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Edited Transcript of PODD earnings conference call or presentation 21-Feb-18 9:30pm GMT

Q4 2017 Insulet Corp Earnings Call

BEDFORD Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Insulet Corp earnings conference call or presentation Wednesday, February 21, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deborah R. Gordon

Insulet Corporation - VP of IR & Corporate Communications

* Michael L. Levitz

Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer

* Patrick J. Sullivan

Insulet Corporation - Chairman & CEO

* Shacey Petrovic

Insulet Corporation - President and COO

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Conference Call Participants

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* Danielle Joy Antalffy

Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Jayson Tyler Bedford

Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst

* Jeffrey D. Johnson

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Jonathan Preston McKim

Piper Jaffray Companies, Research Division - Research Analyst

* Kyle William Rose

Canaccord Genuity Limited, Research Division - Senior Analyst

* Malgorzata Maria Kaczor

William Blair & Company L.L.C., Research Division - Research Analyst

* Matthew Charles Taylor

Barclays PLC, Research Division - Director

* Rajbir Singh Denhoy

Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst

* Robert Justin Marcus

JP Morgan Chase & Co, Research Division - Analyst

* Ryan Blicker

Cowen and Company, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation Fourth Quarter and Full Year 2017 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

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Deborah R. Gordon, Insulet Corporation - VP of IR & Corporate Communications [2]

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Thank you, Brian. Good afternoon, and thank you for joining us for our fourth quarter 2017 earnings call. Joining me today are Patrick Sullivan, Chairman and Chief Executive Officer; Shacey Petrovic, President and Chief Operating Officer; and Michael Levitz, Senior Vice President and Chief Financial Officer.

The replay of this call will be archived on our website, and our press release discussing our fourth quarter 2017 results and first quarter and full year 2018 guidance is also available in the IR section of our website.

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

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

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

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Patrick J. Sullivan, Insulet Corporation - Chairman & CEO [3]

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Thank you, Deb, and good afternoon, everyone, and welcome to Insulet's fourth quarter and 2017 conference call. I'll start off the call with an overview of the business highlights and financial performance for Q4 and full year 2017. Michael will follow with details on our Q4 and 2017 financial results as well as provide 2018 guidance.

Shacey will then provide details of our commercial initiatives and an update on our R&D progress.

We'll then open up the call for questions.

2017 was simply a spectacular year for the company and a year of significant accomplishments. #1 on my list was gaining CMS Medicare Part D coverage guidance for the Omnipod System; #2, we submitted DASH, our next-generation product platform to the FDA. We are implementing our plan to go direct in Europe, and we broke ground on our U.S. manufacturing plant in Acton, Massachusetts. And we delivered a very strong Q4 and 2017 results, including growth of over 30% in our worldwide customer base.

The first 4 are not only our accomplishments for 2017, but importantly, our priorities for this year to fuel our growth in 2019 and into the future, namely securing Omnipod Medicare coverage with Part D sponsors, launching the DASH product platform, transitioning our European business through direct distribution, and implementing our U.S. manufacturing strategy.

I'll start off with the great news on CMS coverage for the Omnipod.

On January the 5, CMS issued guidance clarifying that Medicare Part D sponsors are now permitted to provide coverage for products such as the Omnipod under the Part D prescription drug program. The 450,000 individuals with Type 1 diabetes in the United States, roughly 1/3 in the market, who have Medicare or Medicaid coverage will now have a pathway to access the Omnipod. Our users who are with Medicare and those that age into Medicare for now have the opportunity to continue to use Omnipod. They will no longer be faced with paying out of pocket for their life-sustaining Omnipod or transitioning to a less attractive alternative. Achieving Medicare coverage is a monumental accomplishment and a tremendous benefit to our Omnipod Medicare beneficiaries.

Medicare Part D through the pharmacy channel is a clear differentiator and a competitive advantage for Insulet. The pharmacy channel will provide easier access to Omnipod since its simpler for physicians to prescribe in this channel. And it will also provide our users with a better patient experience since they will be able to access the Omnipod in the same channel as they did with prescription drugs. Securing Medicare Part D coverage provides us with a direct pathway to secure Medicaid state coverage since most of the Medicaid plans follow the CMS prescription drug coverage guidance. For those individuals on Medicaid, particularly the pediatric population, Omnipod will finally become a choice.

We expect the benefits of Medicare coverage to begin in 2019. And during this year, our market access team will focus on placing Omnipod on the formulary of the Part D sponsors.

In the meantime, our customer service team will work with our current Medicare customers to gain access this year through the Part D exception process. Achieving Medicare Part D coverage is a huge win for Omnipod patients, physicians and the diabetes community.

Next, an update on DASH. Last month, we submitted a 510(k) to the FDA for the Omnipod DASH system, our next-generation mobile platform. We are very excited about the significant potential of this state-of-the-art innovation and what it means for Insulet and our customers. DASH is the mobile platform for all of our innovation pipeline, including U-200 and U-500 programs with Lilly and our Horizon Automated Glucose Control System. The launch of DASH is, of course, dependent upon the FDA clearance, which we expect in the second half of this year.

Now turning to the transitioning of our European business. We are on track with our transition to direct distribution of our Omnipod System in Europe on July the 1. I'm thrilled with our European team's exceptional execution. I'm also impressed with the level of experience and market knowledge of the team we are building on the ground in Europe.

Last week, I attended the Advanced Technologies and Treatment of Diabetes or the ATTD meeting in Vienna, Austria, where we exhibited for the very first time as Insulet in Europe. We had an incredibly busy and successful several days at the event, including a large number of visitors at our booth in the exhibition hall and many meetings with health care providers, commercial partners and our European physician advisory board. We also conducted an insulin symposium attended by 120 participants focused on our innovation pipeline. The latest on Horizon and clinical progress, a data review of 40,000 patients and results of a real-world Omnipod experience from researchers in Europe.

The international customer base at the end of last year was estimated at nearly 65,000 with the vast majority in Europe, and we expect the international customer base to continue to grow this year. While we fully appreciate the level of work required to ensure the continuity of care to deliver the best possible customer experience as we transition to direct distribution in Europe, our team has the skills and talent necessary to transition this business successfully, and I'm looking forward to direct distribution on July the 1.

This transition is a huge opportunity for our European customers and significantly improves our financial profile in the second half of this year as Mike will describe shortly.

Now turning to manufacturing.

We have made significant improvements across our manufacturing and supply chain operations and continue to drive increased daily production volumes with less headcount and scrap while delivering superior quality and reliable products. This sustained outstanding production performance continues to drive sizable improvements in our gross margin and we have a very clear line of sight of 70% margins for the business in 2021.

We are on track to begin production in our new state-of-the-art manufacturing facility in Massachusetts in 2019, which will also serve as a site of our new global headquarters. We will build out the facility and install the automation equipment later this year and expect to start production in early 2019. The new facility will provide increased capacity and second-source redundancy to support our significant growth trajectory. Operational excellence is at the core of who we are and what we do and it's a key success factor for this business.

Finally, let's turn to our financial results, which evidenced our outstanding performance and strong momentum. We have exceeded guidance and delivered strong performance across our business in 2017 with revenue of $464 million, a growth of 26% year-over-year and $6 million above the midpoint of our most recent guidance range. U.S. Omnipod revenue was more than $271 million, growing 18%; international Omnipod was $120 million, growing 67%; and Drug Delivery was $72 million, growing 11%.

Our full year gross margin was 60%, an improvement of more than 200 basis points from last year.

Year 2017 was a year of significant accomplishments and performance. During the year, we laid the foundation for further growth and profitability. As a result of the positive momentum we built in 2017, this year is shaping up to be another very exciting year for the company. We're very confident in our 2021 targets of $1 billion in revenue, 70% gross margin and above-market profitability. The future beyond 2021 is rich with significant opportunities for growth through our innovation pipeline and further geographic expansion. We are focusing on delivering innovation to our customers worldwide and superior returns for our shareholders. I'm proud of the team's execution and exceptional performance in 2017. We're focused on our 2018 priorities and excited about the extraordinary bright future ahead of us.

And with that, I'll turn the call over to Mike. Michael?

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [4]

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Thank you, Pat. I echo Pat's excitement about the incredible year we had in 2017 and the strong positive indicators we are already seeing for 2018.

I will now walk you through our fourth quarter results and introduce first quarter and full year 2018 guidance.

We're very pleased to report fourth quarter year-over-year revenue growth of 26%, with revenue of $130.5 million. We exceeded the midpoint of our stated guidance by $6 million, with 2/3 of the beat coming from U.S. Omnipod due to our growing customer base. And the remainder of the beat coming from International Omnipod due to momentum across our markets, including continued strength in France.

Our gross margin increased 210 basis points to 60.9%. This significant growth is primarily from the improvements we've made in our manufacturing and supply chain operation that Pat just outlined, offset in part by unfavorable mix due to faster-growing international distributor sales.

In just the last few years, as a result of the team's incredible execution and discipline to drive improvements in both quality and efficiency, we have seen growth from a mid-40% gross margin range to over 60% and growing.

We are targeting gross margin approaching 70% in 2021. And we expect to make considerable headway towards that goal this year even before lower cost U.S. manufacturing begins next year.

Our operating expenses increased $80 million compared to $65 million, in line with expectations. And the net result was a small operating loss in the fourth quarter, and it positions us well for achieving our 2018 objective. We ended the year with more than $565 million in cash and investments on our balance sheet, up from $300 million at the end of 2016. In November, we issued over $400 million in convertible note. And we subsequently used the proceeds to repurchase existing higher coupon notes with net proceeds of over -- of $290 million.

During 2017, we generated over $40 million in cash from operations, a significant improvement from prior years.

We spent $77 million on capital expenditures to support the growth of our business, most notably for our investment in U.S. manufacturing and supply chain operations. We expect our capital expenditures in 2018 to increase from 2017 as we complete development of our new U.S. operation, which, as Pat said, is on schedule to begin part production in early 2019.

We're very pleased with our strong financial position as we make valuable strategic investments in support of our organic growth opportunities.

I will now walk you through our 2018 outlook.

For the full year, we expect total revenue in the range of $560 million to $580 million, representing growth of 21% to 25%. First, we expect U.S. Omnipod revenue in the range of $316 million to $323 million, representing growth of 16% to 19%. This primarily reflects continued strong growth in our U.S. customer base, which Shacey will describe shortly.

In 2018, we expect International Omnipod revenue in the range of $185 million to $194 million, representing growth of 54% to 62%. This exceptional growth will be driven by 3 factors. First, capturing more of the value of existing end user pricing in Europe, up approximate 50% from our historic distributor pricing after we assume direct operations July 1. Second, the full year impact of the significant increase in Omnipod adoption in 2017. And, third, continued growth in our customer base in existing markets even as our top priority in 2018 will be customer continuity through the transition to direct operations.

For Drug Delivery, we expect revenue in the range of $59 million to $63 million, representing a decline of 13% to 18%. This decrease reflects the current forecast from Amgen.

Now for the first quarter of 2018, we expect total revenue in the range of $119 million to $123 million, representing growth of 17% to 21%. At a product line level, we expect U.S. Omnipod in the range of $68.5 million to $70 million, representing growth of 15% to 17%. We expect International Omnipod in the range of $36.5 million to $38 million, representing growth of 45% to 51%. And we expect Drug Delivery in the range of $14 million to $15 million, representing a decline of $2 million to $3 million.

Please note that our guidance reflects the adoption of new revenue-related accounting standards effective for 2018, which are presented prospectively in our P&L. We do not expect this to have a material impact on our financial trends. Specifically, the adoption of these rules increased our guidance for full year 2018 revenue by less than 1% or approximate $5 million, including $2 million of nonrecurring international revenue spread evenly over the first half of 2018 and $3 million in Drug Delivery spread throughout the year.

For the first quarter, the adoption of these rules increased guidance by approximately $2 million, split evenly between International and Drug Delivery.

Now moving to gross margin.

Following our gross margin expansion of 230 basis points in 2017, we expect full year 2018 gross margin will, again, increase significantly, up over 300 basis points to 63% to 64%, driven by continued operational improvements and the partial year impact of assuming direct European operations July 1. As we stated previously, we expect an annual run rate margin increase of approximately 400 basis points beginning July 1. As such, we expect our consolidated gross margin in the first half of the year to be 60% to 61% and increasing to 64% to 65% in the second half of 2018.

To achieve our revenue growth and profitability goals, we will continue to invest in our business, including incremental investments in 2018 to establish both direct operations in Europe midyear and in-house manufacturing in the United States for production to begin in early 2019. We expect full year 2018 operating expenses to increase up to 25%, but to remain relatively consistent as a percentage of revenue even with the cost to establish our European infrastructure. Outside of the investments in Europe and U.S. manufacturing, the increase in operating expenses includes continued investment in our exciting innovation pipeline as well as expansion of our commercial teams to meet the growing demand that we're seeing and take advantage of CMS' decision that Omnipod is coverable under the Part D drug benefit.

Please note that our expenses in 2018 will also be impacted by the adoption of the new accounting standards, requiring capitalization of sales commissions to be amortized over the period of benefit. The adoption of these rules will reduce our expenses in 2018 by approximately 1% to $4 million. As previously stated, we expect the transition to direct European operations will require ongoing run rate European expenses of $45 million to $50 million, which are included in the stated 2018 guidance.

We also expect certain nonrecurring costs associated with this transition, including $7 million to $8 million primarily in the first half of 2018 as we establish our operation. In addition, we will pay a termination fee to our European distributor based on our contract with them. While the amount will be determined over the year after we assume direct operation and it could vary significantly based on the terms of the agreement, we do not expect the fee to have a material impact on our financial trends as it will be amortized on our P&L over the multiyear period of benefit.

Finally, we expect to make the pivot to operating profit this year with full 2018 operating margin in the low single-digit percentage range. This reflects European infrastructure investments beginning at the start of the year before direct European revenues begin July 1.

As such, we expect operating margin in the first half to increase sequentially over 400 basis points in the second half of 2018.

In summary, 2017 was a tremendous year of growth and development for Insulet, and 2018 looks to be our most exciting and fulfilling yet, where we deliver strong growth at the top line, further expansion in gross margin and positive operating income for the first time in the company's history even with the investments in Europe and U.S. manufacturing that will accelerate earnings growth in 2019 and beyond and we're just getting started.

I will now turn the call over to Shacey.

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Shacey Petrovic, Insulet Corporation - President and COO [5]

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Thanks, Mike. I share the enthusiasm about our team's accomplishments in 2017 and we are off to a terrific start in 2018.

Building on what Pat and Mike have shared with you, I will cover our growing global customer base, including where we ended 2017 and where we expect this strong momentum to take us in 2018. And then I will discuss our strategic imperatives for the year ahead.

Our commercial strategies are clearly driving tremendous revenue and customer base growth.

As a reminder, because of Omnipod's recurring revenue model, the customer base growth is the best predictor of revenue growth. Our global customer base total is an estimate because half of our U.S. base and the majority of our international base goes through third-party distributors. We ended 2017 with an estimated global customer base between 140,000 and 145,000 active users, which represents a year-over-year increase of over 30% and drove our strong company revenue growth. We grew our U.S. customer base by approximately 17% and our international base by approximately 60%. By the end of 2017, our customer mix approximated 55% in the U.S. and 45% in international markets.

Given this great momentum and how well positioned our commercial team is to capitalize on our strength in the market, we will drive robust growth, again, in 2018. We expect our U.S. customer base will grow approximately 15% to 18% this year. In the U.S., our investments in increasing the footprint of our field team, raising awareness and driving broader market access supported by a strong commercial execution are paying off and we'll continue to deliver growth.

As you know, this year in Europe, our mission is to successfully transition our business and ensure continuity of care and world-class support for our existing customers. There is an incredible opportunity in Europe to grow our customer base over the medium and long-term. But this year's success will be driven by our change to a direct business model, which significantly benefits our revenue and gross margin in the second half of this year. Naturally, there will be a period of transition and adjustment. But overall we expect to grow our international customer base approximately 20% to 25%, which coupled with our strong U.S. growth will drive global customer base growth of approximately 20%.

In 2018, our commercial teams will focus on 3 key strategic initiatives. One, is to secure widespread Medicare pharmacy coverage for Omnipod starting in 2019 and to expand Omnipod coverage through the pharmacy channel with Medicaid and existing commercial payers. Two, is to continue our development work focused on a clearly differentiated rich and innovative product pipeline, including this year's launch of our new Omnipod DASH mobile platform. Three, is to stand up our European operations and successfully transition this business.

Starting with Medicare. As Pat noted, gaining Medicare coverage of our Omnipod System is a big win. It's a win for our customers, a win for the physicians who treat them, and it's a win for the diabetes community who may now access innovative technology and chose the device that best suits their need. Coverage through the pharmacy channel provides our users an improved overall experience with broader and easier access through our pharmacy benefits.

A growing portion of our business is already through the pharmacy channel where our customers are getting their insulin and their diabetes supplies. We hear from clinics and patients that this provides for more efficient, less burdensome access. This is also true for our company. In the pharmacy channel, there are typically less hurdles to receive pods. The turnaround time for new customers is typically a fraction of the time through traditional DME and patients are no longer subject to the challenges of large deductibles. The pharmacy channel is a great option for a growing percentage of our commercially covered users and has the potential to offer our Medicare beneficiaries similar advantages.

Between now and Q3, when most of the Medicare Part D plan sponsors establish their reimbursement and coverage policies for 2019, we will work to secure access so Omnipod is included in their formulary benefits at the start of next year.

We also have the benefit of negotiating with a relatively small number of plan sponsors as the top 3 represent approximately 60% of Medicare Part D covered lives, and the top 8 cover approximately 80%. We are currently in discussions with all of these plan sponsors.

At the same time, CMS' Medicare care guidance should help accelerate widespread state Medicaid access and we're in the process of establishing coverage with these plans. Omnipod's low upfront cost and differentiated form-factor provide a strong value proposition and we're confident we will secure broad access for Omnipod on Medicare Part B and Medicaid plans for 2019.

Next, our innovation efforts. We achieved another significant milestone last month with the filing of our 510(k) for FDA clearance of Omnipod DASH.

At the core of this innovative technology is our drive for simplicity and ease of use. And what is so important and so unique about DASH is that it provides benefits across all stakeholders: Patients, clinicians and payers. We designed DASH through the eyes of our customers with a keen focus on ease of use through mobile technology. DASH is unlike any other product in the market. With the addition of secure Bluetooth connectivity, DASH will provide mobile phone display for our users and mobile apps for their caregivers in addition to data and insights for patients, physicians and payers.

For patients, this means incredibly easy and well-controlled insulin delivery with their pod now controlled by a new modern touchscreen PDM. Their data will also be accessible via our Omnipod display app on their smartphone. And they will have the added benefit of sharing their data with caregivers through our Omnipod view app.

For clinicians, DASH means easier patient onboarding, including less training time and immediate access to patients' diabetes data. And payers will have the ability to access detailed data on their specific membership populations through our Omnipod dashboard.

Payers can drill down into outcomes data by patient demographics, geography and behaviors to better understand Omnipod's link to improved outcomes. We'll work with the FDA as they progress through their review of DASH and look forward to a limited market launch later this year.

Our DASH platform is the foundation for future innovation, including our development programs for Omnipod U-200 and U-500 concentrated insulin, and our Omnipod Horizon Automated Glucose Control System.

We are making substantive progress with all of this development work and we're on track to introduce these products into the market over the next few years. We are eager to share our exciting development milestones with you as the year progresses. We're confident that we're on an innovation pathway that will continue to differentiate Omnipod in the market and that will provide our users, their physicians and payers with a world-class experience, with access to critical data insights and with demonstrated outcomes.

In our Drug Delivery product line, we remain excited about what an attractive opportunity this business represents over the long term, as well as the recurring revenue stream it currently generates. Today, the product line primarily reflects sales to Amgen for their Neulasta Onpro kit. As Amgen recently noted, adoption exited the fourth quarter of 2017 at just over 60% of all U.S. Neulasta doses sold. We continue to have active discussions and explore opportunities with pharmaceutical partners and based on their feedback, believe our pod platform provides a truly unique product offering. Omnipod's wearable connected delivery platform has the potential to improve adherence and outcomes and we remain confident that other noninsulin therapies will also incorporate our Pod differentiated technology.

Now turning to our International business and the exciting progress we've made in expanding our European infrastructure to support a successful transition of our Omnipod customers on July 1. We are hitting all of our key milestones in a very thoughtful and very thorough strategic plan, and we're benefiting from the constable expertise of our new European management team. Our newly hired team includes commercial leaders throughout various European geographies within the areas of sales, market access, customer service and all other key support functions. This team brings an incredible amount of diabetes experience, and importantly, a deep knowledge of European market dynamics. Thanks to this talented team and the support of the diabetes community, payers and business partners, we continue to gain deep insight into our key market needs and prepare for a seamless transition on day 1.

One of the key learnings we've had is that the vast majority of this business is served through intermediaries, which reduces the number of parties we have to contract with and mitigates transition risk. So in addition to the concentration of our Omnipod business within Europe, 90% of the volume exist in 5 major markets. We also have this further concentration among these intermediaries within those markets. As we move through this transition, we are increasingly confident that our move to direct distribution will provide meaningful benefits to all of our key stakeholders and set us up to drive significant long-term value. As we grow, we continue to build the clinical evidence supporting the strength of Omnipod through additional studies and within peer-reviewed publications across the globe. We are thrilled to announce 2 clinical publications this month. First, is the German Austrian Registry Manuscript comparing adolescents, who switched to Omnipod from multiple daily injections and it was published in Pediatric Diabetes, demonstrating that Omnipod was associated with improved glycemic control after one year.

Our second publication highlighted the results of the first IDE for our Omnipod Horizon and was published in the Journal of Diabetes Technology & Therapeutics. Also just last week at ATTD in Vienna, there were 2 presentations from our second Horizon IDE study, examining mealtime challenges and exercising adults with Type 1 diabetes. These data further demonstrate that our algorithm continues to perform very well, and additional studies are underway examining longer system use in free living settings.

At ATTD, we also presented real-world data of Omnipod in use in The United States, Germany and the United Kingdom. We are building a strong body of clinical support and generating greater awareness of the benefits of our technology throughout the global diabetes community.

In closing, I'm incredibly proud of our team's accomplishments. We continue to drive robust near-term growth throughout our business while executing on our strategic imperatives to strengthen our foundation for long-term profitable growth. We are excited about our significant opportunities in 2018 and even more so for 2019 and beyond.

We have created tremendous value for Insulet's shareholders and improved the lives of more than 140,000 people living with diabetes.

And we're just getting started.

With that operator, let's open the call for questions

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Matt Taylor with Barclays.

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Matthew Charles Taylor, Barclays PLC, Research Division - Director [2]

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Great. So the first question I want to ask you was, given the 17% growth that you estimated for the U.S. customer base. You got some good things going on here in 2018. I know you're assuming no Medicare. But could you walk us through some of the assumptions that get you to the 15% to 18% to start out? And where there might be some pluses and minuses versus last year?

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Shacey Petrovic, Insulet Corporation - President and COO [3]

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Sure. Matt, maybe I'll start and Mike you can add what's factored into guidance. But essentially that's coming from our investment in expansion of the sales force. So in the United States, we made an investment to increase our field footprint and the sales support staff by about 20% or 25%. And so that is certainly driving benefit. We continue to make strides in terms of market access. So while we believe that the vast majority of that impact will hit us in 2019 as we really unlock coverage in access in Medicare and Medicaid, it doesn't mean that we're not going to continue to drive improved access through the Medicaid channel in 2018. And then, finally, we continue to invest in awareness in the United States to continue to grow the education and around the benefits of Omnipod. So I would say those 3 things are driving our growth in the United States.

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [4]

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And, Matt, this is Mike. As it relates to the guidance, so just as a reminder, there is some seasonality in our business in the U.S. Omnipod business. It generally surrounds the reset of deductibles. And so what we describe is that installed base that, as you mentioned, our customer base is a really -- is probably the best indicator for the growth of the business. But that's definitely more true on a full year basis than it might be in Q1 versus another quarter just because of the reset of deductibles. And so sometimes people will purchase more in the fourth quarter before their deductible resets have a slower Q1 and then will pick up in Q2. The guidance for Q1 is really not indicative of anything other than just that dynamic. We -- as you can see what the guidance we gave for the year, it's very strong growth for the year, and we really believe we have a tremendous amount of momentum.

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Matthew Charles Taylor, Barclays PLC, Research Division - Director [5]

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And just one follow-up. You mentioned the strength in France, which was a real strong area of growth for you in 2017. Can you talk about the trend there and whether you think you may be topping out? Help us understand how that is kind of progressing? And whether there's any other market-specific dynamics internationally that we should think about outside from the transition?

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Shacey Petrovic, Insulet Corporation - President and COO [6]

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Sure. And so France continues to be a very strong performer for us. It now accounts for -- still accounts for about 1/3 of our international business. And while the growth has started to temper, I would say, it was extraordinary for about 1.5 to 2 years and we're still seeing really nice growth out of the market. So we said all along we were new into the market. A couple of years ago, we said all along, eventually, this has to sort of temper down. I would say it's still strong, but softening a little bit from where it was last year.

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [7]

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And, Matt, just to clarify, this is Mike, it's exactly where we expect it would be. So this is all what we expected.

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Shacey Petrovic, Insulet Corporation - President and COO [8]

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And then I think your other question, Matt, was just around other factors or contemplation in terms of the European transition. What we wanted to communicate is, obviously, we feel great about the team's preparation and execution in transitioning in this business. But our focus in 2018 is really on customer continuity for our existing customers, which is why you see a little bit tempering of the installed base growth. So despite this transition, we fully expect that both Europe and our international market customer base will continue to grow in 2018, but a lot of the revenue growth is going to come from the pricing uptick in the second half as opposed to the installed base growth.

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Operator [9]

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And our next question will come from the line of Jayson Bedford with Raymond James.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [10]

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So I guess, just to start and, I guess, it's somewhat tied to the first question. The geographic mix of the user base was a bit different that I thought. The U.S. was stronger than anticipated and the implied base is higher than what we had it. I'm wondering if you saw any benefit in the fourth quarter from some of the competitive disruption in the U.S. market.?

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Shacey Petrovic, Insulet Corporation - President and COO [11]

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We did see some benefits. I wouldn't say it was huge or outsized. So we did have obviously pathways for people to access Omnipod with no upfront cost if they were transitioning off of Animas. And that accounted for maybe 10% to 15% max of our new patient starts. And then just as a reminder, I know you know this, but in any given quarter, our new patient starts don't really drive a significant increase in revenue. So it certainly added a little bit to our install base growth. But it was a strong quarter across a number of fronts in the United States.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [12]

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Okay. I guess just as a related follow-up then, you exceeded the high end of your U.S. range for the fourth quarter. What differed from your expectation 3, 4 months ago?

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [13]

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This is Mike. A few things. One of the things I described in Matt's question is just the dynamic of how people purchase their product. And what we saw as we saw an increasing amount of reorders in the fourth quarter. Sometimes people do that because, again, typically because they have maybe higher deductible plans or other things like that and their planned deductibles reset in the first quarter. So that was higher than what we expected. Our growth was higher than what we expected. We have been guiding to an install base growth of about 15% and as Shacey described, our customer base grew 17%. So that -- we just are seeing a tremendous excitement and momentum in terms of the growth of the business and that's what drove the outperformance.

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Shacey Petrovic, Insulet Corporation - President and COO [14]

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Yes. And that's kind of why I'm reluctant to say it was sort of down to Animas, because, in fact, in Q4, we convert -- we had more MDI new patients to Omnipod than in any preceding quarter. So it was a really strong quarter from a new patient start standpoint just independent of the programs that we have going.

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Operator [15]

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And our next question will come from the line of David Lewis with Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [16]

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Just a couple of quick questions from me on some of these themes. Shacey, just thinking about international, if our math is right, your underlying guidance or underlying performance internationally is like 30% to 38%, sort of how you see the international growth rates and relative to the 60% you put up this year, can you just give us a greater sense of how you're thinking about that number for France and the trend there and then some of that disruption?

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Shacey Petrovic, Insulet Corporation - President and COO [17]

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Yes. maybe I will let Mike comment specifically on the numbers. And I can certainly give some color in terms of what we're seeing in the market and how we feel about the opportunities out there?

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [18]

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Sure. So as it relates to specific revenue guidance. One of the things that we've been saying for quite some time now as we've been talking or feels like quite some time is, we've been talking about this transition to direct is that, our guidance contemplates that there will be some short-term disruption around the transition itself, as any transition would begin some disruption. And so we typically say that installed base is the best indicator of growth. However, in a transition like this, there is another element to it just related to volumes and purchase that would happen when one party exits the market and we enter. And so we're just factoring in that, that disruption could occur in a short term around the transition, that really doesn't relate to the install base. The installed base growth continues to be robust and we're just factoring in that potential short-term disruption into the actual guidance for '18.

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Shacey Petrovic, Insulet Corporation - President and COO [19]

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But I think you're right, in the ballpark if we sort of say, France isn't going to continue to grow at the outsized rate that it had, you're probably right in the ballpark in terms of the growth of the market. That said, what's really exciting about this move is that once we make this transition, we're going to be able to sort of have a truly global footprint and move into new markets when and how we want. And so as we think about '19 and beyond in terms of growth rates for Europe, we'll be looking at entrance to new markets and that we hope to obviously drive continued expansion of growth in that market.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [20]

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Okay. This is a much better number underlying than we expected, so I want to make sure you were being clear there and you are very clear. And then, Shacey, the next question just on the U.S, and I appreciate your commentary in the fourth quarter. But if you think about 2018 even pretty explicit, Medicare is not sort of in the plan for 2018. Is it really -- is that realistic even in terms of how you think about the Medicaid business where you had already seen some traction, and the same kind of question on Animas for 2018, is that really explicitly in your U.S. forecast?

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Shacey Petrovic, Insulet Corporation - President and COO [21]

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Sure. Yes, and, David, both of those things are explicitly in our U.S. forecast, the Animas and as well as the Medicaid continued expansion in terms of Medicaid. So we feel good about the growth that we're going to deliver despite the fact that a lot of these really exciting potential impacts like DASH and like Medicare and really big Medicaid expansion hit us in 2019, but despite that, 2018 is going to be a great year.

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Operator [22]

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And our next question will come from the line of Mike Weinstein with JP Morgan.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [23]

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Congrats on a good quarter. This is Robbie in for Mike. So I will give you a break in -- on terms of the new patient adds. And I wanted to ask about Drug Delivery. Because, say, I think you'd been consistent with saying that you thought it could grow in 2018. So what are you thinking about the trajectory of that line item going forward? And if there any change in profitability as the sales trend off?

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Shacey Petrovic, Insulet Corporation - President and COO [24]

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Great. And so, Robbie, I don't think we ever said that we expected the business to grow in 2018. What we've always said is that we base our guidance and our expectations on Amgen's forecast and orders. So that's kind of the end of it in terms of the Neulasta business, which is the vast majority of our Drug Delivery guidance. But I would say, I think, it sort of points to just how successful the business is on the diabetes side because despite this sort of slight headwind that we have with Drug Delivery, you see the tremendous revenue growth and margin expansion in our diabetes business. So it's really exciting to me to see that happen in 2018 and beyond.

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [25]

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And, Robbie, this is Mike. Just as it relates to your question about what Shacey was referring to on the margin piece. So I mean, we are right on target even with the reduced Amgen forecast for gross margin expansion and EBIT positive results in 2018. And I think, it's just -- we are internally just thrilled with the execution by the operations team and that helps across our business. And so Drug Delivery is a smaller -- much smaller part of our business. And so to deliver the operational improvements that we are doing, it just really shows the strength of the overall business for many years to come.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [26]

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All right. And just a follow-up. As people think about Medicare and Medicaid, and they start to add it to their models going forward, there won't be any revenues in 2018. But how do you want people to size just the market? Are there any metrics you can give us? And in terms of thinking about revenue per patient, is that something that should be similar to a commercial patient going forward?

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Patrick J. Sullivan, Insulet Corporation - Chairman & CEO [27]

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Yes. As it relates to Medicare and Medicaid, I think typically we believe we'll be similar to the DME rates that are out there for pharmacy Part D coverage. But when you think about the opportunities the 450,000 people that are in Medicare and Medicaid and we believe that with this coverage we'll be able to take our fair share of that patient population.

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Operator [28]

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And our next question will come from the line of Malgorzata Kaczor with William Blair.

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Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [29]

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First one from me is a follow-up on some of your commentary regarding those intermediary contracts in Europe. That seem like it was maybe a higher percentage than what we expected when you referenced that I think at the JP Morgan conference. What work have you guys done? And are these intermediaries maybe secondary distributors that you could look to contract with and really smooth out the process come day 1?

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Shacey Petrovic, Insulet Corporation - President and COO [30]

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Yes, that's exactly right, Margaret. So that's exactly how we are thinking about it. And it is higher than maybe we -- every day, we are learning more about this market and this transition. And one of the key elements of the approach we've taken is to reduce complexity and mitigate risk in the transition and so that's been sort of a rallying cry for the team. And part of the reason why there is a higher percentage of any intermediaries is because as we've discovered those opportunities, we have jumped on them to make sure that we reduce complexity and mitigate risk in the transition. So last time -- I think last estimate we were talking about maybe 70% of the business going through intermediaries, now it's closer to 80%, 85%. And where we have the opportunity to do that, while also maintaining the flexibility for the long-term, we will. So we certainly don't want to hem in our opportunities over the next 2, 3, 10 years in Europe, but where we feel like we can mitigate risk, reduce complexity and not disturb our opportunities in the long term we will do that and that business is just evidence of that.

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Patrick J. Sullivan, Insulet Corporation - Chairman & CEO [31]

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And I would just add, we were able to maintain the 50% increase in end user pricing even with these intermediaries in the various markets.

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Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [32]

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And have you guys already approached some of these folks at this point where maybe they are ready or anticipating that transition doesn't change your expense structure as you guys try to roll out in international?

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Shacey Petrovic, Insulet Corporation - President and COO [33]

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I will let Mike to comment on the expense structure, but I'll say that we are in conversations with all of these intermediaries across every major market.

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [34]

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Yes. And it does not change our either the revenue guidance or the expense structure from what we've really been saying.

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Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [35]

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And then just as a second question, a different topic. You guys mentioned an exceptions process within Medicare that you guys are trying to pursue before you get on formulary. Have you seen any success stories yet at this point? Or how many of these patients are in guidance? And then in terms of patient attrition related to Medicare, is that -- is there any change in guidance on that point?

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Shacey Petrovic, Insulet Corporation - President and COO [36]

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So, good questions. We have staffed a team of people to support our Medicare beneficiary potters through the exception process. Today, we've gotten somewhere between 50 and 100 customers through the exception process. But just a caution, it's not really a revenue opportunity for us, because we are focused on the customers who today either pay cash out of their pocket or use some sort of secondary insurance. And so those are the folks that we are getting through this exception process. So in general, they were probably paying more than we will get reimbursed through this process. However, it is absolutely the right thing to do for our patients and our potters, and so we're excited to help support them through this process. And we anticipate that we'll get a vast majority or a good portion of our Medicare beneficiaries through this process.

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Operator [37]

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And our next question will come from the line of Kyle Rose of Canaccord.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [38]

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So I wanted to ask a question about on the Horizon project. I mean, the IDE data we saw last week was definitely positive. I just wondered if you could remind us what the key milestones are for the next round of IDE trials and then eventually the pivotal trial as we think about '18 and eventually regulatory process in 2019?

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Shacey Petrovic, Insulet Corporation - President and COO [39]

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Sure. So our third IDE trial is still underway and so that puts us on track for the clinical plan that we mapped out with the FDA. We're learning a lot in this patient population. So if you remember, our goal was to launch with a product that did 2 things. One was indicated for kids and children because it's such a large component of our patient population and also was simple enough for people coming from multiple daily injections to be able to transition to it. So this IDE focuses on kids down to age 2 and we are learning a tremendous amount in this patient population. We have got kids down to age 2 in free living conditions. And so as we make our way through this data, we're reviewing all of the clinical results. And so that will really determine the rest of the clinical pathway before us. So no changes to guidance today. We're kind of on track to what we originally outlined. But once we've completed this study and analysis, which will happen in the next month or 2, I think, we'll determine if any other clinicals are required before we move into prepivotals. So if everything goes well, we would be in prepivotals this year. If we want to add additional studies, we may push it out.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [40]

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Great. And then similar question on the concentrated insulin side. I think you've historically given guidance on the, I think it's U-200. You're coming to market at some point in 2019. And just as the investors thinking about their models in the out-years just how you think about that opportunity? How we should kind of frame the initial commercialization there, that would be very helpful?

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Shacey Petrovic, Insulet Corporation - President and COO [41]

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Sure. Yes, we're really excited about these programs, obviously, and it's been a terrific partnership with Lilly. And I think you know this, Kyle, that it does double our addressable market and gets us into Type 2 in a big way. But just to clarify, the first product that will come to market is U-500. So that's a smaller opportunity, but one of Lilly's fastest-growing molecules and because it's really a significant unmet need. So that will come to market in 2019. And then in 2020, we'll be in market with U-200, which is the much larger opportunity for us. That gets us access to the vast majority of people living with insulin-dependent type 2 diabetes.

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [42]

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And just -- this is Mike. Just as a clarification. So because of our recurring revenue model, it's not like when it comes to market you get a big bolus of revenue, it really just continues to accelerate the growth curve for our revenue stream.

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Operator [43]

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And our next question will come from the line of Doug Schenkel with Cowen.

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Ryan Blicker, Cowen and Company, LLC, Research Division - Associate [44]

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This is Ryan on for Doug. You've cited channel mix as a tailwind to the U.S. Omnipod business over the past few quarters, but didn't talk about it in your prepared remarks this quarter. Did this benefit you again in Q4? And can you talk about, if so, how material the benefit it was in 2017? And how you're thinking about it in 2018?

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [45]

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This is Mike. So the mix continues to be favorable to us in the U.S from a pricing standpoint, and that's definitely good. It's really not the main part of the story as you could see by the growth in the installed base. That tracks pretty closely to the growth in revenue. So it is helpful and we expect that trend to continue. But the primary reason for the growth in our U.S. business continues to be the growth in the installed base.

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Ryan Blicker, Cowen and Company, LLC, Research Division - Associate [46]

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Got it. And then, can you talk about your overall attrition levels today? And maybe just provide a little more color. Are they consistent with where you've seen historically? I know there's some error bars around that. And then, maybe provide more color on a question asked earlier about the Medicare process. Do you believe that, that can help you reduce your attrition in 2018? Or is that not really material impact until 2019?

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [47]

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This is Mike. I'll take the attrition question and Shacey, if you want to take the rest. So just as a reminder, we moved to really focus our discussions on customer base, on installed base, I think, over the year or so more ago. And the contributors to the -- in the customer base are the additions of new patients obviously and the reductions are attrition. One of the challenges that we have is that because of the amount of distributors that we sell-through from a channel perspective, you don't have the best data on that side of the business. So we rely on what we see on the direct business. And as people move between channels, it can look like attrition or not, and it could just be moving between channels. And so with those caveats aside, we expect that attrition is about the same. It really hasn't changed very much. The trend seems to be positive. We continue to make improvements in our product quality, which is one of the elements. But one of the other biggest elements that drives attrition is access, the cost of the product to patients, meaning the market access. And that's where this Medicare decision is so helpful for us. Because, again, Medicare and Medicaid are 1/3 of the market that we have not until recently had a pathway to. And so we expect that, that will absolutely help attrition as we go forward. And as we found the access site it's really 2019 that Medicare and broader expansion Medicaid really kick in.

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Shacey Petrovic, Insulet Corporation - President and COO [48]

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Yes, I completely agree with everything that Mike just said. I think we won't see a material impact on attrition this year. Despite the fact that we've got this exception process, we are really focused on getting the people who are paying cash out of pocket through that exception process. And so they haven't technically attrited from the product. I do think as we make significant gains in 2019 with Medicare and Medicaid, that has a real potential to solve for some of the access issues that are driving attrition.

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Patrick J. Sullivan, Insulet Corporation - Chairman & CEO [49]

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And I would just add parenthetically that DASH gives us the opportunity to really hone in on understand the attrition because we will know where our patients are with certainty.

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Operator [50]

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And our next question will come from the line of Jeff Johnson with Baird.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [51]

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Mike, just maybe cleaning up one question from the fourth quarter. OpEx was, up 35%, 36%; G&A, up 48%. Was there something onetime in there? I'm just trying to get that jive with kind of your up 25% OpEx guidance for 2018?

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [52]

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Well, first of all, I'd say, there weren't any significant onetime items. Typically if there are significant ones, I'll call them out. One of the things to keep in mind relative to our OpEx guidance is, we're making a lot of investments for the European infrastructure. Some of that is -- and for U.S manufacturing for that matter. And some of those may end up in G&A as a majority of the European ones are for commercial as you would expect the sales and marketing. So there were incremental investments there. And those -- there are some nonrecurring expenses that we will see relative to the European expansion. In my prepared remarks, I described $7 million to $8 million that will happen most in the first half of the year. That's factored into our OpEx guidance for next year for '18. But apart from that, I don't really expect there to be material nonrecurring item.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [53]

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All right. And then, just my second question. Obviously, some interesting IDE 2 data last week in Vienna, especially that I thought the 50% cut to basal delivery pre-exercise, the improvements you saw there versus maybe taking that target range up to 150 ahead of exercise, there are so many cool things like that you guys -- seem like you can do with your algorithms. So I guess the question is how do you balance the -- all these cool things you could do versus trying to make sure you get a product that you could submit for approval, somewhere in 2019, get approval by the end of 2019, early 2020. And Shacey, you kind of alluded to this in your answer to a question a few questions ago about all the different ways you could play with this and maybe do more studies before the prepivotals and all that. So just how do you balance the time to market versus the cool stuff?

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Shacey Petrovic, Insulet Corporation - President and COO [54]

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Yes, it's a great question. I think it's, honestly, one that our team is wrestling with every day. I think you are right, we could -- I think, we could drive incredible value here and do a lot of amazing things with this technology. We go back to our mantra, which is our products are all about simplicity and reduction of burden. So if we're adding features or functionality that don't achieve those and we're not going to compromise time-to-market for that. However, we'd compromise time-to-market for simplicity and ease of use. And so that's really where we're focused on the user interface, and making sure that we drive better outcomes, but that we do that with a very simple easiest to use product on the market. And that's where a lot of the focus has been and including on our target patient populations. So we'll do what we've been doing all along, which is review the data in a very detailed fashion, understand the key strengths of the algorithm and then incorporate those as best we can in the first generation. I think we've also seen that from these technologies that you learn a lot once they get on to the market. And so we're benefiting from others who are sort of hoeing that ground before us. And we do want to get to market as soon as we can so that we can learn even more about our user experience as we get our product out there.

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Operator [55]

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And our next question will come from the line of Raj Denhoy with Jefferies.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [56]

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A couple of questions. One on DASH. And I know it's going to be a little limited launch when you do a launch later this year assuming it gets approval. But how should we think about the revenue contribution from that? Will you be charging for the new PDM? Will there be an upgrade cycle for the patients that want it? Just how should we think about that from a modeling perspective?

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Shacey Petrovic, Insulet Corporation - President and COO [57]

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I think with any new product, and this goes for DASH and every other products that's in our pipeline, I would look at this as an opportunity to accelerate Pod volumes and growth in the installed base as opposed to revenue tied to the piece of capital equipment, which is not our business model. And so regardless of what we decide to do in terms of the commercial launch strategy, that piece will never drive a tremendous amount of revenue in any given quarter or year.

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [58]

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And this is Mike. Just as it relates to the revenue guidance. So as we've said, we've submitted to the FDA. We have limited launch later this year. And given our revenue -- recurring revenue model, it really is more of a 2019 benefit from DASH.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [59]

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Okay. But just to be clear, I mean, the 140,000 or so patients, I guess, I mean, globally, will they have to buy a new PDM in order to get all the new feet functionality of DASH? Or is this something that they can trade their existing PDM for?

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Shacey Petrovic, Insulet Corporation - President and COO [60]

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They will have to acquire a DASH PDM in order to get all the benefits from DASH, but we're working on pathways for our customers to be able to access that.

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Patrick J. Sullivan, Insulet Corporation - Chairman & CEO [61]

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And particularly in light of the new Medicare Part D coverage exploring other launch opportunities.

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Shacey Petrovic, Insulet Corporation - President and COO [62]

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Yes.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [63]

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Okay. Fair enough. And just one on Medicare. How should -- how do you think we should best think about that opportunity? Is the bigger opportunity for you to keep patients that would otherwise age into that population? Or is it -- do think there is a fertile ground in those existing Medicare patients to actually get them on the Omnipod? What's the bigger opportunity for you?

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Patrick J. Sullivan, Insulet Corporation - Chairman & CEO [64]

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I think there's 2 opportunities is those patients who are currently in Medicare that are paying out of pocket to keep those patients. We found that attrition of those turning 65 is a lot higher than attrition in other parts of our customer base. And secondly, it's for patients that are 55 and will be on the product for a long period of time. Physicians were reluctant to provide them the Omnipod because they knew if they would age in the Medicare, it wouldn't be an opportunity for him. So I think it's in both. And then their spillover effect in the Medicaid is tremendous. So all 450,000 patients or 1/3 of the market that we didn't have access to, we now have the access to, that's the big opportunity.

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Operator [65]

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And our next question will come from the line of JP McKim with Piper Jaffray.

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Jonathan Preston McKim, Piper Jaffray Companies, Research Division - Research Analyst [66]

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I had one on Medicare. I think you called out 8 of the planned sponsors, I had like 80% of the volumes. So on those 8 or so sponsors, are you guys already covered with them to the pharmacy for their commercialized? I'm just trying to gauge the risk of them not covering.

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Shacey Petrovic, Insulet Corporation - President and COO [67]

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It's a good question. It's a little bit of a mix. So we do have coverage on the commercial side with some of those planned sponsors. We are in discussions with all of them and fully anticipate that we will be successful with a number of them. I couldn't give you a specific guidance on that today. But I think just to understand the process, most of these plan sponsors, if not all of them, are going to determine their coverage policies by October. So before probably Q3, we're going to be able to give you really good guidance on how successful we were accessing these Medicare beneficiary lives and establishing Omnipod for them. So we'll certainly keep you posted. But we're in discussions with all of them today and we already have commercial coverage with some of them.

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Jonathan Preston McKim, Piper Jaffray Companies, Research Division - Research Analyst [68]

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Got you. It was really helpful. And then, one on gross margins, I mean -- I think you guided 63% to 64% for '18. As you ramp to 70%, how should we think about kind of the debt mix coming from more direct here in the U.S. with your plan versus just overall volume growth? Is there a good way to frame that up?

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Michael L. Levitz, Insulet Corporation - CFO, Senior VP, Treasurer & Principal Accounting Officer [69]

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This is Mike. So it really is interesting. The guidance that we gave for the full year it's almost a tale of 2 halves for this year because all of the first half is investment and the second half related to Europe and the second half is the benefit. So the run rate in the second half on gross margin improves by 400 basis points. So what we're saying -- what I said in my prepared remarks is that we're going to be coming out of the second half in the 64%, 65% range. So as it relates to the target of 70%, all of that is before U.S. manufacturing. We definitely expect that the U.S. manufacturing will drive down cost quite nicely. So it's not just about volumes. When we laid out at our Investor Day the drivers of gross margin expansion, the manufacturing improvements and supply chain improvements, we're the principal drivers and those still remain largely ahead of us. So the 400 basis point improvement comes from going back in Europe, and that's reflected in the 64% to 65% run rate in the second half of this year. But past the 70% is really driven by the combination of U.S. manufacturing, continued manufacturing and supply chain improvement, and then volume supports that on top. But we're making improvements in a number of areas even as mundane as the ones we've talked about in the past like freight that may seem small but we really focus on the pennies and they really add up quickly.

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Operator [70]

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And our next question will come from the line of Danielle Antalffy with Leerink Partners.

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Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [71]

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Congratulations on another great quarter. Shacey, just a question for you. As we think about the TAM for Insulet specifically in the diabetes portion of the business leaving Drug Delivery aside. But we're hearing pretty positive commentary about what the artificial pancreas could do to pump penetration. And you had also mentioned on a call that we hosted a little while back that the pediatric population has something the Type 1 or something like 50% to 60% penetrated for pumps versus 30% to 35% for the national average. So inherently that would imply that, that 30% to 35% number should move higher, albeit minus some attrition as those peds age. So I'm just curious what your view is on the long-term potential pump market penetration in Type 1? And then the second part of this question -- and how important artificial pancreas is to get there? And then the second part of my question is for Type 2. I was surprised to hear you say on that same call that 13%, I think was the number of Omnipod patients are actually Type 2. What that number could move to once we do have Type 2 products on the market?

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Shacey Petrovic, Insulet Corporation - President and COO [72]

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Thanks for the question. I think both are really good ones. And you're right, when we think about pump penetration today in The United States, somewhere between 30% and 35% of people living with Type 1 diabetes use pump therapy. And the rates are actually much smaller when you look across the globe. In Europe on aggregate, probably closer to 20%, for example. So lots of opportunity for the markets to grow. Our data would suggest that, that market in the United States is growing somewhere around a 9% CAGR and in Europe it's growing somewhere around a 5% CAGR. So both areas have markets expanding. And I think the way -- the reason I referred to where we are with the pediatric patients because, I think that's where -- if you want to see where this could go, I think, the pediatrics are a good indicator because people will get more and more familiar and comfortable with these technologies. And once you typically adopt some therapy, it's highly unlikely that you then revert back to multiple daily injections just because of all the advantages. So I think over time this market will continue to accelerate. I think all technologies are helping to drive penetration of pump therapy. And that goes from AP to CGM to patch pumps. But clearly Omnipod is a huge contributor there because 80% of our customers are coming from multiple daily injections. And so we're clearly driving growth in the overall pump market. That's true in The United States without a doubt. And it's likely very true in Europe as well, although, we don't yet have a greater visibility into that data. That will change obviously as we get our feet on the ground and kind of start to take ownership of that business. The second part of your question. I get really excited about the Type 2 insulin-dependent population because it's an area today that manufacturers haven't paid a lot of attention to for a variety of reasons. But I think that Omnipod has potential to drive tremendous value for that patient population. And as we think about our concentrated insulin programs that help us unlock that, what we're doing is really understanding better than needs of that patient population. And we can do that, because today we've got 13% and growing of our users that are Type 2, and we're doing a tremendous amount of human factors work and research with that patient population to sort of understand what does that user interface need to look like to make it a great experience for them. So I think we're really going to see with the launch of these 2 products acceleration in those markets. And that is -- that opportunity is just as big as the current Type 1 opportunity.

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Operator [73]

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

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Patrick J. Sullivan, Insulet Corporation - Chairman & CEO [74]

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Thank you, operator. I'm absolutely thrilled with the performance of the company in 2017 delivering on 4 very spectacular and significant accomplishments: CMS coverage, the submission of DASH, implementation of our plan to go direct in Europe, breaking ground on our U.S. manufacturing operation, and continuing to deliver strong performance. I would like to thank the Insulet employees for their hard work and commitment to easing the burden and improving the lives of people living with diabetes and other diseases. Thank you for joining us on the call today and we look forward to speaking with you on our first quarter conference call.

Thank you very much.

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Operator [75]

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