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Edited Transcript of PODD earnings conference call or presentation 3-Aug-17 8:30pm GMT

Q2 2017 Insulet Corp Earnings Call

BEDFORD Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Insulet Corp earnings conference call or presentation Thursday, August 3, 2017 at 8:30:00pm 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, SVP and Treasurer

* Patrick J. Sullivan

Insulet Corporation - Chairman and CEO

* Shacey Petrovic

Insulet Corporation - President and COO

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Conference Call Participants

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* Christian Diarmud Moore

Jefferies LLC, Research Division - Equity Associate

* Christopher Cook Cooley

Stephens Inc., Research Division - MD

* 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

* Margaret Maria Kaczor

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

* Michael Neil Weinstein

JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group

* Rajbir Singh Denhoy

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

* Ryan Blicker

Cowen and Company, LLC, Research Division - Associate

* Suraj Kalia

Northland Capital Markets, Research Division - MD and Senior Research Analyst

* Tao Leopold Levy

Wedbush Securities Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q2 2017 Insulet Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Ms. Deborah Gordon, Vice President of Investor Relations. Ma'am, you may begin.

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

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Thank you, Bruce. Good afternoon, and thank you for joining us for our second 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. Our press release discussing our second quarter 2017 results and third quarter and full-year 2017 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 second quarter earnings release and in the company's filings with the SEC.

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

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

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Thank you, Deb. Good afternoon, everyone, and thank you for joining us on the call today. I'll begin with comments on the exciting news we released to the market on July 20 to directly distribute the Omnipod in Europe. Then I'll provide a brief review of our second quarter performance and show our recent business highlights. Mike will then provide more detail on our second quarter financial results, our guidance for Q3 and full year 2017. Shacey will follow up on our commercial and R&D progress and then we'll open the call for questions.

July 20, was a day of significant transformation in Insulet's history. On that day, we announced our decision to directly sell the Omnipod System in Europe. This move will significantly accelerate our revenue growth and further improve our gross margin profile. When this transition is complete and when combined with other steps we're taking, our gross margin will expand from 50% in 2015 to nearly 70% in 2021, a remarkable 2,000 basis point improvement. We are absolutely positively thrilled to go direct in Europe. This move will allow us to be close to our customers, have control over our existing and future markets, significantly improve our gross margins and increased value for our shareholders. To be clear, this was a well-considered and extensively evaluated decision.

Since the day I arrived at Insulet nearly 3 years ago, we've analyzed and exhausted number of opportunities to best serve our European customers and capitalize on the significant international opportunities. Our exclusive distributor has done a fine job establishing a large, growing and incredibly loyal Omnipod customer base in Europe. Our decision came down to control, execution, margin expansion and shareholder value creation. This is -- there is absolutely no question that this is the right decision in the right time to go direct in Europe. As Shacey will explain in more detail, we have spent the last 2 years evaluating and preparing for this opportunity and while there may be some short-term disruptions, there is no scenario that results in anything less than significant financial growth and value creation for Insulet and our shareholders. We already have a highly talented team on the ground in Europe, executing a detailed transition plan. We are absolutely confident that we will successfully transition the business and continue to profitably grow in expanding international markets.

I'll now provide some details on our impressive second quarter results. I'm once again pleased with Insulet's strong performance and as a result of this performance and our outlook for the future, we're raising full year revenue guidance to $440 million to $450 million, a raise of $13 million between the midpoint of the previous and this new guidance.

We finished Q2 2017 with revenue of $110 million, a year over revenue growth of 26% and $4 million above the midpoint of our guidance range. Our Q2 gross margin continued to improve and a result of our plans to go direct internationally, when combined with the operational improvements we continue to make, we now have the clear line of sight to gross margin approaching 70% in 2021, a 500 basis point improvement from our previous target of 65%.

In Q2, every area of our business delivered outstanding performance. U.S. Omnipod revenue was over $65 million delivering a strong growth of 16% year-over-year. International Omnipod revenue was almost $27 million, a significant growth of 60% versus the prior year, the result of continued, very strong adoption in France. We achieved strong growth in our installed base in both the U.S. and internationally during the quarter and are increasing our year-over-year worldwide installed base growth expectation to 25% up from 20.

Our Drug Delivery revenue was $18 million in line with our expectations and representing solid growth of 23% over the prior year. We continue to make significant progress in our manufacturing and supply chain initiatives resulting in continued improvement in gross margin and improved quality of our products.

Our manufacturing processes and ongoing improvement efforts continued to reduce scrap, increase productivity, improve line efficiency and drive sustainable cost savings. During the second quarter, we shifted more of our freight shipments from air to ocean and we'll continue to increase this rate during the balance of this year. And as discussed previously, we expect our move from air to ocean will improve our gross margin on an annual basis by approximately 100 basis points and for 2017, we'll be up approximately 50 basis points.

We're also pleased with the progress we're making on the build-out of our new state-of-the-art manufacturing facility in Massachusetts, where we will install 2 highly automated lines with the first schedule to come online in 2019. We are making significant progress on the development of our Omnipod DASH product. We performed market research on DASH at the ADA Trade Show in June and received terrific feedback from clinicians. I'm very proud of the extraordinary efforts of our cross-functional teams to ensure we will have a high quality product that exceeds our customers' expectations.

The DASH is the technology platform for all of our future innovations. The U-200, the U-500 and the Horizon Automated Glucose Control System. These development efforts will allow Insulet to maintain its competitive edge with truly differentiated and innovative products.

In Drug Delivery, Amgen's OnPro kit reached 55 conversion at the end of the second quarter and I'm sure all of you have seen it in the last direct-to-consumer advertising campaign on television. We continue to work with pharmaceutical companies for the delivery of drugs using our Omnipod technology. We have a unique value proposition in drug delivery and we remain excited about the long-term potential in value creation opportunity this business provides. I am very proud of the performance of the company over the past 3 years. When you compare our revised 2017 revenue and gross margin guidance to the 2014 results, we have nearly doubled the top line and improved gross margin by 10 percentage points.

Now we are well on our way to achieve our 5-year target of $1 billion in revenue, gross margin approaching 70% and above market profitability.

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

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [4]

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Thank you, Pat. I will review our second quarter results and then discuss our third quarter and full-year 2017 guidance. I will also give some color on the expected impact of our recently announced assumption of direct distribution in Europe in mid-2018. As I review our results, unless otherwise stated, all commentary regarding changes will be on a year-over-year basis.

We are very pleased to report second quarter revenue growth of 26%, with revenue of $109.8 million compared to $87.3 million. All 3 of our product lines contributed meaningfully to this growth. We exceeded the midpoint of our stated guidance by $4 million with half of the beat coming from U.S. Omnipod and the remainder split between international Omnipod and Drug Delivery due to strong demand across our business.

Our gross margin increased by over 100 basis points to 58.9%, primarily from improvements we've made over the last year to our manufacturing and supply chain operations as well as improvements to product quality offset in part by unfavorable mix due to higher international distributor sales.

Our operating expenses increased to $68 million compared to $51.7 million and were consistent year-over-year as a percentage of revenues. The increase in spending reflects headcount that we've added over the last year to support the growth in our business, including increased investment in development and clinical work on our exciting innovation project as well as the expansion of our commercial and operational infrastructure consistent with our stated plans and objectives.

We ended the quarter with over $258 million in cash and investment compared to approximately $300 million at the end of last year. The decrease is the result of our capital expenditures, primarily associated with investments in our U.S. manufacturing project, which continues on plan.

Our cash and investments also reflect continued strong days sales outstanding as well as stable inventory levels, even with the significant growth of our business. We are very pleased with our strong financial position as we continue to make strategic investments in support of our near and longer-term organic growth opportunities.

I will now update you on our 2017 outlook. For the full year, given our better-than-expected revenue to-date and the strong momentum across all of our business lines, we are raising our revenue outlook to be in the range of $440 million to $450 million, compared to our previous range of $425 million to $440 million. The $12.5 million raise at the midpoint is largely associated with stronger Omnipod demand in both the United States and international markets. The revised guidance compares to 2016 revenue of $367 million and represents growth of 21% at the midpoint. First, we now expect full-year U.S. Omnipod revenue in a range of $263 million to $268 million, representing growth of 16% at the midpoint. Second, we expect international Omnipod in a range of a $105 million to $108 million, now representing growth of 48% at the midpoint. And third, we expect Drug Delivery in the range of $72 million to $74 million, representing growth of 12% at the midpoint.

For the third quarter of 2017, we expect revenue in the range of $112 million to $116 million, compared to $94.8 million representing growth of 20% at the midpoint. This will be driven by continued strong growth across all of our business lines. First, we expect third quarter U.S. Omnipod revenue in the range of $67 million to $69 million representing growth of 14% at the midpoint. As a reminder, our U.S. Omnipod growth this year is net of a 2 point unfavorable impact from the expiration of the historic royalty arrangement. Second, we expect international Omnipod in a range of $27 million to $28 million, representing growth of 44% at the midpoint. And third, we expect Drug Delivery in a range of $18 million to $19 million, representing growth of 15% at the midpoint.

On gross margin, we are reaffirming our expectation that 2017 full-year gross margin will approach 60%, up significantly compared to our reported 57.5% last year. This reflects the significant operational improvements we've made, partially offset by the unfavorable mix of international distributor revenue. We are extremely pleased with the tremendous progress to-date in margin expansion.

To achieve our goals, we will continue to invest in our business to drive long-term growth and profitability, including commercial, research and development and infrastructure investments. We now expect full-year 2017 operating expenses to increase between 25% to 30% from 2016, up from our previous range of 20% to 25% but lower as a percentage of revenue, reflecting initial cost to expand our European infrastructure as well as higher performance based incentive expense. Consistent with our previously stated guidance, we expect full-year 2017 EBIT to be roughly in line with last year.

Given the plan in mid-2018 to assume direct commercial responsibility over our European Omnipod business, we would now like to give you some color on how we expect this change to impact our 2018 results compared to historical trends. From a revenue standpoint, while customer pricing in Europe is on average 20% lower than our pricing in the United States, the move to end user pricing represents an increase of over 50% as compared to our existing distributor pricing. As such, beginning in the second half of 2018, when we no longer sell to our current distributor, we expect a material increase in our revenue run rate, even with the expectation that our newly established European sales force will now reach full productivity for approximately 1 year and expecting that Omnipod's significant installed based growth in France will eventually moderate. We are extremely excited about the opportunity to drive continued strong revenue growth outside the United States with a direct sales force focused on Omnipod and with innovation targeted for our global markets.

From a gross margin standpoint, given the increased revenues, once we transition to a direct model in Europe, we expect our total company gross margin to increase by approximately 400 basis points on a full-year basis, with half of that expected for calendar year 2018, assuming the midyear transition. As a result, as Pat mentioned, we are now raising our long-term total company gross margin target from 65% to approaching 70%.

From an operating expense standpoint, we expect the change to a direct model will result in incremental annual run rate operating expenses of approximately $45 million to $50 million. In addition, we expect nonrecurring expenses associated with the transition to include approximately $10 million to start-up cost as well as the fee payable to our current distributor. That fee is determined based on the number of Omnipods we sell in the 12 months following the June 30, 2018 contract expiration, to customers who had previously purchased their Omnipods from our distributor. Assuming the continued growth of Omnipod in Europe through mid-2018 and limited attrition in the 12 months thereafter, we estimate this fee could total approximately $50 million. Excluding these anticipated nonrecurring expenses, we expect the assumption of direct commercial operations in Europe will be accretive to total company earnings and we continue to expect to be EBIT-positive in 2018. We also remain confident about reaching our longer-term targets of $1 billion in revenue in 2021 with gross margins now expected to approach 70% and above market profitability. This is a very exciting time for Insulet as we drive significant revenue growth, make the pivot to profitability and deliver differentiated innovation to our customers worldwide.

I will not turn the call over Shacey.

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

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Thanks, Mike. We have completed the first half of 2017 with strong results and we're headed into the second half with incredible momentum. Second quarter results were once again terrific. Our commercial strategies continued to drive robust revenue growth and a sizable increase in our installed base. We also made substantial progress on innovation and operational initiatives, particularly, with our Omnipod DASH and Horizon programs. As a result of the tremendous growth we are experiencing internationally, we are increasing our full-year 2017 expectations to approximately 25% year-over-year growth in our global Omnipod installed base. We are reaffirming the expected growth of 15% in our U.S. installed base and we are raising our estimate of the international installed base growth to over 40% from our prior assumption of 30%.

As a reminder because of Omnipod's recurring revenue model, installed base growth is the best predictor of revenue growth. In Q2, our U.S. installed base grew approximately 15% year-over-year as we expected. And our international installed base grew more than 70%, exceeding our expectations.

Combined, this represents year-over-year growth in our global installed base of approximately 35% as of the end of the second quarter, which drove our strong company revenue growth. Our U.S. revenue growth was fueled by the investments we've made to increase field sales footprint, raise product awareness and broaden market access. These efforts are driving improved account penetration and are attracting more potential new users to Omnipod.

Our pipeline is the strongest it has been in company history. We're clearly increasing awareness among our targeted segments; multiple daily injection users. Direct-to-consumer digital advertising is helping to educate MDI users on how Omnipod can give them better control, freedom and quality of life compared to other insulin delivery methods. And our field team is driving increased efficacy and utilization among physicians.

On top of attracting new customers, we continue to focus on improved market access and reimbursement because this impacts customer experience and retention. Our team has been capitalizing on Omnipod distinct product advantages and low upfront cost to expand Medicaid access for Omnipod. In Q2, we added access to 2 million covered lives, primarily for Medicaid beneficiaries, bringing our total U.S. Omnipod access to 180 million lives or approximately 58% of all covered lives in the United States.

Also this quarter, we were thrilled to welcome Bret Christensen as our new Chief Commercial Officer. Bret brings decades of commercial leadership and success to Insulet and he has hit the ground running as expected. In particular, his experience and expertise in consumer marketing, sales force optimization and winning in highly competitive markets is already driving value for the organization. Bret leads all commercial operations and teams for the United States and Canada. While commercial execution and improved customer experience and increased market access drive growth in the near term, our innovative product development pipeline will fuel growth in 2018 and beyond. This quarter, we made great headway on our innovation roadmap. Particularly, with Omnipod DASH, which we (inaudible) for market research. As a reminder, Omnipod DASH includes our Bluetooth-connected Android-based Personal Diabetes Manager. DASH will provide users with improved simplicity and ease of use through a modern touchscreen device, wirelessly connected to our Bluetooth-enabled pod. DASH is the platform for our future innovation, including concentrated insulin and our Horizon automated glucose control system.

By moving to this Bluetooth platform, we are able to liberate the data in our PDM and pod to provide mobile dashboard displays for Podders, mobile apps for caregivers, data and insights for patients, physicians and payers. This platform also allows us to integrate with Bluetooth-enabled sensors, including Dexcom G5 and G6, which are incorporated into our Omnipod Horizon programs. Our introduction of DASH at ADA was a huge success. While more than 100 end users have already been involved in the development of DASH, we took the opportunity to collect additional market research from ADA attendees that focused on preferred product features and the DASH user interface. This feedback was overwhelmingly positive. 94% of participants indicated that DASH was a significant improvement over the current Omnipod System. 90% agreed that the DASH was the right platform for future Omnipod innovation and 80% said that DASH would be even easier to train on than the current Omnipod System and will allow more healthcare providers to treat more patients with pod therapy. It's terrific to see clinician feedback on DASH mirror the enthusiasm expressed by our Podders who have tested this platform as part of our research and development process. We are on track with DASH development and expect to submit to the FDA in Q4.

In addition to the exciting DASH feedback at ADA, we also highlighted the progress that we've made on Omnipod Horizon Automated Glucose Control System, including its impressive clinical performance. We conducted a product theater to share relevant data, progress on development and to complete market research on the Omnipod Horizon user interface. This event was standing room only and attracted over 400 attendees. Based on the participant feedback we collected, the diabetes clinical community is eagerly anticipating the introduction of Horizon. We are making rapid strides towards commercial launch and recently started our third IDE study for Horizon, which is enrolling 48 patients across 3 centers and is expected to be fully completed by October.

Patients in this IDE trial are spending a longer time in our hybrid closed loop phase and it is taking place in a hotel setting instead of a clinical research center. Our Concentrated Insulin Development Program with Eli Lilly to use U-500 and U-200 insulin out of Omnipod remain on track. As a reminder, concentrated insulins enable us to better serve people with higher daily insulin requirements. Including people living with insulin-dependent Type 2 diabetes. These products, which will enter the market in 2019 and 2020, will more than double our addressable market and have the potential to be significant growth catalysts for Omnipod.

Results of our Drug Delivery business remain strong supported by the markets' continued adoption of Amgen's Neulasta OnPro kit. As Amgen mentioned on their last earnings call, its Neulasta OnPro kit now accounts for approximately 55% of all U.S. Neulasta doses. This remarkable growth in adoption is a testament to the value of the pod for delivering medicines other than insulin. And we continue to make good progress on the clinical development programs underway with other pharmaceutical partners. We believe Drug Delivery represents a tremendous opportunity for longer-term growth.

Last but certainly not least, we are thrilled to assume the distribution and commercial support for our Omnipod users in Europe in July 2018. Early on in his tenure, Pat recognized our international Omnipod opportunity and business model as having potential to drive significant additional value for Insulet. Pat, and I each have built and run European businesses and our executive team has substantial international experience, building and growing businesses across all major global markets. Our team understands and appreciates Europe's uniqueness and its considerable prospects. For the better part of 2 years, we've been evaluating and preparing for this potential move. We have now established an office and team in the United Kingdom, including human resources, regulatory, quality and commercial leadership and we are leveraging our European physician advisory board third-party and internal market expertise and our rapidly growing commercial partners to ensure we have a successful transition of the business.

With the guidance of these subject matter experts, we have developed a deep understanding of the patient journey in the various markets across Europe. We are using these insights to formalize our key processes and operations in the country -- at the country and Pan-European levels. Our immediate focus is on providing continuity of care for our existing customer base. And then, we will drive further penetration and expansion into our considerable international market opportunities.

Today, Omnipod is sold in 13 European countries with the vast majority of the use occurring in 4 markets France, the Netherlands, Germany, and the United Kingdom. For onetime clarity's sake and to help you with your modeling, our European distributors' best estimate is that there are approximately 50,000 Omnipod users in Europe. Our largest and fastest-growing European market is France, which represents almost 1/3 of our European business and is highly concentrated, where distribution, training and customer support are managed by home healthcare providers or prestataires. This reduces the business transition risk for us, since no manufacturer sells or markets directly to the patients. Instead, patients in France choose the technology they prefer and they are overwhelmingly choosing Omnipod.

Additional risk mitigation is expected as a result of the existing contractual obligations and incentives for our distribution partner to continue to grow the Omnipod user base over the next year and transition the business to us. We appreciate the execution challenge we have before us to move to direct control of our European business. We have accelerated the work and investments already underway to ensure we are fully prepared to assume complete control of the Omnipod franchise as of July 1, next year. We are confident in our team's ability to secure and optimize our European business in the near term and to deliver exciting international market expansion over the longer term.

In Europe, based on the difference between our distributor pricing and average customer pricing, this change in business model is quickly accretive, delivers operating leverage, expands gross margin and allows us to control our international business, which we see as a strategic imperative. This is an extraordinarily exciting opportunity to drive value for Insulet, for our shareholders and most importantly for our growing global diabetes community.

In closing, I am incredibly proud of the Insulet team. Our team has diligently identified, developed and implemented plans to improve our key performance indicators and build our long-term growth aspects. It is incredibly rewarding to see these plans take shape and make such an impact in the marketplace. We are passionately committed to driving incredible results today and preparing for further accelerated growth tomorrow.

Now, I'll turn the call back to Pat.

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Patrick J. Sullivan, Insulet Corporation - Chairman and CEO [6]

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Shacey, thank you very much. Operator, let's open the call up 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 comes from Margaret Kaczor from William Blair.

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Margaret Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [2]

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Appreciate the extra color at the front end here, that was helpful. In terms of as we look at -- maybe the next couple of years for the European markets. Can you give us any more detail in terms of France? How important is France towards growth and maybe as a percent of the installed base?

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

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Sure, Margaret, this is Shacey. France is approximately a 1/3 of our installed base. And it is an important example of really the risk mitigation in this transition of the business because as I mentioned, the prestataire stands between the manufacturer and the patients and so it's a fairly straightforward market to transition. It's been an incredible growth driver -- I mean, really France has been a phenom. And we do expect that growth to moderate in the near to medium-term but it's been pretty spectacular performer for us over the last quarter. And the businesses and the different markets across Europe sort of span the spectrum from the French model where there's a middleman like the prestataire to more a U.S. type of models like the U.K. But we do expect that market to continue to grow but we are kind of penetrating at large percentages now and so the growth will moderate.

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [4]

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I would just -- this is Mike. I would just add that we have -- as we've seen in the United States strong growth, we've seen very strong growth across the European markets and where we are direct in Canada. And so there's just a tremendous amount of adoption. So it's not a story all about France, I think the point of France is just -- it's a wonderful part of the story. And again, it's fairly easier operating model to transition to.

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Margaret Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [5]

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Great. Appreciate that extra color. In terms of the follow-up, can you talk anything about the U.S. growth and maybe launch plan for DASH. Any kind of specific details you could share of when you think that's going out, maybe incremental detail of patient adoption? How you roll it out into the installed base?

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

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Sure, so we had a great quarter, actually we've had a great year so far in the U.S. Our pipeline is incredibly strong and that's been driven by commercial execution and direct-to-consumer marketing through digital channels. So that's really increasing awareness and then the pull through because of market access and the field performance has been very strong as well. And I think it's evidence that this focus on multiple daily injections and the value proposition there is really strong. And so that distinction is what's helping to fuel Omnipod's grow. As it relates to DASH, feedback we got at ADA is that the platform will be even simpler and should strengthen our value proposition and our differentiation in that patient population. So we'll remain focus on that same user group. In terms of the rollout, we're keeping that kind of under wraps for competitive reasons. But I will say that we're going to have attractive avenues to access the system for both our existing users and new users. And we're really excited about the early feedback and so we're going to do whatever we can to make sure it's a successful rollout and that also we can ramp quickly and supply what we think is going to be pretty great demand out there. But I guess I have tempered those remarks by reminding everybody that our business model is a recurring revenue business model. So it's not like this drives a bolus of revenue that you see with the capital models that exist out there.

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Operator [7]

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And our next question comes from David Lewis from Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [8]

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A couple of questions on Insulet. The first is on margins, the second is just on near-term business momentum. So as with some margins, Pat or Mike, the new target of 70%, makes perfect sense to us 400 to 500 basis points of improvement. But how much of that -- how much is going direct a factor in the initial 65% number? Basically what I'm trying to get at is 70% a ceiling or whether there are underlying improvements still not reflected in that 70%? And then I had a quick follow-up.

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [9]

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This is Mike. So when we talked about 65% target. At that time, we were evaluating whether to go direct or not and so it factored in as the existing business model at that time, which was not going direct and that's why in going direct and that adding about 400 basis points to our model, that's how we raised from the 65% target to the approaching 70% target. The -- in our investor meeting in November, we laid out the key drivers of what gets us from where we are today of approaching 60% to the previous target of 65% and a significant portion of that was associated with manufacturing and operation supply chain improvements, including the move to our highly automated U.S. manufacturing. There are also commercial opportunities that were factored in there as well. Now with the higher targets that's reflecting in full the opportunity that we now have with the direct business model in Europe.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [10]

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Okay. So to the extent that there was underlying manufacturing opportunities that got you to 65% or conservative, there could be upside of a 70% number, and 70% just reflects this and nothing else?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [11]

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Is there at all any answer to that is we have consistently set targets not that we would be satisfied with any of our targets but that the credit -- the targets need to be credible. So we have direct line of sight, as Pat said in the past and I have to these targets. Is there upside to the target? There's always upside. We would say that our targets though are realistic and that -- look there's downside risk, too. So we will not stop in driving the value of this business and we're very pleased with the progress we've made to date.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [12]

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Okay. And then Pat and Shacey. Ypsomed obviously had a best case outcome and I appreciate your comments on how you manage disruption near term. If you think about the back half of 2017, the actual guidance sort of embeds some slow momentum. Do you think that captures the risk here year and how should we think about if there's going to be disruption? How we should weigh first half '18 versus second half '17?

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Shacey Petrovic, Insulet Corporation - President and COO [13]

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Sure. Yes, David I think our guidance is appropriately conservative, given the transition negotiations and the pending change. And so I do think it factors in that risk. But there is clear line of sight to the upper end of the guidance because our interest with our distributors are somewhat aligned. So they make a profit on pods, they are contractually obligated to continue to grow Omnipod between now and the expiration of the agreement. They -- as Mike mentioned, they have a per pod fee following the 12 months of after expiration of the agreement and then they also have reputational risk if they don't continue to support Omnipod in the market. So all of those things we believe help us mitigate risk. And I think the thing to remember is this really is short-term noise. This is a great move for us, it unlocks our international business opportunities both in Europe and beyond over the medium and long-term and just drives incredible value for us. So yes, the guidance factors in that risk and I think we're ready to execute and pull that business over in '18.

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Operator [14]

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And our next question comes from Danielle Antalffy from Leerink Partners.

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Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [15]

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So just a quick question on the U.S. Omnipod numbers in Q2. Shacey, you mentioned that in the installed base in the U.S. was up 15% as expected. But U.S. Revenue beat by nearly $1 million at the top end of the guidance range. So just wondering if you could talk about what's driving that outperformance there? If the installed base is growing as you'd expected? Is it utilization, what's -- or pricing? What's going on there?

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Shacey Petrovic, Insulet Corporation - President and COO [16]

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It's just channel mix distributor versus direct.

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Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [17]

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Okay. Got it. And then my next question is on -- well, I guess following up on that is whatever that mix is, is that sustainable? Or is it just pretty volatile quarter-to-quarter?

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Shacey Petrovic, Insulet Corporation - President and COO [18]

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I think its puts and takes, some of it is sustainable and some of it will just naturally fluctuate quarter-to-quarter.

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Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [19]

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Okay. Understood. And then my next question was at ADA, there was a lot of excitement, at least I saw around well, of course, DASH. But also pumps for Type 2 patients. And I was wondering if you could give an update on when -- the timing for your Type 2 products. And how we should think about the ramp when those products do come in the market? And does the business change at all? Your go-to-market strategy for Type 2 patients, is it going to be significantly different than for Type 1 patients?

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Shacey Petrovic, Insulet Corporation - President and COO [20]

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Yes, thanks, Danielle. That's a great question. For our Type 2 product what -- the limitation in serving the Type 2 market is really about the reservoir size. If we like to keep the form factor that everybody loves about Omnipod, we have to figure out a way to serve people who need higher volumes of insulin on a daily basis for Type 2 patients, who typically require anywhere from 2 to 5x more insulin on a daily basis than a Type 1 patient. And so we do that with the concentrated insulin program. As I mentioned, the timing of those, a U-500 will hit the market in 2019 and U-200 will hit the market in 2020. U-500 is for a very highly resistant -- insulin resistant patient and so a smaller niche, although, we will be the only pump approved for U-500 and so it's very likely we'll take a big portion of that population. And then U-200 is really the molecule that unlocks the Type 2 market for us. And when we think about Type 2 market, we think about insulin-dependent Type 2s. So if you take that volume, that's approximately 2 to 3x the size of the market -- sorry, of our market today -- sorry, it doubles or potentially triples the markets that we have today with Type 1. So we would see acceleration there. But our data demonstrates that most people who use -- who are insulin-dependent Type 2s are seen by an endocrinologist, so it doesn't really mean that we have to expand our channel but we will have messaging, we will have a product that is uniquely developed for a patient with Type 2 diabetes versus the Type 1.

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Operator [21]

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And our next question comes from Mike Weinstein from JP Morgan.

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Michael Neil Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group [22]

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And let me -- I want to circle back on Ypsomed and thanks for all the different commentary, it was helpful. I do want to just understand kind of beyond the fact that there are going to get paid on the next 12 months, revenues post the transition, kind of what is the obligation for them to continue to add new patients. I think their commentary on their own call suggest that the incremental ads from here will be relatively limited.

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [23]

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Mike, I think the answer is that the contract doesn't expire until June 30, 2018. And they're -- both parties are contractually bound with certain obligations and one of our obligations is to actively promote the Omnipod system throughout Europe. And so I think with that, plus the fact that they have a incentive -- financial incentive because they get profit on every Omnipod that they sell between now and then as well as this termination fee is provided for any reputational risk, I have full faith that they will live up to the obligations of the agreement.

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Michael Neil Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group [24]

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And so that does include the continued investment and adding new patients to the installed base?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [25]

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Correct.

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Michael Neil Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group [26]

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Okay. And then I just want to go back to some of the math that you shared. If I took the commentary about European pricing being on average or the 20% discount to the U.S. and then your commentary about the pod, the implied 50% plus increase in realized pricing in going from the distributor to direct. If the math works out to a realized price today to Ypsomed of just under $15. Is that correct? And if so, does that imply a gross margin on that business of about 30% today?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [27]

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Mike, it's Mike. In answer to your question. So we have not had a practice of confirming pricing specifically. But we did give more color here specifically so that you could get comfortable with the modeling. So I think it's fair to say that it is still a discount off U.S. pricing but it's a sizable increase off of our current pricing to Ypsomed. In terms of the gross margin improvement, I think the important way to think through that is just what we said and that it improves total company gross margin by 400 basis points. On a full-year basis, half that for a 2018 as you would expect since the agreement ends midyear.

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Michael Neil Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group [28]

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Okay, one might ask just to clarify, Mike that I think you said $45 million to $50 million incremental OpEx. You expect to -- when do you expect that to layer into the P&L?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [29]

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So I did want to give -- since this is a change in business model, I did want to give a view of a run rate, an annual one rate for the European business and I did say $45 million to $50 million, that's correct. It is important to note that we are standing up this business, we've been doing a tremendous amount of work over the last couple of years to prepare for this. And there is spending in 2017 associated with standing it up. But there will also be -- we expect approximately $10 million of stand up cost that are nonrecurring and then there's also this fee to Ypsomed to essentially buy the book of business that's paid based on the number of consumers that transition to our product. The $45 million to $50 million was really, once we are running the business direct, what does the run rate look like, because it is a change from our historic business model. In terms of how it ramps up next year, we'll give more clarity as we always do when give 2018 guidance in February as part of our year-end results. But I think it's fair to expect that the comps will ramp up through the year because we're growing the business and establishing that infrastructure over time. So we're highly confident of the seamless transition midyear.

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Michael Neil Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group [30]

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So what is that $45 million to $50 million number, just so I understand what you're saying?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [31]

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That's the run rate operating expenses of go direct business in Europe.

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Michael Neil Weinstein, JP Morgan Chase & Co, Research Division - Senior Medical Technology Analyst and Head of Healthcare Group [32]

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Will you expect it to be -- come second half of the...

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Patrick J. Sullivan, Insulet Corporation - Chairman and CEO [33]

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I am sorry, Mike. Could you repeat that?

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Patrick J. Sullivan, Insulet Corporation - Chairman and CEO [34]

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Mike, we lost you. Let's go to the next question.

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Operator [35]

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And the next question comes from Tao Levy from Wedbush.

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Tao Leopold Levy, Wedbush Securities Inc., Research Division - MD of Equity Research [36]

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Just maybe one clarification and I'll ask 2 questions. Is my math correct that we're talking about the current run rate business from the end user side of things for Ypsomed being around $140-ish million plus whatever the PDM's sell for over there, is that in the ballpark?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [37]

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Tao, this is Mike. I just want to make sure I'm understanding your question correctly. Because we gave guidance for the year for our international.

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Tao Leopold Levy, Wedbush Securities Inc., Research Division - MD of Equity Research [38]

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I'm sorry, when you take over the account? Yes, trueing up -- what would that book of business look like under...

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [39]

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I think -- what we've been saying is that the business is growing very nicely from a volume standpoint. From a pricing standpoint, we expect the pricing to improve midyear by approximately 50% from our historic pricing. And so with our guidance that we've already provided of $105 million to $108 million for international, obviously, not all of that is Europe, it's roughly 80% or so. But that's the basis for doing estimates of 2018 run rate. And again, we'll give more clarity specifically on 2018, when we do our year-end call.

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Tao Leopold Levy, Wedbush Securities Inc., Research Division - MD of Equity Research [40]

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Okay, and then just to also be clear following up on what Mike had asked. My German is not great. But I thought that Ypsomed had a -- had said they were going to end the next year around 65,000 installed base and kind of grow it at that 30%. Is that correct or did they say that it wasn't going to grow?

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

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They did indicate on their call that their business would continue to grow. The number that I provided to you was the approximate patients that exist today. So that's 50,000. And I don't recall the exact number but I think it was north of 60,000 that they indicated on their call. And my German isn't great.

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Operator [42]

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And our next question comes from Jeff Johnson from Robert Baird.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [43]

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Mike, maybe just following up, I think what on earlier call, I think was getting at on the SG&A, the $45 million to $50 million. I just want to understand your commentary. Is that $45 million to $50 million incremental to the cost you're putting in right now into that business to try to make the transition smooth in the international markets?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [44]

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Let me be crystal clear. So as a direct business in Europe, we expect the annual run rate operating expenses to support that on a direct basis to be $45 million to $50 million. That is the annual run rate when we are direct in Europe. Up until that time, we are ramping up the team, we have a clear plan across functionally and so the cost will be ramping up to that but that will be the run rate once we assume direct distribution on an annual basis midyear.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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Okay, so we don't have to step up that full $45 million to $50 million come the transition period?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [46]

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Well, I think what's important to understand though, is there will be setup-- standup expenses in 2018, but we have to hire all the people in a full run rate spending, once we are fully operational, is $45 million to $50 million.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [47]

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Understood. And then on the inventory side, I would assume Ypsomed is holding at least 1 or 2 months of inventory, maybe a little bit more. Will that net out against your first half revenues or in other words, will they start drawing into their inventory base as we get into the last month or 2 of their contract that we need to account for that in our revenue estimates for you? Or will there just be some sort of return at the midyear that we'd kind of one off out of the model at that point?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [48]

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Jeff, this is Mike. I would not presume that inventory has a meaningful impact on your models. But we are -- we have been managing as we've been saying for quite some time now, managing to make sure that there is not a lot of inventory in the channel. With all of the improvements that we've made in manufacturing and supply chain, there really is no need for it. And so I would not expect that inventory will have a meaningful impact on your models.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [49]

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Okay, that's helpful. And then if I could squeeze in a follow-up here. Just when I think of some of the Omnipod Horizon trials and progress you've made so far starting the third IDE, Shacey maybe this is a question for you. You know on the first 2, you've already gone through pediatrics and adult, exercise postprandial, some of those things. I've only covered the space for, I don't know, 2 or 3 years at this point, but you've made a lot of progress in a short while here in 6 or 9 months. Is there something about Omnipod? Is it simplicity of it? The safety of it? Is the FDA just getting more comfortable with some of these trials? But what has enabled you or the Horizon system to move so quickly through some of these different IDEs relative to maybe at least what I feel like some of your competitors have done over the last 5 years?

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Shacey Petrovic, Insulet Corporation - President and COO [50]

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I think the primary thing is the team that is working on the development program. We have a world class medical director, Trang Ly, who has been involved in every single APE clinical program prior to coming to Insulet so she's know what great looks like. And she knows how to avoid some of the pitfalls that other programs ran into. We have an extraordinary research and development team, particularly, the software and chip team and mobile technology team in San Diego. And the pod, I can't even single them out. They're working very, very well together, the device team, the software team to make rapid iteration and progress on the innovation front. And then, you highlighted it, the FDA has been very supportive. I would describe our relationship with them as collaborative, and we're getting the guidance that we need and we feel like we got a very tight clinical plan that we're executing on. So I would agree, I get so excited when I think about the progress that the team has made in such a short period of time. And even more excited when I think about the product that we're going to launch and the differentiation that we'll bring to market.

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Operator [51]

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And our next question comes from Raj Denhoy from Jefferies.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research and Senior Equity Research Analyst [52]

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Wonder if I could ask a product development question? One of the things on Horizon that has stood out is the fact you're using a receiver on android device, that's going kind of locked down, right, and there's been some talk about whether you could open that up and maybe have a connected device as the ultimate receiver and made the FDA will willing to do that. Is there any updates on that front?

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Shacey Petrovic, Insulet Corporation - President and COO [53]

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And by connected device, do you mean mobile phone?

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Christopher Cook Cooley, Stephens Inc., Research Division - MD [54]

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Exactly, right. So it has some cellular connectivity to it?

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Shacey Petrovic, Insulet Corporation - President and COO [55]

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Yes, so we continue to be in that great, I think, active discussions with the FDA regarding that. And we're -- that's certainly our hope, is that we can get to phone control, maybe even before Horizon. I think the FDA recognizes and now has set up panels of experts to work on cyber security for mobile devices and moving to phone control for medical devices. And we're actively engaged in those discussions and those panels. And so, we're working very hard on behalf of our customer base to get to that, to phone control because we know it's what they want. And we'd like to be leaders in that area.

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Christian Diarmud Moore, Jefferies LLC, Research Division - Equity Associate [56]

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Okay, that's helpful. And obviously, I hate to have to ask this question but 670G, right, so there's been an automated insulin delivery device out there. It's a little bit limited in its launch but clearly you're not seeing in your numbers. But I'm curious whether there is any anything in offer in terms of feedback in marketplace or where do you think we're through kind of the worst of people's worry around that? Any sort of update on that front will be helpful.

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

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I think we've heard what you've heard, you know there have been some bumps in the launch. And we are hearing from vendors that they're becoming more familiar with just how much time and work it's going to take to -- and that there going to need to devote to support and train people on these more complex systems. And I think that's just highlighting the difference in our value proposition around simplicity and ease of use. And I think it supports our messaging that there may be some reason to use a device like 670 on a patient whose wearing a tubed pump and is willing to put in the work to get whatever incremental benefit they're going to out of that technology. That's not our patient population. Our targeted demographic is the multiple daily injection user and for those people, we can help bring them to pod therapy and better glycemic control, better quality of life that they would not have gotten because they weren't willing to get onto a tubed pump. So I think it just highlights really the segmentation in the market and that we're a different value proposition and a different patient target.

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Operator [58]

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And our next question comes from Doug Schenkel from Cowen.

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Ryan Blicker, Cowen and Company, LLC, Research Division - Associate [59]

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This is Ryan in for Doug. The installed base growth of 15% in the U.S. year-over-year and that your pipeline is as stronger as it's ever been. Based on my math it seems U.S. new patient starts approximated mid to high-teens year-over-year growth in Q2 and maybe even 20% plus? Am I in the right neighborhood?

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

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We're purposely not giving that detail any longer because it's misleading in terms of its connection to our revenue growth and that just goes back to our business model. But really the best predictor of revenue growth is installed base. But you have to take into consideration that's 90-plus percent of what drives our revenue in a quarter. And attrition also drives or retention rather also drives revenue and so I would just focus on the fact that we grew our installed base 15% in the United States in the last quarter.

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [61]

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What I would -- this is Mike. I would just say we're just -- we've seeing increasing momentum quarter-by-quarter and are very pleased with the growth of new patients.

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

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Thanks, Mike.

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Ryan Blicker, Cowen and Company, LLC, Research Division - Associate [63]

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Understood. And then maybe just one follow-up on Drug Delivery. I believe that at your Investor Day last November, you talked about Amgen wanting to launch the OnPro kit internationally. We haven't heard much about that since then. Can you -- anything you can provide there, is there something that's possible for 2018?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [64]

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That's really a question for Amgen. Operator?

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Operator [65]

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And our next question comes from Jayson Bedford with Raymond James.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [66]

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Just a couple of quickies and I apologize if I missed this. But on the payout to Ypsomed, the fee, is it paid on total European installed base at the time of the switchover or is it just on the folks that they add over the next year?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [67]

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Jayson, this is Mike. So the fee is calculated based upon the number of pods that are sold in the 12 months after the contract expires, which is June 30, 2018, to people who had previously purchased Omnipod devices from Ypsomed. So it's based on number of pods sold. So as such, they have every incentive to continue to drive the number of patients on that device through June 30, 2018 and that fee is maximized based upon there being very limited attrition of those patients in the 12 months following the contract expiration. So from our perspective, we are -- we think it's a very helpful fee because it aligns our interest and really making sure that the patients are taken care of, that we continue to grow Omnipod in Europe and there's a successful transition of the business.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [68]

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Okay, that's very helpful. Just as a follow-up, does going direct in Europe change your international revenue goals for 2021 that you laid out at the Analyst Day?

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [69]

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This is Mike, again. So the goals that we laid out at the Analyst Day of a $1 billion in revenue, driven by growth across all of our product lines with strong growth, 20% CAGR across our product lines has not change at all. As we said at the time, the focus is on growing the business. We don't need any one product or area to have outsized impact. It was never meant to be "here's exactly the growth that we're going to have in U.S. versus international versus Drug Delivery," it was really meant to say, we have so many opportunities across this book of business, that's why we're confident in the $1 billion target.

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Operator [70]

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And our last question comes from Suraj Kalia from Northland Securities.

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Suraj Kalia, Northland Capital Markets, Research Division - MD and Senior Research Analyst [71]

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So Pat and Shacey, let me piggyback on some of the Ypsomed related questions. I know you have provided a lot of information and we do appreciate it. Ypsomed has a pretty significant outreach effort and they have indicated 30% plus growth with their footprint. How do you all see the correlation and forgive me if I missed this, between feet on the ground, the geographic disparity, the relative price elasticity, I know you'll have given $40 million to $50 million incremental OpEx on the normalized basis or a steady state condition, I'm more curious if you can give us one additional layer of color. What does this mean in terms of how you'll target the geographies, the people, so on and so forth?

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

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I will just remind you that the business is actually fairly concentrated. And so that's one factor when you think about what our investment and what the size of our team needs to look like. And then the other thing, I'll say is that Ypsomed had a large portfolio of commodity devices in addition to Omnipod. So there weren't a 100% focused on Omnipod and, obviously, recently launched their competitive device. So I think we're expecting once this team is fully -- this sales team is fully productive that we will get benefit from the sole focus on Omnipod and our growing product portfolio. And that may mean that our team needs to look different. And then when you look across the continent and even among our 4 largest markets, their business models are very different. So you may have a different type of commercial presence depending on the market that you're serving. I talked about France in my opening remarks, where our commercial organization in a country like France is going to look very different than our commercial organization, for example, in the United Kingdom or Germany. But we will make and we are -- we plan to make, we are making the right level of investment to make sure that we best serve that marketplace and all of the important customers to us in Europe.

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Michael L. Levitz, Insulet Corporation - CFO, SVP and Treasurer [73]

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And just from another perspective, as Shacey mentioned, we're currently in 13 markets in Europe, concentrated in 4. If you take an individual country in Europe, it's about the size of our Canadian operation. So it's a series of countries that are about the size of our business in Canada. So we have every confidence that we're going to be able to do this very effectively during the transition period.

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Suraj Kalia, Northland Capital Markets, Research Division - MD and Senior Research Analyst [74]

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Fair enough. And last question from my side, Pat or Shacey, again. Can you give us some color on the differences or the relative utilization rates between U.S. patients and European patients? Here's the reason why I ask. We can do the math on the number of patients, we can reverse engineer the ASPs, what potentially you guys are going to charge. And obviously, the key element here is knowing how many pods per month per patient will be used. What I'm trying to really get at is even if we don't increase the number of patients. Let's assume that happens after you all separate. If nothing even else happens, this is the step-up in revenues, just based on this direct transition. So I'm trying to get to the bottom of that. Any color on the utilization between these geographies would be great.

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Patrick J. Sullivan, Insulet Corporation - Chairman and CEO [75]

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In terms of utilization per patient, we're really not in a position to give you that information. I think you can run your models and come up with reasonable estimates. What I would say about the European market is that in terms of pump penetration, Europe is only about 20% penetrated in pumps versus 30% in the United States. And so we think there's great opportunities to expand the market in Europe through a higher penetration. And secondly, the attrition rate is about 9% in the U.S. and it's only about 2% to 3% in Europe. So once a patient gets on a product in Europe, they are set for reimbursement for life, which is vastly different than the every 18-month people transition during -- in the United States transition between insurance plans.

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Operator [76]

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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 and CEO [77]

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Thank you, operator. We are absolutely, positively thrilled to establish a direct presence in Europe. We've done our homework and we're very prepared and we're ready for the challenge. We have the right team in place to drive significant performance and success and we have the right tools in place to win and achieve our goal of $1 billion in revenue in 2021. I'd like to thank the Insulet employees for their hard work and dedication to ease the burden and improve the lives of people living with diabetes and other diseases. Thank you for joining us on the call today. We look forward to sharing our progress during the course of what is shaping up to be a very exciting 2017. Thank you very much.

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Operator [78]

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Ladies and gentlemen, thank you for your participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a wonderful day.