Insulet Corporation (PODD) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Insulet Corporation's Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to your host, Deborah Gordon, Vice President, Investor Relations and Corporate Communications. Please begin. Deborah R. Gordon - VP-Investor Relations & Corporate Communications: Thank you, Suzanne. Good afternoon, and thank you for joining us for our third quarter 2015 earnings call. Joining me today are Patrick Sullivan, our President and Chief Executive Officer; Shacey Petrovic, Chief Commercial Officer; Michael Levitz, Chief Financial Officer; and Dan Levangie, President, Insulet Drug Delivery. The replay of this call will be archived on our website. Our press release discussing our third quarter results and full-year 2015 guidance, as well as a document that provides our quarterly revenue composition, are 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, in our third quarter earnings release, and in the company's filings with the SEC. With that, let me turn the call over to Pat. Patrick J. Sullivan - President, Chief Executive Officer & Director: Thank you, Deb. Good afternoon, everyone, and thank you for joining us today. I will start off today's call with a brief review of my first year at Insulet and how we are positioning the Company for long-term sustainable growth. I will then comment on our third quarter performance and provide a brief overview of the current state of the business. Next, Mike will review our third quarter financial performance in more detail and update you on our outlook for the remainder of the year. Shacey will then discuss the exciting commercial progress we're making on many of our key initiatives, and then we'll open up the call for questions. First, let me provide a brief review of my first year as CEO. When I joined Insulet in September of last year, what initially impressed me was the incredible innovation and elegant design of the OmniPod for Type 1 diabetes patients. I was also somewhat surprised by the relatively small competitive share that the OmniPod insulin delivery system had in the marketplace. My early conclusion was that there was tremendous market opportunity for the Company to significantly increase adoption of our technology for both the Type 1 and Type 2 diabetes patient populations, and to improve the lives of patients living with diabetes. As you know, there are approximately 1 million patients in the United States currently using multiple daily injections, where 70% of our patients come from. Shacey will explain why we believe all of these patients should be using our OmniPod technology. I also concluded there is an equal, if not larger, opportunity to leverage the OmniPod technology in our drug delivery business. And over the past 12 months I have focused on three key areas. First, establishing the right product positioning of the OmniPod System to capitalize on its unique tubeless features with patients, physicians and payors. I spoke to you early in my tenure about the need for clinical data and evidence for physicians and payors, and Shacey will provide you with our significant progress in this particular area. Secondly, we quickly focused on putting the right team in place to fully capitalize on our tremendous opportunities before us. We have recruited a highly talented and experienced executive team to manage every function of the organization. We are building the organization for long-term sustainable growth. And finally, with the right team in place, we focused on developing a winning strategy for both our diabetes and drug delivery businesses to set us up for long-term growth. This strategy included establishing product development roadmaps for both of our business and to capitalize on the diabetes and drug delivery opportunities. I was very excited when I joined Insulet a year ago, and I'm even more excited today, and confident at the conclusion of my first year that we have the right product, the right team and a winning strategy for our long-term success. And certainly our third quarter revenue results are confirmation of the successful execution of this strategy. Our new commercial team drove terrific third quarter revenue results across all of our business. All four realized year-over-year revenue growth, and three of the four exceeded our revenue expectations. Third quarter revenue of $87.3 million grew 16% year-over-year and was $4 million higher than the midpoint of our guidance range. I think it's abundantly clear that the impact of our new commercial leadership and marketing initiatives have created a strong positive momentum in the marketplace. And as Shacey will describe in her remarks, we are making great strides in significantly increasing our patient base and improving our customers' OmniPod experience. Our third quarter U.S. OmniPod revenue was a record $50 million, representing a year-over-year growth of 12% and almost half of our increase over guidance. In the third quarter, our U.S. new patient starts, which as you know is the early indicator of revenue growth in our recurring revenue model, were up almost 25% year-over-year and almost 10% sequentially. And these new starts represented the highest in the company history. We continue to see strong demand for the OmniPod System in treating U.S. pediatric patients, where the OmniPod has a significant advantage over other tubed options. In the third quarter, we saw an increase of approximately 30% year-over-year and 15% sequentially in this patient population, with these new starts also representing an all-time high for the company. Our international OmniPod business experienced strong growth as well, with revenues up 9% year-over-year to $13.5 million. As a reminder, this growth rate has been and continues to be impacted on a comparison basis with the levels of inventory that ran through the distributor channel last year. While last year's higher distributor inventory occurred both in the U.S. and internationally, the increased international levels were weighted more heavily in the back half of last year. Our third quarter revenue results this year were strong and reflect true end-user demand for both our U.S. and international operations, and we fully expect this strong revenue momentum to continue. The results from our drug delivery business are also strong, with third quarter revenue of $7.1 million, slightly higher than our expectations and flat sequentially. And as a reminder, our second quarter drug delivery results had approximately $2 million in revenue from a delayed shipment from our first quarter revenue. So when you level-set the results, based on forecasts from our customers, this business has trended up sequentially from the beginning of the year and we expect the trend to continue. In fact, on Amgen's earnings call last week, their head of commercial operations stated that their Neulasta Onpro kit, which includes a device based on our OmniPod technology, continues to gain adoption in the marketplace since its commercial launch earlier this year. He also stated the Onpro kit achieved 19% unit share of the U.S. Neulasta units in the third quarter, and that share keeps growing. The continued adoption of the Onpro kit will result in increasing the revenue stream for our drug delivery business. In addition to our two commercial agreements we currently have in place with Amgen and Ferring, we now have an additional six development collaboration in place with pharmaceutical customers. Each of these agreements is similar in nature to the development process we engaged with Amgen, and each represents the potential to contribute significantly to our future revenue growth. In addition to growing the number of agreements we have in hand, we continue to respond to the market feedback in further refining the OmniPod System for use in non-insulin drug delivery. In fact, at last week's drug delivery conference in Vienna, we unveiled two such developments. One, a larger-volume OmniPod device which will provide increased compatibility with volumes of biologic therapies under development by a number of our potential pharmaceutical customers. The second is a product configuration we call the Remote Patient Manager, which allows Bluetooth-enhanced communication capabilities of the drug delivery device. This includes confirming dosing, timing, completion of dosing, as well as tracking patient compliance. Both of these product line extensions are being developed in response to market-driven requirements, and feedback on these product concepts was extremely strong at last week's exhibit. While our near-term revenue will be generated from our current commercial agreements, we are creating a very strong foundation in drug delivery to support long-term, high-margin revenue growth and significant value creation. Our Neighborhood Diabetes business grew 8% year-over-year in the third quarter, generating revenue of $16.7 million, also ahead of our expectations. Finally, driven by our commitment to outstanding product quality, and as previously communicated to you, we increased our product quality standards and expectation. As part of our enhanced quality processes we identified certain lots of OmniPod that had a reported incidence of between 1% and 2% in which the pod's needle mechanism failed to deploy or there was a delay in deployment. The affected product was manufacturing starting in July and shipped in September, with about 10 days' worth of product in the field. Once we recognized this issue, we adjusted our manufacturing processes and implemented additional inspection steps to eliminate future potential occurrences, and we implemented a voluntary field safety notification earlier this week. As you can imagine, I am obviously very unhappy about the impact of this situation, first and most importantly on our customers, and secondly our P&L for the quarter. The voluntary field safety notification was absolutely the right thing to do, and we will continue to raise the bar to provide our customers with the exceptional experience of using OmniPod for their insulin delivery needs. We will never compromise our customer satisfaction and product quality. After a year with Insulet, I can tell you I am even more excited than ever about the tremendous opportunities before us. We see a very bright future with accelerating revenue growth, product innovation, and renewed and strengthened customer satisfaction. With that, I'll turn the call over to Mike. Michael?

Thank you, Pat. As I review our third-quarter 2015 results, unless otherwise stated, all of the commentary regarding changes will be on a year-over-year basis. As Pat mentioned, our revenue in the third quarter increased 16% to $87.3 million, compared to $75 million last year, with growth in all four of our product lines and better than expected revenue in three of our four product lines. The primary drivers of this growth were in the U.S. OmniPod and the drug delivery businesses. We are pleased with our continued strong progress on our growth initiatives. Our consolidated gross margin in the third quarter was 41%. This includes a nine-point unfavorable impact in the quarter related to nonrecurring costs totaling $7.7 million. That's associated with products subject to the field notification that Pat mentioned. Excluding these costs, our gross margin in the third quarter was directly in line with our expectations. Let me walk you through the $7.7 million of nonrecurring costs. As Pat mentioned, in the third quarter we produced product that did not meet the higher quality expectations we have established. We identified the issue and responded in a timely fashion, adjusting our manufacturing process and implementing additional procedures. Approximately three weeks' worth of product had not been shipped and remained in our inventory as of September 30. We have decided that the inventory on hand will not be sold to customers, and accordingly we have recorded a full reserve for the inventory, which totaled $6.4 million. In addition, we accrued for the cost of replacing the shipped product that we expect to be returned. We also incurred incremental costs in the quarter due to inefficiencies in our production process as we identified and rectified this product issue. These costs, together with the inventory reserve, decreased our gross profit in the third quarter by $7.7 million, representing approximately nine points of gross margin. In addition to the inventory on hand as of September 30, we procured an incremental $1 million of inventory at the beginning of the fourth quarter, which is being reserved in full, and the $1 million will be reflected as a charge to cost of revenue in our fourth quarter results. We do not expect any further impact to gross margin related to this issue. Our operating expenses in the third quarter totaled $51.4 million compared to $40.9 million last year, increasing 26%, in line with our expectation. As we have discussed previously, we have been strategically investing in our commercial organization to extend field sales coverage, customer support, and marketing to improve access, customer experience and overall retention. In addition, we have been expanding the infrastructure within our drug delivery organization. And in the third quarter we began incorporating the operating expenses of our Canadian distribution business, which we acquired in July, including amortization of the intangible assets resulting from that acquisition. The amortizable intangible assets total just over $2 million, half of which we will expense in 2015. Also as expected, we increased development spending during the quarter due to our expanded investments in innovation, such as integration with the continuous glucose monitor, the artificial pancreas project, as well as improved user interface, to drive accelerated growth and market expansion. As we previously communicated, these investments include variable spend with contractors as we accelerate these very important projects. Lastly, our general and administrative expense was approximately 9% lower in this quarter. That's in line with our expectations. Please note that in the third quarter of last year our G&A expense included non-recurring charges of approximately $7 million, primarily related to the transition of former management. And that compares to approximately $2 million in non-recurring charges this quarter related to our review of historic revenues, as well as our July product recall. Our third-quarter net loss was $18.9 million and our cash balance at the end of the quarter was $145.5 million. Now turning to revenue guidance. As Pat mentioned, we are very pleased with the success so far of our commercial initiatives and expect the positive momentum coming out of the third quarter to continue. We are therefore raising the low end of our revenue guidance by $5 million and guiding to a range for the year of $310 million to $320 million of revenue. This includes increasing our drug delivery business revenue guidance for the year to a range of $25 million to $30 million, up from our previous guidance of approximately $25 million. This increase is based on forecasted orders that we have today. The drug delivery business continues to grow and represents a very exciting opportunity for us. The high end of our total Company guidance of $320 million continues to assume even more upside, should revenue from this product line continue to outpace our expectations. Excluding the impact of the non-recurring charges I just described, we expect our gross margin for the year to be in line with last year's results. And we also continue to expect operating expenses for the full year to approximate between $195 million to $200 million, and that's reflecting the commercial and product development investments we've previously discussed, to provide a foundation that we intend to leverage as we drive continued strong growth in our business over the coming years. With that, I will turn the call over to Shacey.

Thanks, Mike. I am very excited to join today's call and share our commercial progress. We have an extraordinary opportunity with such an innovative and differentiated product, and OmniPod is really building momentum. As Pat mentioned, we have the right product; we have a new, energized team; and we are focused on a winning strategy. This is driving record growth in revenue and record new U.S. patient starts. This year we've had two key areas of strategic focus. The first is to retain our patients through delivering an outstanding new customer experience, and the second is to grow patient and clinician demand for OmniPod. I will first discuss our strategy of improved patient retention and customer experience. We want to get our patients off to the most successful start possible, to ensure that they have great outcomes and they can enjoy the freedom that OmniPod offers for many years to come. To this end, we've made significant improvements in our new patient training program. Specifically, we've improved our new patient training and we've invested in the resources we use to help our patients become confident with their OmniPod from the very beginning. When I joined Insulet earlier this year, I found that less than half of our new patients were being trained by Insulet-employed clinicians, and in the initial training we provided our patients through third-party contracted clinicians, it was anything but standardized. We have changed that approach dramatically. We increased our field clinician team in order to deliver training to more of our new patients. And I am excited to report that our team increased the number of patients we trained by 50%, using our new tools and our standardized approach. Early indications are that this new approach is driving a better patient experience and increased new patient retention. We've also identified opportunities to optimize our internal support processes to improve the new customer experience. Our service levels in the U.S. have improved dramatically, including faster research and delivery of benefits information, higher conversion rates of qualified leads to new patient starts, and improvement on our average conversion time. Ultimately, this focus on enhanced training, service and the customer experience is demonstrating improvements in new patient retention. It is early days, for sure, but the improved new patient retentions trends are very encouraging. We've also made great progress on our second strategic priority, which is to create more clinician and patient demand for OmniPod. Our sales force expansion is complete and it's clearly driving growth, which is evident by the strong revenue performance this quarter. Our team is developing growing clinician appreciation for the unique benefits of OmniPod. We have our field team focused on the highest potential accounts through more effective targeting. They are delivering a compelling message on the clinical benefits of OmniPod and are generating record-breaking U.S. physician referrals and new patient starts. To continue to expand the awareness and use of our OmniPod, we are building stronger clinical evidence to demonstrate to healthcare practitioners and to payors the unique advantages of OmniPod. We have been pursuing clinical data projects in three areas. The first, we want to demonstrate improved outcomes and quality of life associated with OmniPod. The second is to illustrate, in a credible way, the economic value proposition of OmniPod. And the third is to explore innovative models of care that highlight the unique advantages of OmniPod in certain settings and certain patient populations. I am happy to report that we have made impressive headway on the publication front. We now have several clinical studies in process that will demonstrate the clear clinical differentiation of OmniPod. The first of several manuscripts was submitted for publication this quarter, and we expect at least two more to be submitted for publication before the end of this year. We have also worked with a healthcare economics firm to model the impact of OmniPod on a payor's population of patients. This model has been validated and will be used by our market access team to demonstrate the healthcare economic value proposition of OmniPod. We are fortunate to have these efforts bolstered by two highly credible studies published this year. One was an observational study in The British Medical Journal demonstrating reduced morbidity and mortality in patients on continuous insulin infusion therapy in more than 18,000 patients, and the other, a study in The New England Journal of Medicine, showing reduced mortality with better glycemic control offered by continual insulin therapy, also looking at tens of thousands of patients. There is a growing body of compelling evidence demonstrating that continuous insulin infusion improves outcomes, it reduces morbidity and mortality, and it should be the standard of care for patients with Type 1 diabetes. This evidence will help to drive continued robust clinician advocacy for OmniPod, improve access for our technology, and protect and potentially expand reimbursement for OmniPod. We are looking forward to having several exciting peer-reviewed publications demonstrating OmniPod's positive impact on A1c control, its unparalleled ease of use, and the improved quality of life that OmniPod offers our patients. The OmniPod revenue results this quarter are without question driven by the three key elements that Pat mentioned. I'm very proud of our accomplishments during this year and this quarter, and I echo Pat's earlier statements that we have the right product. OmniPod is a truly differentiated and innovative delivery system which we are aggressively supporting with a comprehensive publication plan. We have a new, talented and energized commercial team focused on educating clinicians, patients and payors about the significant advantages of the OmniPod System. And we have them focused on a winning strategy, delivering an outstanding customer experience to ensure successful treatment of our patients over the long term. These are exciting times at Insulet and I really am delighted to be a part of the team. I will now turn the call back to Pat. Patrick J. Sullivan - President, Chief Executive Officer & Director: Thank you, Shacey. I continue to be pleased with our early results we are generating from these initiatives that we put in place since the beginning of the year. And I'm also very excited about the efforts underway which Shacey outlined to further expand the use of OmniPod System and leverage our market insights to deliver an outstanding customer experience in our diabetes business. I'm also equally excited about what we are doing in drug delivery, with six agreements and our commercial success with Amgen, and the foundation we are putting in place there for future growth. We have a very strong team. We are focused on accountability and ensuring a positive experience for our customers, our shareholders, and our employees. With that, operator, let's turn the call up for questions.

Thank you. Our first question comes from the line of James Francescone of Morgan Stanley. Your line is open. James Francescone - Morgan Stanley & Co. LLC: Hey, good afternoon, and thanks for taking the question. I just wanted to get some additional perspective on the manufacturing hiccup in the third quarter. What gives you confidence that you have solved the issue completely, that you are not going to see impacts in further lots? And what changes have you made to the process to ensure better quality going forward? Patrick J. Sullivan - President, Chief Executive Officer & Director: So, I think what I will start with is why it happened, and then I can go into why I believe it won't happen again. So, first of all we made a change that was cut into the manufacturing lines in July to improve the product performance as part of the sustaining engineering effort that every company goes through. And that changed product passed all existing testing and release criteria that we had in place. But the performance in the field identified a failure mechanism that we had not seen in production, and we have improved our processes and inspection procedures to address that issue. I think, furthermore, as we think about why we will ensure this won't happen again, I would just reiterate that I am very unhappy, from both a patient and financial perspective, with this occurrence. But I think, to the positive, we identified the issue quickly, we took corrective action, and we contained the impact to customers. As many of you know, we hired Mike Spears from Covidien Medtronic, and he has been here now 100 days, with 16 years of quality and regulatory experience to help increase the capability of the organization. With Mike's guidance we are tightening up our processes and procedures to improve product and customer – improving the customer experience as well as the quality, and we're putting in place the foundation for long-term sustainable growth. And I guess, you know at the end of the day, I don't think we could ever say there's a zero chance it would never happen again. But I would say that with the right people, the focus on processes and procedures, it is possible to significantly reduce that risk substantially. And I can tell you that I am very focused on the manufacturing and quality organization to do the best that I can to ensure this never happens again. James Francescone - Morgan Stanley & Co. LLC: And does the change to the process or procedure have any impact on the structural cost to manufacture the product? Patrick J. Sullivan - President, Chief Executive Officer & Director: There was no change to the structural cost to manufacture the product. James Francescone - Morgan Stanley & Co. LLC: Okay. Then maybe just one more on gross margins. If I look, even if we had back $7.7 million in nonrecurring costs, we're going to get up to a margin that's just short of 50%, which is obviously down year-over-year, and down even relative to the first and second quarters, as product mix should be a favorable tailwind, as drug delivery ramps up. So, can you offer any broader perspective on why, even as mix is in your favor, we are not seeing advancement on the gross margin line?

Hi, this is Mike. I'll answer that question. So first of all, in terms of comparisons, I just want to make sure we're talking about the right thing. So our gross margin this quarter, when you pull out the specific $7.7 million that we just discussed, is higher than where our margins were in the second quarter. You said it was lower; I just want to be clear. But regardless of that, when we look at year-over-year comparisons, there are a couple of other factors that come into play in our gross margins. First of all, there's about a point of gross margin that were impacted by royalties. As I described previously in some public comments, there was a renewal fee that was paid from a few years ago that had been amortizing into the company's revenue, and ended at the beginning of this year – actually the end of last year. And so that created – and that's essentially – that royalty business was essentially all margin. And so that was about a point, as you look at this year versus last year, for Q3. In addition to that, as previously described, we had a price decrease, according to the contract with our international distributor. And that also resulted in a reduction. We do not expect further price decreases there, so that does impact us on a year-over-year comparison. But we do not expect it to impact us going forward.

And your next question comes from the line of Tao Levy of Wedbush. Your line is open.

Yeah, hi. Good afternoon.

Hi.

Hi, Tao.

So, maybe we could start with – since you guys did put up a pretty healthy U.S. new patient number, any changes to attrition rates that you've seen now that you have access to a greater amount of data?

Sure. Tao, this is Shacey. I would say that we have early indications that we are making an impact on the attrition of new patients. But it's been a few months and we really want to monitor the trend for a bit more before calling it a significant win. But as I said before, small improvements in attrition can really drive significant value for our business over the long term. And we're focused on providing the best customer experience possible. And so I think that's going to drive significant value; it's just early days at this point.

Got you. And what are your thoughts on being able to, at some point, move the – I guess, the selling of the OmniPod in the diabetic setting towards more of a pharmacy benefit manager type area?

Well, we're evaluating pharmacy as an attractive potential channel for us. Obviously, we have a unique product configuration that makes us well suited for that channel, where our competitors aren't. And we've seen other successes like Dexcom's in that channel, so we do have an active exploration, I would say. But we are early days for that as well, and we'll certainly provide more detail as it becomes a more viable pathway forward for us.

And your next question comes from the line of Brooks West of Piper Jaffray. Your line is open. Brooks E. West - Piper Jaffray & Co (Broker): Hi, thanks for taking the questions, and congratulations on a really strong quarter. Patrick J. Sullivan - President, Chief Executive Officer & Director: Thanks, Brooks. Brooks E. West - Piper Jaffray & Co (Broker): Shacey, I wanted to maybe push you a little bit more on the attrition rates. What's an appropriate goal? And where do you think, over time, you want to see that number? You've been talking about 9%. Can you take that down a couple of points over time?

Well, first of all, I would say – and I know Pat would echo this – that, you know, the appropriate goal is 0%. We want to deliver an outstanding customer experience. And so, really, our goal is to retain all of our patients as happy, loyal, long-term patients for OmniPod. That said, 91%, a fairly high customer loyalty number and retention, if you look at it across other industries. We believe it's reasonable to think about reducing that 1% to 2% over the next year. And that drives significant value for us. Brooks E. West - Piper Jaffray & Co (Broker): Great. And then another question on drug delivery. I get a lot of questions on the sustainability of the Amgen business. And I know you guys have basically a six-month rolling order, but can you talk about what might be – and I realize you have limited visibility – but what might be stocking, what might be sustainable for that business? And then with the six new agreements that you're talking about, is anything approaching the scale of that Amgen business going forward? Patrick J. Sullivan - President, Chief Executive Officer & Director: Yeah. So, with respect to stocking versus actual utilization, on their most recent conference call they talked about 19% of the doses of Neulasta administered in the United States were given using the OmniPod device. So that's kind of where we are. Purchases – or revenues that we generated in addition to that would represent stocking. We think that that's going to continue to grow. That's our second full quarter of OBI, or the OmniPod device delivering Neulasta in the market. So I think we're on a really accelerated conversion ramp here. And our objective would be to convert every dose in the United States of Neulasta to be administered with the OmniPod device. We think that's about 1 million doses. Brooks E. West - Piper Jaffray & Co (Broker): And there's no reason it shouldn't be. Patrick J. Sullivan - President, Chief Executive Officer & Director: Yeah. With respect to your second question, we talked about six additional agreements that we have in hand. I'd say three of those agreements are with very large pharmaceutical partners. Each of those companies would be ranked in the top 15 pharmaceutical companies in the world. Each of those agreements, we would expect to have a magnitude equal to or greater than the agreement that we have in place with Amgen. The other three agreements are with smaller companies, earlier-stage development agreements. Potentially very large, lucrative agreements for us, but it's a little early to predict. But I'd say we've got a range of opportunities here, some as large as what we think the Amgen opportunity can be, some smaller.

Your next question comes from the line of Mike Weinstein of JPMorgan. Your line is open.

Hi. This is actually Robbie Marcus in for Mike. Congrats on a good quarter. Patrick J. Sullivan - President, Chief Executive Officer & Director: Hi, Robbie.

Hi. So, one thing I noticed that you didn't give a whole lot of time to in the prepared remarks was the pipeline. So I was wondering if you could take a minute and just lay out your current thinking of the new PDM approval. Are you still going to be able to submit that next year, or is that slipping into 2017? And can you give us an update on your integrated pumps with CGM, both just the display on the PDM, but also more of your artificial pancreas type of pumps, and where that sits right now? Patrick J. Sullivan - President, Chief Executive Officer & Director: Sure. I'll take that one. This is Pat. We're on track to submit our Phoenix PDM product to the FDA in the middle of next year, and we would expect to have that on the market or approved by the end of next year. And we are on track and working with Dexcom for the integration of their G5 sensor with the OmniPod device. That said, I think what obviously everyone is seeing is a move to the phone. And Shacey has done some work from our customers to really understand the interest that they have in seeing the pump settings, as well as the Dexcom CGM results, on an iPhone or an Android phone.

Yeah. I would say, Robbie, that our market research demonstrates that patients really want to see this information ideally on their phone, rather than their pump. And I think that makes a lot of sense for a number of reasons, not the least of which is, if you look at Tandem or Animus today, their integration is already somewhat obsolete, because Dexcom is launching G5 and they are both integrated with G4. And so we see this desire for the patients to have this information on their phone, and we are evaluating ways, working with Dexcom to evaluate ways to accelerate CGM integration, and maybe using mobile as a way to do that. So, I would say stay tuned at this point. But it's something we are clearly aware of, in terms of our patients wanting to have it. The question is, can we get it where they want to have it? And that's what we're working on.

And what about your artificial pancreas program? Is there any update there, because we're going to have Medtronic 640G, 670G out pretty soon. Tandem is moving into trials. Is there any update on your front?

I mean, Patrick comment, but I would say that the program is very active. We've identified our algorithm partners. We have early clinical and development pathway and pipeline meetings on a regular basis. We are very excited. We believe that our product is the most innovative and the most differentiated. And if we can combine that with an AP offering, we know that it's going to be something that patients want. So at this point I think it's a little early for us to comment on next steps and specifics, but know that it's an active investment and active project here. Patrick J. Sullivan - President, Chief Executive Officer & Director: And I would just echo that we are committed to an artificial pancreas product offering. I believe we have the best product configuration and footprint for the artificial pancreas use, and we are committed to get there.

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

Great, thanks. Good evening. Can you hear me okay? Patrick J. Sullivan - President, Chief Executive Officer & Director: Got you. Thanks.

Great. Thank you. One of the questions I continually ask, and I just wonder if you would update, how should we think about – it was a solid quarter. But how should we think about utilization? Is this quarter in the U.S. indicative what normal utilization for a patient is, i.e., whatever it is, 7 to 8 pods a month? Is that how we should think about the business on a go-forward basis?

I would say that utilization doesn't really change, quarter to quarter. So, utilization this quarter is consistent with where it's been, previous quarters. Patrick J. Sullivan - President, Chief Executive Officer & Director: I would also say that there has not been the noise in this quarter that we've had historically, in inventory levels and all the other, I'll call it chaff, running through the results. And therefore, this is a very clean quarter from a end-product use by the customers quarter, so you don't have that other noise. So yes, I would say this is a good quarter to use.

So this is the normalized. So use this as our base rate as we go forward? And then how should we think about – you had a good new patient number. How much of that was new reps versus existing reps, in terms of driving that total growth year-over-year?

The expansion is definitely driving the increased new patient starts. And we did also focus a portion of the field's time on retention, so it's a bit difficult at this point to compare rep productivity. But we are very pleased with the results. Clearly, they are making a terrific impact. The message is resonating and we are excited about the growth that was delivered this quarter. Patrick J. Sullivan - President, Chief Executive Officer & Director: They are doing a great job.

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

Hi, guys. This is Mike Hall (41:12) in for Jayson. Can you hear me okay? Patrick J. Sullivan - President, Chief Executive Officer & Director: Got you, Mike (41:14).

Thanks. Okay. Nice job in the quarter, by the way. I was hoping you can give us some segment-specific color in terms of your assumptions for the fourth-quarter guidance? I know you gave us the drug delivery number, but we were particularly interested in the U.S. business, given the strength in the third quarter.

Sure. This is Mike. So, we expect growth for the second half of the year to be in the low to mid teens for both U.S. OmniPod and international OmniPod. So, mid-point of the guidance is around $51 million for U.S. OmniPod, so between $50 million and $52 million, and between $14 million and $16 million for international. So pretty much in line with where we were before, but we are definitely encouraged by what we are seeing with all of the positive momentum. And Neighborhood we expect to be north of what we said before, but not by a lot, so midpoint probably around $15.5 million to $16 million.

Okay. Great, thank you. And then can you give us an update -- I'm sorry if I missed this, but an update on obtaining Medicare coverage for the OmniPod? Patrick J. Sullivan - President, Chief Executive Officer & Director: Yeah, this is Pat again. As I have stated in my previous conference calls, the Medicare coverage for me is my number-one priority, and continue to work the avenues that we have discussed in the past. I would say we're making progress, but we're not there yet. And I think confident that the two approaches that we're taking with Medicare coverage are the right approaches. It's just hard for me to predict exactly when we might achieve Medicare coverage. But I can tell you that I'm all over it.

And your next question comes from the line of Jeff Johnson of Robert Baird. Your line is open. Jeffrey D. Johnson - Robert W. Baird & Co., Inc. (Broker): Yeah, thanks. Good evening guys. Just a couple of follow-up questions here, more just on the expense side, I guess. It looks like R&D kind of came back from $12 million to $10 million this quarter. Is this kind of about the run rate we should be looking at here, over the near- to intermediate-term? Or how should we be thinking about that line item?

This is Mike. So, I think it's fair to say, and I think I've said before, that I expect – or we expect R&D this year to be north of – to be in the low teens, low to mid teens. And so I think it was a little bit lower this quarter, but it really is – it's timing- and project-specific. As things continue to ramp up on the artificial pancreas, that has some impacts here as we look forward, where it would be a little bit higher. But as I said in my remarks, we have a variable spend that we brought in to ramp up these projects, that we can then ramp back down. So, longer-term we expect R&D to be more in line with a 10% rate, long-term. But I think this year, next, it's going to be north of that as we accelerate these important projects. Jeffrey D. Johnson - Robert W. Baird & Co., Inc. (Broker): All right. That's helpful. And then just going back to the drug delivery question that was asked earlier, I think Amgen said 8% in the second quarter, 19% in the third quarter. Even if I take that up to 25%, 30% -- a good, healthy number in the fourth quarter – the revenue contribution to you guys on the sell-through to the patient basis -- I keep coming back to somewhere around $15 million or so, mid-point of guidance this year, $27 million; bump up $2 million maybe for the Lutrelef contribution. Is there anything else contributing within the drug delivery category that I'm missing there? Are any of these early trials or early discussions generating any clinical trial revenue? Anything there, or is it all just – is the rest of that the inventory build?

Yeah. You are not missing anything, you're just low. Patrick J. Sullivan - President, Chief Executive Officer & Director: Ferring is the other.

Yeah, he mentioned Lutrelef. You got Lutrelef in there, but you're just low. We are very comfortable with the guidance we just gave.

Okay. Your next question comes from the line of Raj Denhoy of Jefferies. Your line is open.

Hi, good afternoon. I wonder if I could start with the international business. I'm curious if you think the run rate that has been established in the international market is where we should expect, or whether that business could trend back up to the 40%-ish growth we've seen in years past?

We are expecting the international business to be consistent with the run rate that we saw this quarter. This quarter reflected, really for the first time in a couple of quarters, I think, true end-user demand. And obviously Ypsomed has talked positively about the growth in their patient install base, and they are our largest international distributor.

Okay. So generally, if you think about inventories in your channel, your distributor channel broadly, how do you feel about that level? Do you feel that there's another either reduction or perhaps an expansion in the inventories distributors are carrying? Or are we pretty much right-sized at this point?

No, we are right-sized. Patrick J. Sullivan - President, Chief Executive Officer & Director: We are right-sized. We're done.

Yeah.

Yeah, I would say we definitely have. We've seen strong utilization from most of our targeted high-volume physicians. And we have a number of programs, including our Pod Promise program, which we have positioned to help us regain support and advocacy from physicians who may have had patients who had challenges with quality in the past. So I think ultimately physicians – the message that we have really clinically differentiated OmniPod, and the programs that we have rolled out have been very well received by clinicians and patients.

And your next question comes from the line of Puneet Souda of Leerink Partners. Your line is open.

Yeah. Hi, guys. This is Puneet in for Danielle here. Can you hear me okay? Patrick J. Sullivan - President, Chief Executive Officer & Director: Gotcha. Loud and clear.

Excellent. Thanks for taking my question, and congrats on a solid quarter. Pat, you had talked about earlier, there are certain studies in publications – and thanks for giving color on that – that you could potentially take to the payors and really drive reimbursement for this. If you could help us understand, are there certain trials or studies that you want to – that you want to start into having had – looked at, what the data that you have, or you feel confident that what you have is good enough to go and take it to the payors? Patrick J. Sullivan - President, Chief Executive Officer & Director: Well, I think what we initially have right now is sufficient to take it to the payors. But as I, I think, talked about last year, the first and foremost is to take the data that we have in-house, to develop that into data that can be published into the marketplace, peer-reviewed journals. And Shacey mentioned – I believe that was the one that was submitted for this quarter, that will be the first indication that we will have in published information. In addition to that, Shacey has been working on – the clinical team has been working on additional studies to show the clinical and economic benefits of OmniPod. And those studies or publications are in various processes of bringing to the clinical community. And we will continue to do this. This is not a once – do it once and you're done; it's a continuous process, and we'll continue to provide publication and clinical support to provide the patients, clinicians and payors to make the case of the – the use of OmniPod is cost effective.

Okay. Thanks for that. And just a quick follow-up on that, in your experience, how do you see the endocrinologist responding to this type of data? Would they – would this change their behavior in terms of prescribing? How sensitive are endocrinologists as a group, as a group of clinicians, to this type of data from publications? Patrick J. Sullivan - President, Chief Executive Officer & Director: I think all clinicians, for the most part, are absolutely interested. They are data hounds. They love to see the data. And I think the studies and the work that we've done specifically targeting endocrinologists on the benefits of OmniPod will be very helpful. And Shacey, we've already done some already, targeting for physicians. But we've already started that process, and the initial indications are very positive of their receptivity to clinical data. That's what doctors are interested in: how is this beneficial for my patient? Why does it make sense for me to provide this therapy to this patient? If you show them that you can increase their – reduce their A1c levels, get their glucose more in tighter control, that's a real strong selling message for clinicians.

Your next question comes from the line of Doug Schenkel of Cowen and Company. Your line is open. Ryan Blicker - Cowen & Co. LLC: Hi, this is Ryan Blicker in for Doug. Thanks for taking my questions. Starting with a follow-up on the pipeline, you talked about two products in your drug delivery pipeline, including one with higher volume and one with Bluetooth capability. These features clearly have potential within your diabetes products as well, for Type 1 and intensive insulin-using Type 2 patients. Have you made any development progress integrating these features into your diabetes products?

I would say for, let's see, the large-volume pod, for example – that would be designed to address patients who have larger insulin requirements, like Type 2 patients or very insulin-resistant Type 1 patients. And there's really two ways you can go after that. You can go after that with a larger reservoir, larger pod, which I think works very well for Dan's side of the business and patients who are wearing the pod for short periods of time. But it might not work as well for patients like our diabetes patients, who have to wear the pod every day. And the other way to go after that patient population really is with concentrated insulin. And that's what we believe the patient would prefer and will provide a better patient experience. And so, that's where we're focused in terms of addressing patients who have larger insulin-requiring needs. The second piece of your question was regarding the Bluetooth technology, and this benefit for compliance. I would say we absolutely are looking at that as a potential way to offer CGM integration and other integration and data management for the patient. So both of those will be leveraged. I guess the Bluetooth will be leveraged, as the larger volume will be gone after in a different way. Ryan Blicker - Cowen & Co. LLC: Okay. And on that concentrated insulin point, with the Eli Lilly agreement I think you're referencing, can you give us an update on progress there and how we should be thinking about that over the next 12 to 24 months? Patrick J. Sullivan - President, Chief Executive Officer & Director: Yes. I think the good news there is that Lilly just enrolled their first patient this month. So that clinical trial is on track and on progress. The majority of that trial is basically being run by Lilly because it requires the recruitment of patients, and we are on track with that and very excited about bringing that opportunity to market.

And your next question comes from the line of Ben Andrew of William Blair. Your line is open. Benjamin C. Andrew - William Blair & Co. LLC: Thanks for taking the question. Just one follow-up to the Bluetooth question, Pat. What does it take from a manufacturing standpoint to incorporate a Bluetooth chip in, so that you can start to lever comms over to a phone? Patrick J. Sullivan - President, Chief Executive Officer & Director: We have the capability in our manufacturing processes to do that with not a lot of change. It's a design change you make to the motherboard of the product, et cetera. But it's – we have that capability from a manufacturing engineering perspective to do that. Benjamin C. Andrew - William Blair & Co. LLC: Right. So is that something that you can start to push your data to a phone? And what sort of regulatory path would it take for you all to do that and ultimately maybe even control the OmniPod from a phone? Patrick J. Sullivan - President, Chief Executive Officer & Director: That's something we are clearly evaluating. We have done some – a fair bit of work on that product concept. I guess it's a little too early for us to comment specifically about that, but we are focused on that. Because that's where the market's going, obviously, right? As Shacey talked about. People want to see – they don't want to see things on your pump display; they want to see it on their phone.

And your next question comes from the line of Suraj Kalia of Northland Securities. Your line is open.

Good afternoon,, everyone. Congratulations on a great quarter. Patrick J. Sullivan - President, Chief Executive Officer & Director: Thank you.

Patrick, let me start out with you for the first question. And I'm just – Patrick, SG&A right now is around 48% of sales. And what I'm trying to understand is, there was some mention about patient retention on the back end. Is the issue more about capturing the incremental patient, or is it more about patient retention? I guess where I'm headed is, given where SG&A is, where do you think the levers are, on the front end or the back end, to squeeze out a few more bps on the SG&A line-item? Patrick J. Sullivan - President, Chief Executive Officer & Director: I would say in terms of the importance of your existing installed base of patients versus new patient starts, both are important. I think what you need to do is to gain new patients through your efforts in new patient starts. And I think Shacey, as she describes, the team's doing a great job with that. But once those people get on the product, it's also very important to retain them. And the more patients you can retain over time, you can continue to grow your installed base and provide the technology to everyone, not only the new patient starts but the installed base. So both efforts and activities are very important to the long-term, sustainable business that we are developing here. In terms of the bps, Mike speaks in bps. I don't speak in bps.

This is Mike. I'll just add a few comments to that. So we have talked about the investments that we have been making in the commercial organization related to both of those items. One being the sales force and the support in clinical around new patient starts. Because the new patient starts we add each year – I mean, this is driving – not a one-time benefit for us but a multiple-year benefit, as people stay on the product. So each new patient start has a tremendous amount of value if we can retain them. That said, new patient starts represent just still a small part of our installed base in any given period. So retaining that installed base and having those folks continue on the product has a dramatic impact on the bottom line and the top line, and really about us achieving our mission. So, I think, we are investing in both of them because, in terms of our drive towards not just top-line growth but overall growth in the bottom line, reaching new patients and retaining those patients, it's a critical part of what we're trying to do.

Fair enough. And Patrick, you have assembled a team together that initially, when you all came on board, there was some level of criticism that there was lack of diabetes experience. The numbers certainly suggest that you guys have put those doubts to rest. I guess Patrick, now that you have approximately three quarters under your belt, are you in a position to say, you know what? As an outsider, for me the key issues I saw – let's say predominantly they were quality control, or patient retention and clinician training, or – what have you, so far, identified that was missing? And the reason I ask is, just trying to see the sustainability of the current trajectory. Thank you for taking my questions. Patrick J. Sullivan - President, Chief Executive Officer & Director: I would say that there was some criticism of bringing in a team that didn't have a lot – diabetes experience. I would counter that argument by saying that if you look at insulin in its totality, we have got great and deep customer – or diabetes experience with our CSNs in the field that are talking to diabetes clinicians. Each and every day we have a medical director that's a well-known and regarded endocrinologist, Howard Zisser. And even to the board of directors; one of our directors is from the Joslin Clinic. But what I have brought in here, I think, is a winning and organized group of people that have very high standards of performance, that focus on the right things and drive execution to perform and to provide long-term, sustainable growth. So that's our strategy. That's the people that we brought in place, and I think from my perspective, you can take it to the bank that this is – the trajectory that we are on is one that we are going to continue to drive for, now and into the future.

And your next question comes from the line of Jan Wald of Benchmark Company. Your line is open.

Good afternoon, everyone. Thanks for taking the call, and congratulations on what looks to be an excellent quarter. I guess I have a couple of questions left. On the drug delivery programs that you have, you mention that you now have at least two configurations for the devices that you're going to sell into that business. Do you see those as being the primary ones, or is this kind of a special-purpose thing that you are going to have to do for each customer as you go forward? In other words, I guess, do you have a platform or a couple of platforms that you are going to be able to use in this business? Or is it a special-purpose device every time you have a new customer? Patrick J. Sullivan - President, Chief Executive Officer & Director: Well, I think the overall platform to think about is the basic OmniPod platform, which is a disposable patch pump that's very easy for the patient to apply and to wear over a period of one, two or three days. So that's kind of the overall platform that we think about. But for each of these drug delivery opportunities, there will be some level of customization required. And I'll go back to our Amgen agreement and our product that we provide to Amgen to deliver Neulasta. Again, that looks very much like the OmniPod product that's used to deliver insulin. But it's customized; it delivers, after a certain interval of time, after it's been administered to the patient, it delivers the drug over a specified interval of time, a certain volume is administered. And then the device shuts down and alarms and tells the patient they're done. So there's that level of customization that we see is likely in each of these opportunities that we have at hand.

Okay. I guess my question was, now you have a large bolus, you have a smaller bolus. Is that – I guess, one of the things is, from a cost perspective and from your gross margin perspective, the less number of platforms you have that you can modify in the way that you were just talking about, the better. And I guess what I hear you saying is that the OmniPod is the thing you are modifying; that's the base from which you are modifying all the time, I guess. Patrick J. Sullivan - President, Chief Executive Officer & Director: That's correct, yes.

Is that the right way to think about it? Patrick J. Sullivan - President, Chief Executive Officer & Director: Yes. If you look at the larger-volume product that we just unveiled this past week, that looks very much like the original OmniPod System.

And this concludes today question-and-answer – pardon me, just one moment. We are going to have one more question from the line of Tao Levy of Wedbush. Your line is open.

Great. Thank you for allow me to follow up. So, just two quick clarifications. One, the recall that took place, is that going to have any impact in your revenues for the fourth quarter?

This is Mike. You're referring to the July product recall? No.

Yeah, the charges that you were taking. And I think, wasn't there something that happened in September?

The July product... Patrick J. Sullivan - President, Chief Executive Officer & Director: The field safety notification that you talked about, the product...

Oh, in terms of the impact on revenues, no, it will not have an impact on revenues. There will be an impact on cost of goods sold, or cost of revenue...

...but not on revenues?

...but not on revenues. There's about $1 million of products that we are reserving that were procured in October, in the beginning of the fourth quarter. And therefore, as we reserve it, that ends up being a fourth-quarter charge, as opposed to the third quarter. But there will not be an impact to revenue.

Okay. And then just last question. Maybe it would be helpful, and I don't know if you can provide this, but any sense in terms of the amount of inventory level that a large pharma company selling a biologic would want to carry? I don't want to mention any names, any pharma names. So maybe you can answer it that way. A year's worth of inventory? Is that what they are comfortable with? Is it six months? Patrick J. Sullivan - President, Chief Executive Officer & Director: I think you need to ask them. That's not our area of expertise. The pharma companies are the folks that manage their inventory. It's obvious that they have a large pipeline that they need to fill when they launch a new pharmaceutical product, so there's significant inventory requirements to get that pipeline, that distribution channel full, in order to launch the product. So, each of these agreements, when they become commercial reality, will require stocking to take place. But again, I'd refer you to the pharma companies to get a better sense for the magnitude of that. I will continue to come back to the fact that we started at zero in February, and today we are at 19% conversion of the doses of Neulasta administered in the United States. It's a terrific trajectory that we're on, and we see that continuing going into the future.

And this concludes today's question-and-answer session. I now turn the call back over to Pat Sullivan for closing remarks. Patrick J. Sullivan - President, Chief Executive Officer & Director: Thank you, operator. Before we conclude today's call, I'd like to publicly congratulate the Insulet commercial team for their spectacular performance this quarter. For the marketing team who put together a great customer-driven marketing messages and programs, the sales team who executed to deliver a record third-quarter new patient starts, and the clinical services team who put together an outstanding diabetes training and support for all of our customers. You guys are on a roll. Keep up the good work, and thank you for a job well done. Thank you, operator.

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