Insulet's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: Insulet Corporation (PODD)

Insulet Corporation (NASDAQ:PODD)

Q2 2013 Results Earnings Call

August 7, 2013 5:00 PM ET

Executives

Brian Roberts - Chief Financial Officer

Duane DeSisto - Chief Executive Officer

Analysts

Kim Gailun - JP Morgan

Danielle Antalffy - Leerink Swann

Ben Andrew - William Blair

Bill Plovanic - Canaccord

Raj Denhoy - Jefferies

Tom Gunderson - Piper Jaffray

Mimi Pham - ABR Healthco

Steven Lichtman - Oppenheimer & Company

Jayson Bedford - Raymond James

Operator

Good afternoon. My name is Sarah, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Q2 2013 Insulet Corp. Earnings Conference Call. All lines have been placed on mute to private any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Brian Roberts, Chief Financial Officer. You may begin your conference.

Brian Roberts

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter 2013 conference call. I’m Brian Roberts, Chief Financial Officer of Insulet. Joining me on the call today is Duane DeSisto, our Chief Executive Officer.

Before we get started, I’d like to remind everyone that our discussion today may include forward-looking statements as defined under the Securities Laws. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act, Section 21E of the Securities Exchange Act and are making these statements for purposes of complying with the Safe Harbor provisions.

These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. There are risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

Information concerning the company’s potential risks and uncertainties is highlighted in the company’s press release issued earlier today and in the Risk Factors section of the company’s SEC filings including the company’s annual report on Form 10-K for the year ended December 31, 2012.

These risk factors apply to our oral and written comments. We assume no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

I’d also like to remind you that the guidance we are offering today represents a point-in-time estimate of our future performance. You will find a link to the webcast of this call, as well as to today’s press release at myomnipod.com in the Investors section.

And now, I'll turn the call over to Duane.

Duane DeSisto

Thanks, Brian. Good afternoon, everyone, and thank you for joining us today. This was an outstanding quarter for Insulet with demand for the new OmniPod exceeding our expectations, with greater than 50% year-over-year increase and more than a 40% increase from the first quarter of 2013. We shipped the record setting level initial orders of the OmniPod in the second quarter.

This robust demand drove strong financial results, quarterly revenues surpassed $60 million for first time and we generated positive quarterly cash flow for the first time in Insulet history.

Enthusiasm for the new OmniPod has been strong as the simplicity of the OmniPod’s smaller design, coupled with the updated insulin on board methodology is appealing both customers and healthcare professionals alike. We commenced transition of our existing customer base to new OmniPod in June and expect the vast majority of customers to be transition by the end of the third quarter.

As anticipated, the launch of the new OmniPod has also provided our commercial team an opportunity to engage healthcare professionals on different levels, either by deepening our relationship with current supporters or broadening our reach to additional potential subscribers.

While we are still in the early days of the launch, we are exceedingly pleased with the progress to date. Let me share a couple of examples with you.

You may recall that last quarter I spoke about the significant practice in the northeast region that averaged one shipment per month in 2012. However, since the launch of the new OmniPod we have added nearly 50 patients from that one practice alone.

In another instance, a nurse practitioner at pediatric clinic in Mid-Atlantic noted that all of the pump starts prescribed so far this summer were OmniPods. She further stated that she expect all further pump placement summer will be on our OmniPod. We also learned this clinic is particularly pleased with the combination of smaller size and the change to insulin on board methodology.

Finally, a clinic in the central region announced back in early 2012 their intention to only offer one brand of pumps to the patients, a tubed pump. With the new OmniPod in hand one of our territory managers embarked on an aggressive plan to demonstrate its key benefits to doctors and clinical diabetes educators at the practice.

The result is that not only our one of the doctors and educators at the practice now wearing the new OmniPod, but they are actively recommending the product. As a result, having these critical influences on board, we have been seeing 19 new shipments over the last few months from the same clinic.

These are just three of the many other examples of the early success of the new OmniPod. In fact, since the launch in late February, nearly 20% of our initial shipments were generated by new practices, which we define as on office or clinic that has not prescribed an OmniPod in 2012. Even more impressive, when we look at our existing practices, over 15% of them have seen 100% or greater increase in initial shipment as compared to the prior year.

The excitement around the new OmniPod is growing outside of the United States too. Ypsomed, our partner in Europe have seen nearly 50% increase in patient base -- its patient base since the end of December as they continue to take significant share in key European markets. We are pleased with Ypsomed progress and continue to work closely together to broaden OmniPod’s reach in additional European market such as France and Italy.

It’s not only our new customers so excited about the next-generation OmniPod. As planned, we began the conversion of our exciting customer base to the smaller product in June and are aggressively working to transition majority of them to new product by the end of September. We are pleased to report that with approximately 40% of the customer base now transitioned we are on track to achieve that goal.

That being said, the timing of this transition did have some impact on our revenues this quarter. As expected, reorder customers either planned to use up remaining supplies or ordered one box of pods at a time, thereby postponing reorder dates in anticipation of the new pod.

We expect similar disruption in the third quarter as we continue to transition customers and manage payer cycles. We expect reorder utilization rates to normalize back to our more predictable reorder patterns with the transition complete in the fourth quarter.

Supporting our high levels of demand and rapid growth has been the outstanding work of our operations team in partnership with Flextronics and our supplier. With the early demand for product exceeding our initial expectation, the manufacturing team has been working non-stop to meet our supply requirements.

We are currently running two full manufacturing lines with an output of more than 20,000 OmniPods per day. In July, we produced nearly 500,000 OmniPods and we expect that number to increase to approximately 600,000 per month in August and September.

Ramping in the manufacturing line is not an easy task. As we accelerated production we have to overcome some minor hiccups over the last three months. Some of these normal cost challenges have been resolved within the matter of hours, yet with inventory levels low the team remains keenly focused on ensuring that we are producing at a rate to satisfy our growing demand.

Our manufacturing line remains on track to be qualified and operational in the next couple of months. The third line will boost our overall capacity to approximately 1 million pods per month, allowing us ample supply for additional demand and to start building inventory in the fourth quarter.

While the priority of our engineering team is currently the production of the new OmniPod, we are also investing in innovative future products that we believe to be unique in the diabetes marketplace.

At the American Diabetes Association annual conference held this past June in Chicago, we noted that much discussion was focused on three topics, the type 2 diabetes population concentrated insulin and the role of continues glucose monitoring. We believe we are well-positioned in each of these areas to realize commercial success.

As we noted last quarter, we have recently entered into partnership with Eli Lilly and Company to create version of the OmniPod which will be specifically design to deliver Humulin U-500 insulin, the concentrated form of insulin used primary by -- primarily by people with highly insulin-resistant type 2 diabetes.

The potential market is large with more than 20 million people live in the type 2 diabetes in the U.S. Of this population, we estimate that up to 10% could potentially benefit from the insulin pump that delivers Humulin U-500 insulin.

We believe that the powerful combination of the product as simple as the OmniPod along its ability to deliver U-500 addresses the need to patients and doctors alike. For the patients, the easy-to-use system can improve inherence to therapy. For the doctor it’s a new tool to help patients manage diabetes and improve outcomes. The project has officially launched and development is underway.

In regards to continues glucose monitoring, we continue to make steady progress in development of the CGM-enabled OmniPod. With simplicity and easy-to-use bring so important to a person leaving the diabetes, we continue to believe we are uniquely positioned and ultimately being able to provide the customer with one OmniPod on the body solution that includes the CGM sensor.

By leveraging the components already contained in the OmniPod, we believe that we can develop a cost effective solution that will increase utilization by customers as they no longer need to wear two separate devices. Much of our work today and for the remainder of 2013 will focus on the sterilization process as well as efforts associated with the insertion system for the delivery of insulin and the sensor.

We are also very active in developing several projects, we use OmniPod outside of diabetes. Our partner, Ferring Pharmaceuticals continues to cite excellent results with the delivery of its fertility drug of (inaudible) through the OmniPod. Ferring is currently working on documentation packaging including the clinical data for an FDA submission later this year.

On the oncology space, we also made a steady progress with a large pharmaceutical partner. Clinical work is proceeding and they expect to be in a position to file this fall with an anticipated approval in 2014. In addition, several smaller, early stage projects have launched and we hope we’ll continue to fill the pipeline in the future years.

Although our primary focus is in the diabetes space, we do expect to remain active in these other delivery opportunities where the OmniPod as a technology platform to make a difference in the lives of people living with other medical conditions. It is clear that we’re making great strides in business, both commercially and operationally.

Just as important, we’re also making tremendous progress financially. In addition tour third consecutive quarter, operating cash profitability. For the first time in company history, we generated positive cash flow. Our cash balance on hand on June 30 improved to approximately $151 million from $148 million as at the end of March.

While many factors influence cash utilization in the given quarter, we are proud of this competence as we continue to drive towards operating profitability by year end. As we look to the second half of 2013, I’m encouraged by the outlook for the remainder of the year.

The response to the new OmniPod has exceeded our ROE expectations and we believe this momentum will continue throughout the third quarter and fourth quarters. New OmniPod is resonating in the market place and driving demand especially in key demographics such as children and women.

Since this launch, new shipments of the OmniPod, the people aged 18 and under have increased by more than 60%. Shipments to women have increased by nearly 50%. We look forward to completing the transition of our customer base for the new OmniPod and the addition of the third manufacturing line.

We will continue to make progress across our various R&D efforts including the Lily partnership, our oncology partnership and with the integrators, CGM-enabled OmniPod. Financially, we expect to see revenues continue to increase despite as we’ve discussed on protocols, the headwinds, from CMS competitive bidding program which went into effect on July 1st.

As a reminder, CMS enacted on approximate 70% rate cuts to certain diabetes supplies including blood glucose testing supplies to Medicare patients. At this point, we are no longer providing Medicare patients with testing supplies to neighborhood diabetes.

This results in about $5 million per quarter revenue impact. We have taken the steps necessary to appropriately transition the patients as well as to mitigate to cost impact. This includes the re-negotiation of several relationships with blood glucose, test strip suppliers and rightsizing certain headcount to meet ongoing needs.

We expect to remain cash operating profitable in the back half of the year and expect to achieve operating profitability by year end. And with that, let me turn the call over to Brian.

Brian Roberts

Thanks Duane. Consolidated revenue increased by 18% to $60.1 million in the second quarter of 2013 compared to $51 million in the second quarter of 2012. OmniPod revenue improved by nearly 25% as compared to Q2 2012.

Revenue was positively impacted by higher than anticipated initial shipments which increased by more than 50% year-over-year and more than 40% sequentially from Q1. However, this was offset as expected by decrease in reorder utilization as customers delayed customer in anticipation of the transition to new OmniPod.

We commenced conversion of the customer base in June. And we believe we were on track to have the base predominantly converted by the end of September. Some reorder disruption has continued into the third quarter as we work with customers to convert them to the new OmniPod.

With the transition effectively complete, we anticipate returning to normal utilization levels in the fourth quarter. Consolidated revenues for the first six months in 2013 was $117.4 million compared to $98.8 million for the first six months of 2012, an increase of approximately 19% year-over-year.

Gross profit grew by 20% for the second quarter to $26.8 million as compared to gross profit of $22.3 million in the second quarter of last year. Gross margin increased slightly in the second quarter to 45% as production of the new OmniPod started to ramp.

With the significant portion of our customer base expected to transition in the third quarter, we anticipate margins to remain relatively unchanged for Q3 and improve towards 50% in Q4. By early 2014, we believe that the new OmniPod will drive U.S. gross margins in the low-to-mid 60s translating to a consolidated gross margin, north of 50%.

Gross profit for the first six months of 2013 was $52 million, an increase of $9.4 million or 22% as compared to $42.6 in the first six million in the first six months of last year. We continue to gain significant leverage in the business to prudent management of our operating expenses.

Operating expenses of $32.7 million in second quarter were down slightly from the second quarter of 2012 although revenue increased by nearly 20%. Operating expenses increased by $1.3 million from the first quarter due to the timing of spend on research and development activities, legal expenses and hired and planned stock based compensation.

Operating expenses remained around $33 million per quarter for the back half of 2013. Operating expenses were $64 million for the first six months of both 2013 and 2012. Our operating loss for the second quarter declined by 45% to $5.8 million as compared to $10.5 million in the second quarter of 2012. We were also profitable on an adjusted EBITDA basis for the third quarter in a row.

Interest and other expense is $4.6 million in the second quarter of 2013 compared to $3.9 million in the second quarter of 2012. Of the $4.6 million net interest and other expense this quarter, approximately $3.2 million was non-cash. In the quarter, we retired the remaining $15 million of our 5.375% convertible notes which matured in June.

We paid consideration of approximately $2.3 million in cash and about 640,000 shares of common stock to retire the convertible debt. As part of the transaction, we recorded a one-time non-cash charge of approximately $300,000 as a loss on extinguishment of debt and included interest and other expense.

Net interest and other expense of $8.9 million for the first six months of 2013, compared to $7.7 million for the same period in 2012. Finally, we reported a net loss for the second quarter of 2013 of $10.5 million or $0.20 per share compared to a net loss of $14.5 million or $0.30 per share for the second quarter of last year. Net loss for the first six months of 2013 was $21.2 million or $0.40 per share compared to $29.3 million or $0.61 per share for the first six months of 2012.

We are pleased that for the first time in company history, we generated positive cash flow as our cash and cash equivalent balance increased to approximately $151 million as of June 30 compared to approximately $148 million as of March 31st. As of June 30th, we had approximately 54.3 million common shares outstanding.

As Duane noted, we remain excited about our prospects for the second half of 2013. Momentum for the new OmniPod has continued to accelerate as evidenced by the more than 50% growth in year-over-year shipments both here in the U.S. and in Europe.

The conversion of the base is in full swing and we expect that the majority of the transition to be complete by the end of September. As Duane mentioned, effective July 1st, the famous competitive bid program affects diabetes supplies such as blood glucose test strips.

As a result, neighborhood diabetes is no longer serving Medicare patients on these supplies. As we discussed last March, this will reduce neighborhood diabetes revenue by approximately $5 million per quarter in Q3 and Q4.

With each factors taken into consideration, we have tightened our full-year 2013 revenue expectations to be in the range of $242 million to $252 million. Fort the third quarter, we expect revenue of $60 million to $64 million as OmniPod growth offsets the neighborhood decline.

With that, let me turn the call back over to Duane.

Duane DeSisto

Thanks Brian. Our innovative product is discrete and reliable. Characteristics, that’s making a disruptive option for potential customers, including those who have never considered pumping before. We continue to see for approximately 70% to 75% of our new customers to be first-time pumpers.

The OmniPod remains product of choice for those people, living with diabetes who want freedom, discretion and ease of use of tubing free pump therapy. We are very pleased with the tremendous and growing excitement for the new OmniPod. With the enthusiasm from both new and existing customers and the dedication of our team, we are well positioned to further penetrate the insulin pump market.

We are confident that our commercial teams will continue to strengthen existing relationships and opening doors with new practices and customers, and excited for the second half of 2013. With that operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kim Gailun with JP Morgan.

Kim Gailun - JP Morgan

Good afternoon.

Duane DeSisto

Hi Kim.

Kim Gailun - JP Morgan

Hey there, couple of questions. So the first is on just as you think about converting your base over. Its sounds like no real change for the plans to have that done by the end of September. But it sounds like maybe you are expecting a little bit more reorder disruption than you might have previously thought in the third quarter. Is that the right way to interpret or you…?

Brian Roberts

Yeah. Kim, that’s absolutely correct. I mean at this point basically everybody who reorders in the third quarter is moving to the new Pod. So we are sure we will have some stragglers in the fourth quarter and that’s predominantly in majority and all those kind of works. Basically everybody will be moved over by the end of September.

We did continue to see some reorder disruption in July. It’s a combination of couple of things, one is as demand is being extremely high, our ability to make sure that we’re getting the product to that customer, at the time of their reorder. We have seen a lot of customers who had been holding off for a few months, all come in effectively in kind of one fall swoop.

And really we have to work through a lot of those managed care payers to make sure that we can get them in the right cycle. So, in certain cases, we have a customer who is ready but because of managed care requirements we may have to delay that slightly and/or kind of change the quantity that we are providing.

So, those are some of the disruptions. At this point, that we’re just kind of continued to work our way through. It will have some impacts -- really here in the first half of this quarter. And then it should be over and it should be kind of normalized as you look into September and beyond.

Kim Gailun - JP Morgan

So you are seeing, what you saw in terms of this reorder disruption in July, hasn’t really dissipated yet. You are still seeing it here into the first week of August?

Brian Roberts

It’s correct. It is starting to dissipate, but a lot of it’s really driven around managed care cycles and really when we are able to reorder a customer and in certain cases, where customer has taken one box or a couple of boxes in the second quarter, its disrupted the timing of their reorder cycle such that we can’t give them right away.

Kim Gailun - JP Morgan

Okay. Makes sense. Got it. And then the other one was just on the neighborhood diabetes, so, could you just let us know what was neighborhood in the quarter because I am just trying to get a sense that, we certainly had already modeled that kind of $5 million step-down, but I want to make sure we know what level for stepping down off of from the …?

Brian Roberts

Yeah. We saw a little bit of back starting, I think as planned in the second quarters as well as some customers starting to move away, in the latter half of the quarter especially. So they were around $ 12 million in Q2 and then we were dropping off from there.

Kim Gailun - JP Morgan

Okay. Great. Thank you.

Operator

Your next question comes from the line of Danielle Antalffy with Leerink Swann.

Danielle Antalffy - Leerink Swann

Hey, guys. Good afternoon. Can you hear me okay?

Brian Roberts

We can. How are you Danielle?

Danielle Antalffy - Leerink Swann

Good. Thanks so much. Duane and Brian, on the last call you guys gave some good commentary around new prescribers, could you provide some kind of an up-to-date commentary in the second quarter as to new prescribers, new account at the next-gen Pod has allowed you to (inaudible)?

Brian Roberts

Yeah. Sure. This is Brian. I will start and Duane can jump in as well. But one of the interesting things and we just kind of run some analytics and look at the amount of initial shipments coming, hasn’t been the number of new practices that have been opening up. And well I think we are really excited about, it is really kind of across the board.

So some of it’s within -- I think as we’ve talked about before, the commerce team has done really nice job. We’re trying to segment out what I would call, kind of their top 60 or so accounts in a given territory and then there is kind of this bucket of everybody else.

And within that top 60 accounts, its not that all 60 of those were prescribing the OmniPod, the accounts within the territory that we wanted to be prescribing the OmniPod. And I think what’s really exciting about -- we're seeing kind of across the board.

Doctors from all those different levels now coming onboard and prescribing. So at the end of the first quarter, about one out of ten, of our shipments we are from these new prescribers but it was pretty early days. Now that we have three more months of the commercial team being able to get in front of these doctors as for a couple of patients and be able to try and sample the product, if you will. We have seen that move almost a one in five.

So that’s a really great trend for us especially when you combine it with the fact that our existing prescriber base, those relationships seem to deepening and we’re seeing a lot of incremental sales from them as well. So, two things, one, as we mentioned in the script, about 15% of those doctors have seen a doubling to date of their number of shipments as well as you know one of the examples Duane pointed out literally one practice that would have done, in the first six months of last year may be four or five shipments has done. I think it is now 48 or 49 shipments through July.

Danielle Antalffy - Leerink Swann

Okay. That’s great. Thanks so much. And then as far as the gross margin extension obviously is very much contingent on transitioning that existing customer base, where about two months in now. Obviously you guys are feeling good about and then September having it fully transitioned, but I guess, my question is what sensitivity of the gross margin to say, if that let’s say a month or two, what does that mean for the gross margin ramp?

Brian Roberts

Good question. So, I mean one of the things that’s very unique about this whole upgrade obviously, is that we effectively trying to do this for free. And so it has created some challenges around exactly trying to time the demand to win where converting the patient where have them planned to convert.

So its certainly, we are assuming a period right now where everybody wants to get there as fast as we can. So, hopefully, we won’t see any slippage in the transition. I think we are going to basically be done by the end of September. We don’t have choice. At this point, we really don’t have any of the older Pod inventory on hand. And so we are relay at this place all aroused.

So it is just a matter of getting through all of those calls and making sure that we touch base with everybody. So I wouldn’t be too worried about it. I think what we are seeing in the quarter is just as the production continues to ramp up and it gets that much experience under our belt. It’s stabilizing that much more and we are able to reduced scrap and increase yield.

And those are the pieces that will drive a little bit of incremental margin one way or the other in the fourth quarter. I think we feel very comfortable as we get in to Q4. We will see that benefit start coming through and we should be basically add or pretty close to 50% for Q4.

Danielle Antalffy - Leerink Swann

Okay. Awesome. Thanks so much, guys.

Operator

Your next question comes from the line of Ben Andrew with William Blair.

Ben Andrew - William Blair

Good afternoon. Duane, maybe talk a little bit more about some of the clinics that have really stepped up their performance with the Pod and you gave some good details earlier in the call, what other sort of things do we heard in terms of people’s use of the product across broader groups of patients that can help us get a sense of patient growth from here?

Duane DeSisto

Okay, Ben, I think the most telling statistics are as Brian just described, I mean, about 20 -- one of our customers now coming from clinics that we had business with in 2012, I think, our growth in the pediatric side of the business, in my definition pediatric is 18 and under is being very, very rapid.

So, so I think all those prospects like I said for us we are pretty excited about. I think the one think we are butting our head into as Brian pointed out, is because we are doing the transition for free, everybody wants a new product now. I mean, they want to jump their reorder cycle. They want us -- we are right now, we are basically going in hand to mouth in terms of production.

They are asking to give everyone on the call some sense, I mean, we are producing over 20,000 Pods a day which is more of a new product than we ever produced of the old product in any given day. So, we come up the learning curve very, very fast, and get to get there next line up and going, start building some inventory.

Like I said, for us, I think the best thing for the customer for our business is to obviously do this transition for free. But it hasn’t been without some logistical hiccups here in terms of chasing the customers just trying to jump there reorder cycle and they want the product, everybody wants it now because it doesn’t cost them anything.

So, the demand is there from all over. It is particularly strong like I said in the lot of these pediatric clinics really wanted us to clean up that insulin on our board calculations in the old product. I won’t bore you with the details of that even though we thought we had it pretty good. But it really is, like I said, I would say, under 18 in the female side of population a smaller size and that IOB calculations really driving that business.

Ben Andrew - William Blair

Right. Okay. And then Brian, given the supply, I’m sorry the disruption in Q2 in terms of reorder and then in Q3, can we actually see patients growth accelerate in Q4 and then into 2014, is that constrained when supply comes off?

Brian Roberts

Actually, I don’t think it is constrained upon suppliers especially as we get into Q4. I think, Charlie and the team feel very confident that we are on schedule with the third line and that third line then gives us some really the kind of ample cushion that we need, if you will, around capacity, it gets us closer.

We need to ramp it obviously, but it gets us up to that million Pod per month capacity. I think that the nice thing about this is as Duane just pointed out it is the expansion of the prescriber base and its sustaining in accrual in the second quarters compared to the first. So what we are starting to see again it’s early but you are starting to see those doctors who ordered for the first time in March, have, repeat business, right.

So, they have a new patients come on in May and in June, as those first customers are reporting back to them and saying hey this is great and we are doing super with it. So from that perspective, I think we look at this is, there is a huge opportunity for us to continue to accelerate. Now that said, I am sure Q1 will still have the same kind of seasonal aspects in Q1 always has. But certainly here as we go through the third quarter and then into the fourth, I think people are feeling pretty excited about the prospects.

Ben Andrew - William Blair

Okay. I mean, not to get ‘14 guidance, but, I mean, there is no reason if -- again the supply is ample that you guys couldn’t see some at least study, not even accelerated patient growth?

Duane DeSisto

Correct.

Ben Andrew - William Blair

Okay. And then finally on CGM, you talked about a couple of developments -- things which you are working on in terms of the inserter et cetera. When do we get a chance to see some data on this sensor and/or maybe some human clinical work with products?

Duane DeSisto

The time of that would probably be some time middle to back-half of next year.

Ben Andrew - William Blair

Okay. Great. Thank you.

Operator

Your next question comes from the line of Bill Plovanic with Canaccord.

Bill Plovanic - Canaccord

Great. Thanks, good evening. Can you hear me, okay?

Duane DeSisto

Hey, Bill.

Bill Plovanic - Canaccord

I was wondering -- couple of things, one is international. I mean, you made a comment that it is up about 50% year-over-year. I think the way we thought about this ramp would be similar to the U.S. where this year we have a doubling versus 2012, would you say you are on track for that?

Duane DeSisto

I think we are on track or even a little bit ahead of it. I think the question in the shorter term is making sure, that we can like the rest of the U.S. business. I think they have seen a huge acceleration in demand. And we just want to make sure that they have appropriate amount of supply as well.

Bill Plovanic - Canaccord

And on the supply topic, I mean your inventory seems pretty low, I mean -- just any commentary would be helpful?

Duane DeSisto

The distribution we are able to do in late spring cleaning up the warehouse. So, Bill, it is -- the fundamental loan aspect when you go into conversion to a product, we knew would resonate with customers and you do it for free. Everybody wants it immediately. And although we had a plan, we laid out a plan, everybody has jumped into the queue as Brian articulated.

If you got your last free orders in March, you can’t a new reorder in April, but what people were trying to do is kind of jumpstart on that system so they would only order a box in March. They call us only one box, but they knew the new one was coming. So what astonishes is -- it’s really -- it’s really put us in a hand-to-mouth situation in terms of manufacturing, Charley, these guys, like I said, we’re now producing more of the new products than we’ve ever produced on a given day of the old product, but we’re still hand-to-mouth.

I mean we’re still working from the backlog all over the place. I mean every aspect of the business here and we’re hoping like I said by the fourth quarter we’ll start put some more inventory back on the balance sheet.

So there is always, you look at all this kind of normal little interruptions that happen every day, all across the world in every manufacturing company. It’s not a big deal. When you go in hand-to-mouth, you have to pay attention to it.

So that is the challenge in front of us right now. It is not demand. It’s not orders. It is really just continue to ramp this thing up. And I’ll take my hat to Charley in the third line. I mean it’s been a pretty impressive ramp up, all the way through supply chain.

But we have to keep going. I mean we’re not there yet, and like I said, I think, Q3, if you look at Q3, our single biggest challenge is going to be executing on that. But the demand is there. The interest is there. But we’re chasing that and you’re right there is very little inventory there.

Bill Plovanic - Canaccord

Is that…

Duane DeSisto

And then it gets cleared in those outfits that there is some hope to us.

Bill Plovanic - Canaccord

Can that be a constraint for a new patient growth in Q3, are you going to pulling the range or would you rather pulling the range of conversion of your existing customers?

Duane DeSisto

Our hope is it’s not pulling the range not any of this, so we are continuing to push. I would tell you I think that the one obstacle we’ve come across is as the example I gave you which is the perfect one, which is some of is due for an order in March. We haven’t started converting it.

They only ordered one box of Om -- the old version knowing the new one was coming up. And now in April, they are saying, okay, I want the new one and I want it now and the insurance companies said, well, you get your reorder last quarter. So we have to go through the process, saying, while they’ve only got one box.

And so that process in of itself, I guess, is helping us manage our way through the people that are being converted. But I mean it’s a lot of paper work. It’s lot of headaches and we should be through it here by the end of third quarter.

But right now the plan is to we have not slowed down the horses. We’ve got the jockeys flipping on them and we are continuing to go. So the real trick is here, I think, Charley and his guys are feeling pretty good about what they’re having. But we’ve got to execute everyday to do -- everything we wanted to do.

Bill Plovanic - Canaccord

And given that this is on that same topic, where exactly are you on line three or is all the equipment in, are you validating, are you building inventory, are you waiting for anything, kind of where exactly is that today?

Duane DeSisto

So all the equipments are there and like we say within the next one to two months here it should all be up and working, is the plan.

Bill Plovanic - Canaccord

Great. Thank you.

Operator

Your next question comes from the line of Raj Denhoy with Jefferies.

Raj Denhoy - Jefferies

Hi. Good afternoon.

Duane DeSisto

Hi.

Brian Roberts

Hey Raj.

Raj Denhoy - Jefferies

Whether if I could ask a little bit more about the integrated product the CGM product. I guess there continues to be quite a bit of question in terms of your partnering that product and CGM technology, or you’re using with that. Is there any more you’re prepared to share at this point and if not when do you think you might be able to share some more around that?

Duane DeSisto

Yeah. Like I said, I think from our standpoint right now, the primary focus is only about sterilization, the insertion and obviously, the accuracy of the sensor. So we’re looking for the middle to the back half of next year when we think we’ll be developing clinical data and at that point of time we’ll go through with everybody.

Raj Denhoy - Jefferies

Okay. But even in terms of the technology you’re using or works coming from anything like that, in the absence of any clinical data you’re…

Duane DeSisto

No. I don’t -- I would. Here is how I categorize where we are. I mean we’re still very much in the R&D phase. So there is -- I don’t want to mislead anyone. We’re very much in the R&D phase. We do think it’s the right format for patients and we continue to pull people, one thing on the body with an integrated CGM sensor. I think it becomes standard of care because anyone in need of insulin it is understand they have to get insulin somehow into their body and if we can incorporate that.

So we think it’s the right form factor. We’re excited about it. And we’re excited about the possibility of being able to execute on that. But in terms of who we are working with the stuff, at the moment still just way too early. It is still very much an R&D project.

Raj Denhoy - Jefferies

Okay. And then the anecdote but in terms of those kind of critical pass you describe them in terms of the sterilization and then the integrated insertion of both devices? Where are you in that, I mean do these represent in a very difficult engineering challenges or are you feeling comfortable if you’re just simply things that will take time to work through and then you’ll move forward from there, I’m just trying to gauge your level of confidence it’s going to become a real product for you?

Duane DeSisto

Look I think from our standpoint we’re trying to do something that no one has really done before, okay. In terms of combined insulin delivery system of continuous sensing and so as a result of all that, I think, we wouldn’t be spending this money if we didn’t think we had a path there, but we’re still not far enough along, where I can sit here and tell you, yeah, we’ll definitely get it done. I mean it’s still a work in progress. We’re intrigued by what we’re seeing but I would not sit here and tell you. It’s just a question of when not if. I mean it is -- there’s still some ifs and yeah.

Raj Denhoy - Jefferies

Okay. That’s fair. And then just on Neighborhood you obviously had a big step down in terms of what’s happening on the strip side? What your current thoughts on that business I guess it’s been a couple of years now, clearly, I don’t think it’s performed as you thought it would. How integrated to your strategy going forward?

Duane DeSisto

Okay. I think there is kind of two parts to this. If you remember way back when we talked about acquiring Neighborhood, one of the things we’re faced with as a company is our infrastructure was not adequate to handle the way our business has grown. So a big piece of the Neighborhood acquisition was, okay, they had focus here we have a DNA supplier that is focused on diabetes and they were just much better at what we wanted to do than we were as a kind of standalone company.

So a big piece of us integrating that was to be able to leverage those economies of scale and then, obviously, the other thing is if we could do all that not just add expense to P&L but have the ability to pick up this incremental supplies and the other stuff, so it was accretive to the bottom line. I mean that was really the launch behind it.

I think while we always anticipated an impact to the strip business, I’m not going to sit here and tell you we thought it’d be 70%. I don’t think anyone thought it’d be 70%. So it’s material. So we’re reacting to it.

I still think and we’re going through a long-term strategic planning process internally to really look at the various opportunities. I mean we’ve brought uncovered some interesting stuff with that business. But having said all that as soon as we knew what the new strip price was going to be, we’ve right sized business.

So it’s helping us in terms of the one aspect that we’re really concerned about which is our infrastructure has worked as we had hoped. I think, on the other side, I think it’s fair statement and we never anticipated a -- we were taking maybe a 30% cut in Medicare and not picking 10 people and doing all I did.

So I mean we didn’t anticipate that. So we’ve right sized and we’re moving forward with it. We do think it uncovered some interesting opportunities along the way. But I think as you described I think it’s going to more often to some little different than we originally anticipated.

Raj Denhoy - Jefferies

Okay. Just lastly on sales force, obviously, you’re seeing very strong demand for the new pod, what are your plans on expanding the sales force?

Duane DeSisto

I think, once again, I think for the rest of this year we add people it would be later in the fourth quarter of this year to get them ready for next year, but right now we’re going through that process. I would tell you we’re very, very pleased with the productivity of the group that we have out there. We’re pretty excited about it. And I mean we’re looking all this and taking a hard look at all pieces of that business.

There is no question that we produce some more people. I’m not going to argue that for a minute. But we want to do it in a smart financial sound way. So that’s kind of how we’re going through and if you think about as Brian described, if you think about when will the opportunity time for that would be once we get through this transition and we get those additional margin dollars. I’m not saying you use all those margin dollars and spend them. I’m saying that does give you more money coming in for the company with the opportunity spend a portion of that on sales and distribution.

Raj Denhoy - Jefferies

Very good. Thank you.

Brian Roberts

I’d only add to that Raj real quick that the sales force and if you can imagine, right. We’re coming off of really five months now of kind of blown the door up at hinges kind of initial shipments, lot of the promise for them too is coming true where, would they be able to increase their prescriber bases, would they be able to see the growth within their specific doctors and clinics, would that translate or come into bigger commission checks?

And I think what we’ve seen so far by the results of the last five months, that’s coming true. So I mean it’s a very, very motivated. I think very excited, very happy kind of sales force right now that’s driving an awful lot of patients demand and often we want to do a slow that.

Raj Denhoy - Jefferies

Okay. Very good. Thank you.

Operator

Your next question comes from the line of Tom Gunderson with Piper Jaffray.

Tom Gunderson - Piper Jaffray

Hi. Good afternoon.

Brian Roberts

Hi, Jeff.

Tom Gunderson - Piper Jaffray

Let me just a moment let me be quick here. Just two questions. One, there is a lot of talk on manufacturing and inventory, and you guys have done an incredible job? But if we look back over the timeline some incredible job that took a lot of work by a lot of people.

So my question is as you talk about the U-500 product? Can you talk about a cancer product, is that the same pod, same hardware and maybe there is a little difference software or different, obviously different drugs going in, but are you able to use all of the manufacturing capabilities that you’ve established now or do you have to setup a whole separate line?

Duane DeSisto

So, Tom, great question. It is from the pod’s standpoint same manufacturing line and the U-500 obviously the handheld will be different, because you’re delivering strength of the drug. And in terms of the cemo drug there is no impact. So we’re leveraging the manufacturing, any prerequisite or anything we do. I think we probably know better than most what it takes. We have to manufacture. We are not doing anything that will require us to build a new manufacturing line at the moment.

Tom Gunderson - Piper Jaffray

But you don’t want to tell Charley to do it all over again?

Duane DeSisto

If I tell Charley to do all over again, he will strangle me.

Brian Roberts

Yeah. What is clear though is after line three is built, here in the short term then we’ll be quickly on within the next few months for line four. I mean there are certain tools and pieces of equipment that have long, long lead times where we’ve already ordered for line four and frankly, for volumes to be able to reach the line five. So we do still have some line building to kind of come, but it’s -- that’s a good problem to have.

Duane DeSisto

Yes.

Tom Gunderson - Piper Jaffray

And then Duane you mentioned again a number that we know, but I’m curious if it’s changing and that’s 70% to 75% of users that are first-time pumpers. The new-gen OmniPod has got a lot of buzz to it. It opens doors with your -- with new accounts. Is it opening any door such that you’re starting to think maybe you can get more into that, not first-time pumpers, the reorder business but significantly larger?

Duane DeSisto

And that’s another good question, Tom. Right now I would tell you the single biggest area that we’re seeing, as I described to you, the growth is coming from the whole pediatric side and kind of the female side who has chosen shots over anything else. So this is a significant amount of growth there.

So do I think long term we can get there, yes. But right now I would tell you the business is coming from kind of the same kind of segments which is people need find themselves as active and don’t want to be feathered in on and on, and on, and on. I mean it really is that cool and it’ll be interesting see we haven’t fought it out yet but over time we’ll start taking a look in that pediatric group with the average age going down as a result of the smaller size allowing younger and younger kids to this or not.

Brian Roberts

Yeah. Actually one anecdote that I could add to that is, we’ve looked at for in preparation for kind of looking at data for the last three months. We looked at zero to 10 group, and that group be the little bit of smaller number that could more than doubled, compared to the same period over the prior year. So I think that’s absolutely true.

Tom Gunderson - Piper Jaffray

I love the way you guys are going after the zero, that just the, opportunities there for somebody to step in, good job. I’m just kidding. That’s sort of feels like when you talk to people out there is, the size, you can talk about it, we can put a number on it, but when you see it side by side or when you where it, the size really as attractive to those beads and to the smaller women, it’s pretty amazing. That’s sit more me.

Brian Roberts

Thank you.

Duane DeSisto

Thanks.

Operator

Your next question comes from the line of Mimi Pham with ABR Healthco.

Mimi Pham - ABR Healthco

Good evening.

Duane DeSisto

Hi, Mini.

Mimi Pham - ABR Healthco

How are you? Regarding the record of level new OmniPod shipments, we estimate you had 5,000 for the first time in second quarter, is that ballpark or accurate?

Brian Roberts

Yeah. I mean, again, I’m not going to -- we are not going to give kind of account number. But, certainly, hopefully, between the 50% year-over-year number and the 40% growth sequentially from Q1, you guys can go and do the math.

Mimi Pham - ABR Healthco

Okay. Just regarding the conversion of the stock-based, were you hearing about any attrition from the slight delay or any centers or endocrinologist upset anyway over the, how the conversion was handled…

Duane DeSisto

So, Mini, here, this is Duane. I will tell you, if you too, the two biggest complaint that we are having at the moment, which is pretty simple is, I want it and I want it now and I don’t care what the insurance says, because and like I said, that’s all being triggered by the fact that we are doing this for free and we try to explain it soon.

And the second, the second piece is, as soon as we started sending out notices for the first group of people. So people that were eligible for reorder in June, send the notice out, because we are looking at their insurance, with just help everyone on the call. The way we decide to get upgraded, as soon as we have to manufacture one, we said, okay, who is eligible for reorder in June. Who is eligible for reorder in April? Who is eligible for reorder in May?

And so you use that is a trigger. As soon as we sent out that first batch, what we ask patients to do is, go to the website because there are differences in the particular product this one versus the other, how you started up, obviously you get to get the new - you get to use the PDM, don’t use the old PDM with the new product. It all seems relatively simple.

What I will tell you, as soon as word went out, but we started that conversion, everybody in our customer base. I think call because it’s for free, right. So in [hinesack] I think long-term it’s absolutely, we are doing the right thing for the patient, we are doing right thing to everybody. But it was like a tidal wave that rolled in here and our average length of our phone calls are going up, we get people calling up and saying, I want it, I want it now and we’re saying, you are not eligible for reorder until September and they like I don’t care, I walk in, I want it now.

So, I would tell you, I’m not sure what we do differently, I’m still trying to work through that. But I think the only complaints that we’ve heard is our customer service, our customer service lines are been jammed solid, we have doubled the number of people, we are answering the phone calls and we are starting to make inroads into all that. But, that magic word, free, has triggered an avalanche to us, so.

Mimi Pham - ABR Healthco

Okay. It sounds like people still maybe just asking about wanting it now versus later but not any one up here…

Duane DeSisto

Yeah. Mimi, I can see here in, you all the logic, you want to throw it’s somebody, but if they want it now, they want it now. So, I would tell you, if there is any frustration out there. And look I appreciate it. I'm thrilled that people really want the product. But we get to work our way though it and as, I actually subscribe them, I mean, we are not holding anything that, I mean, going hand to month. The lots of coming in, the clearing and then they are going right out and so, we just got to manage our way through that process and we’re hoping here over the next 60 days more or less. That will be though that, moving back to the normal reorders, the phone calls will subside. We can lend all the [pen] sold that we have hired to see answering phone and we can get back to where we want to be.

Mimi Pham - ABR Healthco

And the last question, we estimated in the U.S. your share of pump sold to the new patients which incur injections to be about mid 20%? Does that match your math and what could this share of the new pumper segment reach with your second trend do you think?

Brian Roberts

I mean, I guess, we look at this in the broader way. I mean, I think, it’s hard to tell at any point in time, how many people are in that denominator. So, if you just think about the overall market and pump penetration two year ago was probably low 28% kind of range, now we are probably in the upper 20s and we hopefully starting to push towards 30% penetration.

I know some of you guys on the phone have done different surveys in the past and think of penetration, can get into the 40% to 50% range. I mean, for us when you look at that, I can’t see why people wouldn’t come on to this product, especially this version, the smaller lighter pods, to me its, again, that’s -- it’s a borrower but it’s the iPod versus an eight track tape cassette. I mean, it’s a -- this is the new technology. This is something that I think is a game changer.

And from that, I certainly do think we are taking a disproportionate share of new pumpers. And again the data so far, well, I know exactly what percent that maybe. The data is backing it up by just seeing how many new doctors and clinics we’re bring into prescribing the product as well as the growth level of within the existing base.

And what we’re seeing now five months in, that fear of although just a little -- to borrow the word bolus of customers that are going to come through on the launch of the new Pod. We’re seeing the levels of growth sustained, right. So that can be, I think a good point because we’re saying instead being at five patients a month at a clinic, and we will not the 15 patients a month maybe for a couple of months, we're settling between 10 and 12 months. That’s a not a bad place for us to be in any of this places.

Mimi Pham - ABR Healthco

Hopeful. Thank you.

Operator

Your next question comes from the line of Steven Lichtman with Oppenheimer & Company.

Steven Lichtman - Oppenheimer & Company

Thank you. Hi, guys. First question on really, I think last call you mentioned obviously you guys will be distributing the product. Any way to able to leverage their obvious marketing muscle as this product hopefully gets approved?

Duane DeSisto

I think from March standpoint, the agreement we have with Eli Lilly at the moment is purely on the development side that’s the agreement. If something comes about down the road, the two companies work together, that will be terrific. But right now all we have in place is basically in R&D kind of joint development agreement.

Steven Lichtman - Oppenheimer & Company

Okay. And then on the oncology side, at what point will you be able to get a little more information about the partner on that one around you ran early next year?

Duane DeSisto

I think that’s fare timeframe.

Brian Roberts

Yeah. As you mentioned in the script on the plan, I mean, the plan is to file hopefully before the end of the year, hearing so that’s maybe trigger where we can talked about that one.

Steven Lichtman - Oppenheimer & Company

Okay. Great. And then lastly just so Brian, to clarify on the o-US number for this quarter, what is the percent of total non-neighborhood revenue approximately, the international number?

Brian Roberts

Non-neighborhood revenue,

Duane DeSisto

That would (inaudible) that would be easier.

Brian Roberts

Yeah. Kind of mid single digits percent for us total, I mean again as Duane pointed we probably could have -- if we want a little bit inventory constraint probably would've been able to shift some them some more before the end of the quarter but we had to hold that a little bit to make sure we’re meeting the needs hereto.

Steven Lichtman - Oppenheimer & Company

Okay. Great. Thanks guys.

Operator

Your next question comes from the line of Jayson Bedford with Raymond James.

Jayson Bedford - Raymond James

Guys, we can here me, okay.

Duane DeSisto

Hi, Jayson.

Jayson Bedford - Raymond James

So, just first half you obviously haven a lot of successes your follow the new patient add, can you comment on the stickiness to device, maybe you’ve seen maybe better retention rates or lower attrition?

Brian Roberts

It’s hard to -- lot of these patients what have just going through our first reorder. If they were added in the March type timeframe. So, around this specific new set of patients, it’s kind of early days. But our overall attrition rate, it’s been pretty constant down a little bit over the course of the last few months, kind of trending down words such that we’ve been slightly under 9%. So that trend seems to be continuing and going in our direction.

Jayson Bedford - Raymond James

Okay. and then sort of in the same way, Brian, I know, in the past you talked about in Europe, these pods have had roughly, half the failure rate of the old pods, are you certain see that in the U.S. so far?

Brian Roberts

Again, I think it’s pretty early days. What we seeing so far, as Duane pointed out a little bit, there are some nuances and difference in start-up. So from customers who were trying listening to the new pod, sometime they tend to have a couple of failures. Once we have spoken to them, it is really kind of that change in training and we work them through that and they are good to go. In Europe, the rates been holding pretty consistent so far.

Jayson Bedford - Raymond James

Okay. And then lastly, I think on the fourth quarter call when you gave initial guidance, you said you expected that new patient add number to be roughly 40% growth. I don’t think you commented on the last quarter. Obviously it’s been above that and so far in the second quarter, you expect that to be roughly around that 40% level higher or lower, do you have a comment on that?

Duane DeSisto

Yeah. I mean, I certainly within the last five months we've been at this kind of 50% quarter, 50% year-over-year rate. I’m certainly hopeful that’s going to continue to back half of ‘13.

Jayson Bedford - Raymond James

Okay. Perfect. Thank you.

Operator

At this time, there are no further questions. Presenters do you have any closing remarks.

Duane DeSisto

I just want to thank everyone for joining us and I look forward to updating you on the next quarter call. Take care.

Operator

This concludes today’s conference call. You may now disconnect.

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