Insulet 4Q14 – US OmniPod sales of $44 million up 1%; expanding HCP, payer marketing; artificial pancreas strategy in progress – February 26, 2015

Insulet’s new CEO Mr. Patrick Sullivan led the company’s 4Q14 financial update this afternoon, his second since becoming CEO in September. It was a tough quarter for Insulet business-wise, though management provided the most detailed breakdown of the business we’ve ever seen. separating US, International, Neighborhood, and Drug Delivery, which is a relief, making it much easier to assess the business. The company is really in a state of transition right now, as the brand new senior management team comes up to speed, an expanded sales force gains traction in an increasingly competitive market, and new marketing initiatives to payers and doctors come to fruition – indeed, guidance for 2015 sales growth of 6-11% is far more modest than we’ve seen for Insulet in the past. Still, Mr. Sullivan said he has “more enthusiasm and higher expectations” than when he joined the company five months ago (it’s a bit hard to read that, but the candor is very welcome). Below, we enclose the call’s top financial and business highlights, followed by a pipeline summary and Q&A.

Financial and Business Highlights

1. Revenue in 4Q14 totaled $73 million, a 3% sequential decline from 3Q14 and a very modest 6% year-over-year (YOY) increase from 4Q13.  Full year revenue hit $289 million, up 17%. Insulet had ~75,000 worldwide patients on the OmniPod at the end of 2014 (~75% in the US). Management expects full-year 2015 revenue of $305-$320 million, representing growth of 6%-11% YOY from 2014 sales of $289 million.

2. US OmniPod sales in 4Q14 grew just 1% YOY to $44 million. Revenue declined 2% sequentially in the US. Management expects double-digit growth in the US in 2H15. Longer term, we think about what could help grow the market and Insulet’s market share – we wonder if the decision to stick with Abbott had something to do with Libre and driving therapeutic change.

3. International OmniPod sales hit a record-high $13 million in 4Q14, growing 40% YOY and 6% sequentially. We were surprised to hear that international revenue is expected to be flat in 2015, since Ypsomed has been such a strong partner. Insulet announced that it will assume full distribution rights to the OmniPod in Canada, dissolving a four-year agreement with GSK. It’s unclear the impact this will have on profitability but this will be another area of transition.

4. Neighborhood Diabetes’ 2014 sales reached ~$60 million, actually declining 6% YOY from 2013. Insulet expects flat sales growth for Neighborhood in 2015.

5. Insulet plans to spend an additional $15 million on sales/marketing in 2015, including hiring 15 new sales reps (from ~135 at the end of 2014 to 150). The company will place a particular focus on marketing to HCPs and payers. This was in line with its JPM presentation.

6. Mr. Sullivan stressed the benefits of Insulet’s new commercial organization structure and the experience of the new management team. There are many changes afoot and it will be important to see how the organization evolves and in our view to see whether the strongest salespeople can be retained, etc

R&D Highlights

7. In a turnaround, Insulet now plans to be involved in artificial pancreas development and shared high-level that it is working on the CGM and algorithm fronts. Management mentioned the Dexcom Gen 5 partnership, as well as potential to work with Abbott or others in CGM - with Abbott, presumably, it would be on “flash glucose monitoring”. This wasn’t too surprising since Insulet in another turnaround recently said it would work with Abbott exclusively on strips. We have to imagine that the entire industry is trying to figure out how their businesses could evolve to work with Abbott and Freestyle Libre. Although it is early days with the new technology, the ability to impact behavior and drive therapeutic change is clear.

8. By the end of 2015, Insulet expects to submit a 510(k) for the next-gen PDM. Notably, this timeline was ahead of the 3Q14 expectation for an early 2016 filing.

9. A clinical trial of the Lilly U500 insulin-compatible OmniPod is expected to start later this year. Commercialization is not expected until early 2017.

10. Earlier this month, Insulet signed a renewed agreement with Abbott to integrate FreeStyle BGM technology into the OmniPod PDM – see our detailed coverage.

Financial and Business Highlights

1. Revenue in 4Q14 totaled $73 million, a disappointing 3% sequential decline from 3Q14 and a very modest 6% year-over-year (YOY) increase from 4Q13. We’ve never seen Insulet experience a sequential decline in sales between 3Q and 4Q, and 6% YOY growth is the lowest we’ve ever seen in a quarter for Insulet. As a reminder, just prior to JPM in January, Insulet reduced its full year guidance to $71-$73 million vs. prior estimates of $76-$81 million – the reason offered was a delay in shipments of Insulet’s non-insulin drug delivery products ($~5 million) from 4Q14 to 1Q15. Even still, it’s clear from first-ever sales breakout (see below) that the US OmniPod business has markedly slowed down in 2H14.

• For the full year, worldwide revenue of $289 million grew 17% from sales of $247 million in 2013. Of the $42 million increase in sales from 2013 to 2014, the US and international businesses actually provided nearly equal contributions, $23 million and $26 million respectively (2014 drug delivery sales of $5.4 million declined by $2.5 million from 2013, and Neighborhood sales of $59.7 million declined by $4.1 million).
• Insulet had ~75,000 Worldwide patients on the OmniPod at the end of 2014; ~75% of these patients (~56,000) are in the US. In the fourth quarter, ~70% of new patient starts came from MDI, a number that has appeared to remain remarkably consistent over time.
• Management expects full-year 2015 revenue of $305-$320 million, representing modest growth of 6%-11% YOY. Most of the sales are expected in the back half of the year as the new team gains traction. Given projections for flat sales growth in the international business and Neighborhood, this translates to a roughly similar rate of US growth in the OmniPod business. Management previously expected $10-20 million in drug delivery sales for 2015, and notably it has now increased that guidance to $15-20 million – we look forward to learning more on this front. Given recent disappointments in this area, we were surprised to hear they were increasing the forecasts in this area – that said, there is little visibility on this front.

We think international could certainly beat projections though this region is becoming more competitive as well even as the market becomes more open to pumps (we’re thinking about Medtronic having better products as well as Ypsomed launching its own tubed pump).  

2. US OmniPod sales in 4Q14 grew just 1% YOY to $43.6 million. Revenue declined 2% sequentially in the US. US OmniPod sales currently account for 60% of Insulet’s business, down from 63% in 4Q13. Management did not discuss reasons for the flat 4Q14 growth in detail, but implied that the new focus on HCPs and payers can help address some of the issues. We assume several other factors played into the slowdown, including sales disruption from the new management team and increased competition from the likes of Medtronic and Tandem. In particular, Tandem had a good fourth quarter – though the field continues to grow, it is hard to assess how much the market can grow in terms of a ceiling and in terms of assessing conversion from MDI. Management expects markedly improved performance (“double-digit growth”) in the US in 2H15 – at this point, the new commercial and sales changes will be more solidified, and of course, the year-over-comparisons will be easier. Yet and still – what a slowdown from mid 2014.

3. International OmniPod sales hit a record-high $13 million in 4Q14, growing 40% YOY and 6% sequentially. The international installed base grew 70% during 2014 (now at ~19,000 patients), and management expects a further 40% increase in 2015. However, international revenue is expected to be flat in 2015 as Ypsomed uses inventory it stockpiled in 1Q14– this stemmed from the capacity challenges following the second-gen pod launch. Of course, we did not realize in 1Q14 that this was part of what was driving growth. Ypsomed says it is now confident in Insulet’s manufacturing abilities, and orders should return to a more normal level going forward. Althugh management says it expects YOY growth in the international business to return in 2016, we are skeptical on this front since the growth in 1Q14 that we now see came from “stockpiling” was characterized as high patient demand at that point. The issue of Ypsomed’s new pump will be important to watch as well – we think they have been an incredible partner for Insulet and that they can expand the pump market internationally. That said, we won’t know for some time what the split of their business will be and how much it will grow – we do look forward to hearing an Ypsomed twice-yearly update before Insulet next reports.

• Insulet announced that it will assume full distribution rights to the OmniPod in Canada, dissolving a four-year agreement with GSK. The transfer is expected to complete by the end of June 2015 – quite a fast turnaround. Insulet will sell the new OmniPod via a newly created Canadian Subsidiary, Insulet Canada Corporation. This structure should offer greater control of the OmniPod’s distribution and marketing, as well as higher margins for Insulet though it is yet another area of transition for the company. Though the press release acknowledged GSK as a “tremendous partner,” it also implied an underwhelming ramp in sales: “Despite favorable uptake of the OmniPod System, overall pump adoption remains significantly lower in Canada than the United States. We see this as a terrific opportunity to continue growing our diabetes offerings internationally.” While taking on Canada without a partner is easier than other countries in terms of the similar language and proximity to the US, it is a bit of a reimbursement black box and some of the reimbursement advantages in the US aren’t present in much of Canada (though there are some provinces where pediatric reimbursement is extremely storng). We don’t have much visibility into pricing in Canada and expect margins are lower there. Overall, we’ll look forward to watching how much traction the new leadership will be able to make

4. The breakdown of sales by business segment revealed a larger-than-expected contribution from Neighborhood Diabetes – 2014 sales were ~$60 million, declining 6% YOY from 2013. The previous management team had not broken out sales for this business unit in some time, and we had thought it was running at ~$7.0-$8.0 million per quarter or less, so our estimates for the core pump business were higher than the actuals. Insulet expects flat sales growth for Neighborhood in 2015, and it’s clear that this is not going to be a focus of the new management team. Only about 5% of Neighborhood sales relate to the OmniPod (~$3 million).

• As a reminder, Insulet acquired Neighborhood Diabetes in June 2011 for ~$63 million – Neighborhood is a durable medical equipment (DME) distributor that specializes in direct-to-consumer sales of diabetes supplies (including drugs, testing supplies, and support services). Back in the day, management characterized benefits for Insulet on the back-office infrastructure front and a lot of profitability from blood glucose strips, etc. dropping to the bottom line. Overall, it looks like it has been a much harder business to run than anticipated and we imagine the board regrets the decision to acquire the distributor.

5. Insulet plans to spend an additional $15 million on sales/marketing in 2015, including hiring 15 new sales reps (from ~135 at the end of 2014 to 150). Comments were similar to Insulet’s JPM presentation, where the plan to focus on sales and marketing – especially to physicians and payers – came through loud and clear. Some of the planned initiatives management discussed:

• New initiatives to specifically market to payers, including development of patient outcome information and key clinical data – we’ll be eager to see this since management has pointed out that there has not been much progress to date on showing the value of pump therapy (we also believe big data will make this more doable, as will the G4);
• KOL development, widespread medical education efforts, and generally more emphasis on providers;
• Sales force expansion to 150 reps (from ~135);
• Increase market segmentation and sales force targeting. Management specifically mentioned pediatrics – 15% of new customer starts in 2014 were <10 years old, and 35% of new starts were <20 years old. Management “strongly believes” it can accelerate growth in the pediatric segment.

6. Mr. Sullivan stressed the experienced new management team and the benefits of Insulet’s new commercial organization structure. The senior management team has been completely overhauled and now includes the follow individuals – in addition to Dr. Howard Zisser, who effectively plays the role of chief medical officer and is highly respected globally as a researcher and clinician. Most of the executives  don’t have significant direct experience in diabetes (Allison Dorval and Anthony Diehl are exceptions along with a few others), and many will be watching to see how fast they learn the business (historically Cytyc has had very strong results though not necessarily as much of late).

• CEO: Patrick Sullivan (since September 2014);
• CFO: Allison Dorval (since November 2014);
• CCO: Shacey Petrovic (since February 2015);
• COO: Patrick Ryan (since January 2014);
• President of Drug Delivery: Daniel Levangie (since February 2015) – notable to see this as a dedicated position on the senior team, a testament to Insulet’s optimism on this front (Mr. Levangie is the former board chair);
• EVP of Human Resources and Organizational Development: Brad Thomas (since November 2014); and
• General Counsel: Anthony Diehl (since 2003).
• In early January, the company announced six Vice President hires: Sales; Marketing; Managed Care; Customer Care; International; Investor Relations/Corporate Communications. All worked at either Cytyc or Hologic, where Mr. Sullivan served as CEO or Executive Chairman (respectively) in his career prior to joining Insulet in September. Mr. Sullivan emphasized that the completely restructured team has all worked together in the past with great success (at least, many of them), and the new leadership team “will take Insulet to the next level.” Having executives accountable to each of the major businesses – US OmniPod, International OmniPod, Neighborhood, and Drug Delivery – seems logical and we’ll be interested to see how the new structure can drive the business. Most of the 2015 goals seem lower than we would have expected, particularly international, and we will look forward to being able to keep a closer watch on the business dynamics with the more specific breakouts. 

R&D Pipeline

7. “We are putting together strategies so that the OmniPod is a very significant part of an artificial pancreas offering in the future.” This was great to hear from our view since we believe the structure of an Omnipod rather than a tubed pump (or two) will be welcoming to many patients. Mr. Sullivan didn’t miss a beat in highlighting the need for a CGM offering and an algorithm offering, and then putting the three components together. The presence of Dr. Howard Zisser as Insulet’s medical director gives us optimism on this front; while some in his role are excellent clinicians, we also believe that Dr. Zisser has potential to make a major impact on the R&D front.

• Mr. Sullivan mentioned the ongoing partnership with Dexcom to integrate the Gen 5 system into Insulet’s new PDM. Per Dexcom 4Q14 earlier this week, Gen 5 has been submitted to the FDA, and management is cautiously optimistic for an approval by end of year. The gating factor on this integration is Insulet’s next-gen PDM – a 510(k) filing is expected by the end of this year, meaning this integration could launch sometime in 2016.
• Notably, Mr. Sullivan mentioned “opportunities with Abbott and others that would have potential CGM integration.” We assume that Insulet would be excited to integrate the FreeStyle Libre technology into the OmniPod. That would be quite exciting from an ease of use, accuracy, and on-body form factor perspective. The renewed Abbott agreement on the BGM side (see below) presumably had this in mind. The downside is FreeStyle Libre isn’t approved in the US right now, which is presumably where the work needs to be done. 
• Insulet continues to work on its own OmniPod-integrated CGM “at a low level” – this work with an unnamed partner has received less and less visibility over time and we continue to assume it is not moving forward very quickly. As of the 3Q14 call, the first in-human trial was expected in early/mid-2015. The CGM competition only gets fiercer as Dexcom gets even stronger, of course.
• Insulet is also looking into those with algorithm capabilities, though no specifics were provided. This also arose in our Tandem 4Q14 report (who also just announced efforts on the artificial pancreas); presumably, companies are considering licensing an academic algorithm for hybrid closed loop, such as those developed at UVA, DREAM, UCSB, Cambridge, MGH/BU, Padova, or others. The DREAM consortium has already obtained a CE Mark for its algorithm (see our ATTD 2015 Day #3 report), and the UVA team shared plans with us to move its algorithm through regulatory approval (see our ATTD 2015 Day #4 report). 

8. By the end of 2015, Insulet expects to submit a 510(k) filing for the next-gen PDM. Notably, this timeline was ahead of the 3Q14 expectation for an early 2016 filing – it’s a positive to see Insulet moving faster on this project, since getting Bluetooth, touchscreen, and the Dexcom integration are critical innovations to stay competitive with others (particularly the higher cool factor of the Medtronic MiniMed 640G and Tandem t:slim). Insulet previously talked about showing this device at ADA 2015 in Boston, and we hope that is still the case.

9. A clinical trial of the Lilly U500 insulin-compatible OmniPod is expected to start later this year. Commercialization is not expected until early 2017. The trial seems to have been pushed back from the previous mid-2015 timing issued in the 3Q14 call, which is disappointing. Insulet has worked with Lilly on the protocol and FDA has “basically “green lighted” it to go forward. As a reminder, the 3Q14 call shared news that a clinical trial with the U500 OmniPod would be needed prior to filing a 510(k) application; this will enable the necessary label update.

10. Though not discussed at length, management briefly mentioned the renewed agreement with Abbott to integrate FreeStyle BGM technology into the OmniPod PDM – see our detailed coverage from earlier this month. The news was a major win for Abbott, who gains default access to high frequency testers through Insulet’s installed base of 75,000 worldwide customers. At the same time, LifeScan and Insulet mutually agreed not to pursue their BGM integration agreement (originally signed in 2012) or to commercialize the LifeScan Verio-integrated PDM (which received FDA clearance in November). 

Pipeline Summary

Questions and Answers

Q: Could you provide a little color on the dynamics of pump market? The US OmniPod business has historically been significantly lower. It sounds like you’re saying that was due to poor execution. How do we think about the pump market dynamics going forward; is there anything specific to OmniPod beyond poor execution? What are you doing to reinvigorate growth in that business, and what do you see as a sustainable growth rate? What market share does the OmniPod have in the US insulin pump market? Based on the installed base we’re hearing, it might be much lower than we thought.

A: I would start off by saying that we’re seeing significant opportunity to expand the OmniPod business – we’re currently only about 5% of current type 1 diabetes patients, and I think there is tremendous opportunity based on the characteristics of the OmniPod system to significantly increase that. With the focus on marketing to healthcare providers as well as targeted marketing to healthcare insurance companies, we can knockdown obstacles that exist to getting the OmniPod more widely adopted in the marketplace. I think we’ve talked about this a lot – we fundamentally need to show clinical and economic benefit to both doctors and patients to provide widespread adoption. We’re focused on doing that by mining data sources on performance in the field as well as taking that info to insurance plans to show the benefit to the healthcare market place.

Q: It sounds like the OmniPod has been a more patient-driven therapy; however, it seems like that focus is shifting. Will you focus at all on marketing to the patient in the future? Is there any reimbursement issue specific to the OmniPod that we should be aware of? I know there was an issue with UNH in the past – can you also confirm that is now resolved?

A: The issue that faced the company last year with UNH was a paperwork issue, and that has been resolved; we don’t expect any further impact.

Let me frame the marketing. You have to market to three constituencies: the healthcare providers who prescribe, the healthcare insurers who pay, and, finally, to patients who use the product. We have to align all three to provide widespread adoption. We have to market the features and benefits of our product for patient awareness; we have to market the clinical and economic benefit to doctors in the office so they understand the benefit of this product to patients; finally, we have to market to insurers the clinical and economic benefit. You have to align all of those three moons to provide for widespread adoption. Historically, the focus at Insulet has been on one moon – on the patients, providing the tubeless technology and convenience. We need to change focus to healthcare providers and to healthcare insurance companies that pay for it. That hasn’t been done historically. We’re out of whack.

Q: You said the patient base in 2014 grew almost 20% but revenues were up only 15%. Is that right?

A: Yes.

Q: What’s the disconnect there?

A: Part of it is timing that the patients are growing. We added more new patients on the backend, so that would account for a portion of that.

Q: Okay. We can come back to that one because it shouldn’t be the difference. It’s my understanding that international revenues will be flat this year?

A: Yes, we expect revenues internationally to be relatively flat.

Q: For the destocking at Ypsomed, you think that takes a quarter or more than a quarter?

A: We anticipate shipping to Ypsomed this quarter; we anticipate getting back to quarterly ordering patterns in Q2, Q3, and Q4.

Q: If international is relatively flat, and Neighborhood is relatively flat, and given guidance on the drug delivery, that would imply relatively 5%-11% growth for the US OmniPod business. But from the commentary, it sounds like Q1 will be much lower than that and the second half will be higher based on the acceleration of the business in the back end of the year.

A: Yes.

Q: The competitive landscape in external insulin delivery has ratcheted up over the last 18 months, starting with the 530G launch from Medtronic – looking at the numbers it seems like that really slowed momentum for Insulet at that time. You’ve had 530G, the ramp of Tandem, and now, in 1Q, the launch of J&J’s Animas Vibe. Further, everyone has launches coming over the next few years. It feels like a much more competitive environment than it was two years ago. How do you think about that?

A: There has been more competitive activity. However, I’ll come back to the tremendous opportunity. The majority of our business has come from converting MDI patients to the OmniPod. We have not done a great job of differentiating the product to healthcare providers and to insurance plans. We need to increase awareness. We do worry about competition, but I think our major competition is MDI, quite frankly. That’s where we need to focus.

Q: Can you help us with the revenue breakdown, and to really appreciate that detail? Is there something in the Neighborhood that gets that to $60 million plus? I was under impression that was $7-8 million per quarter .

A: In past commentary, we’ve talked about 5% of Neighborhood incorporates OmniPod revenue. That is what the Neighborhood business is running on behalf of OmniPod. The balance of it is routine diabetes products, such as testing supplies, pumps, pump supplies, CGMs, and CGM supplies – as well as full-service pharmacy.

Q: As we sit and think about cadence through 2015, you’ve talked about 20%+ patient growth in the back half, what do you see in the first part of this year? What is international? What can it be in 1Q and 2Q in US? I’m trying to get a handle on the net of inventory adjustments at Ypsomed in Q1, and where are Q1 patient adds for Insulet.

A: We’re going to add new patient starts as we go through the year, but the more significant increase will be in the back half of year as we get the marketing programs and sales force up to speed.

Q: As we look at the market growth of MDIs switching over to pumping, last year, our analysis suggested that you were holding share in terms of your percentage of current installed base vs. what you were getting out of MDI converters. Do you think you can accelerate that and take more share, and over what time frame can that happen?

A: As I mentioned, I’m confident that the team can put it together. It’s not only sales, but marketing, managed care marketing – the whole commercial team. I have full confidence we’ll increase revenue as we move forward with the new initiatives being put in place, with the new team getting in and starting to have an effect.

Q: On GSK - as you make the transition, are there going to be any takebacks on that relationship?

A: What’s a takeback?

Q: Inventory – is that a sell through or how should we think about that? Does it hit any particular quarter?

A: No, overall, the relationship has been sell in. GSK is purchasing inventory based on their demand. I’m sure they’ll have some level of inventory in their warehouse on the date that we make the transition, and as we finalize the agreement, there may be some repurchase of inventory, but it shouldn’t be takeback of revenue by any means.

Q: As we think about it – you’ll get into regular shipping patterns in Q2 after Ypsomed, but then GSK will probably transition in Q2. So, really it’s Q3 or Q4 where international is more normalized.

A: I think revenue will be more normalized in Q2 for international. GSK is not nearly as large a component of international revenue as Ypsomed is.

Q: As we think about Q2, how much will the bolus of stock be in drug delivery?

A: It’s what we anticipated shipping in Q4 of last year.

Q: It was $5 million?

A: That’s right.

Q: You’ve added a lot of support to focus on the payers, physicians, and patients. Can you help us with where does the customer focus – physicians, patient, distribution channels – end in 2014; it would be helpful in quantifying that number. Then, maybe, if you could provide for us where that number will be in 2015? For reference, where was it in 2013?

A: We talked about investing about $15 million more in the commercial organization in 2015. We need to get through 2015, and see how the resources come into play, and make sure they are being productive, and then we’ll talk about plans for 2016.

Q: How many representatives did you have at the end of 2013, 2014, and where do you think you’ll be at the end of 2015?

A: We’re at 135 roughly at the end of 2014, and we’re going to 150 this year.

Q: In your revenue guidance, there was nothing on operating loss. How should we think about operations gains or losses for 2015? Or, even just qualitatively relative to 2014.

A: As you’re planning through year, we’re anticipating getting to an operating breakeven by Q4 of 2015.

Q: In your prepared remarks, you commented on an increased focus on reorders and increased utilization. I had never really thought of utilization as an issue. On the reorder rate, prior management had talked about an attrition rate of sub-10% - have you seen any change in that rate?

A: We have not seen a change – the 10% is correct. What we’re talking about in terms of increased utilization is that, although vast majority of patients order four times per year, there are those that order less than four times per year. We want to get all of our patients to order four times per year. Some of the reasons, maybe during the summer, there are certain periods when some people may go back on MDI treatment. Or, for whatever reason, insurance coverage may change – this happens with Medicare. If a person goes on Medicare, they lose coverage. As you know, Medicare does not reimburse for the OmniPod. We’re taking actions to try to get information to patients that the most important thing for their health is to be on the OmniPod 24/7/365. We also want to take down the barrier of Medicare reimbursement for patients turning 65. Those are the types of utilization initiatives I’m referring to.

Q: On reimbursement, it felt like we were conditioned that reimbursement wasn’t an issue or reason to grow. It seems like you’re more focused on that – you brought on a new executive. What are the goals there – is that primarily Medicare? Have there been any new issues with reimbursement that have cropped up over the past six months?

A: As you know, in general, pump therapy is reimbursed by insurance. However, my point here is that insurance companies have certain requirements that patients must provide in order to have access to pump therapy or OmniPod. In some cases it’s a measurements of A1c over time, glucose levels, other things they have to do to get on pump therapy. I can imagine a world where we have clinical and economic benefit to insurance plans, and they would reduce those barriers to make more widely available insurance coverage for those patients. In order to do that, you must market to insurance plans to show the ability to change A1c levels and provide other quality measurements that convinces them that having more people on OmniPod therapy is important to them. That’s what I refer to when I say marketing to insurance plans. They make it difficult sometimes for patients to get on to pump therapy because of all the hoops the patients have to jump through. Secondly, on Medicare coverage, as you know, we don’t have Medicare coverage. That’s something we’re working on.

Q: One question on new patient additions. For the number included in Neighborhood, in the quarter, is that similar historically?

A: Yes, around the 5% range of Neighborhood’s total revenue; about 5% is OmniPod product that they’re shipping to customers.

Q: When you discuss the new patient additions and total patients, are any of those included in the 5% in Neighborhood?

A: They’re not. They would not be a big number. It’s easier to not break that out at this point.

Q: In terms of the drug delivery orders, do you have any feedback on product use or ordering patterns throughout the year?

A: Based on our contract with Amgen, we’re not allowed to provide any color on what they’re doing. We can say that we’ve taken the low-end of the drug estimate up from $10 million to $15 million. Perhaps that’s an indication of how it’s going.

Q: In terms of the exclusive Abbott agreement, does that have any financial changes to that relationship? Are there any incentives to doing that rather than going with J&J?

A: It’s not really much different than what we would have received under the J&J agreement.

Q: OmniPod has grown like a rocket ship over last five or six years; now the growth seems to be slowing. In your opinion, is it more a function of the low-hanging fruit being taken, product education, customer service, or competition? Product education is one of things you have mentioned – should I infer from that that the other factors have less of an impact?

A: In order to have continued and accelerated growth, we have to have more effective and do targeted marketing. We talked about a focus on the pediatric population, healthcare providers, and payers. We need to demonstrate the clinical and economic benefit to payers. In this market, we have to offer a service component that provides getting the patient a prescription and getting them trained on the product. We are also investing on improving the customer service experience. Not only for those patients coming on product and ensuring a great experience for the first 90 days, but reach out to those on the product more frequently and have a more comprehensive program.

Q: What is the status on CGM development program for OmniPod? Medtronic is launching 640G in Europe. I’d love to get some color on how you on how you see any of those pseudo artificial pancreas impacting business, or lack thereof.

A: As it relates to the artificial pancreas, we are putting together strategies so that the OmniPod is a very significant part of an artificial pancreas offering in the future. With that, you need a CGM offering and an algorithm offering - then, you need to put those three units together. As you know, we’re working on our own CGM development, and our own internal work continues. We also already have an agreement with Dexcom, with our new PDM, to integrate those two products together. Then, we need an algorithm. We’re looking at opportunities to then provide the full package. We would also evaluate and look at opportunities with Abbott and others that would have potential CGM integration. In the short term, we’re looking to other people with CGM and algorithm capabilities. Then, at a low level, we are continuing our own efforts in CGM product development.

Q: I’m a current OmniPod user, and I have been pleased with the level of customer service and support. I would say I’m one of your most active cheerleaders in south Florida. Since I learned of the pod, I have probably told 100 people about it. My endocrinologist, last visit, had four or five different brochures of products – however, none from OmniPod. I believe your end users are the best marketers. I suggest having a coupon offer - direct mail to consumer with a return envelope; if they would include their endocrinologist’s business cards and send it back to company, they receive a $10 credit against the next order; this would provide you with thousands of leads around the country. That’s what I wanted to suggest – this could drive some retail sales because consumers are best marketers.

A: Thank you for your complimentary remarks concerning the customer service organization and your interaction with Insulet. We’d like to make that experience even better for you.

You also make a very good point regarding reference selling; that is a very important part of the overall strategy to get all three moons of doctors, patients, and payers, in alignment and have broader adoption in the market place. I’m going to pass that right along to our head of marketing for his consideration.

Q: Your commercialization effort you’ve said is very important and something you will focus on. You mentioned two components of that, the clinical and economic studies. Could you give a little more detail as to how you’ll go about that, what type of studies should we expect, are they ongoing, and when we will see data for that?

A: As it relates to clinical evidence, what I’m referring to is clinical data that is already available. There are many places throughout country that have a large base of OmniPod users. We’re working to try to find a way to mine that database to show the clinical evidence of, for example, A1c levels of a person on MDI transitioning to OmniPod. There’s a fair bit of clinical data that we simply need to mine. As we go down the road, we may need to do some additional clinical trial work, but we’re not contemplating that at this time. The same information will be helpful for providers to show benefits for OmniPod as it relates to performance with patients.

Q: Right now, you think retrospective analyses are going to be good enough to convince providers and payers?

A: All we have now is data on 59 patients that shows a 0.59% reduction in A1c. But we have data in the field and available that we can mine, in which initial data shows a 1.1% reduction in A1c in a little over 1,000 patients. That data is available, and we’re putting together statistical analysis with the hopes to use that with providers and payers.

Also, insurance plans are often evaluated by their customers, by big large employers, on quality measurements – on the HEDIS measurements. Those are essentially a report card for insurance plans. They specifically have HEDIS measures related to A1c levels and other measurements of diabetes care. In that case, if you have specific numbers where you can show insurance plans that improve A1c compliance, that’s meaningful as they market to large employers throughout the country. That’s the kind of value proposition we need to bring forward that has yet to be done.

Q: In terms of commercialization efforts, you outline the OmniPod’s features and benefits. Which are the ones you are really going to try to detail with payers and doctors?

A: As you think of the benefits, there are many from the product feature set – the tubeless delivery, among others. In terms of the clinical benefit, that’s really the A1c levels; you can show what the A1c levels are on MDI before they go on the OmniPod and what are they after; the data we consistently see is a reduction in A1c levels – in our view, significantly.  Also, in data we’ve mined, there’s a 15 units reduction in insulin usage. There are different metrics we can mine that is going to give us a data set we can take to doctors and payers.

Q: I’m hoping for some commentary on guidance assumptions. In your commercial organization, you’ve made some leadership changes, expanded the headcount, and tried to drive cultural change. Are you assuming the new representatives will be meaningfully productive this year? Or, is what you’re doing and the guidance assumption not linked?

A: We are definitely assuming improved representative productivity in the field. The team on the commercial side under the Chief Commercial Officer has all worked together. They know how to drive sales forces, incent sales forces, and drive topline growth. Absolutely, we have built improvement in sales force productivity into assumptions.

Q: That includes new hires and the time it will take for them to get up and running?

A: Yes

Q:  Thinking about the US OmniPod dynamics in the context of the competitive dynamics in 2015, you talked about capacity improvements. How much do you think capacity limited growth last year, given international growth and Ypsomed stocking?

A: I don’t think capacity was a big driver of 2014. In Q1 and Q2, we were able to bring manufacturing back up to the levels we needed. I don’t think it was a capacity problem at all.

Q: On the expense side, where should we be thinking about gross margin in 2015? Where do you see that going over medium to long term?

A: For gross margin, our US OmniPod sales are just over 60% gross margins. What you’ll see in 2015 is that any improvement in gross margins will be largely driven by mix. We did mention that our international business as well as the Neighborhood business are at a lower gross margins. As you bring in more US sales and more drug delivery sales, you will see some improvement in that gross margin level.

Q: Is 4Q profitability on a GAAP basis?

A: Yes. Operating profit on a GAAP basis.

Q: Regarding the Lilly type 2 diabetes product, when can we anticipate that trial starting and what will it look like?

A: We expect the trial to begin this year, and we have worked with Lilly on the protocol on what they will do and what we will do. The FDA has basically given us the green light. It will start later this year, and probably won’t be commercial until early 2017.

Q: In terms of destocking Ypsomed, what level are you expecting in the first quarter? What is built into the guidance, and what was it in the fourth quarter?

A: We haven’t broken out how much relates to international market. Ypsomed is ordering product again in Q1. We see their order volume getting back to where it should be and then destocking should be done by Q2.

Q: In terms of the level of decline from Q4 to Q1, even though you will have the Amgen revenue, is that level of decline principally because of destocking?

A: The Q4 to Q1 decline was due mostly to destocking.

Closing Remarks: I want to reiterate how excited I am to be at Insulet, and how strongly I believe there are so many untapped opportunities before us. Our new senior leadership team is very well positioned to capitalize and provide improved commercial execution. We have a strong platform with the OmniPod system that will not only allow us to drive further adoption with the right operating strategy in place, but provide us with a unique and incredible opportunity to drive growth in the drug delivery business. We have the right strategy for long-term accelerated growth and shareholder value. I look forward to meeting you at investor conferences and keeping you updated on progress in future calls as well as providing additional details on execution, strategy, and future vision. 

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