Insulet Corp (PODD) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insulet 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Deborah Gordon, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Nicholas.

Good afternoon, and thank you for joining us for our fourth-quarter 2014 earnings call. My name is Deborah Gordon and joining me on the call today are Patrick Sullivan, our President and Chief Executive Officer; and Allison Dorval, Chief Financial Officer. A replay of this call will be archived on our website.

Our press release discussing our fourth-quarter results and first-quarter and full-year 2015 guidance, as well as a document that provides historical data on our quarterly revenue composition, are also available in the IR section of our website. Before we begin, I would like to inform you that certain statements made by Insulet during the course of this call may be forward-looking and involve known and unknown risks and uncertainties that may cause actual results to be materially different from any future results implied by such statements.

Such factors include those referenced in our Safe Harbor statement and our fourth-quarter earnings release and in the Company's filings with the SEC. With that, let me turn the call over to Pat.

Thanks, Deb.

And good afternoon, everyone, and thank you for joining us today. During my remarks, I'll cover our fourth-quarter and full-year financial and operational highlights, specific actions I've taken since joining the Company, and our strategy to drive sustained growth in shareholder value. I'll then turn the call over to Allison for further highlights on our financial performance.

Let me start by saying that when I joined Insulet in September, I was very enthusiastic about the opportunities for the Company. Now over five months later, I can tell you that I have even more enthusiasm and higher expectations for the results that this Company can deliver. With our OmniPod System, we are the market leader in tubeless insulin delivery, and we believe our unique core technology will serve as the foundation for our leadership in intelligent drug delivery.

Clearly, we have work to do but we believe OmniPod is the most innovative and differentiated insulin and other drug delivery system on the market, and we are executing a strategy to ensure it remains well-positioned for continued adoption in the US and international markets.

Let me start with our financial results. In the fourth quarter, we achieved revenue of $72.6 million, a 6% increase compared with $68.5 million in the fourth quarter of 2013.

We ended the year with total revenues of $288.7 million, an increase of 17% over 2013. I would like to now provide you a further breakdown of our 2014 revenue. Revenues of our US OmniPod franchise were $173.4 million, defined as total US revenue excluding drug delivery and Neighborhood Diabetes. Revenues in drug delivery were $5.4 million, defined as sales of products and engineering services to our pharmaceutical partners.

Neighborhood Diabetes revenue of $59.7 million, and included in this number is approximately 5% OmniPod revenue of new Neighborhood Diabetes shipments of OmniPods to their patients. International OmniPod revenue of $50.2 million, this is defined as revenue to all of our international distributors, including Ypsomed, GSK, Canada, and Geffen. We are providing this additional detail in order to give you additional insight into our business.

We are committed to consistently reporting these metrics and will therefore provide you with the same components at the end of 2015, as we believe they are the most important barometers of the performance of the business. I think it's also important to point out that I have a senior executive who is completely accountable with our performance of each of these business areas. In addition to our commentary here today, we have also posted a document on our IR website that provides 2014 and 2013 quarterly revenues for each of these areas of our business.

During the course of this year, we will also evaluate additional metrics that we should provide to you to provide insight into our operational and financial progress. Now turning back to our operational performance, our patient base continues to grow.

As of the end of 2014, there are approximately 75,000 people worldwide using the OmniPod with approximately 75% in the United States. In the fourth quarter, approximately 70% of our new patient starts came from people who previously used multiple daily injections, and we saw a 10% increase in new patient starts of children under the age of 10 compared to the fourth quarter of last year.

In 2014, our installed base of US OmniPod users grew sequentially every quarter in 2014 resulting in an almost 20% increase in our existing patient base in the US. Moreover, we expect a 20% year-over-year growth in new patient starts in the second half of 2015.

We believe this growth will be driven by increased productivity of our exiting sales force and the initial impact of the additions we're making this year. In addition, we anticipate further growth as a result of our peer-to-peer speakers program we started this month. We are well-positioned to deliver even stronger performance including enhanced overall top line growth.

I'd like to take the opportunity to make just several comments regarding the new patient start metric. First of all, in any given quarter, only about 10% of our US OmniPod revenue is from new patient starts. As a new management team, we are focusing not only adding new patients, but capitalizing on the opportunity we see of increased OmniPod utilization that our exiting customer base represents. While the majority of our customers order four times per year, we see an opportunity to focus on reorders and increased utilization where 90% of our US OmniPod revenues come from.

I'd now like to review a few of the actions that I've taken since joining Insulet five months ago. We've completely restructured the US commercial team with addition of proven leaders across the board including a new Chief Commercial Officer and her three new Vice Presidents of Sales, Marketing, and Managed Care. All are experienced leaders with consistent records of outstanding performance and with whom I have worked with in the past with great success.

We've also expanded the sales force augmenting the expansion that occurred during 2014. And due to our confidence in the new commercial leadership, we are further expanding the sales force during the first half of 2015.

We're also making a significant investment in key opinion leader development with subsequent execution of widespread medical education efforts. This is a proven initiative in marketing to healthcare providers.

We are undertaking new initiatives in the area of managed care marketing under the leadership of a proven managed care executive who is building a world-class team with a renewed focus on sustaining existing reimbursement and expanding payer coverage, including Medicare and Medicaid coverage. We've also increased our focus on market segmentation and sales force targeting, including a renewed focus on the pediatric segment and a laser focus on existing prescribers who have significant opportunity to expand their current use of the OmniPod System.

We've made a significant upgrade to our customer service and support function with new experienced leadership, which will provide a much improved ability to move newly prescribed patients through the intake and reimbursement qualification process while increasing our focus on customer retention and our reorder rate. We've brought on two senior executives to focus on this significant opportunity we see in our drug delivery business.

And finally, I've hired two senior executives to focus on our Neighborhood Diabetes business and our international OmniPod opportunities. These changes have been made and as a result, we expect to see markedly improved performance in the US OmniPod business beginning in Q3 2015.

We are confident that this new team will significantly increase the adoption of our unique system and we anticipate returning to double-digit growth in the US during the second half of 2015 and accelerating growth going forward. I've challenged each of these new executives to drive focus, growth, and increased accountability throughout the entire organization. These executives bring a history of executional excellence as well as the experience of working together as a team, and I am confident this leadership team will take Insulet to the next level.

At the national sales meeting in January, we outlined many of these initiatives. There was palpable energy from the sales team who were energized by our new focus and additional materials and the additional support they will receive in 2015. Along with the additions to our field sales team, another key factor in our success will be to enhance our marketing efforts. We have been focused on increasing patient awareness of the OmniPod System and increasing healthcare professionals and managed care plans understanding of our product's unique benefits.

That is why we are in the process of further analyzing patient outcome information and identifying key clinical data sources to improve our marketing materials and drive adoption. We're also engaged in refining our market segmentation. We know that 15% of our new customer starts in 2014 were under the age of 10 and where 35% were under the age of 20.

We've aligned the marketing organization to provide focus on the pediatric segment. In fact, we've had nice success in this segment with limited marketing focus, and therefore, we strongly believe we can accelerate growth in this area.

We will continue to drive marketing initiatives to our specific customer segments. We need to connect with a patient -- of the parent of a child differently with Type 1 diabetes in a very different way than we do with a 35-year-old who has managed diabetes using multiple daily injections.

Our marketing team is fully committed to finding the exact message that resonates in giving our sales team the resources they need. These market segmentation initiatives are very important to our future success with customer adoption and retention.

I'm also very excited about our international business. As you know, Ypsomed is a key partner for us in Europe, and we are very pleased with their performance. They continue to drive new patient adoption of OmniPod with approximately a 70% growth in the installed base in 2014. We believe, based on the 2014 run rate, they will continue to increase their installed base by over 40% in 2015.

I'd like to now address some of the recent questions that many of you have had related to our sales to Ypsomed. As background, we entered into our relationship with Ypsomed in June 2010 with an initial contract expiration of 2016.

Under the terms of the agreement, if Ypsomed met certain purchase volumes in 2013 and 2014, the contract would automatically be extended an additional 12 months. They met the requirements in both years and as a result, the contract has been extended through the middle of 2018. Ypsomed launched the OmniPod into the European market in the middle of 2013, slightly ahead of the United States.

And as you are aware, Insulet had challenges in supplying the market in both the US and in internationally during 2013. As a result, Ypsomed bought inventory in advance to support their market expansion and we were shipping behind their request.

In fact, we shipped about a $4 million Q4 2013 order in Q1 of 2014. And throughout most of 2014, Ypsomed increased their safety stock of inventory as a hedge against our production challenges.

Now that Ypsomed is confident in our ability to reliably and consistently produce OmniPod, they have decided to reduce their safety stock in Q1 2015. It's important to note here that we do anticipate product shipments to Ypsomed this quarter and our international revenues will return to a more normalized quarterly trend beginning in the second quarter of 2015 and forward.

We now have visibility to Ypsomed's new patient starts and reorder rates, and feel comfortable this trend will continue beyond 2015, and in fact, should return to year-over-year growth in 2016. We've hired an executive whose main job is to work with Ypsomed on building out the international markets and driving growth.

As you have seen in our press release this morning, we are also excited about going direct in Canada. As many of you know, we've been working with GSK as our distribution partner since 2011, and we have just announced we decided to take this business direct. We will assume the distribution sales and marketing of OmniPod in Canada, and we are working closely with GSK on a transition plan to go direct this summer.

This is a meaningful step as we look to drive top line growth and to establish OmniPod as the worldwide standard of care and grow our offerings internationally. In addition to our sales and marketing effort, our operations team have also been driving hard. Our best-in-class manufacturing capabilities are a key barrier for anyone trying to compete in the patch pump space.

Just last month, we qualified our fourth manufacturing line at Flextronics and hit 50,000 pods produced in one day. The team has done a tremendous job in getting the line up and running making sure that our quality remains at the highest levels. We are at this point where we have sufficient manufacturing capacity in place and lying forward gives us even more confidence.

Turning to R&D, we're also working on a number of development objects within our diabetes business. In order to maintain continued success, we must continue to innovate. We're making progress on the development of our new personal diabetes manager with a goal of filing for a 510(k) clearance at the end of the year. This new handheld will have even more modern user interface with a touchscreen technology and incorporate Bluetooth low energy capabilities.

We see this as one of the most important enhancements as it will allow us two-way communication with other platforms such as Dexcom's Share platform. Earlier this month, we've announced that we've renewed our partnership with Abbott Diabetes Care and the blood glucose meter will be incorporated into our new PDM. We're very excited about these partnerships as we move into 2015.

As you know, we're also working closely with Eli Lilly on the OmniPod System to be used with Lilly's Humulin U-500 insulin. This product continues to track well and the clinical trial is expected to start later this year. Outside the diabetes space, I'm incredibly excited about our opportunity to use our technology to deliver other drugs.

There's been a shift from pharmaceuticals to biologic in the drug's delivery space and the challenges that come with the delivery of biologics are creating very interesting opportunities for us. A current delivery methods of typically auto injection, injectors, and syringes, but the OmniPod is significantly changing that.

Our pod introduces intelligent drug delivery with capabilities and monitoring compliance. It will also allow for varying dosing and alarm sensing. We believe OmniPod is very well-positioned to increase the ease of use and treatment compliance for a variety of prevalent diseases resulting in improved outcomes. In 2015, we plan to add resources to support OmniPod's anticipated growth outside of diabetes.

Since our first commercial non-insulin product launch in 2011 with Ferring, we've partnered with a number of other companies. And in January, Amgen announced that they received FDA approval for their Neulasta on-body delivery system. Injector for this system uses our OmniPod with some customization for the actual delivery. Under our agreement, we now sell pods to Amgen which are packaged in the Neulasta kit.

We also have a number of other drug delivery partnerships in various stages, are we're very excited about that opportunity. With those remarks, I'd now like to turn the call over to Allison for a financial summary. Allison?

Thank you, Pat.

Unless otherwise stated, all of my commentary regarding changes will be on a year-over-year basis. Pat already provided the revenue growth rates. As a bit of added color, international OmniPod revenue represented 18% of our Q4 2014 revenue compared to 14% in Q4 2013. For the full year, international OmniPod revenue represented 17% versus 10% in 2013.

As Pat mentioned, our international partners continue to drive growth in 2014, and our international OmniPod revenue doubled. Consolidated gross profit increased 11% in the fourth quarter to $36.7 million. Gross margins were 51% reflecting approximately 60% margins on our US OmniPod business, offset by lower margins from our international OmniPod and Neighborhood Diabetes businesses. Gross profit for the full year of 2014 was $143.3 million, an increase of $30.9 million, or 27%, and gross margins improved to 50% versus 45% last year.

We continue to drive efficiencies with our manufacturing process and our focus has paid off. We experienced improved manufacturing yields throughout 2014 driving lower scrap and warranty costs and overall improvement in customer satisfaction. Q4 2014 operating expenses increased 19% to $38.9 million and included $3.8 million of charges related to the management team transition. There were no one-time charges in Q4 of last year.

Operating expenses were $155.6 million for the full year of 2014 compared to $141.5 million in 2013. Operating expenses in 2014 included approximately $17.4 million of management transition and patent litigation settlement charges. Operating expenses in 2013 included approximately $10 million related to patent litigation settlement and next generation OmniPod launch costs. Net loss for the fourth quarter of 2014 was $5.4 million, or $0.10 per share compared to $2.5 million or $0.04 per share in the prior year.

For 2014 full year, net loss was $51.5 million or $0.93 per share compared to $45 million or $0.83 per share in 2013. The main difference between our full-year 2014 net loss and our $12.3 million operating loss was the $39.1 million of net interest expense, which included the loss on extinguishment of our 3.75% convertible notes in addition to interest on our outstanding 2% convertible note. Our cash balance was $151.2 million at the end of 2014 compared to $149.7 million at the end of 2013. We had approximately 56.3 million shares outstanding.

Turning to guidance, we expect full-year 2015 revenue to be in the range of $305 million to $320 million, representing a year-over-year increase of 6% to 11%. The majority of the growth is expected in the back half of the year as we gain traction from the new team and commercial initiatives. We expect to see growth primarily within our US OmniPod business resulting from the renewed focus of the commercial team.

We also expect to see solid growth within our drug delivery business. In fact, we've previously stated that we anticipate $10 million to $20 million of revenue from this business, and we now expect this range to be $15 million to $20 million. Lastly, 2015 revenue from both our international OmniPod and Neighborhood Diabetes businesses are expected to remain relatively consistent with prior-year levels.

For the first quarter of 2015, we expect revenues of $67 million to $69 million driven by a reduction of inventory levels by our international partners. This reduction will be partially offset by the expected increase in revenue from our drug delivery business.

What that operator, please open the line for questions.

(Operator Instructions)

Danielle Antalffy, Leerink Partners.

Thanks so much, guys, for taking the question. Good afternoon. Patrick, I was hoping you could give a little bit of color on the dynamics of the pump market. Obviously, the US OmniPod business has historically been significantly lower. It sounds like you're saying that was due to poor execution, correct me if I'm wrong. And how do we think about the pump market dynamics going forward? Is there anything specific to OmniPod beyond poor execution?

You touched on it, but what are you doing to reinvigorate growth in that business? What do you see as a sustainable growth rate? Maybe confirm with us what market share OmniPod has in the US insulin pump market, because based on the installed base that we're hearing about today, it might be much lower than what we had thought?

I would start out by saying that the opportunity that I see to expand our OmniPod business is significant. We are only about 5% of the current Type 1 diabetes patients. I think there's tremendous opportunity, based upon the characteristics of the OmniPod System, to significantly increase that.

And I think what the appropriate focus on managing -- sorry, marketing to the healthcare providers as well as targeted marketing to the insurance companies, we can knock down the obstacles that currently exist in getting OmniPod more widely adopted in the marketplace. I think fundamentally, I've talked about this a lot, that we fundamentally need to show the clinical benefit and the economic benefit to both the doctors and the patients to provide widespread adoption for the product. We're focused on doing that with mining data sources that we have at the performance of the product in the field, as well as taking that information to the insurance plans to differentiate our product and show its benefit to those to the healthcare marketplace.

Okay. That's helpful. And then so it sounds like historically, the OmniPod has been more of a patient-driven therapy, patients going to their providers and asking for the OmniPod. It sounds like that focus is shifting. Will you still focus at all on the patient, or is this now just focusing strictly on the providers and the payers?

And a follow-up to that, if I could. On the payer side of things, is there anything specific to OmniPod beyond UNH, and if you could confirm that the UNH issue is now completely behind us and you have started getting UNH patients? Is there any reimbursement issue that we should be aware of when it comes specifically to the OmniPod?

And just to knock off the UNH issue, the issue that was -- faced the Company last year was a paperwork issue and that issue with UNH has been resolved and we don't anticipate any further impact from that event that occurred last year. Let me frame the marketing effort. I think in order to really market any product, you have to market in our case to three constituencies.

We have to market to the healthcare providers, the doctors in the office who prescribe the product. We have to market to the healthcare insurers who will pay for the product, and finally, we have to market to patients who use the product. And in order to -- we have to get all three of those moons in alignment to provide for widespread adoption. We have to market the features and benefits of our product and patient awareness, so the patients know that this technology is available. We have to market the clinical and economic benefit to the doctors in the office, so that they understand the benefit that this product has for their patients.

And finally, we have to market to the insurance carriers, the people that pay for it, the clinical and economic benefit for the people for whom they provide diabetes reimbursement. And I think you have to get all of those three moons in alignment to really provide for widespread adoption. I think historically, the focus at Insulet has been on one moon. It's been mostly on the patients, providing the tubeless technology and the convenience for the patients, and to a certain extent I think we really now need to change the focus through the healthcare providers who prescribe the product, and to the healthcare insurance companies that pay for it. And that hasn't been done historically. We were out of whack.

Okay. Thank you for that.

Mike Weinstein, JPMorgan.

Thanks, guys, for taking the question. So let me try and clarify a couple of items. You said that the patient base in 2014 grew almost 20% in the US, but revenues were up only 15%. Is that right?

Yes.

Okay. So what's the disconnect there between the patient base growing 20% or close to it and revenues growing 15%?

Part of it, Mike, is the timing that the patients are growing. As you know, we had discussed that we added more new patients towards the back end of this year than we added in the early part of this year, so that would account for a portion of it.

I think we circled on the map on that, because that shouldn't be the difference, but we can come back to that one. Let's talk about international. Am I understanding that your expectation is that revenues will be roughly flat this year? Is that what you were saying, Allison?

Yes, we expect revenues internationally to be relatively flat.

Okay. And so the destocking at Ypsomed or the work down of the inventory, or the catch up with demand relative to the inventory, do you think that takes a quarter or do you think that takes more than a quarter?

We are shipping -- we anticipate shipping to Ypsomed this quarter. We expect it to be finished this quarter and back to normal ordering patterns -- the quarterly ordering patterns in quarters two, three, and four.

Okay, and so if international is relatively flat and Neighborhood is relatively flat and taking Allison's comments, and given the guidance on the drug delivery fees, that would imply roughly call it like 5% to 11% growth for the US OmniPod business, but it sounds like just from the commentary that you expect the first quarter to be a lot lower than that and the second half to be a lot higher, based on acceleration in the business in the back half of the year. Am I capturing that correct?

Yes.

Okay, and then let me ask one last question. We talked about this -- the dependent landscape in external insulin delivery has -- is ratcheting over for the last 18 months. I'm really starting with the 530G launch from Medtronic, which would certainly -- from the numbers looks like it's really slowed momentum for Insulet at that time.

But you got 530G, you've had the ramp of tandem, and you've had now just in the first quarter, the J&J Animas Vibe launching, and everybody's got launches coming over the next year. It feels like it's a much more competitive environment than it was two years ago. How to think that about that and how to think about competing in today's world versus maybe what was the world two or three years ago for Insulet? Thanks.

Obviously, there has been more competitive activity, but I'll come back to the tremendous opportunity, and where we are getting the majority of our growth is converting the MDI patients to OmniPod. And quite frankly, we have not done a great job of differentiating the product through the healthcare providers to the insurance plans, and we need to increase patient awareness as well. I think with the opportunity before us, we do worry about competition but I think our major competition is MDI, quite frankly, and that's where we need to focus.

Okay, I'll let some others jump in and then I'll get back in the queue. Thank you, guys.

Ben Andrew, William Blair.

Great. Thank you for taking the questions. Allison, can you help us a little bit with the revenue breakdown you were able to give and really appreciate that detail. It's extremely helpful. Is there something in the Neighborhood Diabetes line that gets that to $60 million beyond kind of pure distribution? Is there any OmniPod in there? I was under the impression that was running more like $7 million or $8 million a quarter. I'm just trying to understand the disconnect with where we were at?

In Pat's commentary, he talked about 5% of that Neighborhood number incorporating OmniPod revenue. That's what the Neighborhood business is selling on behalf of OmniPod.

And the balance of it is just routine diabetes products such as testing supplies, pumps, pump supplies, CGM, CGM supplies, et cetera.

Okay.

As well as a full-service pharmacy.

Sure. Sure. Okay. And so then, as we sit here and think about the cadence through 2015, you've talked about 20% plus revenue growth in the back half or patient growth; what do you see in the first part of this year? Is that net of the inventory just talking to Ypsomed, what is international and what do you think it can be first and second quarters in the US?

I'm not sure I fully understood your question, Ben.

I'm just trying to understand the cadence over the course of 2015. I know Mike had just talked about this, but just the net of inventory adjustments at Ypsomed, where do think they are in Q1? And where do you think Q1 patient ads are for Insulet as we start to go through the transition with the new marketing programs coming on?

I think we are going to continue to add new patient starts as we go throughout the year but the balance -- the significant -- more significant increases are going to be in the back half of the year as we get these marketing programs and the sales force up to speed and fully productive in the field.

Okay. And then Pat, as we look at the market growth of MDI switching over to pumping, our analysis suggests that last year you guys were holding share in terms of your percentage, if you will, of your current installed base versus what you were getting out of the MDI converters.

Do think you can convert that -- accelerate that where you start taking more share with the investments and over what time frame can that happen?

As I've mentioned, I think -- I'm fairly confident the team will put them together. If you think about it, it's not only sales, marketing, managed care marketing, its the whole commercial team and full confidence that we're going to be able to increase the OmniPod revenue as we move forward with the initiative we are putting in place as this team gets in and starts to have an effect.

Okay. All right. Thank you.

Bill Plovanic, Canaccord.

Great, thanks, good evening. On the GSK, as you make that transition with them mid-summer, are there going to be any take backs on that relationship?

What's a take back?

Inventory. So will you have to take back any of the inventory or has that been sell-through, or how should we think about that, and if so, does it hit any particular quarter?

Overall, the relationship has been sell-in, but GSK is purchasing inventory based on their demand. I'm sure that they will have some level of inventory in their warehouse on the date that we make the transition, and I think as we finalize the agreement when we go direct in Canada, there may be some repurchase of that inventory, but it shouldn't be a takeback of revenue by any means.

Okay, so probably as we think about it, you have Ypsomed working inventory down in Q1, they'll normalize and get back on ordering Q2, but then GSK will probably have to transition in Q2, so really it's probably Q3, Q4, where international is more normalized?

No, I think in Q2 is where it's going to be more normalized. The GSK is not nearly as large a component of our international revenue as Ypsomed is.

Okay. Good. As then as we think of Q1, you've given guidance. How much is the bolus of the stock in for drug delivery that we should think about in Q1?

It's we would have -- what we anticipated shipping in Q4 of last year, moving into Q1. Is that your question?

Yes. I think if I remember correctly, it was like $5 million or something like that?

That's right.

Okay. And then as we think about one of the things you've talked about, you've added a lot of support to start focusing on the payers, the physicians, even also the patients.

If you could just help us out with where does the customer focus, whether it be the physician-patient focus distribution channel, where does that end 2014 in terms of quantifying that number, and then what should we expect in 2015 and just as a base of reference, where was that in 2013?

We talked about investing about $15 million or so in our commercial organization in 2015. I think that we need to get through 2015, see how the resources have come into play and make sure that they are being productive and then we'll talk about what we're planning to do in 2016. But I think at this point, we're talking about 2015 and $15 million of additional spend over 2014.

I think my question -- I'm sorry, maybe I wasn't clear, is how many reps did you have at the end of 2013? How many do you have at the end of 2014 and where do you think 2015 will be?

I don't know. We're at 135 roughly at the end of 2014. We're going to 150 this year.

Okay. And then in your guidance, you gave us revenue guidance. There wasn't anything on operating loss. How should we think about 2015 in terms of operations in terms of gains or losses for the year, or even just qualitatively relative to 2014? Thank you very much.

As you are planning through the year, I think we are anticipating getting to an operating breakeven level by Q4 of 2015.

Thank you.

Jayson Bedford, Raymond James.

Good afternoon. Thanks for taking the questions. In your prepared comments, you mentioned an increased focus on reorders and increased utilization, and I've never really thought of utilization as an issue. So just on the reorder rate, prior management had talked about an attrition rate of sub-10%. Have you seen any change in that attrition rate or that 10% number correct?

We have not seen a change in that. The 10% number is correct.

Okay.

I think what we're talking about increased utilization of that is all basis, quite simply, there are -- although the vast majority of our patients order four times a year, there are those that don't order less than four times a year. And what we'd like to do is get all of our patients to order four times a year, and we see that as an opportunity to increase utilization.

And some the reasons they don't order four times a year may be that during the summertime or certain periods of the year, they go back to MDI therapy and for whatever reason, and in some cases, the insurance coverage may change and they won't any longer be -- this happens, in fact, with Medicare. If a person's on OmniPod right now and they go on Medicare, since we don't have Medicare coverage, they lose that Medicare coverage, and as you know, Medicare doesn't currently reimburse for the OmniPod.

So we're taking actions to try to get information to our patients that the most important thing for their health is to be on OmniPod 24/7, 365 and secondly, taking down the barrier of Medicare reimbursement for the patients that are turning 65 and going on Medicare coverage. Those are the types of utilization initiatives I'm referring to.

Okay. And just on the reimbursement, it felt like we're all conditioned to think that reimbursement wasn't really an issue or a hurdle to growth. It seems like you're a little bit more focused on reimbursement. You brought on a new executive.

What are the goals there? Meaning, is it a primary goal, Medicare reimbursement? And then secondly, just to circle back on an earlier question, have there been any new issues with reimbursement that have cropped up over the last, let's say, six months?

No, I think in general, as you all know, pump therapy is reimbursed by insurance companies. However, my point here is that insurance companies have certain requirements the patients must provide in order to have access to pump therapy or OmniPod. And in some of those cases, it's measurements of A1C over a period of time, glucose levels, other types of things that they need to do in order to be put on pump therapy.

The way I think about this is I can imagine a world where we have demonstrated the clinical and economic benefit to the insurance plans that they would reduce those barriers to make more widely available insurance coverage for those patients. And in order to do that, you've got to market to the insurance plans to show them your ability to change A1C levels, for example, and to provide other quality measurements that convinces them that reimbursing or having more people on pump therapy, and OmniPod in particular, is important for them.

And so that's what I refer to when I talk about marking to the insurance plans. It's because they make it sometimes difficult for patients to qualify or to be put on pump therapy because all the hoops they have to jump through. And secondly, on Medicare coverage, as you know, we don't have Medicare coverage, and for patients over 65, that's an issue and something we're working on.

That's helpful. I appreciate it, Pat. I'll get back in queue.

Tao Levy, Wedbush.

Great, thanks. A quick clarification in terms of the new patient additions. The number of that that's included in the Neighborhood that you provided on the quarter, is that similar historically?

Yes, I would say it's probably around the 5% range of Neighborhood's total revenue. About 5% of that is OmniPod product that they are shipping to their patients or customers.

And when you talk about new patient additions and total patients, whether it's US, I guess mainly in the US, you're not including -- are those patients in any of the -- 5% of those patients included in the Neighborhood? That's where I'm trying to --

They're not. We don't -- they would be not a big number. We don't include those new patients. It's just easier for us not to break that out at this point.

Okay, great, thank you. In terms of the drug delivery orders, I know someone asked about the inventory buildup there. Any feedback thus far from them in terms of how the product's being used, ordering patterns throughout the year, are they happy, does it have to go back to the design board or anything like that?

Based on our contract with Amgen, we're not permitted to provide any color on what they're doing. I can tell you that as Allison talked about early in the conference call, we have taken the low end of our drug delivery estimate for the year up from $10 million to $15 million. So perhaps that's an indication of how it's going.

Okay, and then just lastly, he change of -- or I guess the continuation of the exclusive Abbott relationship, is that have any financial changes to that relationship? Is there any incentives to doing that rather than going with a J&J?

Not really much different than what we were receiving under the J&J agreement -- what we would have received under the J&J agreement.

Okay. Thank you.

Suraj Kalia, Northland Securities.

Good afternoon, everyone. Thank you for taking my questions. Patrick, let me start out here. You mentioned about your factors in your prepared remarks. Let me see if I can tie all of them together and get your perspective on what's going on, at least from a core growth perspective.

OmniPod has obviously grown like a rocket ship over the last five or six years, and now the growth seems to be somewhat slowing. In your opinion, for the five months you've been at the helm, do think it's more a function of the low-hanging fruit being taken? Product education? Reimbursement? Customer service or competition?

I'm just trying to put various buckets together. And what do you think is the key? Product education is one of the things that you mentioned. Should I infer from that that the other factors are having a de minimis impact, per se?

No, I think in order to provide continued and accelerated OmniPod growth, we've got to, as I mentioned, we have to market more effective and targeted marketing to the healthcare providers and to the patients when we talked about a focus on pediatric patient population.

I think continued demonstrating the clinical and economic benefit to the payers. I think as part of the product offering, you always have to, in this market, offer a service component that provides getting the patient from the doctor prescription onto the product and trained, et cetera.

We are making some investments on our inside organization to improve the customer service experience for those patients that are not only on the -- coming on the product and ensuring that they have a very great patient experience in the first 90 days, but for the existing customers to reach out to them more frequently and communicate and really have a more comprehensive marketing program for our current customers.

Okay. And Patrick, forgive me if I missed this in your guys' remarks. What's the status on the CGM development program for the OmniPod? And part of the reason I ask also is Medtronic is launching its 640G in Europe. I'd love to get some color from you, how you see any of these pseudo artificial pancreas pumps impacting business or lack thereof? Thank you for taking my questions.

Yes, I would say our strategy is that as it relates to the artificial pancreas, we are putting together strategies so that OmniPod is a very significant part of the artificial pancreas product offering in the future. And with that, you need to have a CGM product offering as well as an algorithm offering to put the three units together, if you will. And as you know, we have been working internally on our own CGM development which continues.

But also we have an agreement with -- already have an agreement with Dexcom to use their CGM sensor along with our new PDM to integrate those two products together. I think with that combination you then need an algorithm, and we're looking at opportunities to have an algorithm that we could then provide the full package.

I'd also say that we would evaluate and look at opportunities with Abbott and others that would have potential CGM integration opportunities for us. I think in this short term, we're looking at other people that have CGM capabilities and algorithm capability, and at the same time, we are continuing a low level our own efforts in our own CGM product development.

Thank you.

Jaret Vogel, Newbridge Securities.

Thank you very much, and good afternoon. I'm pleased to say I'm not only a financial professional, I'm an end user. And first to address customer service, I've been extremely pleased with the level of support from the trainings I had with my local reps to the staff. If I had a defective pod, they've been very prompt and courteous.

I would say I'm one of your most active cheerleaders down here in South Florida. Since I learned of the pod from my sales assistant's young daughter, I probably told 100 people about it, shown them, and to a person they've all been very amazed. My endocrinologist's last visit, he had four or five different brochures from other products, and despite my enthusiasm and my continued success with the OmniPod, I haven't seen any brochures in his waiting room.

So I'd like to propose the following because I believe your end users, your consumers, are the best marketers. I'd suggest having a coupon offer that you do a direct mail to all of your consumers with a return envelope, and simply if they would include their endocrinologist's business card, send it back into the Company, they receive a $10 credit against their next order, and you receive thousands of leads from professionals across the country.

That's what I wanted to suggest. I am building my client base with the stock. I'm an end user; that goes a long way. But again, the marketing has to be ramped up because everyone I show is very impressed, and I think this could drive some retail sales because again, I think your consumers are your best marketers. Thank you.

First of all, I'd like to thank you for your very complimentary remarks concerning the customer service organization and your interaction with Insulet as it relates to our OmniPod business. And I'd also like to say we want to make that customer service experience even better for you. So, thank you.

Secondly, I think you make a very good point where reference selling or having people that are currently on the product refer it to their friends and physicians is a very important part of the overall strategy that we are developing to get all three of the moons in alignment of the doctors, the patients, and the payers so that we have broader adoption in the marketplace that more physicians are prescribing it and more healthcare insurance companies are paying for it.

I think you're spot on. I'm going to pass that directly on to our head of marketing for his consideration, and thank you for the great idea.

Jan Wald, Benchmark.

I don't think I can provide as much help as the last caller but I guess I have a couple of questions. Your commercialization effort is something that you said is very important. In fact, you are going to focus on going forward.

Two components of that that you've mentioned are the clinical studies, the economic studies, and the -- I was just wondering if you could go into a little bit of more detail than sort of the top line information you provided as to how you're going to go about that, what kind of studies should we expect, are they ongoing, when should we see presentations of those studies to help the providers make the kinds of decisions you want them to make?

I think as it relates to clinical evidence, I would use the term -- and I -- in my remarks, I didn't talk about new clinical studies. What I'm referring to is actually clinical data that's already available. There are many places throughout the country that have a large base of OmniPod users, and hopefully we're working to try to find a way to mine that database to show the clinical evidence of, for example, A1C levels on a person that was on MDI now going to OmniPod.

So I think there's a fair bit of clinical data already out there that we simply need to mine. But as we go down the road to getting more clinical trials and clinical evidence, we may need to look at and incorporate doing some clinical trial work but that's not contemplated at this point. Additional work is not contemplated at this point in time. And you have to have this same information. Also it will be helpful with working for providers to show the benefits of the OmniPod as it relates to the performance for their patients.

So right now, you think a retrospective analysis are going to be good enough to convince buyers and payers, obviously.

I think -- let me tell you where we are today. We have data on 59 patients that shows a 0.59% reduction in A1C levels. We have data in the field and available I think that we can mine that initial data shows a 1.1 reduction in A1C on a little over 1,000 patients. So that data is available. We're putting together statistical analysis and hope to use that in marketing to doctors and payers.

The other thing I would mention is that insurance plans are often evaluated by their customers by big large employers on quality measurements related to the HEDIS measurements. And those are quality measures that are used to basically a report card for insurance plans, and they specifically have HEDIS measures related to A1C levels and other measurements of diabetes care.

And I think that's another avenue where if you can show an insurance plan that you can improve their A1C compliance or their A1C numbers, that's meaningful for them as they market to the large employers throughout the country. That's the kind of value proposition we need to bring to insurance companies that heretofore hasn't been done.

Okay. And just in terms of again, your commercialization efforts, the OmniPod features and benefits, it's easy to list the top line or what they are, but what are the ones that you really are going to try to detail and go towards the payers and the docs with?

I think it's the -- as you think of the benefits of the product. I mean, there are many from a product feature set, tubeless delivery, and among others, but I think the clinical benefit is what are the A1C levels of individuals on MDI therapy before they go on OmniPod and what are they after they've been on the OmniPod for a while?

The data we seek consistently shows a reduction in A1C levels that are, in our view, significant. So I think that's the principle one. There's also in the data we've mined so far a 15-unit per day reduction in insulin usage. I think there's a number of different metrics we can mine that's going to give us a data set we can take to doctors and to payers.

Okay. Thank you very much.

Shaun Rodriguez, Cowen and Company.

Hi, good afternoon. Thanks for taking the question. So first trying to put some of your commentary back in the context of your guidance assumptions. On the commercial organization, you've made some leadership changes, expanding the headcount, and trying to really drive some cultural changes to the organization. Are you assuming you will see things like productivity increases or that the new reps become meaningfully productive this year? Or are the two what you are doing and the guidance assumptions not necessarily linked that way?

We are definitely assuming improved representative productivity sales force effectiveness in the field. The team that I put together on the whole commercial side under our Chief Commercial Operation Officer is have all worked together, know how to drive sales forces, how to incent sales forces, and to really drive top line growth. Absolutely, we've got improvements in sales force productivity baked into our assumptions.

Okay, and that includes the new hires that you'll be making and obviously the time that it'll take for them to get up and running and productive?

That's correct.

Okay. And then in trying to understand the US OmniPod dynamics the past year or so in the context of the comp dynamics that you are facing in 2015, so you talked about the capacity improvements. How much do think the capacity was the limiter of US growth last year given the international growth in the Ypsomed stocking that you talked about, or do you not consider this a significant factor in the past year performance?

No, I don't think capacity was a big driver of the 2014. I think in Q1 and Q2, we were able to bring our manufacturing lines back up to the levels that we needed them to be producing at. I don't think it was a capacity problem at all.

Okay. Helpful. Thank you.

Operator, we'll take one more question, if there's any available.

Steven Lichtman, Oppenheimer.

Thank you. Hi, guys. Just a follow-up on the expense side of the equation. Where should we be thinking about gross margin in 2015? And where do you see that going over the medium to long term?

For gross margin, we talked about in the call that our US OmniPod sales are just over 60% gross margins. I think what you will see in 2015 is that any improvement in gross margin will largely be driven by mix. We did mention that our international business as well as our Neighborhood Diabetes business are at lower gross margins. So as you bring in more US OmniPod sales, as you bring in more drug delivery, you will see some improvement in that gross margin level.

Okay, and then now to the -- on the fourth quarter, the profitability point you made, is that on non-GAAP basis or non-GAAP basis, cash basis?

Operating profit.

On a GAAP basis. Okay. On the Lilly Type 2 process, when do you anticipate that trial starting, and any early sense of what that trial will look like?

We expect the trial to begin this year, and we have worked with Lilly on the protocol for both but they're going to do what we're going to do and FDA has basically given its green light, so it'll start later this year. Probably won't be commercial until early 2017.

Okay, and then in terms of the destocking out of Ypsomed, what level are you expecting in the first quarter? Approximately, what's built into that guidance? And what was it in the fourth quarter? I know that impacted you somewhat in the fourth quarter.

We haven't broken out exactly how much would relate to the international market. You know, like Pat said earlier, Ypsomed is ordering product again here in Q1. So we see their order volume getting back to where it should be, and we expect that by Q2 that will -- that destocking will all be done.

Okay, but in terms of the level of decline from the fourth quarter to the first quarter, even though you're going to have the Amgen revenue, is that level of decline principally because of this destocking? How should we be thinking about that versus what you would break out and think about in the US?

The Q4 to Q1 decline would be primarily related to the destocking.

Okay. All right. Thank you.

With no further questions, I would like to turn the call over to Patrick for closing remarks

Thank you very much. First of all, I want to reiterate how excited I am to be at Insulet, and how strongly I believe there are so many untapped opportunities before us. Our new senior leadership team is very well positioned to capitalize and provide improved commercial execution.

We have a strong platform with our OmniPod System that will not only allow us to drive future adoption with the right operating strategy in place, but will provide us with a unique and incredible opportunity to drive growth within the drug delivery business. I'm confident we are driving forward on the right strategy to position Insulet for long-term accelerated growth and create shareholder value. I look forward to meeting many of you at the investor conferences over the coming months and keeping you updated on our progress on future calls, as well as providing you additional details about our execution, strategy, and future vision. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a good day, everyone.