Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2012 Insulet Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the conference over to Brian Roberts. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and year-end 2012 conference call. I'm Brian Roberts, Chief Financial Officer of Insulet. Joining me on the call today is Duane DeSisto, our Chief Executive Officer. Before we get started, I'd like to remind everyone that our discussion today may include forward-looking statements as defined under the securities laws. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act and are making this statement for purposes of complying with those Safe Harbor provisions. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. There are risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Information concerning the company's potential risks and uncertainties is highlighted in the company's press release issued earlier today and in the Risk Factors section of the company's SEC filings, including the company's Annual Report on Form 10-K for the year ended December 31, 2011 and the company's quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2012. These risk factors apply to our oral and written comments. We assume no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. I'd also like to remind you that the guidance we're offering today represents the point in time estimate of our future performance. You'll find a link to the webcast of this call, as well as to today's press release at myomnipod.com in the Investor section. Now, I'll turn the call over to Duane.

Thanks, Brian. Good afternoon, everyone. 2012 was an extremely successful year across all fronts for Insulet with strong revenue growth and expanded gross margins driving us to operating cash profitability in the fourth quarter. The year culminated with our most exciting accomplishment, 510(k) clearance for the new OmniPod System. We have pioneered a new market evidence by the 45,000 plus people who use the OmniPod to better control their diabetes. People continue to choose OmniPod in greater numbers for its ease-of-use, discretion and freedom from multiple daily injections or the freedom from nearly three feet of tubing required with a conventional insulin pump. Revenue grew nearly 40% in 2012 to $211.4 million. Our core OmniPod business continued to perform exceptionally well with the third consecutive quarter of nearly 30% year-over-year revenue growth. This growth has propelled us to a double-digit share of the insulin pump market here in the U.S. With over 70% of our new customers having never before used an insulin pump, we are expanding the market of those taking advantage of continuous insulin infusion therapy. However, with just 3% share of the overall type 1 market in the U.S., it is clear that we have an enormous opportunity in front of us as we continue to increase our sales reach. To improve that reach, in 2012, we invested in sales and marketing in the U.S. We added approximately 20 new members to the commercial team in the first half of the year, including a new inside sales capability which launched in May. Almost immediately, we saw a return of these investments as growth accelerated in the second quarter and was sustained throughout the back half of the year. I'm extremely proud of the efforts of our sales team. They were able to effectively communicate to both healthcare…

Thank you, Duane. First, let me summarize our fourth quarter results. Revenue increased overall by 23% to 57.8 million in the fourth quarter of 2012 compared to 47.2 million in the fourth quarter of 2011. Despite some patients choosing to wait for the launch of our new OmniPod, core business continued to perform exceptionally well with approximately 30% year-over-year growth for the third consecutive quarter coupled with record levels of initial shipments and referrals. Gross profit for the quarter improved by over 25% to 25.3 million compared to gross profit of 20.1 million in the fourth quarter of last year. Gross margin was 44%, a slight decrease from the third quarter. This decrease was a result of higher international sales of the new OmniPod which given the current inefficiency of production, produced a decline. Operating expenses for the fourth quarter were 31.4 million, less than a 3% increase from 30.6 million in the fourth quarter of 2011. Operating expenses declined 5% sequentially from 32.9 million in the third quarter of 2000, as we incurred higher costs related to our new OmniPod approval and commercial launch activities in Q3. We reported an operating loss for the fourth quarter of 2012 of 6.1 million compared to an operating loss of 10.5 million for the fourth quarter of 2011 and 8.5 million for the third quarter of 2012. Our fourth quarter 2012 operating loss includes over 6 million of non-cash operating expenses comprised primarily of depreciation, amortization and stock-based compensation. We achieved operating cash profitability back in September and maintained it throughout the fourth quarter. Net interest expense was 4.1 million in the fourth quarter of 2012 compared to 3.8 million last year. Of the 4.1 million in interest expense, approximately 2.6 million was non-cash. Finally, we reported a net loss for the…

Thanks, Brian. In summary, 2012 was a year of very strong execution for Insulet and we expect 2013 will be even more exciting. The OmniPod launched in Europe to a strong early response and we have now commenced the launch in the U.S. We are on track with our transition plans for our 45,000 plus customers and our confident that the feedback in the U.S. will be just as positive. We are always focused on innovation at Insulet in 2013. We will continue work towards expanding our product portfolio with the LifeScan PDM, new entries in the type 2 market and integrated CGM in OmniPod. We will do all this with our shareholders in mind. With the robust demand we expect for our new OmniPod, we expect to be able to continue delivering strong year-over-year top line growth while expanding our gross margins even further to become operating profitable by year-end. At with that, operator, please open the call for questions.

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

Hi, guys. Thanks for taking the question.

Hi, Kimberly.

Hi. So first question I guess is just on the new product launch and maybe just talk about the ability to get into new accounts with the new OmniPod, how those conversations are going? And why you think the new product is going to kind of get you (inaudible) that haven't been using your product before?

I think, Kim, so the early returns -- and keep in mind they were early. But the early returns people are intrigued by this next step in our evolution. And I think from our standpoint, there is both patient excitement and like you said, many of these physicians -- one of the blocking things that was out there was our whole insulin on-board calculation and not to bore everybody with the kind of arcane way we did it, but we thought we had kind of a better mouse trap. It wasn't the way the market leader did it. So this product basically put it in line with the way the market leader did it, which was blocking us in several institutions that they don't want to be treating their patients in multiple ways to calculate this depending on the product. So we know for a fact there's a whole list of people that told us as soon as we fix that, come back in. And even in the original product, we just wanted to fix that. That would have been a whole new 510(k). So we coupled that in this. So we know there's places, we know why a lot of people were blocking. And like I said, there's a lot of interest and so it gives us the opportunity to go back into all these guys. But like I said, that one in and of itself is significant.

Okay, great. And just a follow-up on the gross margin side. So it sounds like you guys are doing all the right things on the manufacturing side. But how do you get visibility into that second half gross margin ramp, because it sounds like you're still looking to kind of exit the year at about 60% plus gross margin level? Thanks.

No problem, Kim. It's Brian. So, we've certainly talked about partner Flextronics on a daily basis and Charlie has been leading the charge for us in making sure that we're hitting all the milestones that we need to hit around our overall pod costs, making sure the component costs is coming in as planned, and so far we're right on track. And so with all of those discussions with Flex, as we get to full capacity here, as we said in the prepared remarks, as the original pod ramped down its final runs of production and all of our resources can then be focused on generating the new pod, we're very confident that we're going to see the cost come in where we need it to be. So, I still feel extremely confident that we're going to end this year with a U.S. OmniPod margin in the low 60s which will translate on a consolidated basis. Our Q4 gross margin on a consolidated basis is probably somewhere around 50%, 51% and then you get the full effect of it probably a few more points in Q1 of '14 once all of the inefficiencies of the transition are now over.

Okay, great. Thanks, guys.

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

Hi. Good afternoon, guys. Thanks for taking the questions.

Hi, Danielle.

Hi. Just wanted to, Duane, follow-up on your comment about patients sort of deferring for the new OmniPod. How do we think about the impact of those patients coming on line versus the reorder disruption that you expect to see in Q1, how do they sort of offset each other? If you could walk us through that, that would be helpful?

Yeah, sure. Danielle, it's Brian. As you guys know, in any given quarter, the majority of our revenue in a given quarter comes from our reorder base, right. As our patients come on board, they typically order every 90 days. And a lot of that is dictated by guidelines that come from the managed care plans of how we can bill. And so no surprise. Typical effect is your sales in the third month of a quarter tend to pick up a little bit, so you're always a little bit back ended. On average we see and hear from patients that they may have around a month's worth of supply maybe sitting around in the closet that they've accumulated over time for whatever those reasons may be. And some would like to be able to leverage and use that supply before going on to the next-gen product. And a lot of that couples with the fact it's Q1 and everybody's deductibles are reset. So there's more cash out of pocket in Q1 than as compared to Q2 or Q3. So what we're planning for just given the -- what we've been hearing from customers through the first two months is that some of our reorder customers who would ship in the month of March normally may not wind up shipping until the beginning part of April. The impact of that just becomes, depending on the managed care plan those reorders, you may have a group of patients who have three reorders in the course of 2013 versus four. And so that's what we've effectively baked into that Q1 number. And then our overall guidance is that phenomenon. Any disruption from the reorder base around this area we think is completely resolved as we get into the Q2. This is really almost just a March, April effect and it's just a timing issue of exactly when the quarter cuts off. Certainly new shipments and one of the things that we're pretty enthusiastic about is coming out of the gates with a strong new shipment number in the first quarter of the year. It means that those patients are going to have three reorders over the course of the year as compared to if they start in Q2, then they have two reorders, right? So, there's a compounding effect there by getting more people on board with the product earlier. It's certainly why we put a lot of effort to making sure that we were ready to go with the launch here and that all of our customers in the U.S. are now getting the new pod. So that will offset some of that effect. But really it's kind of just a timing phenomenon between March and April.

Okay, great. That's great color. And then on Neighborhood Diabetes, so obviously the business is turning out a little bit different than you guys had hoped and dreamed when you purchased it. Can you talk about how you're thinking about Neighborhood Diabetes going forward from a strategic perspective? What might happen to that business or does it still make sense within the total Insulet business from a potential sales synergies perspective?

This is Duane. That's a great question, Danielle. Look, I think from our standpoint it wasn't lost on us or anyone else in the industry. The competitive bidding was going to come out. I think the entire industry in terms of the glucose monitoring business was stunned at $10.41, I think. You know why I would tell you flat out our proposal we thought that was still a profitable business for us in the $13 per 50 box range. At $10.41, it really isn't. I think the pluses that we saw and we described there, we're seeing the benefit of all that. So I think from our standpoint, we obviously have to modify the spend and take into account the business that will go away with this Medicare piece. There's subsets of people out there that are thinking that they can make a lot of money at $10.41, so there's some interesting customer names there. So there's a lot of activity swirling around. But I think our overall concept continues to be, and I think when you kind of fast forward whether it's two years from now or five years from now, patient-driven outcomes are going to be the real key to this whole thing and we still see Neighborhood playing a huge part and where we want to be, their High Touch service model. So we're still very excited about it. And in my mind, look, we didn't buy it for the Medicare strip business. I mean that came along for the ride and was nice and was an accretive business at the time. But at $10.41, you just scratch your head and say -- it's the only real Medicare business that we have. It's easier to get out from under that than it is to be involved and all that goes with being involved in the government at that price a very tough business model for all those guys. So, we're still excited. We still see -- nothing changed, I think, from our standpoint but obviously we have to just kind of readjust a little bit.

All right, that makes sense. Thanks, guys.

Your next question comes from Bill Plovanic with Canaccord.

Great. Thanks. Good evening. Just a couple of questions here. First on the Q1 guide as Jan, February, you've talked about it but for me utilization rate it's going to drop down. It comes back in kind of April-ish. How do you know that that's not a competitive issue?

Bill, this is Duane. Look, I think we're talking for the customers, right? What we have is when we've talked to people, we've explained to them the transition plan. I mean it's not like people are coming back to us saying, we don't want the product. They're trying to use this. What a lot of people are hoping is if they use the supplies, then the next reorder they get will be the new product. So there's a bunch of that going on. But I think one of the benefits that we have in this business, we actually talk to the customers. So, I think from our standpoint, the kind of insight guidance we're giving you is the feedback that we're receiving for our intake group. So really not -- I would tell you I don't -- we're not sitting here with initial starts going up and the other positive things. We don't see it as a competitive thing, but we are -- and like I said, the nice part about the good news and the bad news depending on the given day is we talk directly to the customer.

Great. And then parlay that, 40% new patient growth doesn't sound like competitions really have an impact on you because I think the best growth you'll have had. Can you answer is that worldwide, just a little granularity?

That 40% number is factored on the U.S.

Okay. And then one more, if I may. As you look at CGM, you've talked about it. You signed a partnership we'll say with an unnamed company, a name would be helpful? One. Two, timeframe and cost to develop this? And that's all I had. Thanks.

Sure, Bill. So just to make it clear, I mean the agreement we have with the company until we get to the point where we think we have a final version, a commercial version, we agreed not to give involved in disclosing that. If the company wants to disclose in some point in time, we said it is fine with us. But they asked us not to disclose it. And like I said, it's not material to anything we're doing at the moment. In terms of the cost, it really fits within the guidelines of R&D, because -- once again, just to reset everyone. We are not developing a sensor. We are taking a sensor that is developed by a company that's been in the blood glucose monitoring business and we are trying to integrate that into our products. So we have an existing product. So if you think about what's involved in terms of kind of a new R&D type stuff; it's a, they got to make sure the sensor is competitive with everything that's out there. And like I said, we tested on pigs, so far so good. Sometime next year we'd like to be doing it on people. And we'd like to be doing it on people not as a stand-alone sensor, but in our integrated format. So the big engineering hurdles/opportunities for us is how do we insert this within the framework of the product we have? And how close can it be to the insulin delivery? And the third one is -- and we've tested this a lot now, but we still have to go through in testing it in final is can the sensor withstand ETO sterilization. So from an engineering standpoint, those are the three big things that we have. So I would tell you it's not outside the scope of our ongoing engineering. I mean it's not some huge increase, because once again, we are not developing a continuous sensor.

Your next question comes from the line of Ben Andrew with William Blair & Company. Ben Andrew - William Blair & Company: Hi. Good afternoon. Can you hear me?

Hi, Ben.

Hi, Ben. Ben Andrew - William Blair & Company: Hi, guys. So can you talk maybe about -- two or three topics? One is – and if you've covered this one, I apologize, but give some of the experience with both patient satisfaction and patient add rates as you've rolled off the Gen2, how is that going?

We've seen an uptick. Ypsomed has worked over the course of the last, I call it, five months or so on transitioning their customer base from one to the next. I think our last shipments of the original OmniPod to them were probably back somewhere in the August-September timeframe. All of Q4 was the new pod. And the response has been really positive from that. We've seen it in a couple of ways. One is, their growth rate for the number of patients they've been adding every single month has started to accelerate and that's been happening in a period of time, so, for example, January and February within their business which aren't the strongest of months either. Second, we've also been able to get some early response back from them around their initial feedback, what we're hearing from customers. And one of the things that we've focused on is this idea of out-of-box failures from a quality perspective. One of the things that we know is that customers don't like the fact if the pod comes out of the box and for whatever reason we have a communication failure with a handout and it doesn't work. Historically, we've seen a 2% to 3% rate or so of those here in the United States. We made a lot of changes to the product including why we're giving people a new handout to be able to improve that overall communication protocol. And today, we're seeing that overall rate overseas now drop from that 2% to 3% kind of range to less than 1.5%. So, we think that's a significant improvement overall from where we are and it's a big -- but been a big positive for us and something they've commented back on. Ben Andrew - William Blair & Company: Okay, good. And it sounds like the gross margin was trending consistent with what you'd expect, are the yields flowing in the same trajectory?

Yeah, absolutely. Certainly as Charlie's been working through the process with our various suppliers, there's been a couple of components that the yields are a little bit lower on that you'd like. The good news is it's at the parts that are $0.10 a part versus to the point where you're getting more fully developed OmniPod. But I'd call that just kind of a normal course growing pains as these suppliers ramp up their production from tens of thousands per month to hundreds of thousands per month. And then obviously the next step will be as we get through the year to 1 million pods per month. Ben Andrew - William Blair & Company: Okay. And then turning to the CGM product for a second, can you maybe give us a timeframe for when we could hear an update either public presentation of some data about the performance of the sensor? And have you been able to determine if you can use the same cannula or if you're going to need a fundamental redesign on the pod? Obviously R&D -- then I've got a follow-up for that.

Ben, great question. So from our standpoint we want to fit it in the same form factor, but we're still going around that process to see if we can do it. But the last thing in the world we want to be doing is buying new tools and new base tools and doing all that. So right now we believe, but we still have to prove it, that we can use same form factor. I think in terms of -- I think for us, I think the first kind of real milestone other than the normal R&D and the pig data and the other stuff that we've done, we've kind of gotten (inaudible), we like to begin in next year to start getting it on people. And if we can get it on people, then I think you got -- if you start looking at the convention fees between the ADA, the ATTD, the AADE, hopefully at that point in time we'll have enough that we can start sharing that information with people. Like I said, right now we got some real promise. We'll see if we get where we want. I mean we're excited about it. We obviously wouldn't have signed it. We wouldn't have been putting the effort into it if we haven't seen enough to really kind of take the next step. But to me that's kind of -- that will be kind of a time period where I think we'd start having data in a meaningful format that it'd be worth sharing with clinicians and the general market. Ben Andrew - William Blair & Company: And that's just the sensor itself, not embodied within the pod we'll be seeing…?

No. That's another great question. We're trying to put it in -- we're not doing the sensor. What I'm talking about is we're trying to embody it in the pod and put it on people come the beginning of next year. And so we have a couple of variations that depending on where the insulin is going to be delivered in relationship with the sensor. We're going to try. We're trying a couple of different things here. We've done a lot of work understanding the impact of insulin delivery and the proximity to the sensor. So we think we understand. But as you know, until you go do it and start putting it on people, you really don't. But we think we understand, but we're going to find out what we don't know in doing this. But we are talking about -- when I talk about putting it on people, it's not a stand-alone sensor. I'm talking about in the embodiment that we believe will approximate what the product should look like. Ben Andrew - William Blair & Company: And has that CGM sensor been used on actual patients as opposed to kind of -- human control testing as opposed to diabetics and patients that have got other comorbidities and all kinds of other stuff going on?

It has been used -- the technology has been used on patients, but not in this particular format. We've been through the stats, we've been through blood, we've been through kind of pig testing, but we still got a ways to go. I don't want to paint any picture that we're -- this thing's around the corner. Like I said, I think our view is simple. I think if you look at the pressure being put on blood glucose monitoring and you look at where this is all going, you look at our internal studies on how many things people are willing to wear on the body, but we are focused on insulin-dependent patients. But I think it's pretty clear to us that the right format is to get it all in one person -- I mean get it on the insulin-dependent people and we think over time that will drive some interesting outcomes. We think that's the format. We think we have a cross-structure that we can accomplish that. But hang on. We will keep you informed as we go forward. But that's kind of how we're approaching it. Ben Andrew - William Blair & Company: Okay. And just to be crystal clear, you're talking about the embodiment of the CGM within the pod that the CGM sensor itself has been used on diabetics and patients and all people with health and the different drugs on board and you're comfortable with the performance of the sensor?

The technology has, the embodiment of this sensor has not. Ben Andrew - William Blair & Company: Okay.

They may have been used on a few patients, I don't know, but not in any meaningful way. But the technology itself has been tested on patients. Ben Andrew - William Blair & Company: Okay. Thank you.

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

Good evening. Did you give us the installed OmniPod base at the end of 2012?

Yeah, we mentioned that we're, at this point, slightly over 45,000 patients.

Okay. So I guess doing the math, would that be fair to use a ballpark number of 15,000 new patient add last year when talking about initial shipments increasing by 40%?

Yeah, I'll let you guys kind of go through that part. But I'll just leave it at we're over 45,000 patients and we've talked about that, our overall annualized attrition rate continues to be hovering in that kind of 8.5% to 9% kind of range. So, I'll leave it there.

Okay. And then in terms of just the delay in the CGM integration timeline, how important is CGM integration to your current customer base? Do you have any sense of that 45,000 what percent are using CGM?

So we do an independent survey and I think that 20% of our installed base is using CGM. If you look back at the beginning of the year, about 20% of our installed base which uses CGM. So that's in our particular -- and that 45,000 number has been granted. We have independent companies do a survey. They ask lots of different questions, but CGM usage is one of it. So about 20% of that installed base is used in it. And we're obviously -- they're using the DexCom sensor because if people want CGM, that's where we direct them not to the market leader.

Got it. And then just last question, just to clarify, will you stop shipping first gen pods by year end?

Year-end 2013?

Yes.

Absolutely.

Okay. Thanks.

Hopefully sooner.

Okay. Thanks.

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

Hi. Good afternoon.

Hi, Tom.

So just to be clear, I didn't catch this at the beginning. You're going to start shipping to existing customers of Gen2 or next gen in the next several weeks. Are new customers getting this right away?

Yes. New customers, we've moved all of our new customer shipments to the new pod and we will start to transition our existing customer base here within the next couple of weeks, correct.

Okay. Thanks. And then Duane, you said last quarter that you might start when you got approval or to getting approval, when you got approval that you might go out to some of the big centers that you could get a lot of bank for your buck. Did that in fact happen?

Yes, it did. And Tom the kind of insulin on board calculation, like I said, is a bit of an arcane calculation, but obviously it's critical for diabetes patients. Some of the bigger centers were concerned about how our older product did this and not that there was anything wrong with it. It was just different, so that meant they had some of them were worried about confusing patients. The fact that we are now in line with kind of how the general market does it, we've already been back to those guys and a couple of them have already given us a couple of patients because they want to see it in a (inaudible). It's one thing to give them the demo, but they want to put a couple of patients on and they want to start seeing it. So we're pretty excited. Like I said, I think time will tell here but we're pretty excited about what the opportunity is.

And then just sort of a larger concept on type 1, there's been reports now for the last couple of years that there's a new type of type 1, some are calling it late onset, adult onset the type 1. I would think that OmniPod would be well suited for that. Have you seen any differential uptick by those older, new type 1s?

Tom, that's a great question. There's been a little bit, but the sweet spots for us still remains that 18 and under. What people gravitate to with this product and will gravitate even faster too with the smaller product is obviously this whole freedom not interfering in their lifestyle, basically having diabetes but in their mind they don't have diabetes for that period of time. But there has been an uptick. It's interesting. There's been a little bit of uptick while it's not meaningful yet in terms of our installed base, there has been an uptick in the type 2, insulin-dependent type 2 for the product. But we're seeing some of these numbers start to move a little bit. But it's still -- like I said, the sweet spot for the company is still kind of young, active, whatever you want to define that as, are the people that gravitate immediately to this product.

Got it, thanks. And then one for you, Brian. I think in the script it said operating profitable by year-end was a goal. Could you talk a little bit about cash flow from operations since you've had a good run here in the last part of '12, what do you expect that to be maybe by quarter and '13?

I don't think I have the quarterly detail to probably go through. Overall, we were operating cash profitable over the last four months and again the definition that we use for everybody just to be clear is effectively EBITDA plus an add back for basically stock-comp expense. And so we've been able to achieve that now for the last four months. The trick now is as we continue to grow the overall top line, as we continue to expand the gross margin through the transition to the new product, is that we're able to then cover those non-cash expenses as well to get to overall operating profitability. Uses of cash in 2013, we will still use some cash mainly around capital expenditures and we'll have to cover the interest expense in our debt. But from an operational perspective, using the P&L as a guide I think we're going to be in really good shape and we'll be effectively operating cash profitable for the entire year. There could be a little bit of timing change from a working capital side as we build inventory, as we go through receivables and those things. So that piece is a little bit tricky to be able to nail for you right now.

Got it. Thanks. That's good for me.

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

Good evening. Thanks for taking the questions. Just a couple. I realize the benefits of the new device and you mentioned 8.5% to 9% attrition rate on Gen1. Just wondering internally, are you expecting a lower attrition rate with the new pod?

I would tell you we're hoping for a lower attrition rate from the standpoint; one, if you take about half that attrition rate being economic in that people are impacted in their jobs or whatever, kind of take that off the table. The other big piece of that attrition rate was given that 70% of our customers have never been on an insulin pump before. And if you couple that with what Brian said -- one of the failures we struggled with on and off was the whole kind of out-of-box failure. If Europe is any indication, we are cautiously optimistic but we put that one in a good spot. And that's the one that gets people pretty irritated. The whole idea that they put it on and all of a sudden, they had a problem with this. So that we feel based on the European experience, so far we feel pretty good about. We specifically went after that one in design. And then the second piece, if you look at the second kind of cause, if you get out of that -- if you look in that kind of first 45 to 90 days where a bunch of these people would drop off. The second reason was some of the people put on, it was bigger than -- I know I tried it, but this is a little bigger than I thought. So we think the size will help impact that again. Let's put it this way. If size was an issue, there will probably not in any foreseeable future be a smaller insulin pump in this. So I think that will knock down the second one. So the hope is that we impact that number. Like I said, I think on the economics side, about half the number always has been related to people's jobs, their healthcare benefits. There is a school of thought internally that with kind of ObamaCare kicking in, maybe we get a benefit from that. But we'll see. I'm not -- I will readily admit I'm not smart enough to dial in the impact of what that all means. But there may be a positive in that. But right now, like I said, if you look at the two major things that we think we went after and hopefully knocked out here; size is obvious and then these out-of-box failures, we feel pretty good. If you put those two together, we think they'll do a positive impact.

That's helpful. The financial structure of the CGM partnership, is this a royalty type arrangement, is there a catch outlay from you guys expected upon some sort of milestone?

Yeah, I mean ultimately the plan would just be simply thinking of them as (inaudible). They'll effectively sell sensors to us at an agreed upon price and we'll work it into our bill of materials and then go forward. So no different than how we buy semiconductor chips from Freescale, any type of an approach.

Okay. And then maybe Brian on the OpEx guidance, just curious as to the mix, it looks like it will stay fairly constant in '13 here. Wondering if you're able to take some of the cost out of the Neighborhood business given competitive bidding? And then maybe back drawing that with increased spend on the launch, is that a fair way to look at it?

Yeah, absolutely. I mean certainly as we continue just to figure out -- and obviously there's still some moving parts with the competitive bidding and will the July 1 date move and some of the other stuff, we're just watching it closely. Certainly there's an opportunity to be able to reallocate some resources from that area to other initiatives likely within the commercial team if it all comes to pass.

Okay. And then last one for me if I may. You mentioned that you expect international sales to more than double in '13. What were international sales in '12? Thanks.

Yeah, we haven't disclosed specifically what that number is. I mean I have said to folks that it's somewhere in the mid-single digits, but we haven't got more specific than that.

Thanks.

Your next question comes from the line of Ben Haynor with Feltl & Company. Ben Haynor - Feltl & Company: Good afternoon, gentlemen. Thanks for taking the questions.

Hi, Ben.

Hi, Ben. Ben Haynor - Feltl & Company: Hi. On the gross margin guidance, you talked about the 2% to 3% out-of-the-box failures here in the U.S. and about a 0.5% in Europe. Does the gross margin guidance factor in any improvement in the out-of-box failure rate?

Yeah, we certainly -- again, as we've given you the gross margin expectations for the next four quarters at least which again roughly is flat for the first and second quarter of '13 from where we are today, probably up 300 dips improvement in Q3, another similar kind of an improvement, maybe a little bit more than that in Q4. We are taking into consideration where we're seeing a little bit so far and hopefully being able to just kind of dropdown, if you will, our implied warranty on COGS because -- certainly when people experience the out-of-box failures, we're able to -- we turn around and replace those. We haven't really factored does that impact customer support costs or any of those kinds of things at this point. It's just too early. Ben Haynor - Feltl & Company: Okay, that's helpful. And then on the CGM side of things. Is the plan to insert like the cannula on the OmniPod? And then also is it a glucose oxidase type sensor? Is it something completely new and different?

So the technology while different is based on the glucose oxidized sensor. And the idea is -- what we are working on is automatic insertion. So it will be, I can't say -- it will be on the same general concept as the [comp] product. Ben Haynor - Feltl & Company: Okay, great. And then one more quick one. I didn't quite touch this. Did you say 10% to 15% impact versus 2012 revenue on Neighborhood or 10 million to 15 million?

Million dollars, yeah. So anticipate that it will be $10 million to $15 million of revenue impact in Neighborhood in 2013 with the majority of that in the back half of the year. But realistically, our expectation is that we'll start to see some attrition in the second quarter as we would expect some of the folks who were going to aggressively go after this business for a while will try and do a land grab. Ben Haynor - Feltl & Company: Sure. So 35 million to 40 million type range?

No. You mean for the Neighborhood, this were the total? Ben Haynor - Feltl & Company: Correct.

Yeah, okay. 10 million to 15 million decrease, right. Ben Haynor - Feltl & Company: Okay. Thank you very much.

Your next question comes from the line of Robert Goldman with CL King. Robert Goldman - CL King & Associates: Just two one-off things. With Neighborhood Diabetes in the quarter, was it about the same revenue in 2012 fourth quarter as compared to third? That's what I thought I was hearing but I just want to recheck that detail?

Yeah, that's pretty accurate. It was up slightly sequentially, a little under 13 million in Q4 but that's correct. Robert Goldman - CL King & Associates: Okay. And also Brian, you mentioned some reference to 40% growth with U.S. OmniPod and I didn't catch exactly what metric you were referring to with that 40% growth?

Sure. So what Duane had said was that we're projecting -- I mean if you look at our new patient starts in 2013, we're forecasting that we should – we're forecasting a 40% uptick in that number of new patient starts from 2012. Robert Goldman - CL King & Associates: Okay. And then on the international OmniPod, you mentioned that mid-single digits was what you've been suggesting the first quarter 2012 sales. Did you see any or what sort of progression did you see in the fourth quarter versus the third?

Certainly there was an uptick in the fourth quarter revenue versus the third as we move them completely to the new OmniPod. So, that was a quarter where -- I don't know what to call it, that they built inventory but they certainly added a little bit extra whereas beforehand they were pretty much hand-to-mouth. Robert Goldman - CL King & Associates: Thank you. Okay. Thank you.

Your next question comes from Suraj Kalia with Northland Securities.

Good afternoon, gentlemen.

Hi, Suraj. How are you?

Good, sir. Yourself?

Good. Thanks.

So, Duane, I know there has been a lot of discussion on the CGM part of the equation and hopefully forgive me, just two redundant or just beating down the same questions again. So I heard you say this technology may have been used on patients and I'm just curious in terms of the strategic thought process to the extent that you can share why go down the new technology given the challenges in terms of product launch and technology validation, so on and so forth. To whatever extent you can share, I'm very curious why -- it looks like you'll are going for the new player with probably some combination technology and I'm very curious why not go with some of the existing players?

Suraj, great question. So there's two parts to it, right. First of all, these people do have experience in this. So when I say the technology, the sensor, the trick with all the existing sensor technology, any kind of oxidized sensor is they don't do well in heat and humidity. The way we sterilize our product involves heat and humidity. So the real trick for us if we're going to integrate it into the pod is was there sensor technology out there that can withstand heat and humidity and still function at a comparable level to the technologies out there. So that was the real trick for us. If we're going to put it in one pod, I think if you talk to any of the existing players, they would tell you that heat and humidity is not a good thing for any of their sensors. And we think we found one that has the servility cycle that can be ETO sterilized, that can be comparable to everything that's out there. It has a start-up time within an hour and can work in our products at a cost that we think we can make money at. So, I mean that's really the trick for us, right? Other than that, I would just tell a patient if that product doesn't exist, you would just the patient [go on]. We tell them to go with the DexCom sensors and that's the best one out there and they'll get it. I mean that's the way we go about it. But if we're going to put it all in one product that is a significant technological hurdle that the existing sensors -- I would tell you, I think if you talked to any of the players out there, they would tell you their product doesn't like and we think we have a product that we can do all that. All the animal testing we've done, all the testing in blood has all been through an ETO cycle. And like I said, while it's early and I want to emphasize it's early, the data looks very, very intriguing to us and the form factor can fit in our product. So those are the biggies.

Duane, what percent of the Neighborhood Diabetes patient base has been converted to the OmniPod? And I guess how are you'll looking at it from a fiscal '13 perspective?

Hi, Suraj. It's Brian. So we purposely for a couple of different reasons have not aggressively gone after switching Neighborhood customers to the OmniPod at this point. And a lot of that was really predicated around we wanted to do it with the next gen product. Now Monday morning quarterbacking, we would have -- we thought we would have been kicking that initiative up nice months ago and instead we're effectively kind of kicking off that initiative now. So, as we talk about 2013 and new patient starts, certainly there's a group of folks within the Neighborhood business that we think we can get over to the OmniPod side that may up a piece of that number.

Okay. And Brian, just to follow-up on that question. So if I strip out again in terms of units or new patient add-ons 40% growth, let the X% you remove, strip it out because of Neighborhood Diabetes and on a year-over-year basis when I strip out Neighborhood, would you say it would still be higher than what we have seen in 2012? I'm just trying to get a sense of the new OmniPod, what that is going to do to core patient growth stripping out Neighborhood Diabetes?

No, absolutely. I mean the Neighborhood's just a small piece of this overall, right? So – again, look at the last three quarters. We've seen overall 30% year-over-year growth in the core OmniPod business and again, [sans] and reorder disruption will need to just go here between the next couple of months and then that will be behind us. We're forecasting overall that our new shipment number here in Q1 can be as much as 30% higher than where we were last year and looking at even acceleration beyond that as you get into Q2 and beyond. So, it will absolutely be higher. There's no doubt, (inaudible) does not have enough patients…

And finally, Brian, in terms of Neighborhood, should we assume that when the sales come down, let's say by 10 million or 13 million margins, everything at least anecdotally what we know about Neighborhood from a modeling perspective, we pretty much keep it in line or you anticipate some things to change on those lines so that the rated average gross margins from a modeling perspective, any help would be great?

On the numbers that I tried to give you guys were basically kind of consolidated gross margins for 2013. So to reiterate, I mean I think again we're looking at relatively flat gross margins in Q1 and Q2 of this year from where we are in Q4. We start to see the benefit of the new smaller pod coming through and effectively the PDMs, if you will, are paid off. We should see some uptick in the third quarter. My best guess at the moment is probably somewhere around 300 dips from where we are today. And then you'll see another uptick of a similar number probably a little higher as we get into the fourth quarter and that many more customers are now contributing with, if you will, a fully paid off in PDMs. So, the Neighborhood changes are reflected and factored into that thinking.

Great. Thanks, guys.

Your last question comes from the line of Debbie Wang with Morningstar.

Thank you for taking my questions. In the past you have mentioned that supply chain issues keep you up at night. And then particular there's one component you were hoping to bring a second supplier on for. I'm just curious what's the situation now? Is it still giving you sleepless nights?

So that will always give -- five years from now that will be giving me sleepless nights. But we have a second supplier. We're pretty happy with where we think we're at. And we continue to move through that. I would tell you any kind of issues we're facing at the moment is more just from the normal ramp out that we're going through as opposed to a particular supplier that I think in that particular case, we were concerned that they really had the capability to produce in that kind of volume. Now it's normal stuff. You go from a two-cavity tool to a 10-cavity tool. They're all 10 cavities working the way they should be and it's kind of normal ramp up stuff. But the thing that really scared us early on is, like I said, we had a supplier that helped us, was instrumental in the design. But when we started stepping on the gas, we came to the conclusion that we just didn't think they could handle the volume of business and we were way outside the comfort zone. So that's behind us.

Great. Thank you very much.

I would now like to turn it back over to management for closing remarks.

Thanks everyone for joining us and we look forward to updating you throughout 2013. It should be an interesting year. Thanks.

Thank you. This concludes today's conference. You may now disconnect.