Insulet Corp (PODD) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation first quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Deborah Gordon, Vice President, Investor Relations and Corporate Communications.

Thank you, Valerie. Good afternoon, and thank you for joining us for our first quarter 2016 earnings call. Joining me today are Patrick Sullivan, our President and Chief Executive Officer; Shacey Petrovic, President of Insulet Diabetes Product; Michael Levitz, Chief Financial Officer; and Dan Levangie, President, Insulet Drug Delivery.

The replay of this call will be archived on our website. Our press release discussing our first quarter 2016 results and second quarter and full-year 2016 guidance is also available in the Investor Relations 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 in our first quarter earnings release, and in the Company's filings with the SEC.

With that, let me turn the call over to Pat.

Thank you, Deb. Good afternoon, everyone, and thank you for joining us on the call today.

I'll start off today's call with a brief review of our Q1 performance and recent business highlights. Following my remarks, Mike will review our financial results in more detail and discuss our second quarter and full-year 2016 guidance. Shacey will then provide an update on our commercial progress before we turn the call over to questions.

Following our significant accomplishments and improved financial performance in 2015, we carried our positive momentum into the start of 2016. We are successfully executing against our long-term strategy, delivering strong results in the first quarter and making progress toward our 2016 goals.

We continue to drive improved results, with first quarter revenue ahead of expectations. We advanced our key commercial initiatives and made progress with our Digital Insulet strategy and artificial pancreas program. These initiatives will dramatically improve the quality of life for those living with diabetes. We are also keenly focused, along with Eli Lilly, on our concentrated insulins product development and clinical work, and we experienced dramatic growth in our drug delivery business.

Now I'd like to take the next few minutes to highlight some of the key financials for the quarter. Revenue from all of our product lines continued to grow year over year, and the results exceeded our expectations. Revenue for the quarter was just over $81 million, about $2.5 million higher than the midpoint of our guidance range. This represented growth of about 69% compared to last quarter's revenue from continuing operations.

First quarter US OmniPod revenue was just under $51 million, representing 28% year-over-year growth, and higher than our expectations. Our international OmniPod business delivered stronger than expected growth, with revenue of more than $15 million. We are well on our way to growing our 2016 worldwide installed base by the 20% we had previously guided to, and growth within the pediatric population continues to be strong.

And, lastly, our drug delivery business produced revenue of just over $15 million, in line with our expectations. As you know, a large portion of our drug delivery business includes sales to Amgen for their Neulasta Onpro kit, which includes our OmniPod technology.

This product continues to remain -- to gain remarkable adoption in the United States, and we just learned from Amgen's online presentation that the Neulasta Onpro kit now represents approximately one-third of their US Neulasta business. It improves patient compliance to achieve maximum benefit of Neulasta. Amgen also expects Neulasta growth throughout the United States in 2016.

I'd now like to take a minute to remark on the recently appointed -- recently announced appointment of our Senior Vice President of Advanced Technology and Engineering. Aiman brings a wide breadth of technology leadership and experience to the senior leadership team. His experience in emerging technologies will accelerate our unique product position.

Aiman comes to our organization with over 30 years of engineering and research and development experience, and, importantly, significant software and advanced technology proficiency. He will leverage his experience in mobile technology, data and analytics and software to accelerate the success of our technology roadmap.

He previously worked within the mobile healthcare division of Qualcomm and served for 25 years at General Electric, including within their healthcare division. We are absolutely thrilled he joined our talented leadership team to drive innovation and maximize the future potential of our OmniPod technology.

During the first quarter we made solid progress in resolving the quality and regulatory issues we encountered in the second half of 2015. We completed all activities related to the recall and field safety notification, and we have requested closure from the FDA.

Our new QA and RA team did a great job in resolving these issues effectively. Our operations team also made great progress in improving the efficiency and effectiveness of our supply chain and manufacturing operations. As an organization, we are laser focused on continuously improving the quality of our products to ensure the best possible experience for our customers.

We look forward to a very exciting 2016 as our team executes a winning strategy. I am thrilled with the momentum we are experiencing in our diabetes and drug delivery businesses and remain confident we have the right foundation in place to deliver long-term, sustainable and profitable growth and increase value for our shareholders.

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

Thank you, Pat.

I will review the first quarter 2016 results and then introduce our second quarter guidance. Please note that our prior-year reported results included Neighborhood Diabetes, a business we divested in February of this year.

Please refer to our first quarter earnings release and the financial data schedule on our Investor Relations website, which aids in year-over-year comparisons of our business. As I review our results, unless otherwise stated, all commentary regarding changes will be on a year-over-year continuing operations basis, which therefore excludes Neighborhood Diabetes for all periods.

We are very pleased to report the first quarter revenue growth of 69%, with revenue of over $81 million, compared to $48 million. All three of our product lines contributed meaningfully to this increase.

While we had an easier revenue comparison resulting from low shipments in the first quarter of 2015, our results this past quarter demonstrated significant growth, driven by the success of the ongoing commercial initiatives within our US diabetes business, the volume growth in our international business, and the dramatic growth we've seen within our drug delivery business, largely due to the success of Amgen's Neulasta Onpro kit, which was approved by the FDA just before the start of last year.

Our gross margin was 54%, in line with our full-year expectations of low to mid-50% range. Gross margin in the first quarter of last year was higher than this quarter and higher than historic levels. The gross margin this quarter reflects the increased sales to our largest international distributor, which generally have a lower gross margin than the rest of our business.

Operating expenses increased to almost $52 million, compared to $36.5 million last year, primarily due to 2015 investments that we made in expanding our sales force, customer care, product development and building a foundation for continued strong growth from our commercial strategy.

We ended the quarter with a cash balance of approximately $112 million, compared to almost $123 million at the end of 2015.

I'd like to now walk you through our outlook for 2016. We are reaffirming our previously announced full-year revenue guidance of $330 million to $350 million, driven by continued strong growth across our product line. This compares to 2015 revenue of $264 million and represents growth of approximately 30% at the midpoint.

As a reminder, we expect this strong growth to be driven by US OmniPod growth in the mid-teens on a percentage basis, international OmniPod growth of approximately 50%, and drug delivery growth of approximately 75%. We believe the midpoint of our guidance range is realistic and represents our current outlook for the year, while the high end of our range is achievable should we experience better than expected growth within our US and international diabetes business.

For the second quarter of 2016 we expect revenue in the range of $81 million to $84 million, compared to approximately $61 million. This represents growth of over 35% at the midpoint. We anticipate strong US OmniPod revenue growth in the mid to upper teens on a percentage basis for the quarter. We expect our international revenue to be approximately $15 million, which represents strong year-over-year growth, even excluding the favorable comparable.

On the drug delivery side, we expect revenue of approximately $15 million, up significantly from last year, due largely to the continued strong adoption of Amgen's Neulasta Onpro kit. Our drug delivery guidance is based on steady quarterly shipments to meet our partner's forecasted annual demand.

We look forward to providing you additional color on our progress and our long-term outlook as the year progresses.

I will now turn the call over to Shacey.

Thanks, Mike.

As we shared with you on our last earnings call, we have an enormous market opportunity before us that we are converting through improved commercial execution and a laser focus on patient retention. We are also making significant progress on our Digital Insulet product development roadmap and our artificial pancreas program.

This first quarter was a success, both internationally and in the United States, and we are on track to achieve our objectives for the year. Strong commercial execution is driving market adoption of OmniPod across the globe.

Our continued focus on patient retention, clinician advocacy and market access is on track to drive 20% growth in our installed base in 2016. These efforts will be bolstered by a growing body of clinical evidence demonstrating the economic value proposition of OmniPod and the improved clinical outcomes it delivers for our users.

In fact, we are pleased to announce that we have two manuscripts accepted for publication demonstrating OmniPod's positive impact on glycemic control for individuals living with type 1 and type 2 diabetes. We are completing ongoing studies and submitting additional publications as the year progresses. We will be showcasing these studies and other data at the American Diabetes Association scientific sessions in June.

Our longer term growth strategy leverages innovative product development to accelerate OmniPod's market penetration. In Q2 we will launch the first step in Digital Insulet, our nonregulated OmniPod customer mobile app.

This app will be available on iOS and Android devices, and it will provide training tools, easy product ordering and interaction with customer care, along with other key support resources. It is designed to help improve patient retention, and it will be regularly updated with additional features to deliver a great OmniPod customer experience.

Later this year we plan to submit a 510(k) for a separate mobile app and Bluetooth-enabled PDM. This app will act as a secondary display for key PDM data on a customer's mobile phone. Information such as a user's insulin onboard, current basal profile and blood glucose readings will be at our customers' fingertips.

This PDM mobile app will also provide integration of OmniPod data with Dexcom's G5 data on a customer's mobile phone. This development project is on track, and we plan on a submission by the end of this year.

We are also working on our updated PDM and Bluetooth Pod program, with the goal of delivering increased mobile connectivity and ultimately our first product with automated glucose control, or artificial pancreas functionality. We recently announced our algorithm partnership, and we're executing an aggressive development program. We expect to be in clinical trials later this year, and we plan on being in the market in late 2018.

Providing our customers with an increasing array of mobile features and a terrific customer experience will help accelerate growth this year and next and will be followed closely by the first product offering from our artificial pancreas program, a highly differentiated product offering, to drive significant market expansion.

We are also working with Eli Lilly to get their concentrated insulins, both Humalog U-500 and U-200, each approved for use in our Pod. This will ensure that people who have higher total daily insulin requirements, such as those living with type 2 diabetes, can benefit from a three-day Pod change.

These projects are underway and really making great progress. The U-500 product development work is complete, and the clinical trial is over half enrolled.

The U-200 development work launched recently, and the team is focused on product and clinical trial design work and leveraging everything that we've learned from the development of the U-500 OmniPod system. Concentrated insulins in the Pod will be a reality in the next two to three years, and they will double the addressable market for OmniPod.

As our recent financial and commercial results have illustrated, we are increasing awareness of OmniPod. We are growing clinical advocacy for OmniPod, and we are building an innovative product pipeline to accelerate our penetration in both the type 1 and type 2 diabetes markets.

The progress we've made to support OmniPod's truly differentiated market position is exciting, and we are on track to drive continued conversion of the huge market opportunity before us.

I'll now turn the call back to Pat.

Thanks, Shacey.

With that, operator, let's open the call up for questions.

Thank you.

(Operator Instructions)

James Francescone, Morgan Stanley.

I just wanted to touch quickly on guidance for the full year and the second quarter relative to what we saw in the first quarter numbers. Typically there's been a pretty nice seasonal sequential step-up from the first quarter to the second quarter. I mean, you've actually got a pretty modest increase of about 2% embedded in the guide for 2Q.

So how should we be thinking about that? Should we be biased more towards the high end of the guidance range, or is there some reason why the seasonal sequential pickup from 1Q to 2Q that we've seen in the past wouldn't be as pronounced this year?

This is Mike. I would just say that we're talking about for the year significant growth, a 30% year-over-year growth at the midpoint. We're really excited about the direction that we're going in.

We just gave that guidance a short time ago, and we're really pleased with where we've been in the first quarter, but we think we've got a lot of opportunities through the rest of the year. We just didn't want to move on our guidance at this point, because it's still early on.

But we've got real upside in the diabetes business, both US and international. But our guidance balances upside with what some potential risks are. But coming out of the first quarter we are really excited, and we've got really strong momentum.

Got it. And then just second on operating expenses, as we rebase the models after the Neighborhood divestiture, can you help us think through what the trend on OpEx through the year might look like?

This is Mike again. What I would say is we aren't -- we haven't given guidance for OpEx by quarter or for the year. But what I have said is that the growth that we're seeing in OpEx is largely reflective of the full-year impact of investments that we made in 2015.

So with that in mind, I think it's a reasonable position to look at where we exited 2015 from a run rate standpoint. We do expect an increase this year compared to last year, other than just the full-year impact, but it really is largely that full-year impact.

So we expect improved operating leverage this year, even with the investments that we're making in the different areas that Shacey described in R&D and the full-year impact of the investments we've made in other places. So I think if you look at the first year results, first quarter results, compared to the run rate from Q4, we're essentially in line when you pull out the items that we described as nonrecurring in the fourth quarter.

Okay, perfectly clear. Thanks, Mike. I'll get back in queue.

Danielle Antalffy, Leerink Partners.

Congrats on an excellent quarter. I was wondering if you could touch on two things. Number one, new patient adds were strong again in the quarter. I was wondering if you could give some color on what's driving that. I mean, obviously you guys have been building, rebuilding out the sales force. How much is execution versus just your standard easier comps year over year?

And then the second question is on the drug delivery side, wondering if you could give any color on how much is due to stocking. Sorry if you commented on the prepared remarks and I missed it. Thanks so much.

Sure, Danielle. This is Shacey. In terms of what's driving new patient adds, I'm not sure if we gave color into that, but we're on track to deliver the guidance in terms of the installed base, so we are guiding to a 20% increase in our installed base.

And in the United States one of the contributing factors is that we anticipate somewhere around a 20% increase in new patient adds this year, as well. What's driving that really is commercial execution in the US. And so that is primarily driven by account targeting from the stronger clinical messaging and from better pipeline management internally so that our sales team can really focus their selling time in the field on converting clinicians to recommend OmniPod for their patients.

And then the other thing I would say is there's a growing body of clinical evidence that just continues to support the value of using CSII, or continuous subcutaneous insulin infusion therapy, pump therapy, for patients. All of that is working in our favor.

And we're excited about the results of Q1. It's just one quarter, but things look strong.

And Dan, the other's on the --

Yes, you've got it.

You did such an eloquent job last quarter, I thought I'd --

Yes, so with respect to the question about Amgen's use of the product, I think they just reported that at the end of the quarter the Onpro kit accounted for about a third of the doses in the United States. And so they're in a much better position to answer the question as to how much of their purchases from us during the quarter represented stocking versus utilization. But we do know utilization is -- roughly a third of the doses in the US are being administered using the Onpro kit.

Operator, next question?

Mike Weinstein, JPMorgan Securities.

I apologize. I may have missed it. But new patient starts, it sounded like Danielle heard about it, but I did not. I know last three quarters it was up 20% year over year. Did you give a number for this quarter?

Yes, Mike, I just answered Danielle's question, so I don't think I gave it in my opening remarks. But we do expect in the US that new patient starts will grow approximately 20% in 2016 versus 2015 in the United States.

And what was it this quarter?

We don't give it quarterly, so just to let you know that we're making progress, and we're on track.

You guys gave it every quarter last year, right? Or am I off on that?

Yes, I think it was just because it was a new management team, a lot of moving parts in the business last year with some of the inventory management challenges, and so we wanted to give that granularity. But what we want to do this year and what I indicated last quarter was that we will guide you to our annual objectives and guidance for the installed base and new patient starts, and then let you know if we're on track or if for some reason we're changing that guidance. So the message is we're on track. Things look good.

Okay. Let me just quick follow-up, then. So two questions. One, we can do the math on Amgen, so we have a pretty good read how much every quarter is underlying demand versus the reported sales. Do you think just with the math and how much you're reporting this year in sales, do you think Amgen revenues grow after 2016?

Yes, our assumption would be that there would continue to be growth opportunity in 2017.

In the US? I mean, we're still just talking about US opportunity, because the max out in the US opportunity is about $50 million.

I'm not sure how you got to that answer, but, as they just reported, there are about a third of the doses converted as we speak. So you could assume -- if you assumed a straight-line trajectory from where we started to where we are today I think that would get you around 50% by the end of the year. I think that leaves another 50% for 2017.

But in terms of revenues, because there's the stocking revenues. I'm differentiating between patients -- I'm talking about total revenues, because you're reporting obviously a significant chunk of your revenues right now are stocking, so that's going to create a comparison for you for 2017. That's what I'm asking.

Yes, well, let me just say I would expect growth in 2017.

Okay. All right. Thank you, guys.

Tao Levy, Wedbush Securities.

Maybe I could ask on attrition rates, as I play around with the model, in order to get to your guidance in the second quarter without boosting new patient adds significantly, your attrition rates need to come down quite dramatically. Is that what you're seeing in the field, or is that something that's incorrect in my model?

I guess I'd suggest you look at your model. Nothing substantively has changed in terms of the attrition rate. And so we're feeling good about certainly the initiatives that we have in place to support a reduction in attrition over time and an improvement in retention this year. But, no, we're not expecting attrition to increase in Q2.

Jayson Bedford, Raymond James.

Just wondering if you could talk about the international business and if new reimbursement in France had any outsized impact on the business in the first quarter.

Hi, Jayson. No, I don't -- certainly Ypsomed prepared for their market entry into France this year, and they did that in Q1. But in any new market entry in Europe it's a really small component of the whole. So, while they prepared for entry into France, I don't think it had a substantive impact on the international revenue performance.

Okay, so this is a pretty clean number. There wasn't any stocking at all in there.

That's right.

Okay. And then just secondly, on the guidance, in talking about the high end of the annual guidance you kind of inferred that the upside would stem either from the international or the US diabetes business. So is it fair to assume that your drug delivery number here is pretty much locked in, meaning -- I realize it's growing well, but you're not really expecting any upside from that going forward?

Jayson, this is Mike. I would say that the guidance, as we stated, is the -- the high end of the guidance is reflective of upside in the diabetes business. And the upside in drug delivery would be incremental to that, if it occurs.

But we're early in the year. We're really pleased with how Amgen's doing and the growth in the adoption of the product. But at this point we've got a view into their demand for the year, and that's what we based our guidance on.

Just to add a little bit of color to that, Amgen gives us purchase orders. We ship them product based upon their purchase orders. If they increase the purchase order volume going forward it will be reflected in our shipments. It's pretty simple.

So we don't -- we're not baking anything in. We're using what they provide us to come up with the guidance we provided. And if that changes on the upside, as Dan mentioned, they're expecting to grow throughout this year, we'll reflect that in our performance going forward.

And, Pat, your visibility into that is basically rolling 12 months. Is that fair?

It's 90-day firm forecast, 90-day firm, and then the rest of it is basically a forecast.

Okay. Thanks, guys.

Kyle Rose, Canaccord Genuity.

Just two questions and I'll hop back in queue. The first is just underlying patient utilization and metrics in the US business. It sounds like no changes to attrition, but I just wondered if you could qualify some of the new patient growth. I mean, where are you really seeing that come from? And then any updates or changes as far as the utilization from those patients?

And then, secondly, OUS, Ypsomed, I believe they were launching into a number of new countries over the coming year. Just wanted to see how much of the growth when you think about your growth is coming from entrance into some of those new geographies versus continued share taking in the existing geographies? Thank you.

Sure, Kyle. In terms of your question regarding where are new patient starts coming from, just like previous quarters, the vast majority, between 70% and 80% of our new patient starts, come from people who were formerly using multiple daily injections. So that's where the vast majority of our business is coming from. We really are helping to drive adoption of pump therapy across this patient subset.

And then the question regarding Ypsomed and the value of new market entries versus existing base, really we're seeing growth in both the existing base and new market entries. And their base continues to grow such that the new market entries and new patient adds is a little bit smaller of a component.

But, so I wouldn't attribute too much to market entries. They've been relatively small. France is a bit bigger, and so over time that's probably going to contribute a bit more.

Next question?

Ben Andrew, William Blair & Company.

So, Pat, you talked about the Bluetooth-enabled PDM and kind of the plan there to display data and integrate the Dexcom data into the display. What's it going to take from a development standpoint and from a timing standpoint to start pushing data back or commands back toward the OmniPod?

So you've talked about manufacturing a Bluetooth-enabled version, etc. Does that tie into the 2018 time frame, or can you do something along those lines earlier?

Well, as you think about the Bluetooth-enabled Pod and a launch in 2018, as Shacey talked about, with the artificial pancreas, we're going to have to be able to push stuff back. So we would start that program and start essentially seeding the inventory into the field with the Bluetooth-enabled Pod ahead of the launch of that product. So it would back up, and we have that in our development timeline and implementation program.

In terms of -- oh, sorry. I was going to say in terms of control from the phone to the Pod, that is still something that we are discussing with the FDA. And so we don't have really good guidance in terms of timing on that.

Doug Schenkel, Cowen and Company.

This is Ryan Blicker in for Doug. So a strong gross margin quarter, in line with your full-year guidance. Is there any reason why gross margin can't increase sequentially throughout 2016 as your mix of US diabetes revenue continues to increase?

This is Mike. What we've talked about on gross margin is our guidance for the year is, as I said, low to mid-50% range. We definitely believe we have upside to that.

But, as we saw last year, there can be challenges, as well, as we ramp up the operation, so our guidance reflects really a balancing act of those things. But structurally we don't believe there's any reason why we wouldn't be at our target that we've talked about before of 60%-plus gross margins.

In terms of sequentially guiding gross margin through this year, we're really not in a position to do that. And we guide for the year, and we guide to revenue by quarter.

But I think what we've said in terms of our expectations for the year reflects the fact that, and Pat mentioned, we're really pleased with what our operations/manufacturing/supply chain team is doing. We've got what we believe to be a lot of opportunities. But those things take time, and that's reflected in our guidance.

Christian Moore, Jefferies.

I just wanted to have a quick question on the progress that Medtronic has had with the MiniMed 640G over the course of the last year. Have you seen the competitive landscape change internationally as you both pursue a closed-loop product? And what do you see playing out for the course of 2016 on that front?

Internationally we have not actually heard a lot of buzz regarding the 640G, and obviously it's not here in the United States. And obviously we continue to grow our business internationally and take share of the market as well as help grow the overall market. So I don't -- I guess I don't have a lot of comments on that.

In terms of the United States in 2016 we see the same dynamics in terms of the market growing, so more people moving to pump therapy and OmniPod taking a greater share of that market. So we don't see it slowing down our growth in the near term, and things are progressing nicely.

Great. Thanks. And then on the drug delivery front, you mentioned the progress of Neulasta, that you're now in one-third of Neulasta deliveries. What kind of capital investment would be required there to serve other partners down the road in order to maintain the strong growth in that segment?

Well, I think as we've discussed in the past we have a number of other agreements in hand with other potential drug delivery partners in which there's a development process underway. I think down the road we could potentially see revenue that would come to us as a part of those development agreements. But we haven't given that guidance at this point in time.

But in terms of capital investments by Insulet, we would hope to be able to structure agreements that would offset some of that capital investment or all of that capital investment by having our partners pay for that. Did I understand your question?

Mike Weinstein, JPMorgan Securities.

Now that we've gotten through kind of the quarter discussion, one big picture question, Pat. I was hoping you could just talk a little bit about the OmniPod manufacturing process. And we've been seeing -- it's been 10 years, and we've seen the manufacturing process ramp and productivity obviously improve with volume.

But it's hard to drive the costs of manufacturing OmniPod down meaningfully with the current process that they use. Can you just talk about any efforts underway to try and rethink the OmniPod manufacturing process and where those may stand?

Sure. First of all, Mike, I would disagree with you that we don't have an opportunity to drive additional cost out of our cost of goods sold through improved supply chain and manufacturing operations efficiency and effectiveness. And certainly with the addition of Chuck Alpuche that came onboard in early February we're already seeing, I alluded to in my prepared comments, improvements in our manufacturing operations efficiency, and ultimately we believe an opportunity to take cost out of the manufacturing process and reduce the cost of goods sold to improve our margins.

We see a pathway to do that. We've started those initiatives early this year and are making great initial progress. As everyone knows, it takes longer to effect those kinds of changes in the manufacturing process to drive those efficiencies and therefore cost out, but I think we've got significant room to improve the cost of goods sold and therefore the margins with our existing manufacturing operations.

We're also looking at and working on a long-term manufacturing strategy as we look to add additional capacity, which we know we're going to have to do in the next couple of years, to have redundancy outside or perhaps inside of China. We have four lines in one location, and certainly we want to be thoughtful about where and when we put additional manufacturing capacity in place.

But that will also have an opportunity to drive the cost per Pod down as we increase our volumes and perhaps improve the automation efficiency of the manufacturing process. So I think we -- Mike has talked about a pathway to a 60% gross margin for the business. There's clear line of sight to get there. And part of that will come through improving the margins out of the factory.

Tao Levy, Wedbush Securities.

So a question on -- two questions. International Neulasta, I mean, obviously you guys are having success here in the US in this larger market, but they do sell the product internationally, so just wondering if there's a program there or opportunity over there. And also I don't know if you commented on operating expense guidance for the rest of the year for the full year. Thanks.

Yes, with respect to the Neulasta Onpro kit outside the United States, obviously that's an Amgen decision. We would be excited, obviously, to launch the product outside the US together with Amgen and to see the rate of success that we've seen in the US.

But, frankly, that's a decision that's really up to them. We're prepared to support that but have not made any announcements about that international expansion at this point.

And, Tao, this is Mike. In terms of the operating expenses, there was an earlier question on that, but just to reiterate, so we don't give specific operating expense guidance. We give revenue guidance by quarter and we give gross margin for the year.

But what I have said is that we expect our expenses to increase this year, but that's really driven primarily from the full-year impact of initiatives in 2015 related to the expansion of our sales force, customer care and product development initiatives that we put in place, and just overall investments in the underlying foundation for our growth.

So if you look at where we ended last year, when you pull out the things that we identified last quarter in the Q4 run rate that we said were nonrecurring in nature, you'll see that Q1 is essentially in line with that, apart from just some timing things on some program spend.

So there is going to be growth. We are making continued investments here. We're really excited about those investments, and Shacey talked about some of those with concentrated insulins and otherwise. But there will be improved operating leverage this year.

And we talked about being EBIT positive in 2018, and that's definitely very real. As we've talked about in previous conversations on calls, we would love to beat that. But we really need to drive execution, and between all the different movement that we're -- the moves that Pat described and the improvements in gross margin, in cost of goods sold and operating leverage and mix and otherwise, there's a lot of good things that support the pathway to doing the things that we've said we would do.

Mike Weinstein, JPMorgan Securities.

I was just going to follow up. Pat, I was just wondering if you could comment on Howard Zisser's departure for Verily and where you are in the process of replacing him.

Sure. I guess it was about two weeks ago now Howard informed me that he has taken a job at Google's -- yes, I forgot the name of the company -- their healthcare company to be their -- in charge of their clinicals. I guess it's Verily. So he informed me of that a couple of weeks ago. He has departed the Company. He's now at Google.

We thank him for everything that he's done. He's done a great -- did a great job for us in all of the work he did on the artificial pancreas, and he really wanted to see the benefits of his labor. And we've done that now with our AGC agreement. And Howard did a terrific job for us, and we wish him well with what he's doing. I think it is a great opportunity for him, quite frankly, in the Google environment.

As it relates to replacing him, we are in the short term reaching out to our scientific advisors and those in the community to help us on the short-term support, and we are looking to replace Howard as Medical Director in the future, looking to another, obviously, endocrinologist that can help us get smarter about diabetes and guide us in our product development activities as well as our relations with the other constituencies that we deal with. So, pretty excited for Howard, and it gives us an opportunity to hire a replacement for him.

Kyle Rose, Canaccord Genuity.

Just wanted to see if you could give us an update on or the status of reimbursement in the Medicare/Medicaid population, and then any upside that you could expect to see from there over the course of 2016.

Yes, I continue with CMS coverage for Medicare beneficiaries being one of my top, if not my top priority. Nothing new to report since we last spoke to you about 60 days ago.

We are making progress on the Medicaid front with coverage decisions or coverage in some key states, Texas, Florida and New Jersey. And we are -- we have targeted other states, the higher population states throughout the US for Medicaid coverage that we can go and knock those down one at a time.

But we're very focused not only on CMS but on Medicaid, where, as you know, we have a very attractive product for the pediatric population and focused on providing that to those patients that are on Medicaid. So stay tuned. I'll let you know as soon as I know. But I think we're making progress.

I will now turn the conference back over to Pat Sullivan.

Thank you. We are starting 2016, I think, with a very strong momentum. And I have to tell you, our entire team is energized and very confident in our continued innovation and long-term sustainable growth that lies ahead of us.

We have the team in place, I think functional experts in engineering, manufacturing, quality, regulatory, and we're making progress across all fronts. And I'm just very excited about the opportunity that lies before us, and it's all within our ability to execute.

So very excited about it. Keep taking -- we'll keep getting back to you every quarter. And thank you for participating on the call today, and we'll speak to you again as we make progress throughout the year. Thanks for participating.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day.