Insulet Corp (PODD) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insulet Corporation First Quarter of 2018 Earnings Call. (Operator Instructions)

And as a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Deborah Gordon, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thank you, James. Good afternoon, and thank you for joining us for our first quarter of 2018 earnings call. Joining me today are Patrick Sullivan, Chairman and Chief Executive Officer; Shacey Petrovic, President and Chief Operating Officer; and Michael Levitz, Senior Vice President and Chief Financial Officer.

The replay of this call will be archived on our website, and our press release discussing our first quarter 2018 results and second quarter and full year guidance is also available in the IR section of our website.

Before we begin, I would like to inform you that certain statements made by Insulet during the course of this call may be forward-looking and involve known and unknown risks and uncertainties that may cause actual results to be materially different from any future results implied by such statements. Such factors include those referenced in our Safe Harbor statement in our first quarter earnings release and in the company's filings with the SEC.

Also, unless otherwise stated, all financial commentary regarding dollar and percentage changes will be on a year-over-year basis.

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

Thanks, Deb, and good afternoon, everyone. Joining me on today's call are Mike Levitz, our CFO; and Shacey Petrovic, our President and Chief Operating Officer. After my opening remarks, Mike will provide detail on our first quarter results and increased 2018 guidance. Shacey will then follow with an update on our commercial and R&D developments and milestones. We'll then open the call for questions.

I am absolutely thrilled with the company's first quarter performance. Our Q1 results once again exceeded expectations, with revenue of nearly $124 million representing year-over-year growth of 21%. We achieved yet another quarter of impressive gross margin expansion, to 61.4%, a 300-point basis point improvement. We entered 2018 with strong momentum and are excited about our continued growth and achieving positive operating income this year for the first time in Insulet's history.

In the first quarter, we made significant progress on our 4 key strategic initiatives; namely, expanding market access, executing on our innovation roadmap, building our U.S. manufacturing facility, and implementing our plan to go direct in Europe on July 1.

Since the first of this year, we achieved 2 significant milestones in expanding market access. In January, CMS issued guidance that Omnipod may now be covered under the Medicare Part D prescription drug benefit program. This decision by CMS also provides an easier pathway to secure state Medicaid coverage. And on April 1, we secured in-network coverage of Omnipod with UnitedHealthcare, the largest commercial payer in the United States.

These 2 accomplishments represent a step-function expansion of our addressable market, providing a pathway to approximately 40% of the U.S. market, or roughly 600,000 individuals who previously had little or no access to Omnipod.

We submitted Omnipod DASH to the FDA in January and expect to enter a limited-market release in the second half of this year. As you know, DASH serves as the platform for our exciting products in our innovation pipeline, including our concentrated insulins and Horizon, our automated glucose control system.

In manufacturing, we have made significant progress in building our new, state-of-the-art facility in Massachusetts. Later this year, we will install highly automated equipment for assembly of the Omnipod and will begin production in early 2019. This facility will also serve as our global company headquarters.

We are making this investment to not only provide redundancy to our existing operations overseas but, importantly, produce Omnipod at a lower cost. This will provide incremental capacity to support our rapid growth and contribute meaningfully toward achieving our 70% gross margin target in 2021.

In Europe, we are on track in our transition to direct operations to better serve our fast-growing European customer base and further improve our gross margins. Over the past year, Shacey and I have traveled to Europe to spend time with our rapidly growing team. I am thoroughly impressed with their drive, their passion and significant diabetes experience. They've made tremendous progress, and all systems are go for our transition on July 1. We have been planning this for years, and I am absolutely confident we will execute a smooth transition.

With this transition, we will be in control of our global distribution of Omnipod. And as you know, the size of the international diabetes market is large and expanding. Our transition in Europe is just the beginning of our vision to grow Omnipod adoption around the world.

With our strong Q1 performance and outlook for the year, we are confident of achieving our 2021 targets of $1 billion of revenue, 70% gross margins and (inaudible) profitability. In the meantime, we are focused on our mission to significantly improve the lives and reduce the burden of even more people around the world living with diabetes. We've never been more confident in the bright future ahead, and we still have lots and lots of room to run.

I'll now turn the call over to Mike. Michael?

Thank you, Pat. Our first quarter certainly was one of significant progress, and I am pleased to walk you through our financial results and second quarter and increased full year guidance.

Our first quarter revenue growth of 21% exceeded the midpoint of our guidance by $2.6 million, and that was driven by strong performance in the United States and international Omnipod based on our growing worldwide customer base and continued momentum across our markets. Specifically, U.S. Omnipod revenue grew 17%, reaching $70.3 million. International Omnipod grew 53%, totaling $38.4 million. And Drug Delivery was approximately $15 million, down $2 million.

Our gross margin increased to 61.4%. That's up 300 basis points, due primarily to the significant improvements that we have continued to make in our manufacturing and supply chain operations, offset in part by unfavorable mix due to faster growing international distributor sales. This improvement in gross margin is ahead of our expectations for the quarter, and we are increasingly confident in reaching our full year gross margin expansion objectives.

Our operating expenses totaled $75.8 million. That's up from $64.7 million, and that's in line with our expectation. As a reminder, this does include our investments to assume commercial activities in Europe beginning on July 1.

The net result was breakeven operating profit for the quarter, and we are well positioned, very well positioned, for achieving our 2018 objective of EBIT positive for the year.

We ended the quarter with $516 million in cash and investments. That's down from the $566 million we had at the end of 2017 and as a result of capital expenditures in the first quarter in line with our plan, primarily to support our investments in U.S. manufacturing and supply chain operations. The change also reflects $4 million of cash used in operations in the quarter, which was a significant improvement over the first quarter of last year.

I will now update you on our 2018 outlook. For the full year, we are raising the low end of our revenue guidance by $5 million, largely associated with our worldwide Omnipod sales. We now expect total company revenue of $565 million to $580 million, and that represents growth of 22% to 25%.

On a product line basis, for the U.S. Omnipod, we are raising the low end of our revenue range by $3 million, and that reflects our increasing confidence in growth in our customer base given recent market access wins and strong commercial momentum, overall. We now expect revenue of $319 million to $323 million, representing growth of 17% to 19%.

For international Omnipod we are also raising the low end of our revenue guidance. We're raising that by $1 million on growing confidence in commercial execution, and we now expect revenue of $186 million to $194 million. And that represents growth of 56% to 62%. Please note that this exceptional growth includes capturing more value from existing end-user pricing in Europe, which is up approximately 50% from our historic distributor pricing as we assume direct operations midyear.

For Drug Delivery, we are raising the low end of our revenue guidance by $1 million and now expect revenue of $60 million to $63 million. That represents a decline of 13% to 17% based on the forecast from Amgen.

For the second quarter, we expect revenue of $130 million to $134 million, and that represents growth of 18% to 22%. On a product line level, we expect U.S. Omnipod revenue of $75.5 million to $77 million, representing growth of 16% to 18%. We expect international Omnipod revenue of $38.5 million to $40 million, representing growth of 45% to 50%. And we expect Drug Delivery revenue of $16 million to $17 million, and that's down 7%.

Now moving to gross margin. We are increasingly confident in reaching our full year 2018 expectations that gross margin will increase over 300 basis points, to between 63% and 64% for the full year, driven by continued operational improvements and the partial year impact of assuming direct European operations midyear. As we stated previously, we expect the assumption of direct European operations will drive a 400-basis-point increase in our run rate gross margin, with half of that coming in 2018 based on the midyear transition.

Finally, we are tremendously excited to pivot to operating profitability this year, and we are reaffirming our expectation of full year 2018 operating margins in the low-single-digit percentage range. This reflects the European infrastructure investments that we've made beginning at the start of this year before we assume direct European sales in the middle of the year.

In summary, 2018 is starting out to be another exciting year of tremendous growth and success for Insulet. We are already raising our guidance for top line growth, and we are delivering on our expectations of significant margin expansion and positive operating income for the year. We are increasingly confident about reaching our 2021 revenue and margin targets, and we are just getting started. We look forward to updating you on our progress as we execute on the exciting growth initiatives before us.

I will now turn the call over to Shacey.

Thanks, Mike. I am incredibly proud of our team's continued execution and first quarter accomplishments. Our financial performance is just one of many indicators that 2018 will certainly be another exciting year.

Our commercial strategies continue to drive robust revenue and customer base growth. As a result of our strong start to the year, we are reaffirming our expected 2018 full year customer base growth of 15% to 18% in the United States, and we expect to finish towards the high end of our customer base growth guidance, in line with revenue. For our international customer base, we expect to grow 20% to 25%.

We are making terrific headway on our key commercial initiatives: first, expanding market access for Omnipod; second, preparing for the launch of DASH; and third, standing up our European operations.

Starting with market access, CMS' coverage decision and UnitedHealthcare's inclusion of Insulet as an in-network provider for both their commercial and Medicaid members are incredible wins for Insulet and, most importantly, for people with diabetes who are covered by these plans. We have already begun to see the impact of the UnitedHealthcare agreement, which went into effect April 1, and this is a great sign for future revenue growth.

In addition to pull-through of the UHC access, we are diligently working with all Medicare Part D plan sponsors to secure access so Omnipod will be included in their formulary benefits for 2019. I am very pleased to share the exciting news that 2 Medicare Part D plan sponsors, Express Scripts and Magellan, have recently added Omnipod as a covered benefit effective April 1 of this year. Securing early access with these carriers is a great leading indicator of our progress to ensure broad availability of Omnipod to all individuals who can benefit from it.

On our Medicaid efforts, our strategy to secure widespread coverage is paying off, and we continue to establish reimbursement with state plans. Our low upfront cost, CMS' Medicare coverage decision and Omnipod outcomes data are strongly resonating with these plans because they demonstrate a compelling value proposition. This past quarter we strengthened our Medicaid coverage position, adding approximately 2 million covered lives for Omnipod.

While we are delighted with these early decisions, given our recurring revenue model we continue to expect all Medicare and Medicaid decisions will drive modest revenue this year, with the true financial benefit impacting 2019 and beyond. We will continue to update you on our progress as the year unfolds.

Turning to our innovation efforts, as Pat noted, earlier this year we filed a 510(k) with the FDA for clearance of our next-generation product, Omnipod DASH. We are working with the FDA as they progress with their review, and we're on track for our planned limited-market release in the second half of this year.

We are excited to showcase DASH at the American Diabetes Association scientific sessions in June. We received tremendously valuable feedback from our market research and user test groups since debuting DASH at ADA last year. This resulted in notable improvements in product design, functionality and the overall user experience. Omnipod DASH has been developed with significant input from Podders, and we're confident it will provide an engaging user interface and significant ease of use advantages.

This year at ADA individuals will have an opportunity to experience DASH firsthand, including our Omnipod Display app which allows users to see their data on their smartphone; our Omnipod View app which allows caregivers to view the data of their loved ones; and also our Omnipod DASHboards which allow for quick and easy accessibility of population data for payers.

From a clinical perspective, we will have the largest presence at ADA in [inflatissory], with 10 clinical abstracts accepted. Several of our presentations will report positive outcomes for our Omnipod Horizon Automated Glucose Control System, examining longer use in free-living settings for users across all age groups. Additional presentations include both U.S. and international data that further supports the benefits of Omnipod, as well as data from our collaboration with Eli Lilly examining the use of U-500 with the Omnipod system compared to multiple daily injections in patients with Type 2 diabetes.

Turning to our Drug Delivery product line, our sales to Amgen for its Neulasta Onpro kit provide an attractive recurring revenue stream. And as Amgen recently noted, adoption of its OnPro kit exited the first quarter of '18 at 62% of all U.S. Neulasta doses sold; remarkable adoption since its launch just 3 short years ago.

And finally, we could not be more excited that our transition to direct operations in Europe is just under 2 months away. This area of our business continues to be our fastest growing, and we anticipate transitioning over 60,000 Omnipod users to Insulet Europe on July 1. We are laser-focused on continuity of care and a seamless transition. I am absolutely confident our talented leadership team will successfully execute our thoughtful, comprehensive strategy.

As Pat noted, our leadership team in Europe frequently spends time there, and our European team, I just spent some time with them last week. I was thoroughly impressed with their deep knowledge of diabetes, the competitive landscape and their state of preparedness as we move towards the July 1 transition date.

We have attracted top talent in our industry, and I was struck by the considerable expertise and passion of this group. We have now hired almost 100 people into Insulet Europe, and we have an outstanding 1,000 years of diabetes experience on our team.

In addition to having our full leadership team in place, this morning we announced our partnerships with Teleperformance and HealthLink. These European partners will help support local customer care, product support and distribution and logistics services. Both companies have strong histories providing outstanding customer experiences in the medical device space and in the European diabetes community, specifically.

We also announced distribution agreements with Theras Group and Nordic Infucare, both of which are also highly experienced and well-respected diabetes companies that will provide full-service distribution of Omnipod in Italy and in the Nordic markets.

With these important partnerships and our European Insulet team in place throughout multiple functional levels and geographies, we believe we have the optimized organization to support our go-to-market strategies for each European country. We have built a strong infrastructure, and we are very well positioned for success.

I'm pleased with our global team's continued execution and tremendous accomplishments in a short period of time. We are firing on all cylinders and confident in achieving our major milestones throughout the year.

Insulet's profile will dramatically change in the second half of this year with the launch of DASH, continued and significant margin growth and the expansion of our global footprint. These strategic initiatives are setting us up for exciting long-term growth and value creation.

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

(Operator Instructions) Our first question comes from Chris Pasquale, with Guggenheim.

I just want to follow up on the European announcements. You've laid out a couple of partnerships in the past week here. Where are you in terms of having the infrastructure in place to handle the crossover to direct? What else should we expect to hear from you in the next couple of months?

I think we are in great shape. We now have the infrastructure in place, and we're ready to assume that business as of July 1.

Where we're still doing some work in executing is on the intermediary. So just as a reminder, more than 80% of this business goes through intermediaries. Many of these intermediaries work with our current distributor. So in effect, we'll be sort of getting one middleman out of the scenario. But we do have to go and contract with all of these intermediaries. We're in the process of doing that and fully confident that we'll have that in place.

We now have inventory in Europe ready to serve patients as of July 1. Obviously, we made the announcements about our team in place. And we're just going to make sure then that all those intermediaries have product to be able to serve patients starting July 1, as well.

So that's the work that's underway now. Our plan is really on or ahead of track at this point, and we're feeling increasingly confident about that transition.

Great. And then just one on reimbursement. There was a lot of moving pieces recently with some of the wins you've had. Can you just give us an update on your total covered lives in the U.S. at this point?

I don't have that number handy. I think that's something we could follow up on. I will tell you we've made great progress. So when we think about Medicaid, for example, I know we're sitting now just with Medicaid lives at about 10% of the population, around 25 million, 23 million, covered lives. I don't have the number specifically for commercial, though.

But in general, really broad coverage now, particularly with the UnitedHealthcare decision. That is the largest commercial payer in the market. And as I said, that's already starting to make an impact in our new patient starts and shipments this quarter, already this month.

Our next question comes from David Lewis, with Morgan Stanley.

Shacey, I wanted to start with the U.S. market. How would you describe market dynamics here sequentially? And then a related question is, just I think about first quarter performance you delivered right in the middle of the guidance for the year. Is it safe to assume as we think about Animas, United, Medicare that you can sort of build on this momentum here in the first quarter over the next couple of quarters?

So in terms of just market dynamics, Q1 is always our softest quarter, and that's just simply due to sort of seasonality in the business. Every year, deductibles reset in Q1 in the U.S. And so that typically is our lightest quarter. That said, it was a very strong quarter year-over-year.

And with any of these decisions, as we've said many times, because of the business model they are really a compounding effect over time. So UHC just went into effect April 1, and we're already starting to see that in new patient starts. So we will expect that benefit to compound for the rest of this year and 2019.

I think you mentioned Animas and the competitive dynamics. We do still see people taking advantage of the pathway that we have for Animas users to be able to adopt Omnipod.

And we would expect these Medicare, Medicaid and increasing access wins to continue to compound. We think a lot of that impact will come in 2019, but we're obviously guiding to a strong year of 18% growth in the United States in the install base.

Okay. And Shacey, if the -- just on pipeline real quickly. Does DASH timeline soft commercial fourth quarter still make sense? And I think you're going to have a Horizon clinical update potentially in the next couple of months here. Any updates on those? And I'll jump back in queue.

So DASH, we're very excited about that. We're on track. We expect to be moving into limited-market release some time probably midsummer, late summer, just based on our interactions with the FDA.

And we forecasted or planned for a 6-month limited-market release, which would take us to the end of the year. But 2 things to note about that. One, we're going to -- I think the team is doing a great job planning for this launch, and we're doing all the right things to make sure that we have a successful launch. Obviously, we've learned a lot by watching this market and others launch new technologies into it, and we want to get this one right. So we're going to take the time to do that.

But we always have the opportunity to accelerate that. So if we get in 3, 4 months into it and everything is going to plan, we could certainly move into commercial launch at that point.

The last point that I'll make is that any new product launch works differently for us than it does for others in this market, again because of the business model. So we are not going to have -- it doesn't impact us in that we don't sell a piece of capital equipment right off the bat, right? This is again about the slope of the line and increasing new patient starts. So if we move the launch up a quarter or move the launch back a quarter, it doesn't materially impact revenue.

Then I think you asked about Horizon. We're going to have some great clinical updates at ADA on Horizon. So very excited about that. Data that I think is really compelling and in free-living settings down to age 2. So really exciting progress there that we'll be sharing with the community on our IDE-3, which is currently underway.

Our next question comes from Joanne Wuensch, with BMO Capital Markets.

Two questions. The first one is your gross margins seem to be improving faster than we had expected and even faster than your guidance of 60% to 61% in the first half. What is helping drive that a little bit better or a little bit faster?

This is Mike Levitz. So we have over the last number of years just continued to improve our oversight in our operations side of our business, and that just continues. We couldn't be more thrilled with the work that our operations team is doing. And so we've talked in the past calls about driving down scrap, driving up product quality, driving efficiency. All of those things are true. So we have a lot of opportunities ahead of us.

At our Investor Day, now it's gosh November of 2016, we laid out what the key drivers are from our gross margin expansion. And that is continue to drive improvements in the operations, which we continue to do and I expect us to continue to do through the year. Driving down component pricing and sourcing, we absolutely are doing that and just getting started with that. And the product platform that we have, first with DASH and then the other products that introduce after that that we've already described here, are all on the same base platform. And that enables us to drive component savings. And then also even mundane things such as the move from air freight to ocean freight.

All of those initiatives are really ahead of schedule, on or ahead of schedule, and we expect to drive significant margin expansion in those areas this year.

The move to -- that we'll see in the second half with the move to direct in Europe will drive a run rate 400-basis-points improvement in gross margin. So half year impact of that is about 200 basis points.

And then really things are going to improve even further as we deliver on U.S. manufacturing beginning in the beginning of 2019. That program is doing very well.

And so we have a number of initiatives to drive gross margins. We've laid out our multiyear targets, the 70%, and are very confident of that. But in the quarter, there was nothing unusual; it's just continued strong execution.

Blocking and tackling.

(inaudible) My second half of my question is you sound very organized on the international move. What can go wrong? What do you worry about?

It's a great question. I think what we -- what does a flawless execution look like? We would be perfectly ramping down one channel and equally perfectly ramping up another channel. On July 1, every patient and every clinician and every government body would know to call Insulet instead of our current distributor. And we would have perfect supply and awareness throughout the market.

And so obviously that's the goal, but I think none of us are -- certainly, in our guidance, we're assuming that there's going to be some bumps in the road as that plays out. But we're doing everything that we can to drive awareness in the marketplace and make sure that patients, clinicians, government bodies know what's happening as of July 1 and that they know to call us. And then we're certainly reaching out to all of the intermediaries that serve this market.

But I think it's just really about awareness and making sure that everybody understands what's happening and that we don't create confusion in the marketplace, and we're working very hard to do that.

I would say a lot less is keeping me up now on this program, just as we've built such a talented team, so experienced and really understanding what needs to happen and kind of helping us execute successfully on the program.

Our next question comes from Ravi Misra, with Berenberg.

Just a couple of questions on the U.S. install base. You're guiding to that 18% or at the high end of that 18% range that you've given. I'd like to understand some of the dynamics around patient attrition, especially with the Medicare coverage decisions and the Animas conversions. Are you seeing any early benefit from that? Or how is this translating to new patient adds or attrition rates?

So in the U.S., attrition has remained fairly steady, at about 9%. So I think we've shared that number, and that hasn't materially changed.

And really, when we think about these wins around UHC and Medicare, even these early Medicare wins don't go into effect until April 1, and UHC went into effect April 1. And so that's why we say most of the benefit, both in terms of new patient starts, install base growth and the potential impact on attrition, is likely to be more of a '19 and beyond impact.

We do know that market access will impact attrition. We know that people attrit off the product because they lose access to it. And so we are very excited that if we're successful, and we fully expect to be, in implementing coverage with these Medicare Part D plan sponsors that we should see a nice impact on retention of our patients starting in 2019.

As well as new patient starts.

And new patient starts.

This is Mike. Just to clarify, one other point is when we talk about our customer base, it really is in many ways because of how much goes through a distribution channel, it's an estimate, and it's a backward-looking estimate. And so a lot of these benefits, they may already be contributing but we won't be able to report that out or see that right now. But we are seeing tremendous momentum.

Great. And then my follow-up question is just around the kind of profitability ramp of the business. You broke even this quarter, kind of still guiding to nice low-single-digit operating margin for the year. How should we think about the phasing of that profitability given some of the investments that might be made in the second quarter, I'm assuming, perhaps to support the European expansion? Is this going to be kind of like a steady increase in profitability? Or where -- is there going to be a little extra investment in 2Q to account for those changes coming in Europe?

It's a great question. One of the things that I talked about on our last call is how this is going to impact us. Because it's an interesting year. We give full year guidance, but we gave more clarity around first half, second half on the last call because we're making those investments now for ramping up the team. As Shacey described and Pat described, we built an amazing team. We now have 100 people. But they're coming in -- a lot of those are recent here and are coming in ramping up through the year.

So when we -- so we'll have a run rate of expenses by the time we get through the second quarter, without the benefit. The benefit comes beginning really in the third quarter when we have the sales that correspond to it.

And so we do expect this to be a step-change from the first half of the year to the second half of the year. I talked about gross margins going up 400 basis points on a run rate basis; so a half year, 200 basis points for the full year impact. So we do expect there to be a step-change as we do this.

The guidance that we've provided we believe is realistic because this is not a small transition. It is an incredibly meaningful one and a really exciting one. We've made great progress but, as Shacey said, we haven't built our guidance assuming that everything goes perfectly. The good news is that we'll have a really good indicator when we're on the next call how we've gone through the transition. And so we're looking forward to that.

But everything right now is looking very good, but we'll report out to you as we continue to make progress.

Our next question comes from Margaret Kaczor, with William Blair.

First one for me is on Medicare and just to follow up on Express Scripts and Magellan. Can you give us a sense of what percentage of Medicare patients are covered by those two? Whether there are any other steps that you have to go through to start billing for these sponsors? Or are you already seeing some patient adds for Medicare at this point?

So you may remember from last quarter's call that the top 8 plan sponsors account for 80% of the population. So I don't have specific numbers that I can provide, but I will say that ESI is one of those top 8. Magellan is not; it's a little bit smaller.

So great win with both of these plans, and there is nothing more that we need to do starting April 1 for these patients to access their Medicare benefits through these providers and Omnipod. And we have started to ship Medicare patients now. So we're starting to see this benefit pay off; very early days, though.

And I would just add, this is Mike, that Medicare is really exciting and meaningful for us. Medicaid is probably a bigger impact for us because of the pediatric population. And so those wins are really -- they really increase in speed after getting the Medicare Part D decision. And so that again, as Shacey said, is going to benefit us from a new patient start standpoint probably beginning in 2019, but definitely on the revenue side then. So a lot of exciting things.

Got it. And just to follow up on that discussion, you guys talked about having new customer adds 15% to 18% and on the higher end of that in the U.S., how much of that is being driven by Medicare, Medicaid and UNH? Is it that 150 bps from the midpoint to the high end? Really what could drive it higher or lower as you go on throughout the year?

So just to clarify, the 15% to 18%, which in the United States we believe it will be 18%, is install base growth. So new patient starts are actually higher than that, but that accounts for attrition and the overall install base growth. And market access wins are clearly contributing to that. So very excited about that progress, and so UHC to a greater degree. I wouldn't say at this point Medicare and Medicaid are contributing significantly to that. It's primarily UHC and then just commercial execution, patient awareness, et cetera.

Our next question comes from Danielle Antalffy, with Leerink Partners.

I wanted to see if we could talk a little bit more about the guidance raise. It seems like you're raising precisely by the Q1 beat, and it just feels like you have a lot of momentum going in the right direction from a top line growth perspective, UNH being one of them. Shacey, I appreciate you saying that the 2019 contribution will be more meaningful, but I have to think that there will be some contribution in 2018. So I just want to make sure I understand. Why not feel -- why shouldn't we feel better about the rest of the year from an outlook perspective, given all that seems to be going your way right now? Knock on wood.

Danielle, this is Mike. I'll start, and then I'm sure Shacey will add additional response to your question. In terms of the guidance, specifically, so it's been our practice that, generally speaking, in the first quarter we really don't change our guidance a whole lot because you give the guidance for the year so close to when you come to the first quarter. And that's been our practice, and we followed that.

I think -- if it's not clear from the statements we've made, I think we need to make it abundantly clear: things are going very well across the business. And we really are -- we're seeing tremendous growth. In the U.S., these wins are incredibly exciting. They're not 2019 wins; they're wins now, but from our recurring revenue stream we don't get as much of it as some of the other players in the space do because they have a one-time, upfront capital. We have it spread over years.

In terms of the overall guidance, we have a number of -- we have a big transition with Europe coming midyear. And so our guidance reflects there's a wide range of outcomes there. We're going to be able to report back in a very short period of time how that's looking. And it's looking great right now, but you know what? We need to execute on it.

So I wouldn't read into the guidance raise anything other than our confidence. And we made a similar guidance raise last year in the first quarter. And so that's what's reflected in it. Shacey?

The only -- I'll add 2 bits of color. So the first is, as I alluded to in the script, is our new patient starts are up significantly this quarter versus a year ago. But as we always say, it's just the business model, right? It's all about installed base growth. That's what will drive our revenue growth in a given year.

So we could not be more excited about the momentum and the potential that the United agreement, for example, and this access wins offer, and they're clearly showing in our metrics. But it compounds over time just because of the business model.

The other thing I'll say is there was a little bit of noise in the market this quarter because of the United win. The current distributors that were serving that business are no longer serving that business because we're serving it directly. And so we also saw them just reduce their inventory to account for that change, and that's a little bit of noise or headwind in the market [first quarter].

Got it. That's actually great color. Thank you so much for that, guys. And 1 follow-up question, if I could, on the pipeline and your Horizon AP product. Do you guys have any sense -- Dexcom has obviously talked about, who is your partner in that project, has talked about potentially faster time to market for some CGM products. Does that impact Horizon at all? Have you started having conversations with FDA on what their new view on CGM could mean for integrated insulin delivery products?

Danielle, we applaud the agency for finding creative faster ways to accelerate innovation to the market. It's really exciting what they did with this ICGM designation. And we are participating in these discussions around enabling interoperability with both the agency, Dexcom, and others in the industry. So we're definitely a part of those.

I think it's a little too soon to share how those might impact our partnership and development programs with Dexcom. But really looking forward to sort of capitalizing on that in any way that we can.

Our next question comes from Robbie Marcus, with JP Morgan.

Shacey, maybe one for you. We've had a lot of transition in the market over the past year, with J&J exiting the business and 670G really failing to launch last year and into early this year. So maybe you could tell us sort of how you think the market, in general, has been shaping up and what sort of share you think you have now and where you think the market's growing in the U.S.

So, Robbie, I say it every time and I'm not sure that it kind of gets through, but I say it to our team, too. We really don't look at other tubed pumps as our competitors. And so these failed launches and/or exits from the market, they've given us a little bit of a tailwind but really not anything of substance. And when we look at where our new patients are coming from, still the vast, vast majority of them are coming from multiple daily injections.

There's different estimates on how in the United States the pump market is growing. I hear anywhere from 5% to 7% CAGR anticipated over the next 5 years, and other people who say maybe it's not growing to that degree. All I can comment on is the fact that we are growing, and the vast majority of our business is coming from multiple daily injections. And so we're clearly growing the overall market.

And it may be that the other players are really taking from an existing base as opposed to growing the market. I think that's the beauty of Omnipod, is it really helps people transition from MDI to the benefits of continuous subcutaneous insulin infusion.

And so where do you think most of the J&J patients are going? Because it's something like 50,000 in the U.S., 40,000 international. Are they all going to Medtronic? Or are you able to capture a good portion, as well?

I don't know where they're all going. I can say that certainly there are still patients that are taking advantage of our pathway to ensure that Animas patients who want to have the option to use Omnipod.

So I think I said it last quarter, and the same is true this quarter, typically anywhere from 80% to 85% of our new users are coming from multiple daily injections. Now it's closer to 70% to 75%. So that differential is probably the uplift that we're getting from Animas users.

Our next question comes from Jeff Johnson, with Baird.

So just a couple of follow-up or clean-up questions, I guess. But Shacey, going back to the question on Horizon, you're not yet in pre-pivotals or pivotals. Is there any way to move G6 into that pre-pivotal and pivotal trial? And if not, Horizon will be a PMA product. So would it make sense to think that switching out from G5 to G6 in a whole new ICGM world, and what have you, and once Horizon has PMA approval that could be a very fast process? So even if Horizon comes out with G5 in the end of '19, it's a 3- to 6-month path only to get G6 integration.

So Jeff, we fully expect to enter into pre-pivotals and pivotals with G6.

You do?

Yes.

Okay. That makes it very simple then.

Then 1 other question, just on the international change-out here in July. So I get the customer care and logistics intermediaries, what you announced today. Italy and Nordics was a bit of a surprise to me, I guess. Is there a reason those markets needed an actual distributor relationship for you guys? Just trying to figure out why maybe not going fully direct there. And does that have any implications, Mike, on how we think about that up-charge on the price side and all that across your European business?

So we -- the great thing about this move is that we were able to get a lot closer to the markets. We were able to sort of design our go-to-market strategy and our organization to suit what we saw as the myriad of opportunities across the market. But they're very different business models in every market, very different in their level of diffuseness in terms of the purchasers and the customer base.

And so we just opted to go through distributors in those 2 markets, mainly because we felt like it was our strongest position to serve those markets based on the number of buying points and the number of customer points and support required across them. So ultimately we just thought it was the best way to go, and we're excited about those partnerships.

And this is Mike. I would just add that we've talked in the past about how concentrated our base is. When you look at -- I think we've talked about France, Germany, the U.K. and the Netherlands representing roughly 75% of our base. Those places, we aren't going through distributors. The places that are less impactful and it makes sense to, using a distributor makes complete sense.

And again, in France, as you may recall, that also -- that goes through what's called the (foreign language), as an intermediary through -- as defined by the French market. So in the core countries where we have the most significant presence, that's where we're going to have our reps calling on customers and on physicians and so on.

In terms of the financial impact of this, this has all been contemplated in the guidance that we provided. And so I reiterated in my comments about the 50% uplift in pricing from our historic distributor pricing. That's all in. That includes -- that's -- nothing has changed, and everything that we're seeing is in line with what we've stated for guidance. So absolutely no change.

Our next question comes from Steven Lichtman, with Oppenheimer & Co.

Shacey, I know over the last several years you've made investments in the commercial organization in the U.S. I was wondering specifically this year are you looking to meaningfully grow the commercial footprint in the U.S.? And if so, about how much do you expect to do so?

So Steven, we did grow. In fact, we're done with that expansion now. And there I think most, if not all, of the positions, are full. We did that at the very beginning of the year.

And we grew -- in total, we grew the sales organization, which I would characterize both as the external, the field-based, and the internal or inside sales team, we grew that by approximately 25%, thereabouts. And the internal team focuses on pipeline management, sort of getting interested patients through the pipeline. And then the external team is comprised of sales people and clinicians. And so they support our existing base, which obviously is growing, as well as new patient starts.

And this is Mike. I would just say that we did that expansion because we expected this market access wins. We've made the investment. You've see in some of our OpEx increase, a good portion of that -- or within that OpEx increase was an investment in really driving market access. And now we're seeing the fruit of that investment, and we want to have the sales people to take advantage of the increased demand.

Got it. And then, Mike, you reiterated on the OpEx -- or the operating margin side for the year. Just specifically within that, the stand-up costs for Europe still we should thinking sort of in the $45 million to $50 million range. Is that fair?

Just to be clear as it relates to -- you used the term stand-up costs for Europe. So when I spoke on the last call, I talked about the run rate cost of the European business, meaning because it's kind of a ramp through the year, I wanted to talk about this new business model of being direct. The run rate cost will be, yes, $45 million to $50 million on an annualized basis. And so we really have that team in place as we get into the middle of the year. And so you see the run rate of OpEx on an annual basis of $45 million to $50 million.

I also talked on the last call about some upfront costs, non-recurring costs to stand up the business. And we expect that that would be -- the non-recurring costs in the year around $10 million is what I guided to last time. There's no change in that guidance.

So everything we guided to relative to the spending is on track, and that's what we expect for the year. It wasn't really all that material in the quarter as it relates to non-recurring costs, but we're doing all the things we expected to do, and we're either doing as well or better than we expected to do them.

Our next question comes from Doug Schenkel, with Cowen & Co.

This is [Ron] on for Doug. Amgen stated on their Q1 earnings call that they are in final preparations to launch the OnPro kit in Europe. Was this already contemplated in their previous forecast to you? Can you remind us how big of a volume opportunity Europe is for OnPro? And do you think your Drug Delivery business will return to growth in 2019?

So I'll start, I guess, with those questions and, Mike, you can add any color if you have it. But ultimately we don't really have insight into what was contemplated or not contemplated in the forecast from Amgen, just really what their forecast is. And our guidance and our raise of guidance is based on Amgen's forecast.

And it's sort of the same response in terms of the market opportunity in Europe for Neulasta Onpro. It really is a question best directed to Amgen. We are working with them to support all of their needs as they enter that new market and certainly excited about the partnership. But we have committed to them to let them comment on their business opportunities.

And Doug, this is Mike. We were pleased to raise the guidance on Drug Delivery for this year. In terms of 2019, we just gave 2018 guidance. So I don't want to get ahead of us on 2019.

Got it. And then, it's been a while since we've got an update on Drug Delivery outside of Neulasta. Can you give us at least a qualitative update on how that pipeline is progressing? Is the pipeline progressing? And do you think any of your partnerships will progress to the point that we hear more about them by the end of 2019?

So yes, we continue to have discussions with pharmaceutical partners and some technical feasibility work, et cetera. I think we've said all along we don't expect another Amgen really in the next few years. And obviously, all of these partners are very -- take confidentiality very seriously. And so we can't give a lot of color on that.

I will say 2 things. We still see this as a great opportunity. But as we've continued to say over the last year, 1.5 years now, it's really a longer-term opportunity, these programs. When we're testing molecules in many cases in Phase I, oftentimes the molecule doesn't meet its endpoints, and/or as we get through technical feasibility something is uncovered. And so these are just longer-term programs. We see them as a long-term potential benefit.

And I think what's really exciting is just to see where we are from a margin expansion standpoint and for a growth standpoint despite that slight headwind that we have because of Amgen's forecast.

So we'll certainly keep you posted. Unfortunately, we can't really give a lot more color at this point in those activities.

From a guidance standpoint -- this is Mike. From a guidance standpoint when we talk about our 2021 target of $1 billion in revenue, 2021, given the time horizon that Shacey talked about, we never really expected Drug Delivery to play a significant portion in that. So as we look -- right now, the nearest-term opportunities are within the U.S. Omnipod and international Omnipod. And even by 2021 a lot of that's in existing markets.

So it's really coming out of 2021, what continues to drive significant growth for this business are the expansion into other markets outside the United States for the Omnipod and the opportunities in Drug Delivery. So when we talk about the $1 billion target going from where we are now, that's largely driven by the U.S. Omnipod and internationally in existing markets, and then the growth beyond that is really the significant opportunity that Pat described and Shacey described.

And our final question comes from Jayson Bedford, with Raymond James.

So just a couple of questions. Getting back to the U.S. growth, the quarter-to-quarter move, the seasonality seemed a little bit more pronounced, at least relative to the last couple of years. The fourth quarter was obviously quite strong. Was there something exceptional that you saw in the fourth quarter that maybe you didn't see in the first quarter?

This is Mike. There always is this big seasonality piece. And so no, there really wasn't anything all that extraordinary. Q1 was very strong. It was in line with our expectations. In fact, it beat our expectations.

As Shacey mentioned, with the new access wins there was some ramping down of existing intermediaries where now we're going to be going direct, with UnitedHealthcare as an example. So that did -- that was a headwind in the quarter. But by and large, we always have expected this kind of seasonality.

Is there any way to quantify the inventory drawdown at the distributor level?

I wouldn't call it out. I guess maybe you could say around $1 million or something like that, but it's hard to say exactly how much that is. And that's just a natural -- the opportunity before us is significant, and that's why we raised our guidance for the year in the U.S. And so the access wins are a much bigger impact than the small ramp down, because we really, with the United side we get so much more coverage by being direct than the small piece that we lost from the transition from an intermediary.

And actually, we have time for one more question. So we will take the line from Kyle Rose, with Canaccord.

Just one quick question and then a follow-up. Just I think we understand the dynamic of the using the intermediaries versus building out the direct infrastructure on a country-by-country basis. But maybe just help us understand how many more of these intermediary contracts should we expect to see before you go live and how many other countries you think you'll use the intermediary model in. And then from a longer-term perspective, does that change the operating profile in the margin expectation internationally given you have less infrastructure to build out?

And then quick question for Shacey. On the Horizon, any updated thoughts on whether after the third IDE trial you'll be able to move to pre-pivotal or if there's going to be maybe another IDE trial before that step?

I'll take the first piece. Our current distributor in Europe uses intermediaries and/or distributors in a good portion of the market. So by going direct, we'll be interacting with those intermediaries or distributors directly and, basically, as Shacey said earlier, removing the middleman that we have today.

So when you look at France, as Mike mentioned, that's going through the (foreign language). There's a number of them. You contract with them individually, as well as many of the other markets where you have -- probably 80% of our business going through Europe when we are completely up and running will be using either intermediaries or distributors in the marketplace; not different from what our current distributor does today. The benefit is we're going to get a 50% improvement in our end-user pricing and substantial 400-basis-points improvement in our gross margin.

And Kyle, we don't anticipate any other full distribution partnerships. So we've got our team established in the other markets in which we serve outside of Italy and the Nordics. All of that is in place. So we'll work through, as Pat said, distribution intermediaries, but we don't expect any full distribution partnerships outside of Theras and Nordic Infucare. The rest of the team is in place and we're ready to go.

And then I think your last question was on Horizon. And we will give an update as soon as we're done with IDE-3 and reviewing that data. I just don't want to comment too early. As I've always said, as we get done with these IDEs we review the data. We evaluate if we're ready to move into pre-pivotal or into the next stage or if we need to do another study. And because we're -- especially since we're focused on kids, the data looks terrific so far, but I'm going to wait and see it all, and then we'll update everybody on kind of our next steps with Horizon.

And this is Mike. Just to fully answer your question, you had asked about our guidance and what's contemplated from a margin standpoint given the intermediaries. So in the United States, as an example, we go through distributors, but it's our sales force, it's our product support, it's our customer service. So the infrastructure that you think of in the direct business, we're having that same infrastructure in Europe, apart from these 2 markets of Italy and the Nordics.

All of what we guided to from an expectation on it being accretive as a business and improvements in gross margin, all of that is -- everything we're doing now is in line with those stated plans and expectations.

Thank you. That concludes our question-and-answer session. So I'd like to turn the conference back over to Patrick Sullivan.

Thank you, Operator. Look, we are absolutely thrilled with our first quarter financial performance and very excited about the significant opportunities before us in 2018. We've made significant progress expanding market access, executing our innovation roadmap, building our U.S. manufacturing facility and implementing our plan to go direct in Europe on July 1.

I'd like to thank the Insulet employees in the United States, Canada and now Europe for their hard work and commitment to ease the burden and improve the lives of people living with diabetes around the world.

Thank you for joining us on the call today. We look forward to speaking to you on our second quarter conference call, where we will update you on our successful European transition. Thanks for joining us.

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