PODD

Insulet Corporation (PODD)

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Insulet Corporation (PODD)

Q2 2008 Earnings Call Transcript

August 12, 2008 5:00 pm ET

Executives

Duane DeSisto - President and CEO

Carsten Boess - CFO

Analysts

Kim - J.P.Morgan

Mimi Pham - JMP Securities

Paul Choi - Merrill Lynch

Shawn Fitz - Stephens, Inc.

Philip Legendy - Thomas Weisel Partners

Ben Andrew - William Blair

Bruce Cranna - Leerink Swann

Anup Mehta - Canaccord Adams

Derek Leckow - Barrington Research

John Green - Smith Barney

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second-quarter 2008 Insulet Corporation earnings conference call. My name is Emity, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's conference, Mr. Duane DeSisto, President and Chief Executive Officer of Insulet Corp. Please proceed.

Duane DeSisto

Thank you, operator. Good afternoon, everyone, and welcome. With me today is Carsten Boess, Insulet's Chief Financial Officer. Thanks for joining us to discuss our results from the second quarter of '08, another strong quarter for Insulet.

We will be making forward-looking statements about various aspects of our business, so please refer to our most recent 10-Q for a full discussion of our risk factors.

I am pleased to report that in the second quarter, we continued to make impressive progress in expanding Insulet's commercial footprint. We have more than doubled our manufacturing capacity since our last earnings call and already surpassed the production goal that we set for the end of the year.

In the second quarter, we also strengthened our sales and marketing infrastructure, achieving nationwide salesforce coverage to respond to the growing demand we continue to see for the OmniPod System. Our increased sales reflect the success we're having across the board in expanding our commercial operations.

In the second quarter, new patient shipments grew more than 35% sequentially, with the addition of approximately 1650 new customers. And in the first half of 2008, we generated more revenue than in all of 2007.

Several years ago, when we finalized the design of the OmniPod System, we were confident that the product's customer-friendly form factor would appeal to people with diabetes and their physicians and that our pay-as-you-go model would appeal to third-party payors.

We were sure that if we could deliver an insulin pump therapy that overcame the challenges of conventional pumps, we could eliminate the obstacles preventing so many people from choosing the best possible treatment for Type 1 diabetes.

As I've said before, we knew the tough part was going to be building the manufacturing capacity to meet the market's eventual demand for such an innovative product. I'm proud to say that we have made a dramatic jump on the production front and reached a manufacturing output of approximately 200,000 pods per month at the ended June.

Expanding manufacturing capacity inherently reduces per-unit production costs, and we will further drive down costs by both continuing to increase volumes and transition manufacturing to China.

The majority of the 200,000 pods we produced in June were manufactured in Bedford, Mass. Going forward, we expect that the majority of pods will be produced in China. We see a continued strong buildup in China over the next six months and think there is a possibility of significantly increasing throughput per line beyond our estimates of 200,000 pods per month.

In the second quarter, we broke through a major milestone by producing our millionth pod. To put that in context, that is approximately four times the total number of conventional pumps in the U.S. market today. When you produce anything at this scale, the ongoing challenge is going to be staying on the alert for manufacturing supply issues.

As we indicated on our last quarterly call, we did encounter a quality challenge related to the plating of a component. This issue manifested itself in the field in Q2 and caused a 2-point to 3-point increase in our out-of-box failures. We addressed it in the second quarter and saw a significant drop-off in complaints in July, and no key institution has stopped prescribing OmniPod as a result of the issue.

We have seen the manufacturing issue impact our P&L primarily in two ways, increased product testing and a slightly higher attrition level, which reached approximately 10% in Q2 compared to approximately 8% in the prior quarter.

Turning to the build out of our sales and marketing infrastructure, with our national sales force in place, in Q2 we were able to implement an increase in direct-to-consumer marketing programs. These DTC programs include magazine and Internet banner advertising, direct mail, as well as ads on dLife, a television program targeting the diabetes community.

Our DTC campaign has dedicated links and 800 numbers to order our unique trial tool, the OmniPod Product Demonstration Kit, or PDK.

Earlier this year, we broadened the sampling program by introducing a non-inserting PDK so patients can experience using OmniPod without waiting to visit their doctor. We dropped our first direct mail marketing piece to people with Type 1 diabetes, over 100,000 pieces in Q2, featuring a call to action to order the non-inserting PDKs. We're extremely pleased with the response to these programs so far. These activities have driven a 51% increase in traffic to our website.

Despite all the positive traction on leads generated through our DTC campaigns and sampling program, our sales growth has been slowed by our ability to process referrals. Our infrastructure build out for reimbursement processing is lagging the demand we see in the marketplace.

Currently, our conversion rate is about 5% to 10% lower than we would like it to be. We're working on addressing this challenge by increasing our spending on reimbursement processing and are in the midst of outsourcing some of our reimbursement support system.

We continue to invest in demonstrating OmniPod's clinical efficacy relative to other insulin delivery options. Last week, at the 2008 annual meeting of the American Association of Diabetes Educators, The Endocrine Group in the Albany College of Pharmacy of Albany, New York, presented results on a retrospective review titled Clinical Experience with the Tubeless Insulin Pump System. The study concluded that the OmniPod Insulin Management System was safe and effective in improving mean A1C values.

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