Insulet Corp (PODD) 2016 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation's fourth-quarter 2016 earnings conference call.

(Operator Instructions)

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

Thank you, Sandra. Good afternoon, and thank you for joining us for our fourth-quarter 2016 earnings call. Joining me today, are Patrick Sullivan, Chairman and Chief Executive Officer; Shacey Petrovic, President and Chief Financial Officer; and Michael Levitz, Senior Vice President and Chief Financial Officer.

The replay of this call will be archived on our website. Our press release discussing our fourth-quarter 2016 results, and first-quarter and full-year 2017 guidance, is also available in the IR section of our website.

Before we begin, we 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 statement. Such factors include those referenced in our Safe Harbor statement in our fourth-quarter earnings release and in the Company's filings with the SEC.

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

Thank you, Deb, good afternoon, and thank you for joining us on the call today. I'll begin this afternoon's call with a brief review of our Q4 and 2016 full-year performance, and share with you recent Business highlights and our accomplishments.

Mike will then discuss our 2016 financial results and introduce our 2017 guidance. Shacey will then provide an update on exciting commercial and R&D progress, and then we'll open the call for questions.

I am absolutely thrilled with Insulet's recent performance. 2016 was simply an amazing and very successful year. Our 2016 revenue was $367 million, up $103 million from the prior year, representing growth of 39% and $3 million over the mid-point of our guidance range. Our gross margin for the year improved at 57.5% for the full year, up 700 basis points from 50.5% just a year ago.

Every area of our Business delivered outstanding performance in 2016. US Omnipod revenue was $230 million, an impressive growth of 21% over prior year. Our international Omnipod revenue was $72 million, a terrific growth rate of 78%, and this growth was driven by deeper expansion in our existing markets, and significant growth in new markets.

We finished 2016 with an Omnipod worldwide installed base of between 105,000 and 110,000 active users, an increase of more than 25% over 2015. Our drug delivery revenue was $65 million, a remarkable 92% growth.

This performance was primarily due to sales to Amgen of its Neulasta Onpro kit. And according to Amgen's most recent public comments, the Onpro kit represented approximately 50% of full US Neulasta doses at the end of 2016, just two short years after product launch.

I'm extremely pleased with our Team's execution and the progress across all areas of our Business. I'm even more excited about our great prospects and opportunities for 2017.

Let me provide you forth a few highlights from last year. We started off the year by divesting Neighborhood Diabetes, a business that did not fit our higher growth Omnipod and drug products. In 2016, we brought Chuck Alpuche into the Company to lead our worldwide operations.

Chuck quickly built a team and made significant improvements to our manufacturing operations and supply chain during 2016, resulting in significantly improved gross margins. The improvement was due in part to increase daily output with fewer head count, as well as reduction in manufacturing scrap. In 2016, we had manufactured approximately 65% more pods than we did in 2015, with 20% fewer head count, and a 50% reduction in scrap.

As a result of these efficiency initiatives, we achieved approximately 15% savings per pod, which not only drives down costs, but most importantly, significantly improves the quality of the product and the customer's experience. We also made significant investments and improvements in our manufacturing supply chain to provide for redundancy and improve costs. In addition, by the end of 2016, we implemented product shipments from China to the United States via ocean freight.

As you know, we recently announced the purchase of a new manufacturing facility in Acton, Massachusetts, just 15 miles from headquarters, where we will install highly-automated manufacturing lines, and expect to be operational in 2019. One US line, as compared to all four of our lines in China, will be capable of producing up to 70% of our total capacity in China, with up to 90% fewer head count. Meanwhile, we will continue to improve our performance in China, where we will continue to manufacture our products.

We are very excited about this new phase of our manufacturing and operations strategy, which will support our growth plans and further reduce [pretty net] costs and improve quality. In March, we brought in Aiman Malek on board as our SVP of Advanced Technology and Engineering.

We are making great progress on our innovation road map, and are very excited about introducing our Omnipod Dash product at the ADA trade show in June. The impressive capability of our San Diego innovation team will differentiate us in mobile technology, human factors, and data analytics. We've also been making significant progress on our artificial pancreas program, with very good results.

Both of these development efforts are on schedule, and will allow Insulet to maintain our competitive edge with truly innovative and differentiated products. During 2016, there were a number of changes in the diabetes marketplace that caused significant disruptions to competitors in the tubed pump market. Although we're not immune to these dynamics, our significant product differentiation, as well as the strength of our business model, insulate us from much of these distractions.

And any time there are disruptions in markets, as we're seeing today in the diabetes market, there are opportunities to benefit significantly from these market dynamics. We intend to invest to make sure we get our share of this opportunity. We've got a strong balance sheet, a true differentiated technology, and a very dedicated team on the front lines to make sure that we win.

Our drug delivery team did a phenomenal job in executing on a significant opportunity with Amgen. In addition, they're working closely with a number of pharmaceutical partners to determine the feasibility of using the Omnipod technology in the delivery of other compounds. We're very excited and bullish in the long-term potential of our drug delivery business.

In September, we raised $345 million in a convertible debt financing at some very attractive terms. This additional capital allowed us to retire a portion of the preexisting debt and provides the capital to support our significant growth, and fund our US manufacturing strategy. Throughout 2016, we executed and drew our results within every aspect of the Business.

I am very proud of our Team and dedicated efforts and accomplishments. Together, we have developed a strong and robust strategy, with a truly differentiated product platform that positions Insulet for significant growth.

As a result of this hard work and dedication, we have everything we need today to deliver significant organic growth and capture the substantial market opportunity before us. We are well on our way of achieving $1 billion in revenue over the next five years, and I'm very excited and confident in our ability to deliver on that promise.

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

Thank you, Pat. I will review our fourth-quarter 2016 results, and then introduce our first-quarter and full-year 2017 guidance. As I review our results, unless otherwise stated, all commentary regarding changes will be on a year-over-year basis.

We are very pleased to report fourth-quarter revenue growth of 24%, with revenue of $103.6 million, compared to $83.8 million. All three of our product lines contributed meaningfully to this growth. We exceeded the mid-point of our stated guidance by $3 million, with strong performance from all of our product lines, with over half of the beat coming from the United States Omnipod due to strong demand from our growing installed base.

Our fourth-quarter gross margin increased to 58.8%, up 870 basis points from 50.1%, primarily from improving manufacturing and supply chain efficiency and effectiveness, as well as improvements in product quality. Operating expenses increased to $65.1 million, compared to $54.6 million.

This increase included a charge of approximately $6 million to write down in-process software, due to a change in our ERP system requirements. The increase also reflects the cost of additional head count to support the expansion of our Business, including increased investment in our innovation projects, as well as continued expansion of our commercial and operational infrastructure.

We ended 2016 with almost $300 million in cash and investments. Compared to $123 million at the end of 2015. This increase was primarily driven by $180 million from our issuance of 1.25% coupon convertible notes in the third quarter, net of issuance costs and the repurchase of two-thirds of our existing 2% convertible notes.

We also generated over $15 million in cash from operations in 2016, compared to cash outflows from operations of over $12 million. As a result of our significantly-improved operating performance, even as we increased investments in inventory and operational initiatives to support the continued growth in our Business.

We are making great early progress in establishing our US manufacturing operation announced a few months ago. And we remain on schedule for production out of our new Massachusetts facility, beginning in 2019. We expect capital expenditures to increase above historic levels to fund the new US manufacturing operation, and either funded by the net proceeds from our convertible notes offering in 2016. We are very pleased with our financial position coming out of the fourth quarter as we continue to make these strategic investments in support of our near and longer-term organic growth opportunities.

I will now walk you through our 2017 outlook. We finished 2016 strong and have great momentum, and our guidance reflects our expectation of continued strong growth in 2017.

For the full year, we expect revenue in the range of $420 million to $440 million. Compared to revenue of $367 million, representing growth of 17% at the mid-point. We expect strong revenue growth across all of our business lines.

First, we expect US Omnipod in the range of $257 million to $265 million, representing growth of 14% at the mid-point. This growth reflects our growing US installed base, partially offset by 2 points, due to contractual expiration earlier this year of a royalty, which contributed $5 million in 2016.

Second, we expect international Omnipod in the range of $94 million to $101 million, representing growth of 36% at the mid-point, on strong growth on our installed base in both historic and newer international markets. And, third, we expect drug delivery of $69 million to $74 million, representing growth of 10% at the mid-point on continued strong market adoption of the Neulasta Onpro kit.

For the first quarter of 2017, we expect revenue in the range of $96 million to $99 million, compared to $81.2 million, representing growth of 20% at the midpoint. We expect this to be driven by continued strong growth across our Business line.

First, we expect US Omnipod in the range of $56.5 million to $57.5 million, representing growth of 12% at the midpoint. Second, we expect international Omnipod in the range of $23 million to $24 million, representing growth of 53% at the midpoint. And, third, we expect drug delivery in the range of $16.5 million to $17.5 million, representing growth of 13% at the midpoint.

On gross margins, we expect our full-year gross margin to continue to increase significantly, approaching almost 60% for 2017, compared to 57.5%, reflecting the operational improvements made in 2016, and continued improvements in 2017, including the partial-year impact of our move from air to ocean freight we have discussed previously. We are extremely pleased with the tremendous progress to date in margin expansion and the expected 2017 results nearing 60%, which as a reminder, had been our five-year target just a few quarters ago, before we increased that multi-year target to 65% on our stronger performance and outlook.

To achieve our goals, we will continue to invest in our Business to drive long-term growth and profitability, including commercial, research and development, infrastructure investments. While our level of spend for the upcoming year may change, we currently expect an approximate 20% to 25% increase in 2017 operating expenses over 2016. Driven largely by increased spend to support our product development and innovation pipeline, expansion of our commercial team to meet our growing demand, and the investments in our manufacturing and supply chain operations.

As such, we expect EBIT in 2017 to be roughly in line with 2016, and are on track with our goal of becoming sustainably EBIT positive, beginning in 2018. We also remain confident about reaching $1 billion in revenue in five years, with gross margin of 65% or higher, delivering above-market profitability.

I will now turn the call over to Shacey.

Thanks, Mike. The Team and I are excited about the great momentum we have coming out of 2016, and we are already off to the races in 2017. Insulet competes in a large growing and under-penetrated market, and we had success capitalizing on this market opportunity, evidenced by the robust revenue growth we achieved this past year, and we will again deliver strong revenue growth in 2017.

We ended 2016 with an estimated worldwide installed base between 105,000 and 110,000 active users, which represent a worldwide increase of more than 25% over 2015. Year over year we grew our US installed base by approximately 15%, and our international installed base by more than 50%, with our mix now about 60% to 65% in the US, and 35% to 40% international. As a reminder, our installed base is an estimate, due to the fact that close to half of our US sales, and most of our international sales, are through a third-party distribution channel.

As I mentioned on our last call, we did encounter some noise in the US market in Q4 around the approval of 670G. While this caused a slight distraction, it was not a disruption. This noise simply lengthened some patients' decision-making processes, which resulted in a slower conversion rate from an interested patient to product shipments.

In 2016, our growth in new patient starts over the growth in new patient starts in 2015 was 13%. While we had a stated goal of 20% compounding growth, this represents more than 15,000 new patients in 2016, compared to approximately 13,000 new patients in 2015.

Because of Omnipod's recurring revenue model, and because in any given quarter, new patient starts equates to about 10% of US revenue, this conversion delay did not meaningfully impact our US revenue finish, our approximate 15% US installed base growth for 2016, or our strong outlook for 2017.

In 2017, we will continue to drive great year-over-year growth, and expect our US installed base to, again, increase by approximately 15%. Coupled with exciting and fast-paced growth internationally, we once again expect our global installed base to grow approximately 20% year over year.

Due to our recurring revenue model, the growth in installed base, as opposed to compounding growth in new patient starts, is much more indicative of revenue growth. Our 2017 US Omnipod growth will be drive by continued commercial execution focused on three things. One, leveraging our expanded market access team and clinical data to improve customer access through private payers and Medicaid plans. Two, US sales force expansion, and a targeted patient awareness campaign. And, three, continuing to raise the bar for customer care in a world-class customer experience.

First, our expanded market access team is using the strong clinical data published last year to secure and expand coverage for Omnipod. As you'll recall, in 2016, there were three publications in peer-reviewed scientific journals demonstrating the clinical and quality of life benefits associated with Omnipod. This growing body of evidence has proven to be impactful with payers, and in 2016, our Team added 15 million covered lives through Medicaid and managed Medicaid plans across the US.

These efforts will accelerate in 2017, with continued focus on Medicaid, regional private payers, and other avenues for securing access and reducing hurdles for new customers to get Omnipods. These initiatives, both to continue to build strong foundation of clinical data for Omnipod, as well as to use the data to drive expanded coverage, will continue in 2017.

This year, we plan to once again have a number of peer-reviewed publications evaluating Omnipod's critical role in reducing the burden of diabetes, including data on our Omnipod Horizon Automated Glucose Control System, Omnipod data from large, robust registry studies, and Omnipod real world use data.

This real world use data will compliment our unique pay-as-you-go business model advantages to demonstrate Omnipod's value to payers. Second, at the beginning of this year, we expanded our US sales team by 20%, strengthening our field presence, particularly in areas where we have strong market access, and in some previously uncovered geographies. We are arming this expanded team with the right messaging and tools to continue to drive new patient starts and growth in clinician utilization.

The sales team is delivering a strong message, highlighting Omnipod's positive impact on quality of life and reduction of burden. The data published just a few months ago, demonstrating Omnipod's remarkable ability to reduce diabetes distress and improve quality of life, coupled with Omnipod's dramatic reduction in burden, is resonating with our clinicians.

Omnipod offers the ability, the potential to reduce the number of required steps for insulin delivery by almost 50% compared to tubed insulin pumps, and by a whopping 86% compared to multiple daily injections. Omnipod significantly reduces burden for people living with diabetes, and this results in better compliance, which drives improved quality of life and improved outcomes.

The sales team also remains focussed on implementation of Insulet-provided gluco in our targeted offices. We now have more than 30,000 Podders using gluco, that is almost half of our installed base, and this tool continues to drive increased utilization among our clinicians, with gluco offices averaging a five-fold increase in Omnipod prescriptions, post implementation.

This valuable resource is helping our Podders, and their care teams gain insight to improve their diabetes management, and demonstrating to clinicians the positive impact that Omnipod can have on the patients' compliance and glycemic control. In addition to an expanded field presence, with stronger clinical messaging and great tools like gluco, we're also expanding our patient awareness effort. We're pursuing a targeted digital direct-to-patient campaign to highlight Omnipod's quality of life improvements and ability to reduce diabetes burden.

Over the past year, we have seen a significant increase in unaided patient awareness, following our rebranding. This increased awareness was also associated with increased activation of those patients to take some form of action, like speaking to their doctor or requesting an Omnipod demo kit.

Our focus is on generating awareness and activating patients in select geographies, where we have strong clinician support and solid coverage. These commercial investments in clinical data, sales force expansion, and awareness, will drive demand and growth in 2017.

Finally, in 2016, we significantly improved the Omnipod customer experience, and this is an area where we will continue to raise the bar in 2017. This past year, we focussed on measuring and improving our customer experience through reduced turnaround time from lead to shipment, customer satisfaction surveys, and improved new patient training. We delivered an impressive result with standardization of improved training tools; a meaningful reduction in turnaround time from qualified lead to shipment; and in Q4, 96% of our customers indicated that they were very satisfied with customer -- with Omnipod's customer care.

In the coming year, we will continue to drive a world-class customer experience through the launch of an innovative online patient training portal. Automated benefits investigation tools, and the launch of our financial assistance program. Lastly, expanding and strengthening our footprint in international markets will continue to be an important factor in our growth. Our focus is on both expansion and penetration in international markets. Today, we are in less than 20 countries across the world, and we're primarily focussed in North America and Europe.

While our near-term growth will come from the markets we are in today, over the medium to long term, we see geographic expansion and continued robust growth for Omnipod. In 2016, our international installed base grew by more than 50%, reflecting remarkable performance across our markets. In addition to our strong commercial execution and international expansion, we've made significant headway in our innovation road map.

We have had particularly great progress with Omnipod Dash, our Bluetooth-connected platform, to provide our customers with a modern intuitive touchscreen PDM, and more data and functionality on their mobile phones. We are excited about this new system and how it will benefit Podders. Over the last few months, we completed the majority of our development work, had a very positive pre-submission meeting with the FDA, and started our human factors work.

We remain on track to debut this platform at ADA in San Diego in June, and to launch later on this year. Dash is the platform for our innovation road map, including our Omnipod Horizon Automated Glucose Control System. Omnipod Horizon will incorporate CGM data from Dexcom's G5 or G6 sensors, to automate insulin delivery, reduce burden for our users, and deliver first on-body hybrid closed loop system.

We are currently in clinical trials for Horizon, and we completed two IDE studies in 2016, including 34 adults and 24 children, down to age 6. We are incredibly excited by the early results of the trials, which demonstrated excellent glucose control and tremendous promise to make a significant impact in the market. And just a couple weeks ago, our first data was presented at the 10th International Conference On Advanced Technologies & Treatments for Diabetes.

Dr. Bruce Buckingham, Professor of Pediatric Endocrinology at Stanford, and principal investigator of the study, shared impressive results, highlighting the system's glucose control, time and range, and reduction of hypoglycemia. Omnipod's U200 and U500 concentrated insulins are also being developed on our Dash platform, in partnership with Eli Lilly. These programs are on track with U500 formative human factors work and clinical trial enrollment complete, and U200 technical and clinical trial design work well under way.

And lastly, we're making great progress within our drug delivery business. Similar to our diabetes franchise, the opportunity within drug delivery is enormous. We recently extended our agreement with Amgen, which reflects the strength of our partnership. The Neulasta On-Body Injector leverages the pod's precise dosing capabilities to provide better delivery and better outcomes for physicians, payers and patients.

There are a number of other opportunities in our pipeline exploring Omnipod's impact on simplifying the user experience. Our Omnipod platform has the ability to improve the experience for patients and drive better adherence and improved outcomes, and we're working with our pharmaceutical partners to capture this broader market opportunity.

In summary, we are on a very exciting trajectory, and we're so proud of the Team's hard work to get us where we are today. Omnipod, whether used by people living with diabetes, or to deliver a novel medicine like Neulasta, allows our users to feel more confident, to live more normal lives, and to experience improved quality of life and improved outcomes.

Our innovative product development pipeline will accelerate adoption over the near and long term, and will drive sustainable and profitable growth. I look forward to sharing with you our progress during what will be an exciting 2017.

So, with that, I will turn the call back to Pat.

Thanks, Shacey. Operator, we'll now open the call up for questions.

(Operator Instructions)

David Lewis, Morgan Stanley.

Good afternoon. Congrats, another good quarter.

So, for the broader team, just starting off at guidance here for a second, it looks to us the US OmniPod is roughly in line with us, ex the royalty. I wonder, Shacey, what assumptions were made here in 2017 for potential competitive launches here coming into the spring. And then ex-US momentum was a lot better than we expected. Is this the same countries we saw in 2016, or broader strength? And I have one quick follow-up after that.

Okay. So, yes, we did take into consideration the competitive dynamics in the market in our guidance for 2017. It is just offset by the commercial investments that we're making. And what we see so far is strength and leads in the pipeline, so we're feeling confident in the guidance that we just gave.

In terms of international, really, it is driven by a lot of the strength that we saw throughout 2016, particularly France as a new market. The uptick there has just been tremendous, and probably blew everybody's expectations away, really. And that's driving significant growth in 2017, and continues to do that. But really, there is strength across all of Europe and Canada, and so that is just reflected in the guidance for 2017, as well.

Okay. Pat, I know your favorite question, but I wonder if you could share with us this updated timing on Medicare. And if you can't, was Medicare forecasted in 2017 guidance? And any insight you can provide and whether we should be expecting Part D coverage versus other forms of coverage? Thank you. I'll jump back in queue.

No conference call would be complete without an update on Medicare coverage. During 2016, we made significant progress to secure Medicare reimbursement, and our interactions with CMS had been primarily with the CMS career staff. I was very hopeful to get a decision in January before the change in the administration, but as expected, as soon as the new administration took over, all actions across the government and policy decisions within CMS were put on hold, and CMS has communicated that they hope to resolve this issue as soon as the new appointees are put in their jobs. So, I think it's simply a change in the administration and there was no -- in fact, there was no expectation in our guidance for Medicare reimbursement in 2017, David.

Jeff Johnson, Robert Baird.

Thank you. Good afternoon, guys.

So, Pat, maybe I can follow up just on that CMS point. Maybe a little bit of a surprise earlier this year when they talked about putting pumps back into competitive bidding in 2019. Obviously, that then got suspended as the new administration came in and wants to take a look at all those things. But just how is your outlook, I guess, for CMS coverage? Are you still as bullish that you will get it? Will it mean as much? Is there risk if you do get it that, as you get to 2019, would OmniPod be considered a competitive bid-type product? Or if you get protection in that, if it does go to Part D, as David asked? Or something like that?

Yes, I think the news that came out at Medicare on the competitive bidding for Part B Medicare applies specifically to tube pump technology, which are a durable medical equipment. CMS has never considered us durable medical equipment thus far, and I would say that, as we look at coverage options, they can do Medicare Part B or Medicare Part D. We actually feel we fit better into Medicare Part D. But I think in terms of our position within CMS, I think we have a very strong position with coverage of OmniPod under either Medicare Part B or D, and I have every confidence we're going to get Medicare coverage. Just as usual, can't say exactly when. As I often said, the only thing that is certain is that April 15 is tax deadline, and we're working with the government.

I would just add one more thing on that note, which is that PMA products are not eligible for competitive bidding. So, if we just fast forward to 2019, 2020, most pumps are going to be sensor-augmented pumps, which are PMA products. I'm not sure that it's going to have a material influence if it comes through, even on the growth rate behind the pump market.

Yes, understood. That is a great point, Shacey. My follow-up question would just be a bigger-picture question.

We've seen JDRF, we've seen NIH come out, some big grants, a lot of funding of some pump studies and closed loop and hybrid systems, and that. Where does Insulet stand in maybe deferring some of their own spending or your own spending on some of these studies through grants and other things? Are there opportunities out there? We have seen a lot of this money flowing to some of the other private payers, or private players here recently.

Yes, I think there is opportunity; there is certainly a lot of energy and advocacy behind seeing progress on the artificial pancreas front. That said, in many cases the funding comes with other strings attached to it, and so it is just a business decision, in terms of whether or not we want to take advantage of that type of funding or not. Either way, we are committed to making progress on our program. We're making really exciting progress on the Horizon product. And I don't think for that particular product that we're going to need or tap into private funding. But who knows? It is a long-term program. We see iterations on that product in the future after we launch Horizon.

Thank you.

Mike Weinstein, JPMorgan.

Thank you. Thanks for all the updates on the business, because it is obviously helpful for us; we're trying to track progress. Let me just try and clarify a couple of items.

Probably the first thing would be, maybe Shacey, you're the best to do this, but could you just reconcile the 15% growth in the US installed base in 2016 versus the 21% revenue growth? How do we get from one to the other?

In US, well, probably -- let's see, the 15% installed base is what we saw in the US. In terms of revenue growth, that's driven by primarily the growth in the installed base.

Yes, what is the 6-point difference there.

This is Mike.

So, principally, it's the installed base that's the biggest driver of it. There are other factors that can be involved in terms of mix and pricing. And there are also in 2015 versus 2016, in the early part of 2016 there was de-stocking, and so that played into it as well. That was -- it is pretty much in line. The main driver going forward is, really, given the recurring revenue business, is really the installed base, and that is why we have been talking more about that.

Yes, we see that in Q4. Q4 was, I think, 17% growth year over year, and that is pretty much what we're forecasting, besides the royalty in 2017.

In the 17% [porcue] growth in the US installed base, is that what you are saying, Shacey?

I was saying revenue, actually.

Oh, you were saying revenue. Okay.

Let me ask you on the 3Q call you said that we're on track to grow our 2016 worldwide installed base by 20% and generate approximately 20% growth in our US new patient starts, consistent with our prior guidance. But then on the update today, you [announced] on the call that US new patient starts for the year increased just 13%. I guess my question is, what happened in the fourth quarter that made the 20% go to 13% for the year?

Yes, our leads were incredibly robust. In fact, they were at record rates. They still are at record rates in Q1. And so, what we didn't really appreciate in November on that call was the delay in the conversion rate from lead to new patient shipment. And so, that is basically what drove that. But one of the reasons it wasn't readily apparent is that it doesn't impact revenue performance in any meaningful way. And so, at the end of the day we're really excited about the robust interest in pipeline, and that is reflected in our guidance. And what we're trying to get you guys focused on is just the growth in installed base, as opposed to that compounding growth rate of new patient starts, because it is much more indicative of revenue growth.

And, Mike, this is Pat. I would like to amplify the response a little bit more.

What the 13% versus 20% of new patient represents, it's approximately 800 customers' difference year over year. That is about a little over $2 million in revenue in 2017, or it's less than 1% of our revenue at the mid-point. So, that 7% delta only represents 1% of our total revenue for 2017. And I think this really points out the really strength of our business model. Unlike tube pumps, we have a very predictable revenue model. If you just think of our installed base coming into -- or at the end of 2016, and look out to 2017, 85% of our revenue, our OmniPod revenue in 2017 was basically being provided for by the installed base at the end of 2016. You apply that net of attrition and the royalty. If we only get the same number of new patient starts as we had in 2016, that's another 12.5%, or almost 13%, and the new patient growth year over year represents only about 2% to 2.5%.

So, as Shacey mentioned, we have a very predictable revenue model, given the strength of the installed base, and the new patient year-over-year growth is really a very small percentage of the overall revenue for the Company. As we said before, 10% of our revenue, usually, in any given quarter, comes from new patient starts. Some of that is the -- we're getting the same number as last year, and then the growth on top of that is only about 2%. So, we're very bullish about all the things we're doing this year to grow the new-patient starts and continue to grow the business. But the 13% versus 20% is really a red herring.

Got it. And I agree on all that math. Is that why the first-quarter US revenue guidance is below the guidance for the year, because of what you guys saw in the fourth quarter? So you guided to 12% US revenue growth for 1Q versus a 14% for the year? And the last part of that would be, what drives the acceleration over the course of the year? Thanks.

Yes, so just seasonally, Q1 is always our lowest volume and lowest growth rate quarter for just a number of dynamics around the industry in the US. The other thing that is working against us is the royalty rate, so that starts in Q1. So, you see both of those things in Q1. But in terms of acceleration, I think it is just our typical seasonality in the business; there is nothing other than that.

This is Mike.

I would just say we do expect the growth to accelerate through the year, and we're excited, we just added 20% growth in the sales force, and a number of initiatives, and so we are seeing growing demand and we expect the growth to continue to extend or expand through the year.

Tao Levy, Wedbush.

Great, thanks, good afternoon.

So, first, a clarification on the 15,000 new patients that you have mentioned, Shacey, in 2016 in the US. Is that the net new patients? Or is that before attrition, if I'm thinking about 2015 ending installed base, versus 2016 ending installed base?

It is not net. So, that's pre-attrition. And Tao, I guess for everybody, the reason we're giving you that clarity is just to try to help you all understand. We know it is at the beginning of the year. You're probably looking to reset your models. We just really want you to understand the drivers behind the revenue for the US OmniPod business, in particular, which is the installed base. And so, we are going to be focussing more and more on the growth in the installed base, which obviously factors in new patient growth, as well as attrition.

Great. That is very helpful.

And my follow-up question, on the drug delivery, what is the reason that, that would decline sequentially? My understanding was Amgen would place forward orders, and they're pretty consistent throughout the year, so I'm surprised to see that go down, or guide down sequentially in Q1.

Just timing on their forecasts. Really, our guidance is based on Amgen's forecast, and I think that is just a timing of orders issue.

And, Tao, this is Mike.

Just to be clear, to back up Shacey's point, it was roughly a run rate of about $15 million for the first three quarters of Q3. They had an order there and the business grew in the fourth quarter, and we're going to see growth in that business, nice growth in that business this year, as well. So, the run rate in Q1 is higher than the first three quarters of last year.

Particularly when you consider the national advertising campaign that's on every television show that I've seen, the Onpro kit is all over the direct-to-consumer advertising campaign.

Brooks West, Piper Jaffray.

Can you hear me?

Got you.

Great. Thanks, guys. Congratulations on a good quarter.

Shacey, I wanted to dig into the Dash launch a little bit more: debut at ADA and launched sometime in the second half, but can you talk about how you're going to roll that product out? Does it become available right away to your whole installed base? Give us a sense of how that is going to work. And when should we start to think about this product actually starting to drive the revenue line for you guys? Thanks.

Sure. So in terms of the rollout for Dash, we will, as any good company would do, we'll do a limited market release, so that will probably take us through the first quarter, I would guess, of 2018. And then we'll roll it out both to our installed base and to new users. And we're still finalizing some of the details around that commercial strategy. But what I will say, because I think sometimes we often get wrapped up in how these launches work for other players in the market, again, because of our business model, it's not hugely problematic. So if, for example, customers held off on -- first of all, we just said, right, new patient starts don't really drive meaningfully any revenue in a given quarter, so if they hold off it is not too impactful. And in our base, we're not counting on our base to cannibalize itself and opt in for this new technology, because our revenue is coming from pods.

We have a lot of flexibility in terms of how we can launch this product, and it is not going to mean that customers hold off for a quarter and it is potentially challenging for our revenue. But we do believe it is going to be very differentiated. It will be the best user experience and interaction on the market today, so, we think it will be very attractive, particularly for our targeted segment, which are those multiple daily injection users. So we are forecasting for that to drive value for us in 2018.

Just one other amplification to that. The beauties of this new product, and the new product launches, is that the pod will essentially be in the same configuration, and most, if not all, of the components, will be the same, with the exception primarily of the Bluetooth chip that will be in the new generation Dash pod. So the manufacturing lines in China will -- we will convert those over, and they will have the ability to produce either the new Dash pod or the previous configuration pod. So we'll be able to throttle this launch from a production standpoint very smoothly, and we'll take the product launch in a very measured way to make sure that we do everything right this time.

Got it. Got it. Thank you for that.

And I guess just follow-up from me on drug delivery: you said expanded relationship with Amgen. Is that beyond Neulasta? Or is that primarily Neulasta focused?

It is an extension of the Neulasta agreement. So.

Nothing beyond Neulasta.

Right.

Perfect. Thanks, guys.

Thanks, Brooks.

Doug Schenkel, Cowen and Company.

Good afternoon. Thank you for taking the questions.

My first one is on gross margin. You guided gross margin to approach 60%. This would represent about a 200 basis-point improvement year over year. In terms of headwinds, is it right that your guidance embeds an assumption for a 100 basis-point to 150 basis-point hit associated with royalty [ex for ees]? And what is the negative impact on gross margin associated with international OmniPod sales accounting for a higher mix of revenue? And I'll follow up in a second with my second question.

This is Mike.

So, you're right, so there is headwind from the royalty moving away. But that really doesn't have that meaningful of an impact directionally. As I said, moving from 60% as our one-year view; after that, with our five-year target, we're really excited about. And that is, as to your point, reflects the fact that we do have unfavorable mix. We don't calculate or measure gross margin for the international business versus the direct business, but directionally, it definitely carries a lower gross margin. It is a different business model for us in that a lot of it is through a distributor, and so you get a lower gross margin, but you don't carry the same operating expenses that you would in a direct business.

So, the guidance that we are providing, does factor in an unfavorable mix, because the international business is growing so significantly. But some of that is coming from our direct business internationally, as well, which is growing very nicely, although that is a smaller part of the business. But what's really driving the gross margin expansion is what we have been talking about the Investor Day, back in November, and it is just the tremendous operational performance. And that's only going to be augmented when we move to the US manufacturing here in the next couple of years.

Okay. Thanks for that, Mike.

And quick follow-up: you guys in your prepared remarks described, I think you said 670G was a distraction, not a disruption, in the fourth quarter. Would you be willing to comment on how that distraction evolved over the first two months of 2017? And relatedly, and I apologize if I missed it, but is the chatter in the market on 670G at all factoring into the calculus behind your US guidance? Thank you.

Yes, so as I said, the competitive dynamics are factored into our US guidance; so that is true. And in Q4, we added thousands of patients. It was a successful quarter for us, just simply people were delaying their decision-making process, and that was reflected in the conversion rate. So that is how it is impacting us. These aren't lost leads. We categorize all of our patients in the consideration process, and so we do know that they remain in the pipeline. The pipeline is stronger than it ever has been before. So, we're optimistic and it is just taking some time for people to do their research and make their final decisions. So far in this year, we're seeing similar results, really: slightly delayed conversion rates, but very strong record-breaking leads in the pipeline, both coming in, and as that pipeline grows. And so, we're feeling very good about where we are so far this year, and that's reflected, I think, in the guidance.

And this is Mike.

Just to add on the guidance piece, as I mentioned, in the fourth quarter, we had a significant beat. That was principally in the United States, and our guidance and our expectations reflected an expectation there would be some disruption or some impact of the 670G, and we were really pleased to see that, that impact was, really didn't impact us in any meaningful way for revenues in the fourth quarter. And I would say that the same thought process is involved in our thinking for 2017, in that we really want to be thoughtful about the guidance, and we believe the mid-point is realistic. But the high end of the guidance is certainly attainable, and we'll see when there is launches and other market dynamics out there, how our guidance evolves through the year. But we are very excited about the opportunities that we have. That's why we're adding the significant amount of sales people to manage the growth in demand.

Jayson Bedford, Raymond James.

Good afternoon and congrats on the progress.

Thanks, Jayson.

Just a few questions.

Can you give us an idea of how many new countries that you or Ypsomed expect to enter in, in 2017?

What we're planning for 2017 is deeper penetration, primarily for the markets that we're in, so we won't be expanding into other markets with Ypsomed. And that's primarily because we're in discussions with them about the contract extensions, so we want to get those resolved before we continue to enter into new markets with Ypsomed.

So, the midpoint, the 36% growth, that doesn't reflect any new countries?

That's right. No, that is existing growth, primarily from -- some of the really high growth rates are from some of the early markets, like France and Italy, that we've entered into in the last two years.

Is there any way you can quantify the contribution from the launch in France in the fourth quarter?

This is Mike.

No, and I would say that the reason why is because, when we take orders from Ypsomed, they're not telling us orders, they give us an order for how much product they want. We may ultimately find out what countries they go into, but we're selling to Ypsomed, and they're managing the channels through the various countries. So, you really can't say for certain when you're shipping something what country it is going to go to. That said, I think it is fair to say that the growth that we've seen, and why you see an outside growth when you look year over year for Q1, is that the launch of the new markets, such as France, in the second half of last year, really drove a tremendous amount of growth and surprised Ypsomed, and therefore surprised us positively. And our guidance expects that, that is going to continue. But at some point, that's going to level off, but we just don't know when that is, and we're thrilled with the progress to date.

Okay. That's helpful. Thanks, guys. I'll keep it at that.

Thanks, Jayson.

Raj Denhoy, Jefferies.

Hello, this is Christian on for Raj. Good afternoon, guys, and congrats on a nice quarter.

Just had one question on the Horizon: is there any update here on the timeline, and I'm sure we'll hear more at ADA, but are you still planning on pivotal trials by 2018, and then a commercial launch in 2019? And do you know yet what that launch is going to look like? How expansive it will be in 2019? Or whether we'll really start to see the impact more in the 2020 time frame, if you have that detail yet?

Yes, I think if you go back to our targeted timelines that we provided on Investor Day, there is a slide in that deck that outlines the Horizon artificial pancreas timeline. We remain on track with that timeline, and I would say it is too early to talk about the launch until we get further through the process with the pre-pivotals and the pivotal trial for the FDA submission.

But I will add that you will see more OmniPod Horizon data at ADA. We're excited to have podium and poster presentations there, and Horizon will be highlighted.

Maybe one follow-up on drug delivery.

As OmniPod -- I mean, the pods are now in more than 50% of Neulasta script, where can that penetration go to? Is it something you can run all the way up to almost all script? Just trying to gauge how to model out into the out years, in terms of it plateauing at some point before you're able to execute on another pharmaceutical arrangement.

Well, the opportunity set, as I have mentioned before, on Neulasta, is about 1.2 million doses potential in the United States. And there is some international market opportunity, but all of the conversion is in the hands of Amgen. We provide product through them, and they go through the conversion process with their clinics and their hospitals. From my perspective, every dose should be in an Onpro kit, because of the benefit it provides to the physicians, the payers, and the patients, but ultimately, that's in Amgen's hand. I would say that, from our perspective, we know that they're very pleased and happy with the performance and the penetration they have had to date, and I think probably think of the opportunities like we do.

And so, what percent penetration does the guidance for 2017 imply that you get to by the end of the year?

There is no implication of a market penetration rate in the guidance that we provided. We provide product to Amgen, and they provide it to the physicians and they give us purchase orders. There is not an implication -- it's not our position to give you an implied penetration. That is for Amgen to provide the market.

Danielle Antalffy, Leerink Partners.

Good afternoon, guys, thanks so much for taking the question, and congrats on a strong end to the year.

I was hoping to talk a little bit more about some of the competitive dynamics. You have J&J looking at strategic alternatives for their diabetes business. There is rumors about Roche. Just wondering what kind of impact you're seeing commercially with the uncertainty that, that could cause in the market, if any? And medium to longer term, what that could mean if those businesses do get divested?

Well, Danielle, I believe that any time you have disruptions in markets going through some changes, there is opportunities for other people to benefit. And we're making investments to make sure that we benefit from any disruptions that are occurring in the tube-pump market. We have a unique product platform with lots of freedom provided to patients, and it would be our intent to make sure that we get our fair share of any disruptions in the marketplace that may occur.

And we have had patients reach out to us looking for support or the opportunity to transition to OmniPod. And so we're fully prepared, and we've got programs to help patients do that. We want people to have [continuative] care, obviously. But as I like to remind the sales team, so I'll take this opportunity to do it, our number-one competitor is multiple daily injections. That is where 70% to 80%, if not more, of our patients come from in any given time period. That is where we're focused; that's where OmniPod can provide 86% reduction in burden, and that's our primary competitor right now.

Sure, but I have to imagine, with uncertainty around J&J and Roche, that new patient might be more likely to go to an OmniPod versus -- yes, okay.

And actually Roche is not accepting new patients in the US anymore. So, really, it is just about Medtronic and Animas.

Got it. Okay.

And then I was wondering if you could provide some more details on where you're seeing some momentum in the US. I don't know if you guys have ever given this metric. Are you seeing new prescribers come on line? If so, what is driving that? Versus, I guess you would call them same order sales: existing prescribers just getting more and more patients on. Have you guys ever -- any color you could give there, that would be helpful?

Yes, we actually track that very carefully, and while we've seen an expansion in both, the primary driver of the growth is more penetration in existing accounts as opposed to expansion broadly of prescribers. But both are happening. It is just that the penetration, or the same-store sales, is definitely driving more than -- and we think Glooko is a big contributor to that as clinicians understand and can identify more patients in their practice that can benefit from OmniPod.

Suraj Kalia, Northland Securities.

Good afternoon, everyone, congrats on the quarter. So --

Thank you.

Shacey or Patrick, a couple of questions.

First, Shacey, in your prepared remarks, and forgive me if I got this wrong, I heard you talk about the Phase II IDE on patients six years or older. I guess what I was trying to understand is, if you look at the 670G, that is only 14 years or older. If you guys are going six years, are there any read-throughs on the sensitivity and specificity of your MPC algorithm? Just trying to understand from a competitive perspective. Did I hear you correctly on the six-year?

You did. We are down to age six now, so the second IDE study that we completed was adolescents down to age six. And it has been very important to us from the beginning to be able to serve all of our customer population with Horizon. And obviously, pediatric remains one of our fastest growing elements of our patient population, and so we are intent, we are absolutely committed, to ensuring that we will be able to serve all kids. In fact, our discussions with the FDA, they want us to come out with an indication down to two, and we have users down to two, so we certainly want to be able to do that, as well.

You know, I don't know how to -- there can't be direct comparisons today between Horizon and 670G or the algorithms, although at ADA last year Frank Doyle did present data that demonstrated that MPC was, performed better than a PID algorithm. That could be part of why we feel comfortable. I will just say that the data looked great. We are very excited and totally committed to being able to launch with a pediatric indication.

Fair enough. And, Patrick, or Shacey, again, one last question from my side.

I know the number of new patients for FY16; if I use 15,000 number, we have all been focused on that. But roughly speaking, let me ask the question from a different flavor. If I assume 9% to 10% attrition rates, net new patients, give or take, is around 13,500 in the US. What do you think of the total net new patients in the US across the board? What does that represent? I'm trying to understand where do you all stack up in that market share? If I look at the 13,500, is that 10% share? Is that 15%? How does that stack up? Thank you for taking my questions.

In terms of market share, which is, I think, Suraj, what you were asking, the best data we can refer to is at close concerns market research, and that would demonstrate that we have somewhere in the neighborhood of 15% to 17% share of the pump market. And a higher percent of new patients selecting a pump. But, again, we really -- I know it might be hard to believe, but we don't pay a lot of attention to that data, because our focus is on MDI patients and growing the market, as opposed to taking share from tube pump.

Ben Andrew, William Blair.

Hey, Pat. Good afternoon.

Hey, Ben.

Couple of quick questions for you.

Just maybe talk about the timing to having an opportunity with Amgen for Onpro outside the US? How do you think about potentially using other glucose sensors (inaudible) Libre rather than G56 with the Horizon products, as you have mentioned that in the past? And then just a quick follow-up on reimbursement.

Well, first of all, with Amgen going international opportunity, we know that they are exploring an international opportunity. That, again, is within their control, and we don't -- they need to do all of the [registrar] work to make sure to provide the product to international markets. But that is something that I know they're working on, and it wouldn't necessarily involve us other than support for any regulatory clearance that they might need.

Yes, in fact, Amgen, I know, made it public that they're in, I think, Costa Rica, and potentially one other international market. At least as we understand it, there is about 400,000 doses internationally, so it does definitely represent a strong growth opportunity for us. But again, that is for Amgen to execute on, and we're supporting them in their international expansion plans.

And the other question was about Libre, I think, and we have got a great partnership with Abbott. We like the Libre product. We know there are a lot of overlap in the customers in Europe, people who are using both OmniPod and Libre, and really getting dramatically reduced burden and a great customer experience. And so I think that's a nice opportunity. We have ongoing discussions about our pipelines and opportunities for continued partnership and development. But I don't have anything significant to comment on in terms of integration of Libre.

Finally, you mentioned the new opportunity to keep expanding coverage. Can you size for us just roughly the percentage of either private payers or Medicaid? And total patient population that you don't have access to today, so that's the opportunity? And then, is CMS still roughly 20% in your mind? Or is it smaller than that? Thank you.

If we look at just market access opportunity, it is probably an additional 40% or so of patients that we don't have access to, because of Medicaid, Medicare, and small regional payers. And so that's where we're focused. And I think what we've said in the past, I don't know about Medicare specifically by itself. But Medicare and Medicaid together represent about 30% of that opportunity. So, another 10% tied to regional payers. And we're making good progress on Medicaid. And as Pat said, we remain confident that Medicare will happen. It is just a matter of when.

Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to Pat Sullivan.

Thank you, operator. I'll finish where I started: I am absolutely thrilled Insulet's performance in 2016. Our team has done a remarkable job in driving our performance and positioning us for continued success. We have the right tools to win and achieve our goal of $1 billion in revenue in 2021. We have strong momentum across all areas of our business, and we fully expect this momentum to continue. Our line of sight to a sustainable top-line growth and above-market profitability becomes clearer every day, and we are even more confident than ever in our ability to drive and deliver long-term shareholder value.

I'd like to close by thanking the Insulet employees for your hard work and dedication to ease the burden and improve the lives of people living with diabetes and other diseases. I'd also like to thank everyone for joining us on the call today, and we very much look forward to sharing our significant progress with you during 2017. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.