Insulet 4Q13 – OmniPod grows nearly 30%; operating profitability for first time; FDA 510(k) filing for LifeScan integrated PDM – February 27, 2014

Executive Highlights

  • Overall sales totaled $69 million in 3Q13, an increase of 19% year-over-year (YOY) on a challenging comparison. OmniPod sales grew nearly 30% YOY and 5% sequentially to ~$58 million.
  • In a major operational milestone, Insulet achieved operating profitability in 4Q14. The business is expected to be operating profitable in every quarter of 2014.
  • Last week, Insulet filed for FDA 510(k) clearance of a LifeScan OneTouch Verio integrated OmniPod.

Today, Insulet CEO Mr. Duane DeSisto led the company's 4Q13 financial update, calling 2013 “a monumental year for Insulet.” Indeed it was, with nearly 30% OmniPod growth, the company’s first quarter of operating profitability, the upgrade of over 60,000 patients to the new OmniPod, expanding margins, and manufacturing capacity to now produce one million pods per month. The business is tracking well by all accounts, with patient demand (particularly MDIs and pediatrics), HCP demand, and international demand hitting high points. Indeed, Insulet is hiring an 20 additional sales reps (an 18% increase) just to keep up.

On the pipeline side, the call was filled with more updates than we’ve heard in a while. Most notably, Insulet filed for FDA 510(k) clearance of a LifeScan OneTouch Verio integrated OmniPod last week. In new news, management shared that work has commenced on a “more modern PDM,” with an FDA submission expected in 2015. Meanwhile, Insulet is focusing efforts on finalizing software modifications for the special PDM designed for use with Lilly’s U500 insulin; an FDA 510(k) submission is expected in late 2014. Last, work on the CGM-integrated OmniPod continues, with an update expected in 2H14.

Much more detail on the call’s top five financial and top five pipeline highlights can be found below, followed by a pipeline summary and Q&A.

Financial and Business Highlights

1. Total revenue in 4Q13 reached $69 million (a 19% year-over-year increase) carried by “nearly 30%” growth in the core OmniPod business (~$58 million). Both figures came on a challenging comparison, as revenue grew 23% and 29% (respectively) in 4Q12. The quarter's total revenue was toward the upper-end of the 4Q13 guidance offered in 3Q13 ($65-$71 million). Excluding the impact of competitive bidding in the Neighborhood Diabetes business (a $4 million reduction in 4Q13), total revenue increased by over 25% vs. 4Q12. Overall, the business has a lot of momentum despite the increasingly higher base of sales – for context, 4Q13 OmniPod sales of ~$58 million are double 2Q11 sales of $29 million. For full year 2013, total revenue of $247 million increased 17%, with the core OmniPod business growing ~27%.

  • Management highlighted some encouraging new patient and prescriber metrics. Notably, new patients adds were growing 40% year-over-year as 2013 finished (in line with 3Q13), initial shipments to patients <18 years grew 60% in 2013, and new patient starts in children <10 years doubled in 2013. Management reiterated that over 70% of Insulet’s new patient adds have never used a pump before, down slightly from 75% one year ago but still a clear sign that the OmniPod is expanding the pump market. In addition, the new pod has made “tremendous strides” with HCPs – over 30% of prescribing practices since launch are new to Insulet. Two-thirds of the practices that wrote their first prescription in 2Q or 3Q started at least one new patient on the pod in 4Q – a potential sign that they have been satisfied with their early pod experiences.  

Worldwide OmniPod Revenue (4Q12-4Q13)









Total Revenue (millions)*








Year-Over-Year Growth








Sequential Growth









*OmniPod Revenue is extrapolated based on previous performance and the growth rate given during the financial call. Management’s exact language said that OmniPod revenue grew “nearly 30% year-over-year.”

  • In line with 2013 performance, management expects 2014 OmniPod revenue to grow 30% and new patient adds to grow 25% – for context, Insulet currently has “over 60,000” customers, representing over 33% growth from 45,000 customers as of January 2013. At JPM in January, Insulet’s presentation cited that the OmniPod has 15% market share in the US, up from 10% one year ago.
  • Management guided for 2014 total revenue to fall in the range of $295-$315 million (19%-27% YOY growth). First quarter 2014 revenue is expected in the range of $67-$71 million (17%-24% YOY growth and flat sequentially).

2. In a major operational milestone, Insulet achieved operating profitability in 4Q14. Operating profit was $0.2 million in 4Q13 compared to an operating loss of $6.1 million in 4Q12. Impressively, this goal was set in 4Q12, a true testament to management’s clear optics on the business and consistent ability to set expectations properly. CFO Mr. Brian Roberts emphasized that of the $10.7 million in additional total revenue in 4Q13 (vs. 4Q12), $0.60 cents of each dollar fell to bottom line. Said management, “The investments we made are paying off.” The customer base is now fully transitioned to the new OmniPod, allowing Insulet to start reaping the margin improvements with the second-gen pod. Looking to 2014, the business is expected to be cash flow positive and operating profitable in every quarter of 2014.

3. Management was “thrilled” with the international business, which doubled in 2013 and is expected to double again in 2014. Our estimates put the international business at ~$14 million in 2013, representing ~7% of the total OmniPod business. Management noted that Ypsomed has seen “exceptional growth” in key markets such as Germany and the Netherlands. Ypsomed’s customer base more than doubled in 2013 and the supply constraints on the new pod have been eliminated. Due to reimbursement challenges, Ypsomed is still not shipping the OmniPod to France. However, Ypsomed is looking at the Italian market. Notably, the OmniPod was filed for Chinese approval “a while ago” – management only said things “continue to move methodically through that process.” Notably, the agreement with Ypsomed has now been extended one year to 2017, a clear sign that this is going quite well for both parties. In Canada, demand for the new pod “exceeds expectations” and partner GSK is working to transition the customer base in early 2014.

4. Insulet is in the process of hiring 20 new reps for the field sales team, an 18% increase to 130 people. Management noted that the sales dynamic has changed now that the bigger institutions are giving the company a lot more business. The expectation is that reps will spend more time in offices providing support. Insulet will also make investments into marketing, inside sales, and the reimbursement teams to handle “higher and higher” levels of demand.

5. In the fourth quarter, manufacturing “took a giant stride forward,” with production levels reaching over 2.5 million pods in the quarter (an increase of 50% over the third quarter). Notably, Insulet is now manufacturing at a rate approaching one million pods per month. The company had a “huge improvement” in inventory on-hand, exiting the quarter with ~250,000 pods on hand (this was a challenge in the prior couple quarters as the installed base transition completed). A fourth manufacturing line is expected to up and running in the second half of 2014, and the construction of lines five and six is already on the radar.

  • With the transition of the customer base complete, Insulet is starting to realize gross margin improvement of the second-gen pod. Gross margin improved to 48% in Q4, up more than three percentage points from 45% in Q3. Gross margin on the US OmniPod is expected in the low-to-mid 60s by 2Q, which translates to consolidated margins in the low 50s. (The lower consolidated margins reflect the impact of Neighborhood Diabetes and the lower margins in the international business.)
  • In late January, Mr. Patrick Ryan signed on as Insulet’s new COO, replacing Mr. Charlie Liamos. Mr. Ryan has a strong background in global supply chain management and according to CEO Mr. Duane DeSisto, is “the perfect person to take over manufacturing and R&D efforts.” Mr. DeSisto thanked Mr. Liamos, who played an “instrumental role” in getting Insulet on solid ground. Mr. Liamos will remain on Insulet’s board of directors and remain full time for the next couple of months to ensure a smooth transition.

Pipeline Highlights

6. Last week, Insulet filed for FDA 510(k) clearance of a LifeScan OneTouch Verio integrated OmniPod. Depending on the approval timing, there is a chance new customers could move to that PDM later this year. We’d note that this product has been a long time coming, as the partnership was originally signed in April 2012. Presumably, the delay stems from the hang-up at the FDA over the second-gen pod and the second-gen pod transition. As background, Insulet extended its agreement with Abbott in 3Q13 to integrate FreeStyle blood glucose monitoring technology into the OmniPod PDM handheld. That agreement is non-excusive and will last through 2014. It will be interesting to see if Insulet retains both partners or switches completely over to LifeScan. Certainly, two partners gives patients more freedom to chose what strip they want to use, though it undoubtedly creates additional hassle for Insulet (making two PDMs, dealing with two partners, etc.).

7. In new news, Insulet has commenced work on a “more modern PDM,” with an FDA submission expected in 2015. Management shared no specifics other than saying, “We think we have an interesting way of going about it.” The company has yet to file the IP around the device and may share more once that’s in the bank. We wonder if this will include a touchscreen or any other unique features (cloud connection, smartphone integration, etc.).

8. Insulet is focusing efforts on finalizing software modifications for the special PDM designed for use with Lilly’s U500 insulin; an FDA 510(k) submission is expected in late 2014. This was a fairly significant timing update from 3Q13, where the project was categorized as still “in the early days.” Management reiterated that this product has an estimated marketing potential of two million highly insulin resistant type 2 patients (>100 units of insulin per day), and it will be key to show improved outcomes through clinical work. Lilly should be a tremendous resource in that regard.  

9. Regarding the CGM-integrated OmniPod, management believes the sterilization challenges have been overcome (“a significant milestone”); work will progress to the mechanical aspects of the device (insertion, sensor/catheter co-location, etc.). Once through that, Insulet will file “a bunch of IP” and be in a better position to talk about the device in 2H14. As of the 3Q13 call, an update on the CGM project was expected in “mid-2014.” In the 2Q13 call, management expected that clinical work would be available in the middle to back half of 2014. This is clearly still a long-term, challenging project for Insulet, though management “remain[s] convinced that a combined device will change the game in diabetes.”

10. Insulet has a growing number of drug delivery partnerships outside of diabetes; these are unlikely to impact 2014 numbers, though management is excited for their potential in 2015 and beyond. As a reminder, we heard at JPM that Insulet has fielded interest in using its patch pump to deliver an obesity drug that has “pretty dramatic side effects” upon injection (we wonder if it is Zafgen’s beloranib or Novo Nordisk’s Victoza). Insulet has already announced an oncology partnership with Amgen (pod only for basal infusion; no handheld required) and a fertility drug partnership with Ferring (a pod and an icon-driven handheld). Additional partnerships are being considered in pulmonary hypertension, oncology, and Parkinson’s.

Pipeline Summary

Pipeline Product


New OmniPod PDM with integrated LifeScan OneTouch Verio BGM

FDA 510(k) filed in February 2014

OmniPod with integrated CGM

[single on-body device]

Update expected in 2H14 following IP filing. Sterilization issues appear resolved. Work progressing to mechanical aspects of the device

Updated OmniPod PDM for use with Lilly’s Humulin U500 insulin

FDA 510(k) submission expected in late 2014

“More modern” PDM

FDA submission expected in 2015

Drug delivery device for Amgen oncology medications

Drug delivery device for Ferring Pharma infertility drugs

Additional partnerships for drug delivery with obesity, pulmonary hypertension, oncology, and Parkinson’s medications

Unlikely to impact 2014 numbers, though potential in 2015 and beyond

Questions and Answers

Q: You’ve turned operating profit and you’ve given the guidance you need to flush through the model, but you gave us the spending as you go forward. Are you seeing increases mostly in sales and marketing or R&D? Can you characterize where you expect that spending?

A: Absolutely. The increases we are seeing are from the cost of living. I would characterize those around 4% or so in the categories of R&D and G&A [general and administrative]. I think it is a little higher than originally planned around stock compensation expenses - obviously, that’s non-cash in nature, but that spreads across all the groups. The rest of the investment, then, would all be within the sales and marketing function. So, it’s safe to say, we expect to add around 12-13% to our total overall sales and marketing spend in 2013, give or take in the investment here in 2014 – we’re starting that hiring process now. Therefore, it should kick in and ramp up fully in the back three quarters of the year.

Q: For gross margins, you’re saying that in the second quarter, or sometime in the second quarter, we’ll see overall gross margins for the business get to that mid-50% range?

A: I think it will be for all of the second quarter. I would only characterize the consolidated number probably being in that low-to mid-50% range. That really comes down to a question of what’s the level of international contribution into the overall mix.

As we see the international business, which we’ve talked about doubling in 2013 and with an expectation that it’s going to double again in 2014 – certainly that’s outpacing the U.S. a little bit. That’ll pressure the gross margin a little bit. However, again, that’s a profitable business, so that’s a good problem for us to have.

Q: You did give us some clarity around the Neighborhood Diabetes business. You’re basically saying that that business was down probably, if it was standalone, about $4 million year-over-year?

A: It’s probably between $4 million and $5 million year-over-year from where we were. It’s at a consistent run rate effectively with where we were in the third quarter of 2013, and it’s safe to say that most of our investment is pushing towards the OmniPod side. So we’re expecting that business to remain around that run rate throughout 2014.

Q: Can you give us a sense of what the Abbott revenues were in the quarter once you were baked in for guidance in 2014? How might that shift over to J&J when you eventually get that approval?

A: Abbott revenues at this point are pretty immaterial. Given that the initial contract had expired in March of 2013 and we were non-exclusive at that point, it’s effectively pretty small. Certainly, the expectation is that – depending on when the LifeScan PDM is approved – we would have the opportunity to think about moving new customers over to that new PDM later in the year. We did not bake into the model a real expectation for much revenue there because we just did not want to the bank on 510(k) clearance.

Q: Thinking more broadly about the guidance for 2014; as you look at the opportunity with the new OmniPod and the additional sales people that you’re bringing on board, obviously you’ve given us some sense of 1Q14 and the full year. Are you adding seasonal people, and can we expect productivity quickly from these guys? Or you’re being super conservative relative to how rapidly you expect these new reps to ramp?

A: I think the mix of that group is a little bit different than what we have traditionally done. What we’re not talking about doing is taking 20 people and creating 10 new territories. I think we got a couple of key account people that we’re going to hire; we’re getting a lot of business out of a couple of these bigger institutions – and there is a lot more to be gotten – but it’s a little bit different of a sale now. You’re going to sell to institutions, not doctors, so we have a little of that. Some of the expectation in our successful offices is that we’ll spend more time with in the office. So as a result is that we’re taking a hunter salesperson, and we’re bringing in someone that will be a little more junior but more of a farmer; this person is going to spend plenty of time in these offices, assisting around the office, and we’re going to free the hunter up. So, it’s kind of a mixed batch. I think what we’re excited about is that as we strengthen these relationships, more business comes. So, you see a model where we’re trying to figure out how to leverage the relationship we have and then continue to expand beyond that. Like I said for the 20 people, it’s a mixed bag of the type of people that we’re hiring.

Q: What are the moving pieces around the international contribution? You’ve talked about it doubling yet again, so obviously you have been having some great experiences. What can you do to accelerate that, or what could cause that to come in weaker than you expect in the period?

A: I think we’re pretty comfortable with what they’re doing. I think we’d be surprised if it came in weaker. Right now, business is really predominantly coming from three or four major countries internationally. We’re still not shipping in France, so we spent a lot of time working with them on the French market. We’re looking at the Italian market. What we haven’t dialed into the model is because we don’t have the answer yet. But, we think gaining reimbursement in France and getting into the Italian market could accelerate our international growth; we also filed in China a while ago, so we continue to move methodically through that process.

I think we’ve got a lot of interesting upside. The downside is, obviously, what it would be anywhere: it’s quality, performance, having the product, and salespeople. It’s always execution I think in those countries. We do think there’s potential upside. You have to go through the process, and you have to keep pounding on the door until you get an answer.

Q: Can you talk a little bit on how patient retention is going as well as how the quality of manufacturing, how the box failures, is trending. Is that still consistent with what you’re seeing? Have there been any changes there?

A: In terms of retention I think our attrition rate’s probably around 8%, and hopefully if we continue we’ll get below that. I think in terms of the quality of product, it continues to improve out in the field. Part of that was education, it’s a new product, and so we’re seeing improvement in all the numbers that we track.

Q: I have a question on the manufacturing front as it pertains to both the core OmniPod opportunity, but also more so to some of these partnerships which I think are going to come into much greater focus over the next 12 months and 24 months. How are you planning your manufacturing expansions relative to these partnership agreements? Are you still thinking about potentially diversifying the location of your manufacturing as you expand?

A: We have our fourth line going up; it will be running in the back half of this year. That will give us opportunity in the first line, which is probably the most manual line that we have. That is probably the line that we start looking to for some of these other drug opportunities because it’s the easiest to convert back and forth. The other thing that we are doing is looking where lines five and six go and we should be looking at. The good news is by working with Flextronics, they have places in Mexico, Malaysia, and all around the world. There is no question on lines five and six. With line four, we’re gaining this momentum on the margin, and we want to continue to drive that. Obviously, if you have a whole other facility, you take a short step back in that, but we’d like to have the volumes at a certain level that the math would make that a very temporary hiccup.

Q: You disclosed that you had extended the relationship with Ypsomed out another year. How you are thinking about the level of sales associated with that relationship through 2017?

A: If you look at the way the program is structured with Ypsomed, there is a certain minimum that they are required to meet, and that hasn’t been a problem for them. Then there are significant levels above those minimums that if they do achieve that, they get an extra year. So, Ypsomed earned their extension; it’s built right into the contract. They have the ability to extend this one more year if this year goes really well, I believe. So, technically that means we can go out to 2018. After that, it would be everybody sitting in that room negotiating how you wanted to go forward with it.

From a sales perspective, we’ve been very happy with the partnership, especially how well they’ve done since the launch of the OmniPod. As we’ve talked about in previous quarters, we were, frankly, a little on the manufacturing constraint side, throughout the last probably 1.5 to 2 years, both with the old pod and then transitioning to the new pod. With the production level hitting 2.5 million pods in the fourth quarter, and realistically doing that number or even a little bit better here in the first quarter of 2014. That constraint has really come off the business, and I think we’re seeing them flourish. So, they’re adding patients at a very rapid rate; they doubled their business in 2013. I think the expectation is to double again here in 2014. And then, we’ll look at those future years out, but I would expect that their growth rate will continue to exceed.

Q: If you continue to beat expectations from the top line, will you reinvest or will you let that drop to the bottom line, potentially achieving profitability sooner?

A: Well, I’d frame it in a little bit differently; we’re most confident at that midpoint of our range. I think one of the things that we pride ourselves on is that we have high level of visibility into the business. If you go back a year and look at the original guidance that we gave, for 2013 we gave a range of 240 to 255 which would put the midpoint of that right around 247 to 248 – and that’s exactly where we came out for the calendar year. So I think that reorder base certainly gives us a big leg up in visibility.

That’s the way we’ve structured the guidance for 2014, and we’re very comfortable with that. On the whole, obviously we still have debt on our balance sheet and some other things. So as we continue to progress forward, we can see how quickly the business is accelerating and growing, which certainly gives us an opportunity to make these investments in 2014 and effectively self fund them. We can then determine where that cash balance goes and whether we want to accelerate some of that rate of investment. So to me it’s kind of an open question for us. We’ll see where we head as the year progresses.

Q: I just wanted an update on the competitive front. Medtronic has been rolling out there MiniMed 530G with low glucose suspend, so I’m wondering if you’re seeing anything from that? Also, Cellnovo got approval for something similar to a patch pump in Europe. What are your thoughts there?

A: I think where we compete with all these companies is for mindshare at the doctor’s office. What we don’t compete for are the patients. When a patient walks into the office, and a doctor presents all the options, they’ll ask the patient if they want tubing or no tubing. If you want CGM accompanied with no tubing, then we recommend that you go with a Dexcom.

We would argue that that combination is probably the best pump and the best sensor on the planet at the moment. We feel really good about that, and I think the key for us is to just make sure that at the doctor’s office we are getting that opportunity. With Cellnovo and all these other companies, only time will tell. We really feel good about our form factor, about what we have in the pipeline, and about the opportunity. I think in 2013 we hammered that home. We really put some structure into the sales force. We transitioned 60,000 people in six months.

We feel good about this opportunity, and the competition will always be out there; however, I think we have the right solution for the patients, and I’ve been saying it since the first product we shipped in 2005. I’ve been on the soapbox for a while. I would admit it all takes longer than you ever think it does, but I do think we have the right answer for what people really want.

Q: In 4Q13 there were a lot of things going on the tube side: the Animas reorganization was settling in, Tandem went public, and Medtronic stated that they gained 400 basis points – or they measure that they gained 400 basis points of market pump share on a sequential basis. My first question is are you sensing anything out there that would have shifted the dynamic on pumps overall to go back to tubed? I just want to hear your reaction to the Medtronic’s statement. My second question is, has there been any shift in what’s going on from the current tube pump patients whose insurance comes up?

A: I can’t comment on what Medtronic is saying, but I think Medtronic has pent up demand in their install base and I am sure they’re probably churning that base. They are a tube pump with their 530G. I would argue – and I’ve got to be very careful – but Ypsomed has been going head to head with the 630G, which is the next version and Ypsomed is doubling the business.

Of course you worry about a multibillion dollar company. I just don’t think that form factor long-term is the right answer. I think if you fast-forward five years from now, it’s going to be all in one, and I said I think we have the right platform. I am probably the most biased person on the planet in that regard, but I will tell you that Ypsomed’s seen all their new products, and they are doing just fine; they’ve double their business going head-to-head with that, so I feel comfortable that if they can do it, we certainly can do it. I think in terms of people switching back to tube pumps, we just don’t see it. I think there’s an interesting dynamic as Animas did their whole restructure and there was an opportunity out there. Medtronic was kind of on hold for some period of time while they were waiting for MiniMed 530G to get approved. There’s been a lot of stuff going on. I think our focus still remains on the patient that’s on MDI injections.

Roughly a year ago, I think 75% of our customers had never been on an insulin pump before; now we’re at about 70%. So, we’re picking up some share. The thing you have to understand is how that decision is made. If it’s patient driven, we will get the patient. If their warranty expires on a traditional pump, and its working form, the doctor typically will not recommend that they change anything because it’s working for them. What the doctor really cares about is the outcome, and where people’s A1cs are, and how well they doing.

So, if they have form factor that works, the doctors will not change the prescription. Having said that, we picked up some patients who switched, and the mix has changed a little bit; however it is still predominantly our focus to figure out how to accelerate people going off shots to a better therapy, which is CSII. That really is where we are focused in driving the business.

I want to add one pretty important metric that people should take away from this call, which is really that it is a lot of times about the mindshare of the doctor. What’s crystal clear is that the new OmniPod is taking a lot of that mindshare of practices. Almost a third of our doctors prescribing the new OmniPod in 2013 are brand new doctors. Of those doctors, two-thirds of the ones that had written their first prescriptions in 2Q13 and 3Q13 wrote again in Q4. I’d hazard a guess there’s a third that didn’t, a lot of them were people that probably started in the later part of the third quarter. So the sales team seems to be doing a very, very good job of getting these doctors to take a look at the product, prescribe the product, watch a patient or patients for a period of time and then they’re getting more, which tells me that the new OmniPod is really resonating in the marketplace. We’re seeing as it is we move forward here in the first quarter with levels of referrals and shipments that provide us the comfort to be able to say – although we had a very strong year last year of new patient adds – that we’re going to see that number grow by at least 25% more here in the 2014. So regardless, it’s a big market. I’m sure that there is some share for everybody out there, but on the whole, I think we’re doing pretty well.

Q: Regarding your guidance for new adds growing over 25% this year, just to make sure the math is ballpark, are you implying that new adds will grow from about 20,000 last year to north of 25,000 this year?

A: I’m just going to leave that metric as it is. I’ll let you guys do the actual amounts for everybody’s models, but we’ve mentioned that we’re over 60,000 customers now and the expectation is 25% patient adds in 2014.

Q: What percentage of the 60,000 are in the US?

A: We’re not going to break it up specifically, but again we’re over 60,000 patients now.

Q: In terms of the all-in-one OmniPod and CJM did you say you still expect to complete animal studies this year and/or when do you think you’ll provide the street with more concrete details about the design and partners?

A: I think the next big step for us that we alluded to in the prepared remarks is that we’re now focused on the mechanical aspects of this particular device and how you deliver the insulin and the sensor into the body. I think once we get through some of that we have a bunch of IP that we’re filing also. We want to get all that in place before we talk too much in detail about where we’re going and what we’re doing. Hopefully in the back half of this year we’ll have done enough work and filed enough papers here on the IP front that we feel comfortable highlighting a little further.

Q: Regarding the Type 2 product with Lilly U500, are you hearing more from your prescriber base requesting that you modify the second OmniPod products to the Type 2 products?

A: I haven’t heard a lot about that, to be successful in that space you really are going to have to drive outcomes. So the great part of about working with a company like Lilly is that there’s clinical work, there’s a lot of stuff going on. I think that the doctors will embrace this, I think a lot of a lot of doctors are using U500 now in the marketplace in all kind of various forms, there’s been two, three clinical studies now done using that the U500 product which is all being done off label and we find out about it when we read the clinical results that are being published. I think it’s the right answer for a subset of the Type 2 market.

Q: You mentioned new patient adds growing 40%, I wasn’t sure if that was for the full-year or for the fourth quarter as well?

A: Both, since launch, which was effectively the very beginning of March.

Q: I think if I recall, you exited the third quarter with $4 million in kind of unfulfilled inventory, did you exhaust this level in the fourth quarter, and what does it look like as you enter the first quarter?

A: We still have some backlogs that we’re working through as we’ve talked about. Because of the Chinese New Year, we made the decision at the end of December to hold on to some inventory versus shipping every last pod we had. We left the calendar year with approximately 200,000 pods to 250,000 pods available to us to really position us through the Chinese New Year, which, thankfully, went very smoothly for us. Effectively the rest of that backlog should be eliminated in the first quarter or by the very beginning of the second quarter.

Q: You threw us a teaser of the new PDM, not the J&J one, but the one you plan on filing in 2015. Can you maybe talk about some of the features and potential benefits of the device?

A: We think we have an interesting way of going about it, which is a little different than the stuff that’s out there. So, we are also piling a lot of IP on that. I’ll just hold off on that until get all the stuff out.

Q: With all of these partnerships that are filling up your pipeline so nicely, is there something where we’re looking to an overall rate of R&D because some of these costs are going to be borne by your partners?

A: What’s key to all of these different partnerships that we’re looking at is we’re certainly trying to leverage the new pod for all of them. So the big kind of calling card that works well for us and works well for these partners is that you’re able to leverage this manufacturing where we’re producing effectively a million OmniPods per month today. And that number could be a 1.5 million by the end of the calendar year. So, unlike others who are kind of thinking about this space or so, where they’re still kind of in that prototype stage, the big competitive advantage we have is that we’ve made over 25 million of these things to date. There’s a tremendous amount of learning that comes with the manufacturing of every one of those.

So we don’t expect a tremendous amount of R&D, as we go through some of these different partnerships. The MGM-1 for example kind of going forward and other things, but as that happens then certainly depending on the opportunity, we’re looking for our partners to potentially take on that freight.

Q: Let’s say they have a PDM versus these ones like Amgen that don’t have their own PDM, that’s going to be distributed to these partners as well?

A: That’s right. So for example the Ferring Pharmaceutical partnership we have, that has an icon-driven PDM. So making changes to the PDM from a software side, I don’t want to minimize it, it’s all working and all takes time, but those are certainly easier changes to make and to do something with the OmniPod.

Q: When you’re speaking for your operating profitable, you’re not talking about each quarter being operating profitable further?

A: No, I think we will be operating profitable each quarter. Typically, the first quarter is always the most challenging. As we mentioned revenues are sequentially flat, a little up and you start to get some incremental expenses in the quarter, payroll, taxes restart all those things. So 1Q14 will be the one that will be closest, but beyond that I feel very good.

Q: The R&D growth you’re looking for about 4% growth, is that based on quarter-over-quarter or is that just mainly look more as an average over the full year?

A: I think average is fine. I mean, if you think of it in the $6 million to $6.5 million range, that’s where it is.

Q: If I look at trying to do math and utilization metrics, would you say that 4Q13 was normal or would those metrics still be a little low because there is still some backfill? When would you expect utilization metrics to be normalized?

A: I think reorder utilization normalized during the fourth quarter. We pretty much finished the transition of the customer base by around Veteran’s Day. So certainly the second half of the quarter was much more like what we’ve typically seen as compared to the first half.

The first quarter is normal from what we’ve always historically seen. It’s just that you have a group of people who took products in the fourth quarter, started on the OmniPod in the fourth quarter and then deferred their trainings to February. As we’ve talked about in the past, people don’t want to necessarily learn a new way to manage their diabetes over the holidays. Those people skip their reorder in first quarter, and their first reorder doesn’t really happen until the second quarter and then some people are managing their cash flow with deductibles and as such may try to skip it in first quarter and take it early in second quarter. So there is always a little bit of that disruption in first quarter, but beyond those normal patterns I think we are back to where we historically have been.

Q: You haven’t provided this, but any help or direction in kind of the year-over-year growth in disposable revenues in 4Q13 or full year?

A: It’s not really how we look at the business or track it. So it goes where we are, but obviously the fact that we are producing nearly one million OmniPods per month, the great majority of the business is driven by disposables, so just those two.

Q: How much free cash flow do you think you’ll generate in 2014? I would assume most of the CapEx is behind you and you are turning operating profits. What type of cash flow from operations and how much free cash flow would you expect to generate?

A: Typically EBITDA has been a decent proxy for cash flow for us. We will still continue to be investing in some CapEx throughout 2014. Two major things; one is obviously we’re putting in a fourth line in China this year in the back half in the third quarter. The second is we are relocating our corporate headquarters up the road a mile or two, as our lease is expiring here and we need a bigger facility. So, there’ll be a little bit of capital that will be extended in just making sure we can facilitate that move as smoothly as possible.

Q: About how much does the new line cost and same question on relocating the headquarters?

A: Headquarters maybe a few million, and $6 million to $7 million on the new manufacturing line.


--by Adam Brown, Hannah Martin, Jenny Tan, and Kelly Close