013. Going forward, we expect to record interest expense related to the 2% notes of approximately $3 million per quarter comprised of $1 million in cash interest expense and $2 million in non-cash interest expense.

Excluding the impact of the extinguishment of debt and the one-time compensation charges, we reached breakeven results at the net income line and on an earnings per share basis in the third quarter of 2014. Including these items, our net loss for the third quarter was $10.8 million, or $0.19 per share, as compared to a net loss of $21.3 million, or $0.39 per share for the third quarter of last year. Net loss for the first nine months of 2014 was $46.1 million, or $0.83 per share, compared to $42.5 million, or $0.79 per share for the first nine months of 2013.

Our cash and cash equivalents balance was $146.4 million at September 30 compared to $149.7 million at December 31. As of September 30, we had approximately 56 million common shares outstanding.

Turning to guidance, we have further refined 2014 revenue expectations to $292 million to $297 million, translating to a range of expected revenue of $76 million to $81 million for the fourth quarter. That takes into consideration the impact of the payer issue we have discussed.

Lastly, after six rewarding years, I have made the difficult decision to resign my position at Insulet. I'm proud of all that has been accomplished over my time here, including a 10X increase in revenue from approximately $30 million in 2008 to nearly $300 million this year, an even larger increase in market cap to over $2.2 billion and achieving operating profitability.

More importantly, I've had the privilege to speak with many of our customers and see the impact we make in their lives each and every day and to work with incredibly talented team of people.

It is with even greater pride that I turn the CFO reins over to Allison Dorval, who has been my right-hand since my first day. Many of you have had the opportunity to meet Allison in various investor conferences over the past couple of years and I am more than confident she will do a tremendous job for you, our shareholders, our customers, and our colleagues. I'll stay on as an employee of Insulet through the end of the year to ensure a smooth transition.

With that, Operator, please open the call for questions.

(Operator Instructions) Our first question comes from the line of Danielle Antalffy, Leerink Partners.

Thanks so much. Good afternoon. Let me start by saying, Brian, you will very much be missed. But, Allison, congratulations. I'm not sure if you're there, but looking forward to working with you more closely. Also, welcome aboard, Pat. Looking forward to getting to know you better. Maybe I'll start with, how have your first 50 days been? Anything surprising? What's your initial read of the Company and the potential long-term growth trajectory here?

Well, when I joined the Company back in September, I was wicked excited about the technology and the opportunity that this product can make -- that it makes in the lives of patients that use it. What I've learned over the last 50 years is that it is more exciting than when I joined.

I'm very excited about the product, the technology, and really focused on market adoption of this technology for anyone with type 1 diabetes. The organization is tremendously focused on capitalizing on this opportunity, and I'm very excited to be here. Also, congratulate Allison on her promotion to CFO and spending some time on the road with her meeting all of you.

Great. Thanks for that. Pat, I was hoping -- or Brian, I was hoping to get a little bit more granularity on the UNH issue and resolution there. Can you talk about, number one, what that equates to in annual sales in your view? If I remember correctly, I think you characterized it previously in the $10 million to $15 million range. If you could confirm that. Also, what gives you the confidence that the issue is now at rest and no longer an issue?

Yes, Danielle. It's Brian. Thank you for that, and thank you for your warm words. On the issue -- I can tell you, over the last few months, that the team has worked extremely hard, and there's been a lot of conversations that have happened between the payer, the distributor, and internally to try to ultimately figure what was the best way to resolve it.

I think in the end we've come through with a couple of changes specifically around this form that we had talked about previously that will allow for the brand name of the product to be included on the form, which should allow us to be able to eliminate all of the confusion that existed in the marketplace. So we're pleased with that.

As you can imagine, with any change that needs to go through large organizations, it takes a little bit of time for it to go through. That's why we continue to expect and we've seen, for example, in October, still some impact on the new patient starts front, but it seems like that will dwindle now over the course of the coming weeks. We think it'll be a non-issue as we turn the calendar year into 2015.

As we talked about last quarter, we had built into the change in the revenue guidance, the full impact of this for the full year. I think, as we've given the guidance for this quarter of $76 million to $81 million, that's including all of the impact that we expect to have in Q4 as well. Obviously, as you think forward to 2015, there'll be some reorder impact because those people won't have started yet, or they'll have just started. But, I think we'll be able to mitigate most of it.

All right. Thanks so much.

Our next question comes from the line of Raj Denhoy from Jefferies.

Good afternoon. Maybe I'll just follow up a little bit on Danielle's question. But with so much change in the senior management over such a short period of time, invariably, it will raise questions and people will ask whether there's something, perhaps, more to this than simply, Brian, you moving on, and the Board wanting to make a change at the CEO level. I don't know if there's anything else you can maybe offer, both Pat or Brian, about the sheer amount of change at the senior level in such a short period of time?

I can tell you from my side, Raj, for me, I've obviously been here at Insulet for about six years. It's been a great ride. I've loved every minute of this Company, and I remain very passionate about what we do, and what we do and how we help folks. You see it every single day.

I can give you an example of running into a kid on my son's 10-year-old basketball team this past weekend. That doesn't change for me. For me, personally, it was -- I started to have conversations earlier this year about thinking about what was next and what was the right time for me to potentially take on additional opportunities and see if they were either here at Insulet or elsewhere. This just seemed like the appropriate time for me to make that next step of transition and move on.

I think, Pat -- I can tell you for being here the last 50 days and watching Pat in action, he spends an inordinate amount of time getting to know people, getting to know this Company. Not jumping to conclusions, really trying to understand what's going on here. I think his track record speaks for himself. He's going to make a very, very positive impact in this business.

I look forward to still being here for the next couple of months and helping the Company through. Then, watching it from the sidelines, but, obviously, have some very vested interest in how the business continues to do. There's a lot of relationships here for me, both internally and externally, and I want it to succeed.

Yes, and I would say that I've been very impressed with the organization since I joined 50 days ago. For me, it was an opportunity, as I say to some of my friends, that I flunked retirement and decided to get back into the saddle and really enjoyed running Cytyc. And, I'm enjoying doing what I'm doing here.

And I think the opportunities are similar, that there are challenges in every organization, but there are certain things that we can do better. I'm focused on converting this market to a standard of care for the OmniPod product. I think it's an exciting technology. There are, obviously, obstacles and barriers you have to knock down one at a time, but we're focused on making that happen.

Great. Maybe I could ask two specific follow-up questions. First to you, Pat. You've talked a lot about diabetes but less so about perhaps drug delivery. That seems to have been perhaps an evolving part of the story that could potentially get larger, much larger over time. I'm curious if you have any thoughts around that. Some of the timeline [sounds] were perhaps lengthened a little bit in terms of the Amgen deal and also the type 2 products. I don't know if there's anything you can comment around that.

I would say that, as I've gotten into the Company and understand the technology, and particularly the Amgen deal, I think the opportunity to leverage the existing technology in the drug-delivery business is, quite frankly, huge. And Amgen is the first really significant opportunity, I think, to capitalize on that opportunity. We're looking at making additional investments in the whole drug-delivery side because I think it, from a revenue perspective, can be potentially a very large number.

And, Raj, its Brian. I'd add a couple of things. One, I don't think there's anything that we've said so far that you should take away saying that the timeline for the Amgen product has changed.

If anything, the fact that -- on their earnings call last week, they presented this Neulasta product, talked about it for the first time publicly, showed a picture of the product -- if anything, I think shows that they're feeling extremely confident that we're going to get to the finish line, and our timeline on that had always been thinking that they were going to have a Q4 approval, and Q4 is not done yet.

In the Lilly case, we had originally been working towards a plan where we would be able to file the 510(k) and gain clearance, and Lilly wanted to use cleared product to drive the clinical. The FDA provided some feedback as we were working through with them collaboratively around human factor testing that they wanted us to just reverse that and do it in a different order.

It is different in that we won't have the 510(k) filed, which would have allowed us to potentially sell a little bit on the side while Lilly was going through their process. That said, from the overall timeline of the product, it's really not changed, it's just reordered.

Okay. And then, sorry, just last one, just on gross margins. You mentioned low 60% for the US. How much more is left there? I think you had talked about getting into the low 60%s with the gen 2, or the current generation pod. How much left do you think there is in driving that gross margin higher?

Personally, I think there's a lot left. I think that there's -- I'm sure at some point there's a theoretical ceiling, but I've said to different people at different times, and I certainly am not willing to put a ceiling on our ability to gain leverage in the business. We should be able to continue to drive as the business gets bigger and bigger, and we add more lines, more and more efficiencies that should be able to drive the cost of different components down and be able to spread out the overhead even more.

I think, as we looked at this quarter, we gained a couple hundred basis points on the US OmniPod basis. We lost a little bit of it on a consolidated margin when you look at international share in the Neighborhood mix. I think when we would look at Q4 to gain a couple hundred points more of margin is absolutely achievable. And, hopefully, all of that flows to the consolidated. But, again, that'll just depend a little bit upon mix of the different components of the business.

That's helpful. You'll be missed, Brian. Thanks.

Thanks, Raj.

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

Good afternoon, and I'll add my congratulations and also -- to everybody that's staying with the Company. Brian, we will miss you.

Two questions for me. First, can you talk a little bit about the new patient add trajectory in Q3, and what's implied in Q4? Was it plus/minus 20%? Whatever detail you can give us there. And then, what's the Neighborhood Diabetes revenue number for the quarter? Or, maybe a percentage there if we can? Thanks.

Yes, sure. Ben, it's Brian. A couple things. New patient starts, I think we were -- as Pat mentioned in his remarks, I think we're seeing some nice productivity uptick for these territories where we've added the proverbial third man in, in the form of this KAM, or territory associate kind of a role.

Overall, we saw probably somewhere about a 5% to 10% sequential increase in new patient starts from Q2 to Q3. Still on the trajectory, I would tell you, of somewhere in the 15% to 20% range, overall new patient starts year over year. The trajectory still seems very solid here as we're a month and a few days into the fourth quarter. So, I think everybody's feeling good about that.

Obviously, the payer issue being put to bed, I think, allows everybody to feel that much more confident as we end this year and we look forward into 2015.

On the Neighborhood side -- Neighborhood, obviously we lapped competitive bidding this year in the third quarter. That was July 1 of 2013 when CMS really significantly reduced the pricing of blood glucose testing supplies.

The Neighborhood business was up slightly in Q3 on a year-over-year basis, probably a couple percentage points. Again, absolutely filling their role and doing a good job. Only difference, as we have seen, is that, on a gross margin basis, it's come down a little bit as the mix of the business has changed. And, obviously, the lower pricing overall from blood glucose testing strips.

Okay. And then, Pat, maybe a question for you that I think we've all looked at over the years, why -- given that only 30% of people are using insulin pumps, there's obviously reasons for that. What do you think are the bottlenecks to adoption that Insulet can address from here that perhaps it wasn't addressing effectively before? What are the real levers that you guys can bring operationally to try to accelerate that?

I think there's a number of -- at least in my initial read on the whole insulin market, or type 1 diabetes market -- you have, certainly, those that are on the multiple daily injections. Most patients start out in that therapy and then move over to being considered for pump and pump therapy.

And I think as we've done market research into the market, it appears that there's a large number of MDI patients that would never consider a pump if they had to use the current conventional pumps. But, when provided with the opportunity to use OmniPod, the uptake -- or, the interest level is exceedingly high.

I would say what we need to do is focus on the marketing message to the endocrinologists and getting more MDI patients converted to the OmniPod technology. I think from my perspective, it's really leveraging our sales force presence in the field and focusing on those high prescribers. As I said earlier, if you look at the number of patients below 18, this is where the product really, I think, is very good for the kids and their parents to manage these patients with type 1 diabetes. So, focusing on that market segment, I think, will pay great dividends.

Were there things the Company wasn't doing effectively before from that marketing message to endos? Or, is this simply going to require a fair bit more spending, whether it's on salespeople or marketing dollars, to accomplish?

I think it's fair to say that, in order to grow, we're going to have to add sales and marketing resources to get the message out and to have adequate coverage in the marketplace. When I compare what we spent at Cytyc, at the same level of $300 million in revenue versus where we are today, at Cytyc we spent more in sales and marketing. And, I think we need to make some investments in sales and marketing to really ramp the sales number.

Could we see that growth (multiple speakers) I'm sorry?

I'm not prepared to give you exactly what that looks like today because we're still going through that process. But I think it's fair to say that we're going to need -- we're going to add additional sales and marketing resources.

Great. Thank you.

Our next question comes from the line of Bill Plovanic from Canaccord.

Can you hear me okay?

Bill, how are you?

I'm in the airport. Sorry if there's some background noise. Same -- welcome, Pat; congrats, Allison; and Brian, definitely missed. Most of my questions have been asked, so I'm going to ask some more pointed questions.

It sounds here -- you're still reviewing things it sounds like. But, as we think about 2015 and the current revenue expectations and even profitability expectations out there, should we -- can we ask, at least, are you comfortable with that? It sounds like from an operating standpoint, maybe some more investments in sales and marketing. I know you're still 50 days in getting in there, but how should we start thinking about, as you put your stamp on the business, for 2015 and beyond?

Bill, it's Brian. Let me take a first crack at some of it. I think for Pat, certainly the Company, as we get into the first quarter, we'll ultimately provide appropriate guidance for 2015. But I think there's a couple of takeaways.

One is, we've been adding sales resources as we know in these 20-person or so chunks because it works well from a -- historically, from the manufacturing side, for not overtaxing the sales management and the infrastructure of the business, the reimbursement pieces, and the like. And that's worked really well.

Again, I think one of the things to take away is this, again, third man in or so that we've put into some of these territories is seemingly -- although early days, keep in mind, these folks have only been in the field now for one full quarter.

We seem -- they seem to have some good momentum and productivity behind them, but I think it's something that the team, as it works through strategic planning and budgeting here in Q4, is really trying to figure out how that model works. Do we add more? Or is there a certain territory level where it doesn't -- isn't as effective, and really what that planning is.

And, a lot of the marketing-type things -- you'll recall, six months ago or so, we talked about -- we hired for the first time an agency of record in Digitas to be able to come in here and help drive the branding. And help, I think, really push messaging into the healthcare professional community that talks about -- pumps make sense for multiple daily injecters, and we need to move them on to pumps and this is how you do it. And I think all of that stuff is resonating.

And for me -- one of the things that I shared with Pat when he started was I told him, I said, this, in my mind is a really great time for him to come and join because, in a lot of ways, it's the first chance this business has had in a long time to play offense versus defense.

As you know from following this Company for a long time, we were worried about out-running manufacturing capacity with the old pod. And then, we were trying to work on getting the new pod approved. And then, the transition of the customer base, which took up a big chunk of last year.

And then, this year now, we're putting in those building blocks into place. I think, if anything, some of the momentum of what's been invested here over the last six to nine months is starting to show some of those dividends. I think that's a really exciting thing to be.

That said, I think -- Pat, as he [keeps] that in and started to allude to it -- yes, there are absolutely things we can do better. I think his leadership and his commercial experience and what he's been through, along with Pete Devlin and his team and the planning efforts they are, will drive a lot of what makes some of those new investments look like next year.

I'd concur with what Brian just discussed. I would also say that I've spent the majority of my time over the last 50 days being mostly internally focused inside the -- understanding manufacturing, R&D, and our commercial efforts. But now, I'm turning my attention to spending more time in the field with the field force. And, over the next couple of months, getting a good flavor of how we execute the sales strategy in the field and would come back to you early next year with my assessments and plans for 2015.

Fair enough. Thank you. And then, some pointed questions. I was wondering, with Amgen, can you quantify what you believe that market opportunity is? When do we actually start seeing that show up in the business?

Neulasta for Amgen is about a $4-billion product in the United States. There are -- I think, as I've done the research, about 900,000 patients use that drug every year. It, currently, in its current form, is approved by the FDA. This filing is for use of that product in our OmniPod.

I would say, we will -- assuming it gets approved in the fourth quarter or early next year, we expect to receive revenue from it. But it's hard to really put a number on the table because it all depends upon how that launch goes for Amgen. But I know that they are extremely excited about it. And we're working very hard with them for a very successful launch.

Okay. And then, secondly, you mentioned a new PDM that you're looking to come out with. What do you expect for timing for that product?

We expect to show that PDM at the ADA meeting next summer in Boston. So, we're going to have a coming out party in our hometown with that product and would expect to file that in early 2016.

So you'll show it at ADA, but you'll file the PMA -- I'm sorry, the 510(k) in early 2016?

Correct.

Okay, great. I think that's all I had. Thank you very much.

Safe travels, Bill.

Thanks.

Our next question comes from the line of Mike Weinstein from JPMorgan.

This is actually Robbie Marcus in for Mike. Maybe just turning towards the model -- Brian, do you mind quantifying exactly what the impact for UNH was this quarter, and what you have for next quarter? You had spoke for $3 million in 3Q and $4 million to $5 million in 4Q. Is that still the assumption baked into guidance?

Yes, that's correct. Because, again, each passing quarter you have to include the reorders -- or, the lost reorders, if you will, for the patients that didn't start the quarter before.

My assumption really hasn't changed from what we talked about back last quarter which was there was about $1.5 million of impact in Q2. It was probably somewhere in the $3 million to $3.5 million range in Q3. And then, probably $4.5 million or so in Q4 as we start to see the new patient start pipeline ramp up again.

Great. And then, going back to the new patient growth, you had mentioned 5% to 10% sequential growth. You'd said 20% last quarter. Is that to imply 25% to 30% this quarter?

No. Different metrics, right? 5% to 10% sequential growth, Q2 to Q3. When we talk about 20%, we're talking year over year. And the year over year, we've been talking about that full nine-month period on a year-to-date basis which is that. Just to make sure we don't mix and add there.

All right. Because last quarter, unless our numbers are way off -- we had about 6,400 patients. Would that imply above 6,500 this quarter? Is that the right ballpark?

I don't want to comment about actual patient count numbers. I'll just leave it to say that we were about 5% to 10% higher sequentially in Q3 than we were in Q2. I don't have all the models in front of me.

Okay. And then, maybe just one more. Looking at the drug-delivery opportunity. How should we think about that unfolding over the next few years? Are you targeting more existing products that could get into commercialization fairly quickly? Or is this something that you're looking more at a mix of commercialization and generic drugs plus also drugs in trial? How should we think about this impacting revenues over the next, let's say, three-plus years?

I think, conceptually, we're looking at the marketplace and, basically, looking at the drugs that are currently on the market and the opportunity for using the OmniPod as a special drug-delivery device for those products, whether they're currently on the market or in development, and stack ranking those in terms of opportunity in near-term sales growth that we could expect from those type of applications.

And then, putting resources against those opportunities to really capitalize on this use of the OmniPod. I think from -- you can leverage two things. You can leverage the technology, which this obviously does, and focusing on your sales and marketing to leverage the sales force. So, we're going to definitely be making plans to leverage this technology.

It's interesting, when you think about one of the benefits of the product when you think about existing drugs is looking at when certain compounds or things come off of patent, for example, could be an interesting way and an interesting reason why adding in a delivery device like the OmniPod makes sense.

Keep in mind that, with a lot of these -- and even with the Amgen product we've seen it -- it takes a few years from when you sign a deal to ultimately be able to get it to market because of the process of either -- maybe a little bit of development, maybe not. But then, ultimately, going through the -- obviously, the FDA process.

Capricor is -- on the other side of it, which is -- theirs is a phase II product, and we're helping them through their clinical trials. Now, the reality of when that becomes a commercial product is years down the line. But, it's exciting to be part of that one, too, and effectively part of their filings.

There's a mix of them in the pipeline. Ferring's obviously an approved one in Europe, and we're generating revenue from it. Amgen will be next, and then, as we continue to add more and more of these projects -- and we have a couple more ongoing -- we'll see how those develop and evolve and be able to drive actual timelines for each one.

Great. And if I could just sneak in one last one. How many territory managers did you end the quarter with?

We have about 135 people or so in the field. Right now, I think we're still split at 53 territories, right? That would be basically -- so, 53 I guess would be the answer to your question.

Okay, great. Best of luck, Brian.

Thank you.

Our next question comes from the line of Tao Levy from Wedbush.

Good afternoon.

Hi, Tao.

Maybe we could start with the new patient additions. Again, your comments -- these definitely seem a little bit different than the comments last quarter where expectations were around 20% new patient growth. It doesn't sound like you gave a new number, yet the revenue guidance is coming down.

I guess what I'm trying to get at is, there's obviously -- there was a backlog of patients related to UNH. Is the expectation that most of those start to flow in here in the fourth quarter? And, even though they may not be big on the revenue side, they are going to be noticeable on the new patient additions?

I apologize, Tao, I'm not sure I completely followed that. Again, where we're heading -- just so we stay clear here -- is, on a year-over-year basis, we've talked about that we're looking effectively for 20% year-over-year patient growth -- new patient starts. I think everything's been trending close to that number. We're probably a little lower than that at the moment.

But, again, if you look at the specific issue around the payer, that's been the one that's been driving it. On a quarter-over-quarter basis, Q2 to Q3, I mentioned a couple minutes ago that we're basically driving between 5% and 10% sequential growth. Those are the two pieces.

In regards to the payer issue specifically, it's an open question, right? Because what you find with patients are, in some cases they may -- if their endocrinologist has been saying, look, you need to get on a pump, and unfortunately, we can't get this one approved right now, but you've got to get on another pump. Some of those patients may have gone elsewhere. Some may delay their decisions. Some wait for the next trip back to the doctor.

Our team has done a really good job, I think, on the commercial side of trying to keep the patient -- the pipeline warm, if you will, and trying to be able to bring these folks ultimately across the goal line, knowing that we're able to going to get this resolved. But ultimately, we have to see how that plays itself out.

So, from that perspective, I don't think there's any difference. I think when you look at the revenue growth in the business, it's -- again, we've always been a midpoint company, and when we updated guidance last quarter, the midpoint of that range is [295]. If you look at the midpoint of the range that we gave you today, it's 295. So, I don't think there's any real change or difference there at all.

Okay. So, the backlog of patients that you tuys talked about last quarter as being one of the biggest in the Company's history, that hasn't necessarily changed. Or, have those patients gone away? That's what I was trying to reconcile.

That's the overall pipeline, right? We're not talking about just one pair here. We talking about the overall pipeline. That has absolutely not changed. The team has continued to do a good job of driving in referrals, and ultimately, those referrals turning into new patient starts.

I think we see good momentum in that business overall. My only comment specifically to this one payer is it's unclear if a patient who was looking to start on OmniPod back in May is going to still be there for us to be able to convert in January. We're certainly going to try, right? But it's a little less clear to be able to say everybody's been willing to wait six, seven, eight months or whatever it is to be able to finally cross the goal line.

Great. And just one final question. Welcome, Patrick. You talk about investing more sales and marketing. In this quarter, excluding the one-time charges, you get to breakeven. Q4 is generally the strongest quarter of the year, so assume that's going to be positive net income there we saw on an adjusted basis.

As you move into 2015, where does profitability on the bottom line fit in your next, call it, 12- to 18-month thinking as you try to maximize top-line growth while obviously spending appropriately?

I think your last point is the key one -- spending appropriately. We're going through that process, as we speak, to develop our 2015 budget and our sales plan. It's premature at this point to try to peek into the future and give you the results of what we're literally in the process of doing. So, I'll have more information for that early next year.

Okay. Thank you.

Our next question comes from the line of Jayson Bedford from Raymond James.

This is Mike Rich calling in for Jayson. Can you hear me okay? Most of my questions have been answered, but I wanted to circle back to a couple things. First, good color on the partnership with Ypsomed outside the US. I know you're tracking for doubling growth this year. But can you comment on the sales growth outside the US in the quarter? Or, perhaps what percent of sales -- international sales were?

Not at this point, I guess, but as Ypsomed said last week, they've seen, over their last six months, about a 60% or so increase in their business. We're absolutely on track -- when we look at our international partnerships, which would also include GlaxoSmithKline for Canada -- to double our international revenue in 2014 versus 2013. As Pat mentioned in his remarks, I think we're really excited and hopeful that we're going to see reimbursement in France come through very soon.

France is a really interesting market in Europe. I think it's the second largest pump market in Europe. Today, we sit with a zero there. So, getting France over the goal line would allow another really good growth opportunity for Ypsomed as they turn the corner into calendar-year 2015.

But overall, I think the international business has been doing great. Again, one thing you can point to a little is, the revenue share is great. They're certainly helping us drive to net breakeven at the operating level at an operating profit. It lowers the gross margin slightly, but that's a good trade-off.

Got it. Okay. Is there an updated timeline for OmniPod approval in China?

Not anything at this point. I will tell you that we've continued to work through the regulatory process over there in China. I don't have an update on it. I know that we're still knee deep in it, but it's probably still a while to come, the feeling we get.

Lastly -- sorry if I missed this, but an update on the current generation PDM with the LifeScan meter.

Yes, we're looking to, hopefully, have approval on that very soon. We've responded to all of the FDA's questions. Most of the questions that the agency came back with actually were more, I would tell you, LifeScan-driven than Insulet-driven. There were some questions around the Vario strip and those pieces, which our partner has done a great job of responding to and providing the data for. We're just in the waiting game at the moment. But, hopefully, we'll have an answer pretty soon.

Okay. Great. Thank you very much.

Our next question comes from the line of Jan Wald from Benchmark Company.

Thank you. Congratulations to Allison. Sorry to see you go, Brian. And, Pat, welcome and good luck. As you might have guessed, most of my questions have been answered, but let me ask a couple more.

Maybe taking off on Tao's question a little bit more on profitability versus investment. Not looking for what you're going to do, but how do you see the Company moving forward? A company at your stage looks toward profitability but needs to make investments. How do you see the priority of those two things occurring over the next year to two years?

I think you have to strike a balance between the two. I think you have to really focus on your sales growth. But, you also, obviously, have to focus on bringing numbers to the bottom line. And, we're looking at plans to be able to meet those objectives.

One of the nice things, Jan, is we've been able to find a good balance of both of those in the past, as you can see from the fact that we've been able to balance a very strong overall top-line growth with getting now to operating profitability. $4 million of operating profit, excluding out the transition costs, is our highest level of operating profit.

And, obviously, we continue to feel very bullish about pushing more gross margin through the business. So, I think the business is positioned well to be able to find the balance for both of those going forward, which is a good spot for the Company to be in.

Okay. My next question is, in your prepared remarks, you mentioned that there are more efficiencies that you're going to look for. I think you probably meant to manufacturing. What kinds of things would you be looking to do in manufacturing or elsewhere in the business that might improve those -- might lead to more efficiencies?

Yes. Specifically, when we talk about -- we have the fourth manufacturing line come up. One of the things that's been interesting in our manufacturing process is, with each line we're obviously getting smarter of how to make an OmniPod with the highest level of quality and most cost-effective way possible.

I think I've shared in the past that, when you look at line three, for example, right now, for us, it's been our most efficient line. And, we've been able to make some small adjustments to line two, for example, to make it look like line three, so that, that one becomes a lot more efficient.

Line one for us has probably always been our most inefficient line where it's highest level of people required and it's the lowest capacity. So, when line four comes onboard, for example, it's going to mirror image line three. So, we'll get that efficiency out of the gate and it starts to give us some flexibility to think about how we can better leverage line one, for example and, therefore, spread out overhead and costs and look at the amount of direct labor required and those type of things to hopefully further bring down the pod price.

That, plus, as we keep moving up the volume spectrum, we're able to drive some additional cost component decreases from our suppliers, which is also another positive in helping us generate more gross margin. Those are a couple of examples of where more efficiency can be gained.

Okay. My last question, on the CGM sensor. It sounds as if you're still going through some kind of design process, because you're addressing the kinds of issues that would get addressed in design. Any sense of when you're going to be ready -- when there'll be a design freeze, or something like that, and you'll be able to move on into the clinical?

I think we've said -- we've been going through a process, obviously, this sterilization. We've gone through this latest testing we did was really around this idea of distance between sensing and dispensing. We think we've got some, we believe, some pretty favorable results out of that. So, you're right, that is still in the design phase, if you will.

We've talked about doing some in-human trial work, hopefully, sometime early to mid-2015. Ultimately, we'll see where that timeline is driving toward, and if that can hold. That will probably be the next real indicator to drive the overall timeline of the project. As we get closer to that point, that's probably the next check-in time.

Okay. Thank you very much, and congratulations on the quarter.

Thank you.

Thanks.

This concludes today's Q&A session. I'd like to now turn the call back over to Mr. Sullivan for closing remarks.

Thank you very much, operator. In summary, Insulet has achieved much in the first nine months of 2014, and I am very excited for the opportunities that lie before us. With the payer issue basically behind us, new commercial resources gaining valuable experience and continued international expansion, I believe we're poised for tremendous success.

Our manufacturing partnership with Flextronics is world class as we continuously produce 1 million OmniPods per month, with our fourth manufacturing line coming online soon. We have the most unique, user-friendly product in the market, with a continued pipeline of innovation that should continually raise the bar.

I'm delighted to add Allison, and Brad Thomas, our new EVP of HR, to the senior leadership team at the Company. I worked closely with Brad to build a Cytyc organization for future growth prior to the acquisition by Hologic. Finally, I would also like to thank Brian for his dedication and hard work over the past six years, and wish him well.

Thanks again for joining us today. I look forward to meeting many of you at the various investor conferences over the coming months and keeping you updated on our progress. Thanks.

Ladies and gentlemen, thank you for attending today's conference. This does conclude today's program. You may all disconnect, and have a wonderful evening.