Insulet Corporation (PODD) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen and welcome to the Insulet Corporation Fourth Quarter 2016 Earnings 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. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Deborah Gordon, Vice President, Investor Relations and Corporate Communications.

Thank you, Sandra. Good afternoon and thank you for joining us for our fourth quarter 2016 earnings call. Joining me today are Patrick Sullivan, Chairman and Chief Executive Officer; Shacey Petrovic, President and Chief Operating Officer; and Michael Levitz, Senior Vice President and Chief Financial Officer. The replay of this call will be archived on our website. Our press release discussing our fourth quarter 2016 results and first quarter and full year 2017 guidance is also available in the IR section of our website. Before we begin, we 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 fourth quarter earnings release and in the company's filings with the SEC. With that, I'll turn the call over to Pat.

Thank you, Deb. Good afternoon and thank you for joining us on the call today. I'll begin this afternoon's call with a brief review of our Q4 and 2016 full year performance and share with you recent business highlights and our accomplishments. Mike will then discuss our 2016 financial results and introduce our 2017 guidance. Shacey will then provide an update on our exciting commercial and R&D progress. And then we'll open the call for questions. I am absolutely thrilled with Insulet's recent performance. 2016 was simply an amazing and very successful year. Our 2016 revenue was $367 million, up $103 million than prior year, representing growth of 39% and $3 million over the midpoint of our guidance range. Our gross margin for the year improved to 57.5% for the full year, up 700 basis points from 50.5% just a year ago. Every area of our business delivered outstanding performance in 2016. U.S. OmniPod revenue was $230 million, an impressive growth of 21% over prior year, our international OmniPod revenue was $72 million, a terrific growth rate of 78% and this growth was driven by deeper expansion in our existing markets and significant growth in new markets. We finished 2016 with an OmniPod worldwide installed base of between 105,000 and 110,000 active users, an increase of more than 25% over 2015. And our Drug Delivery revenue was $65 million, a remarkable 92% growth. This performance was primarily due to sales to Amgen of its Neulasta Onpro kit. And according to Amgen's most recent public comments, the Onpro kit represented approximately 50% of total U.S. Neulasta doses at the end of 2016, just two short years after product launch. I'm extremely pleased with our team's execution and the progress across all areas of business. And I'm even more excited about our great prospects and opportunities for 2017. Now, let me provided you for a few highlights from last year. We started off the year by divesting Neighborhood Diabetes, a business that did not fit our higher growth OmniPod and Drug Delivery products. In 2016, we brought Chuck Alpuche into the company to lead our Worldwide Operations. Chuck quickly built a team and made significant improvements to our manufacturing operations and supply chain during 2016, resulting in significantly improved gross margins. The improvement was due in part to increased daily output with fewer headcount as well as reduction in manufacturing scrap. In 2016, we manufactured approximately 65% more pods than we did in 2015 with 20% fewer headcount and a 50% reduction in scrap. As a result of these efficiency initiatives, we achieved approximately 15% savings for the pod, which not only drives down cost, but most importantly significantly improves the quality of the product and the customer's experience. We also made significant investments and improvements in our manufacturing supply chain to provide for redundancy and improved cost. In addition by the end of 2016, we implemented product shipments from China to the United States via ocean freight. As you know we recently announced the purchase of new manufacturing facility in Acton, Massachusetts, just 15 miles from headquarters where we will install highly automated manufacturing lines and expect to be operational in 2019. One U.S. line as compared to all four of our lines in China will be capable of producing up to 70% of our total capacity in China with up to 90% few headcount. Meanwhile, we will continue to improve our performance in China where we will continue to manufacture products. We are very excited about this new phase for our manufacturing and operation strategy, which will support our growth plans and further reduce per unit cost and improve quality. In March, we brought in Aiman Malek on Board as our SVP of Advanced Technology and Engineering. We're making great progress on our innovation roadmap and are very excited about introducing our OmniPod Dash product at the ADA Tradeshow in June. The impressive capability of our San Diego innovation team will differentiate us in mobile technology, human factors, and data analytics. We've also been making significant progress on our artificial pancreas program with very good results. Both of these development efforts were on-schedule will allow Insulet to maintain our competitive edge with truly innovative and differentiated products. During 2016, there were a number of changes in the diabetes marketplace that cause significant disruptions to competitors in the tubed pump market. Although we're not immune to these dynamics, our significant product differentiation as well as the strength of our business model, insulate us much from much of these distractions. And any time there are disruptions in markets as we're seeing today in the diabetes market, there are opportunities to benefit significantly from these market dynamics. We intend to invest to make sure we get our share of this opportunity; we've got a strong balance sheet of true differentiated technology and a very dedicated team on the frontlines to make sure that we win. Our Drug Delivery team did a phenomenal job in executing on a significant opportunity with Amgen. In addition, we're working closely with a number pharmaceutical partners to determine the feasibility of using the OmniPod technology to the delivery of other compounds. We're very excited and bullish in the long-term potential of our Drug Delivery business. In September, we raised $345 million in the convertible debt financing at some very attractive terms. This additional capital allowed us to retire a portion of the pre-existing debt and provides the capital to support our significant growth and fund our U.S. manufacturing strategy. Throughout 2016, we executed and drove results within every aspect of the business. I'm very proud of our team and the dedicated efforts and accomplishments. Together we have developed a strong and robust strategy with a truly differentiated product platform that positions Insulet for significant growth. As a result of this hard work and dedication, we have everything we need today to deliver significant organic growth and capture the substantial marker opportunity before us. We are well on our way of achieving $1 billion in revenue over the next five years and I'm very excited and confident in our ability to deliver on that promise. With that let me turn the call over to Mike.

Thank you, Pat. I will review our fourth quarter 2016 results and then introduce our first quarter and full year 2017 guidance. As I review our results, unless otherwise stated, all commentary regarding changes will be on a year-over-year basis. We are very pleased to report fourth quarter revenue growth of 24% with revenue of $103.6 million compared to $83.8 million. All three of our product lines contributed meaningfully to this growth. We exceeded the midpoint of our stated guidance by $3 million with strong performance from all of our product lines with over half of the beat coming from the United States OmniPod due to strong demand from our growing installed base. Our fourth quarter gross margin increased to 58.8%, up 870 basis points from 50.1%, primarily from improving manufacturing and supply chain efficiency and effectiveness as well as improvements in product quality. Operating expenses increased to $65.1 million compared to $54.6 million. This increase included a charge of approximately $6 million through write-down in-process software due to a change in our ERP system requirement. The increase was reflects the cost of additional headcount to support the expansion of our business including increased investment in our innovation projects as well as continued expansion of our commercial and operational infrastructure. We ended 2016 with almost $300 million in cash and investment compared to $123 million at the end of 2015. This increase was primarily driven by $180 million from our issuance of 1.25% coupon convertible notes in the third quarter, net of issuance costs and the repurchase of two-thirds of our existing 2% convertible notes. We also will generate over $15 million dollars in cash from operations in 2016 compared to cash outflows from operations of over $12 million. As a result of our significantly improved operating performance even as we increased investments in inventory and operational initiatives to support the continued growth in our business. We're making great early progress in establishing our U.S. manufacturing operation announced a few months ago. And we remain on-schedule for production out of our new Massachusetts facility beginning in 2019. We expect capital expenditures to increase above historic levels to fund the new U.S. manufacturing operation and these are funded by the net proceeds from our convertible notes offering in 2016. We are very pleased with our financial position coming out of the fourth quarter as we continue to make these strategic investments in support of our near and longer term organic growth opportunities. I will now walk you through our 2017 outlook. We finished 2016 strong and have great momentum and our guidance reflects our expectation of continued strong growth in 2017. For the full year, we expect revenue in the range of $420 million to $440 million compared to revenue of $367 million, representing growth of 17% at the midpoint. We expect strong revenue growth across all of our business lines. First, we expect U.S. OmniPod in the range of $257 million to $265 million, representing growth of 14% at the midpoint. This growth reflects our growing U.S. installed base, partially offset by two points due to contractual expiration earlier this year of a royalty, which contributed $5 million in 2016. Second, we expect international OmniPod in the range of $94 million to $101 million, representing growth of 36% at the midpoint on strong growth in our installed base in both historic and newer international markets. And third, we expect Drug Delivery of $69 million to $74 million, representing growth of 10% at the midpoint on continued strong market adoption of the Neulasta Onpro kit. For the first quarter of 2017, we expect revenue in the range of $96 million to $99 million compared to $81.2 million, representing growth of 20% at the midpoint. We expect this to be driven by continued strong growth across our business lines. First, we expect U.S. OmniPod in the range of $56.5 million to $57.5 million, representing growth of 12% at the midpoint. Second, we expect the international OmniPod in the range of $23 million to $24 million, representing growth of 53% at the midpoint. And third, we expect Drug Delivery in the range of $16.5 million to $17.5 million, representing growth of 13% at the midpoint. On gross margins, we expect our full year gross margin continue to increase significantly, approaching almost 60% for 2017 compared to 57.5%, reflecting the operational improvements made in 2016 and continued improvements in 2017, including the partial year impact of our move from air to ocean freight we have discussed previously. We are extremely pleased with the tremendous progress to-date in margin expansion and the expected 2017 result nearing 60%, which as a reminder had been our five-year target just a few quarters ago before we increased our multiple year target to 65% on our stronger performance and outlook. To achieve our goals, we will continue to invest in our business to drive long-term growth and profitability including commercial, research, and development, and infrastructure investments. While our level of spend for the upcoming year may change, we currently expect an approximate 20% to 25% increase in 2017 operating expenses over 2016, driven largely by increased vendor support our product development and innovation pipeline, expansion of our commercial team to meet our growing demand, and the investments in our manufacturing and supply chain operations. As such we expect EBIT in 2017 to be roughly in line with 2016 and are on-track with our goal of becoming sustainably EBIT positive beginning in 2018. We also remain confident about reaching $1 billion in revenue in five years with gross margin of 65% or higher, delivering above-market profitability. I will now turn the call over to Shacey.

Thanks Mike. The team and I are excited about the great momentum we have coming out of 2016 and we are already off to the races in 2017. Insulet competes in a large, growing, and underpenetrated market and we've had success capitalizing on this market opportunity evidenced by the robust revenue growth we achieved this past year and we will again deliver strong revenue growth in 2017. We ended 2016 with an estimated worldwide installed base between the 105,000 and 110,000 active users, which represents a worldwide increase of more than 25% over 2015. Year-over-year we grew our U.S. installed base by approximately 15% and our international installed base by more than 50% with our mixed now about 60% to 65% in the U.S. and 35% to 40% international. As a reminder, our installed base is an estimate due to the fact that close to half of our U.S. sales and most of our international sales are through a third-party distribution channel. As I mentioned on our last call, we did encounter some noise in the U.S. market in Q4 around the approval of 670G. While this caused a slight distraction, it was not a disruption. This noise simply lengthens some patient decision-making processes, which resulted in slower conversion rate from an interested patient to product shipment. In 2016, our growth in new patient starts over the growth in new patient starts in 2015 was 13%. While we had a stated goal of 20% compounding growth, this represents more than 15,000 new patients in 2016 compared to approximately 13,000 new patients in 2015. Because of OmniPod's recurring revenue model and because in any given quarter, new patient starts equates to about 10% of U.S. revenue, this conversion delay did not meaningfully impact our U.S. revenue finish. Our approximate 15% U.S. installed base growth for 2016 or our strong outlet for 2017. In 2017, we will continue to drive great year-over-year growth and expect our U.S. installed base to again increase by approximately 15%. Coupled with exciting and fast-paced growth internationally, we once again expect our global installed base to grow approximately 20% year-over-year. Due to a recurring revenue model, the growth in installed base as opposed to compounding growth in new patient starts is much more indicative of revenue growth. Our 2017 U.S. OmniPod growth will be driven by continued commercial execution focused on three things. One, leveraging our expanded market access team and clinical data to improve customer access through private payers and Medicaid plan. Two, U.S. sales force expansion and a targeted patient awareness campaign. And three, continuing to raise the bar for customer care and a world-class customer experience. First, our expanded market access team is using the strong clinical data published last year to secure and expand coverage for OmniPod. As you'll recall in 2016, there were three publications in peer-reviewed scientific journals demonstrating the clinical and quality of life benefits associated with OmniPod. This growing body of evidence has proven to be impactful with payers and in 2016, our team added 15 million covered lives through Medicaid and Managed Medicaid plans across the U.S. These efforts will accelerate in 2017 with continued focus on Medicaid, regional private payers, and other avenues for securing access and reducing hurdles for new customers to get OmniPod. These initiatives both to continue to build a strong foundation of clinical data for OmniPod as well as to use the data to drive expanded coverage will continue in 2017. This year we plan to once again have a number of peer-reviewed publications evaluating OmniPod's critical role in reducing the burden of diabetes, including data on our OmniPod Horizon Automated Glucose Control System, OmniPod data from large robust registry studies, and OmniPod real-world use data. This real-world use data will complement our unique pay-as-you-go business model advantages to demonstrate OmniPod's value to payers. Second, at the beginning of this year, we expanded our U.S. sales team by 20%, strengthening our field particularly in areas where we have strong market access and in some previously uncovered geographies. We are arming this expanded team with the right messaging and tools to continue to drive new patient starts and growth in clinician utilization. The sales team is delivering a strong message highlighting OmniPod's positive impact on quality of life and reduction of the burden. The data published just a few months ago demonstrating OmniPod's remarkable ability to reduce diabetes distress and improve quality of life coupled with OmniPod's dramatic reduction in burden is resonating with our clinician. OmniPod offers the ability -- the potential to reduce the number of required steps for insulin delivery by almost 50% compared to tubed insulin pump and by a whopping 86% compared to multiple daily injection. OmniPod significantly reduces burden for people living with diabetes and this results in better compliance which drives improved quality of life and improved outcome. The sales team also remained focused on implementation of Insulet Provided Glooko in our targeted offices. We now have more than 30,000 Podders using Glooko, that's almost half of our U.S. installed base. And this tool continues to drive increased utilization among our clinician with Glooko offices averaging a fivefold increase in OmniPod prescription post-implementation. This valuable resource is helping our Podders and their care teams gain insights to improve their diabetes management and its demonstrating to clinicians the positive impact that OmniPod can have on their patients' compliant and glycemic control. In addition to an expanded field presence with stronger clinical messaging and great tools like Glooko, we're also expanding our patient awareness effort. We're pursuing a targeted digital direct-to-patient campaign to highlight OmniPod's quality of life improvement and ability to reduce diabetes burden. Over the past year we've seen a significant increase in unaided patient awareness following our rebranding. This increased awareness was also associated with increased activation of those patients to take some form of action, like speaking to their doctor or requesting an OmniPod demo kit. Our focus is on generating awareness and activating patients in select geographies where we have strong clinician support and solid coverage. These commercial investments in clinical data, sales force expansion, and awareness will drive demand and growth in 2017. Finally, in 2016, we significantly improved the OmniPod customer experience and this is an area where will continue to raise the bar in 2017. This past year we focused on measuring and improving our customer experience through reduced turnaround time from lead to shipment, customer satisfaction surveys, and improve new patient training. We delivered an impressive result with standardization of improved training tools, a meaningful reduction in turnaround time from qualified lead to shipment, and in Q4, 96% of our customers indicated that they were very satisfied with customers -- with OmniPod's customer care. In the coming year, we will continue to drive a world-class customer experience through the launch of an innovative online patient training portal, automated benefits investigation tools, and the launch of our financial assistance program. Lastly, expanding and strengthening our footprint in international markets will continue to be an important factor in our growth. Our focus is on both expansion and penetration in international markets. Today we are in less than 20 countries across the world and we're primarily focused in North America and Europe. While our near-term growth will come from the markets we are in today, over the medium to long-term, we see the geographic expansion and continued robust growth for OmniPod. In 2016, our international installed base grew by more than 50%, reflecting remarkable performance across our market. In addition to our strong commercial execution and international expansion, we've made significant headway in our innovation roadmap. We've had particularly great progress with OmniPod Dash, our Bluetooth connected platform to provide our customers with a modern intuitive touchscreen PDM and more data and functionality on their mobile phone. We are excited about this new system and how it will benefit Podders. Over the last few months, we completed the majority of our development work, had a very positive pre-submission meeting with the FDA and started our human factors work. We remain on-track to debut this platform at ADA in San Diego in June and to launch later on this year. Dash is the platform for our innovation roadmap including our OmniPod Horizon Automated Glucose Control System. OmniPod Horizon will incorporate CGM data from Dexcom's G5 G6 sensors to automate insulin delivery, reduce burden for our user, and deliver the first on-body hybrid closed loop system. We are currently in clinical trials for Horizon and we completed two IDE studies in 2016, including 34 adults and 24 children down to age six. We are incredibly excited by the early results of the trial, which demonstrated excellent glucose control and tremendous promise to make a significant impact in the market. And just a couple weeks ago, our first data was presented at the 10th International Conference on Advanced Technologies & Treatments for Diabetes. Dr. Bruce Buckingham, Professor of Pediatric Endocrinology at Stanford and principal investigator of this study shared impressive results, highlighting the system's improved glucose control, timing range, and reduction of hypoglycemia. OmniPod U200 and U500 concentrated insulins are also being developed on our Dash platform in partnership with Eli Lilly. These programs are on-track with U500 formative human factors work and clinical trial enrollment complete and U200 technical and clinical trial design work well underway. And lastly, we're making great progress within our Drug Delivery business. Similar to our diabetes franchise, the opportunity within Drug Delivery is enormous. We recently extended our agreement with Amgen, which reflects the strength of our partnership. The Neulasta on-body injector leverages the Pod's precise dosing capabilities to provide better delivery and better outcomes for physicians, payers, and patients. There are a number of other opportunities in our pipeline exploring OmniPod's impact on simplifying the user-experience. Our OmniPod platform has the ability to improve the experience for patients and drive better adherence and improved outcomes and we're working with our pharmaceutical partners to capture this broader market opportunity. In summary, we are on a very exciting trajectory and we're so proud of the team's hard work to get us where we are today. OmniPod, whether used by people living with diabetes or to deliver a novel medicine like Neulasta, allows our users to feel more confident to live more normal life and to experience improved quality of life and improved outcome. Our innovative product development pipeline will accelerate adoption over the near and long-term and will drive sustainable and profitable growth. And I look forward to sharing with you our progress during what will be an exciting 2017. So, with that I will turn the call back to Pat.

Thanks Shacey. Operator, we'll now open the call up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of David Lewis of Morgan Stanley. Your line is now open.

Good afternoon. Congrats, another good quarter. So, for the broader changes, starting off with guidance here for a second. It looks to us U.S. OmniPod is roughly in line with us ex the royalty. I just wonder Shacey what assumptions were made here in 2017 for potential competitive launches coming into the spring? And then ex-U.S. momentum was a lot better than we expected, is this the same countries we saw in 2016 or broader strength? And I have one quick follow-up after that.

Okay. So, David, yes, we did take into consideration the competitive dynamics in the market in our guidance for 2017. It just offset by the commercial investments that we're making and what we see so far as strength in leads in the pipeline. So, we're feeling confident in the guidance that we just gave. In terms of international, really it is driven by a lot of the strength that we saw throughout 2016, particularly France as a new market. The uptake there has just been tremendous and probably blew everybody's expectations away really and that's driving significant growth in 2017. It continues to do that. But really there is strength across all of Europe and Canada and so that's just reflected in the guidance for 2017 as well.

Okay. And then Pat I know your favorite question, but I wonder if you could share with us just updated timing on Medicare and if you can't, just was Medicare kind of forecasted in 2017 guidance and any insight you can provide on whether we should be expecting Part D coverage versus other forms of coverage? Thank you. I'll jump back in queue.

No conference call would be completed without an update on Medicare coverage. So, during 2016, we made significant progress to secure Medicare reimbursement and our interactions with CMS had been primarily with CMS courier staff. I was very hopeful to get a decision in January between the change -- before the change of the administration, but as the expected, as soon as the new administration took over, all actions across the government and policy decisions within CMS were put on hold and CMS has communicated that they hope to resolve this issue as soon as the new appointees are put in their jobs. So, I think it's simply a change in the administration and there was no -- in fact, we -- there no expectation in our guidance for Medicare reimbursement in 2017, David.

Thank you. Our next question is from Jeff Johnson of Robert Baird. Your line is now open.

Thank you. Good afternoon guys. So, Pat maybe I can follow-up just on that CMS point, maybe a little bit of a surprise earlier this year when they talked about putting pumps back into competitive bidding in 2019. Obviously that then got suspended as the new administration came in and wants to take a look at all those things. But just how is your outlook, I guess, for CMS coverage? Are you still as bullish that you will get it, will it mean as much as their risk if you do get it that as you get to 2019, would OmniPod be considered a competitive bid type product, or do you get protection in that if it does go to Part D as David asked or something like that?

Yes, I think the news that came out of Medicare on the competitive bidding for Part D Medicare applies specifically the tube pumps technology, which are durable medical equipment. CMS has never considered as durable medical equipment thus far. And I would say that as we look at coverage options, they can do Medicare Part B or Medicare Part D, we actually think we fit better in the Medicare Part D. But I think that in terms of our position within CMS, I think we have a very strong position with coverage of OmniPod under either Medicare Part B or D and I have every conference we're going to get Medicare coverage just as usual can't say exactly when. As I often said, the only thing is certain is April 15th is tax deadline and we're working with the government.

I would just add one more thing on that note, which is that PMA products are not eligible for competitive bidding. So, if you could just fast-forward to 2019, 2020, most pumps are going to be center augmented pumps, which are PMA products and so it -- I'm not sure that it's going to have a material influence if it comes through even on the growth rate behind that competitor -- behind the pump market.

Yes, understand. That's a great point Shacey. And then I guess my other -- my follow-up question would just be maybe a bigger picture question. So, we've seen JDRF, we've seen NIH come out, some big grants, a lot of funding of some pump studies and really I guess the closed loop and hybrid loop systems in that. Where does Insulet stand in may be deferring some of their own spending or your own spending on some of these studies grants and other things, are there opportunities out there? We've seen a lot of this money flowing to some of the other private payers here -- or private players here recently?

Yes, I think there's opportunity. There's certainly a lot of energy and advocacy behind seeing progress on the artificial pancreas front. That said, in many cases, the funding comes with other strings attached to it. And so it's just a business decision in terms of whether or not we want to take advantage of that type of funding or not. Either way we're committed to making progress in our program. We're making really exciting progress on the Horizon product and I don't think for that particular product that we're going to need or tap into private funding. But who knows, it's a long-term program. We see iterations on that product in the future after we launch Horizon.

Thank you.

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

Thank you and thanks for all the updates on the business, because it's obviously helpful for us for trying to track progress. Let me just try and clarify couple of items. Probably the first thing would be maybe Shacey you could do this, but could us reconcile the 15% growth in the U.S. installed base in 2016 versus the 21% revenue growth. How do we get from one to the other?

In U.S., we'll probably -- let's see the 15% installed base is what we saw in the U.S. in terms of revenue growth that's driven by primarily the growth in the installed base.

Yes, what's the six-point difference there?

This is Mike. So, principally it’s the installed base that's the biggest driver of it. There are other factors that can be involved in terms of mix and pricing and there also in 2015 versus 2016, in the early part of 2016, there was destocking and so that played into it as well. That was -- it's pretty much in line. The main driver going forward is really given the recurring revenue business is really the installed base and that's what we've been talking more about that.

Yes. And we see that in Q4. Q4 was I think 17% growth year-over-year and that's pretty much what we're forecasting besides the royalty in 2017.

In the 17% Q4 growth in U.S. installed, is that what you're saying Shacey?

I was saying revenue actually.

Averaging revenues, okay. Let me ask you -- just on the fourth quarter -- Shacey on the 3Q call, you said that we're on-track to grow our 2016 worldwide installed base by 20% and generate approximately 20% growth in our U.S. new patient starts consistent with our prior guidance. But then on the update today, you announced in the call that U.S. new patient starts for the year increased just 13%. So, I guess my question is what happened in the fourth quarter that made the 20% go to 13% for the year?

Yes, I mean our leads were incredibly robust. In fact they were at record rates. They still are at record rates in Q1. And so what we didn't really appreciate in November on that call was the delay in the conversion rate from lead to new patient shipment. And so that is -- that's basically what drove that. But one of the reasons it wasn't readily apparent is that it doesn't impact revenue performance in any meaningful way and so at the end of the day, we're really excited about the robust interest in pipeline and that's reflected in our guidance. And what we're trying to get you guys focused on is just the growth in installed base of as opposed that compounding growth rate in new patient starts, because it's much more indicative of revenue growth.

And Mike this is Pat, I'd like to just amplify the response a little bit more. What the 13% versus 20% in new patient represents? Its approximately 800 customers difference year-over-year. That is about a little over $2 million in revenue in 2017 or its less than 1% of our revenue at the midpoint. So, that 7% delta only represents 1% of our total revenue for 2017. And I think it really points out the really strength of our business model. Unlike tubed pumps, we have a very predicable revenue model. We just think of our installed base coming into -- or at the end of 2016 and look out to 2017. 85% of our revenue -- our OmniPod revenue in 2017 was basically being provided for by the installed base at the end of 2016, apply that net of attrition and the royalty. If we only get the same number of new patients starts as we had in 2016, that's another 12.5%, or almost 13% and the new patient growth year-over-year represents only about 2% to 2.5%. So, Shacey mentioned, we have a very predictable revenue model given the strength of the installed base and a new patient year-over-year growth is really a very, very small percentage of the overall revenue for the company. As we said before, 90% -- 10% of our revenue usually in any given quarter comes from new patient starts. Some of that is -- we're getting the same number as last year and then the growth on top of that is only about 2%. So, we're very bullish about all the things we're doing this year to grow the new patient starts and continue to grow the business. But the 13% versus 20% is really a red herring.

Got it. And I agree on all that math, Pat. Is that why the first quarter U.S. revenue guidance is below the guidance for the year because of what you guys saw in the fourth quarter, so guided 12% U.S. revenue growth for 1Q versus the 14% for the year? And then I guess the last part of that would be what drives the acceleration over the course of the year? Thanks.

Yes, so just seasonally, Q1 is always our lowest volume and lowest growth rate quarter for just a number of dynamics around the industry in the U.S. The other thing that's working against us is the royalty rate, so that starts in Q1 and so you see both of those of things in Q1. But in terms of acceleration, I think it's just our typical seasonality in the business, there's nothing other than that.

Yes, and this is Mike. I would just say, we do expect the growth to accelerate through this year and we're excited we just added 20% growth in sales force and a number of initiatives. And so we're seeing growing demand and we expect the growth to continue to extend or expand through the year.

Thank you. And our next question comes from the line of Tao Levy of Wedbush. Your line is now open.

Great. Thanks. Good afternoon. Just first a clarification on the 15,000 new patients that you've mentioned Shacey in 2016 in the U.S. Is that net new patients or is that before sort of attrition if I'm thinking about 2015 ending installed base versus 2016 ending installed base?

It's not net, so that's pre-attrition. And Tao -- I guess for everybody, the reason we're giving you that clarity is just to try to help you all understand. We know what's the beginning of the year, you're probably looking to reset your models and we just really want you to understand the drivers behind the revenue for the U.S. OmniPod business in particular, which is the installed base. And so we're going to be focusing more and more on just the growth in the installed base, which obviously factors in new patient growth as well as attrition rate.

Great. That's very helpful. And in spite of my follow-up question on the Drug Delivery, what's the reason that that would decline sequentially? My understanding was Amgen would place forward orders and they are pretty consistent throughout the years. So, surprised to see that go down or guide down sequentially in Q1? Thanks.

Just timing on their forecast, really the -- our guidance is based on Amgen's forecast and I think that's just the timing of orders issue.

And Tao this is Mike, I mean just to be clear so, there was -- to back up Shacey's point, it was roughly a run rate of about $15 million for the first three quarters of Q3. They had an order there and the business grew in the fourth quarter and we're going to see growth in that business -- nice growth in that business this year as well. So, the run rate in Q1 is higher than the first three quarters last year.

Yes, particular when you consider the national advertising campaign that's on every television show that I've seen. The Onpro kit is all over the direct-to-consumer advertising campaign.

That's true.

Thank you. And our next question comes from Brooks West with Piper Jaffray. Your line is now open.

Hi, can you hear me?

We got you.

Great. Thanks guys. And congratulations on a good quarter. Shacey I want to dig into the Dash launch a little bit more, debut at ADA and launch sometime in the second half. But can you talk about how you're going to roll that product out? Does it become available right away to your installed -- your whole installed base? Give us a sense of that's going to work. And then when should we start to think about this product actually starting to drive the revenue line for you guys? Thanks.

Sure. Yes, so in terms of the rollout for Dash, we will as any good company would do, we'll do a limited market release. So that will probably take us through the first quarter I would guess of 2018. And then we'll role it out both to our installed base and to new users and we're still finalizing some of the details around that commercial strategy. So, what I will say because I think sometimes we all get wrapped up in know how these lunches work for other players in the market. Again, because of our business model, it's not hugely problematic. So, if, for example, customers held off on -- first of all, we just right new patient starts, don't really drive meaningfully any revenue in a given quarter. So, if they hold off, it's not too impactful. And in our base, we're not counting on our base to cannibalize itself and opt-in for this new technology because our revenue is coming from Pod. So, we've got a lot of flexibility in terms of how we can launch this product and it's not going to mean that customers hold off for a quarter and its potentially challenging for our revenue. But we do believe it's going to be very differentiated. It will be the best user experience and interaction on the market today. So, we think it will be very attractive, particularly for our targeted segment, which are those multiple daily injection users. So, we are forecasting for that to drive value for us in 2018.

Just one other amplification to that. One of the beauties of this new product and the new product launch is that the Pod will essentially be in the same configuration and most, if not, all of the components would be the same with the exception, primarily the Bluetooth chip that will be in the new generation Dash Pod. So, the manufacturing lines in China will -- we will convert those over and they will be -- they will have the ability to produce either of the new Dash Pod or the previous configuration Pods. And we'll be able to throttle this launch from a production standpoint very, very and we'll take the product launch in a very measured way to make sure that we do everything right this time.

Got it, got it. Thank you for that. And then I guess just follow-up from me on Drug Delivery. You said expanded relationship with Amgen, is that beyond Neulasta or is that primarily Neulasta focused? Thanks.

It's an extension of the Neulasta agreement. So,--

Testing beyond Neulasta.

Right.

Okay, perfect. Thanks guys.

Thanks Brooks.

And our next question comes from Doug Schenkel of Cowen & Co. Your line is now open.

Hi, good afternoon and thank you for taking the questions. My first is on gross margin, you guided gross margin to approach 60%, this represent about 200 basis point improvement year-over-year. In terms of headwinds, is it right that your guidance embeds an assumption for a 100 to 150 basis point hit associated royalty expirees? And what the negative impact on gross margin associated with international OmniPod sales accounting for a higher mix of revenue? And I'll follow-up in a second with my second question.

This is Mike. So, you're right. So, there is a headwind from the royalty moving away. But that really doesn't have that meaningful of an impact directionally. As I said moving to 60% as our one year view after that with our five-year target, we're really excited about. And that is as your point reflective of the fact that we do have unfavorable mix. We don't calculate or measure gross margin for the international business versus the direct business, but directionally, it definitely carries lower gross margins. It’s a different business model for us and that a lot of it is through distributor. And so you get a lower gross margin but you don't the carry same operating expenses that you would in a direct business. And so the guidance that we are providing does factor in an unfavorable mix because the international business is growing so significantly. But some of that is coming from our direct business internationally as well which is growing very nicely, although that is a small part of the business. But what's really the driving the gross margin expansion is what we've been talking about at the Investor Day back in November and it's just the tremendous operational performance and that's going to only be augmented when we move to the U.S. manufacturing here in the next couple of years.

Okay. Thanks for the Mike. And quick follow-up. You guys in your prepared remarks described, I think you said 670G was a distraction on a disruption in the fourth quarter, would you willing to comment on how the distraction of all over the first two months of 2017? And relatedly -- and I apologize if I missed it, but is the chatter in the market on 670G at all factoring into the calculus behind your U.S. guidance? Thank you.

Yes. So, as I said the competitive dynamics are factored into our U.S. guidance. So, that is true. And in 4, we added thousands of patients, so it was a successful quarter for us; just simply people were delaying their decision-making process. And that was reflected in the conversion rate. So, that's sort of how it's impacting us. These aren’t lost leads. We categorize all of our patients in the consideration process and so we do know that they remain in the pipeline. The pipeline is stronger than it ever has been before. And so we're optimistic and it's taking some time for our people to do their research and kind of make their final decisions. And in so far in this -- so far in this year, we're seeing similar results, really slightly delayed conversion rate, but very strong record breaking leads in the pipeline, both coming in and as that pipeline grows and so we're feeling very good about where we are so far this year and that's reflected I think in the guidance.

And this is Mike, just to add on the guidance piece. So, so as I mentioned in the fourth quarter, we had a significant beat. That was principally in the United States and our guidance and our expectations reflected an expectation that would be some disruption or some impact of the 670G and we were really pleased to see that impact was -- really didn’t impact us in any meaningful revenues in the fourth quarter. And I would say that the same thought process is involved in our thinking for 2017 and that we really want to be thoughtful about the guidance and we believe the midpoint is realistic, but the high end of the guidance is certainly attainable and we'll see when launches and other market dynamics out there how our guidance evolves through the year, but we're very excited about the opportunities that we have, that's why we're adding the significant amount of salespeople to manage the growth in demand.

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

Good afternoon and congrats on the progress.

Thanks Jayson.

Just a few questions. Can you give us an idea of how many new countries that you or Ypsomed expect to enter in 2017?

What we're planning for 2017 is deeper penetration, primarily for the markets that we're in, so we won't be expanding into other markets with Ypsomed. And that's primarily because we're in discussions with them about the contract extensions, so we want to get those resolved before we continue to enter into new markets with Ypsomed.

Okay. So, this midpoint -- the 36% growth that doesn’t reflect any new countries?

That's right. No, that's existing growth, primarily from some of the -- the really high growth rates are from some of the early markets like France and Italy that we've entered into in last two years.

Okay. Is there any way you can quantify the contribution from the launch in France in the fourth quarter?

This is Mike. No, and I would say the reason why is because when we take orders from Ypsomed, they are not telling us orders, it's not -- they give an order for how much product they want. We may ultimately find out what countries they go into, but we're selling to Ypsomed and they are managing the channel to various countries. So, you really can't say for certain when you're shipping something what countries going to go to. That said I think it's fair to say the growth that we've seen and why you see an outside growth when you look year-over-year for Q1 is that the launch of the new markets such as France in the second half of last year really drove a tremendous amount of growth and surfside Ypsomed and therefore surprised us positively. And we -- our guidance expects that that's going to continue, but at some point, that's going to level off, but we just don't know when that is and we're thrilled with the progress to-date.

Okay. That's helpful. Thanks guys. Let's keep it at that.

Thanks Jayson.

And our next question comes from the line of Raj Denhoy with Jefferies. Your line is now open.

Hi. This is Christian on for Raj. Good afternoon guys and congrats on a nice quarter. Just had a one question on the Horizon, is there any update here on the timeline, I'm sure we'll hear more at ADA, but are you still planning on pivotal trials by 2018 and then the commercial launch in 2019? And do you know yet what that launch is going to look like? How expensive it will be in 2019? Or whether it will really start to see the impact more in the 2020 timeframe if you have that detail yet?

Yes, I think if you go back to our targeted timeline that we provided on Investor Day, there's a slide in that deck that outlines the Horizon artificial pancreas timeline. We've remained on-track with that timeline and I would say it's too early to talk about the launch until we get further through the process with the pre-pivotals and the pivotal trials for the FDA submission.

But I'll add that you will see more OmniPod Horizon data at ADA. We're excited to have podium and poster presentations there and Horizon will be highlighted.

Okay. Thanks. And then maybe one follow-up on Drug Delivery. As OmniPod -- I mean the Pods are now more than 50% of Neulasta script, where can that penetration go to, is it something you can run all the way up to almost all scripts, just kind to gauge how to model out into the out-years in terms of it plateauing at some point before you're able to execute another pharmaceutical arrangement?

Well, the opportunity set as I've mentioned before on Neulasta is about 1.2 million doses potential in the United States. And there is some international market opportunity. But all of that conversion is in the hands of Amgen. They -- we provide product through them and they go through the conversion process with their clinician, their hospitals. So, from my perspective, every dose should be in an Onpro kit because the benefit it provides to their physicians, the payers, and patients, but ultimately that's in Amgen's hand. And I would say that their -- from our perspective, we know that they are very pleased and happy with their performance and the penetration they have had -- I think probably think of the opportunities like we do.

And so what percent penetration does the guidance for 2017 imply that you get to by the end of year?

There's no implication of a market penetration rate in the guidance that we provided. We provide product to Amgen and they provide it to the physicians and they give us purchase orders. There's not an implication -- it's not our position to give you an implied penetration. That's for Amgen to provide the market.

Thank you. And our next question comes from the line of Danielle Antalffy with Leerink Partners. Your line is now open.

Hi, good afternoon. Thanks so much for taking the question and congrats on a strong end to the year. I was hoping to talk a little bit more about some of the competitive dynamics. So, you have J&J looking at strategic alternatives for their diabetes. There's rumors about Roche. Just wondering what kind of impact you're seeing commercially with the uncertainty that that could cause in the market if any? Medium to longer term what that could mean if those businesses do get divested?

Well, Danielle I believe that anytime you have disruptions and the market is going through some changes, there's opportunities for other people to benefit. And we're making investments to make sure that we benefit from any disruptions that are occurring in the tubed pump market. We have a unique product platform with a lots of freedom provided to patients and it would be our intent to make sure that we get our fair share of any disruptions the marketplace that may occur.

And we have had patients reach out to us looking for support or the opportunity to transition to OmniPod. And so we're fully prepared and we've got programs to help patients do that. We want people to have [Indiscernible] care obviously. But as I like to remind the sales team, so I'll take this opportunity to do it. Our number one competitor is multiple injections and so that's where 70% to 80% if not more of our patients come from in any given time period. And that's where we're focused. That's where OmniPod can provide 86% reduction in burden and that's our primary competitor right now.

Sure. But I have to imagine with uncertainty around J&J and Roche that new patient might be more likely to go to an OmniPod versus -- yes okay.

Actually Roche is not accepting new patients in the U.S. anymore, so really it's just about Medtronic and uniramous.

Got it. Okay. And then I was wondering if you could provide some more details on where you're seeing some momentum in the U.S. I don't know if you guys have ever given this metric, but sort of are you seeing new prescribers come online? And if so, what's driving that versus I guess call them same order sales, existing prescribers just getting more and more patients on. Have you guys ever -- if any color you can give there, I think that should be helpful.

Yes, we actually track that very carefully and while we've seen expansion in both, the primary driver of the growth is more penetration in existing accounts as opposed to expansion broadly of prescribers. But both are happening. It's just that the penetration or the same-store sales is definitely driving more than -- and we think Glooko is a big contributor to that as clinicians understand and can identify more patients in their practice that can benefit from OmniPod.

Thank you. And our next question comes from the line of Suraj Kalia with Northland Securities. Your line is now open.

Good afternoon everyone. Congrats on the quarter.

Thank you.

So, Shacey or Patrick, couple of questions. First, Shacey in your prepared remarks and forgive me if I got this wrong, I heard you talk about the Phase 2 IDE on patients six years or older. I guess what I was trying to understand is if you look at the 670G that is only 14 years or older, if you guys are going six years, are there any read-throughs on the sensitivity and specificity of your MPC algorithm? Just trying to understand from a competitive perspective, did I hear you correctly on the six year?

You did. Yes. We are down to age six now, so the second IDE study that we completed was adolescent down to age six. And it's been very important to us from the beginning to be able to serve all of our customer population with Horizon and obviously, pediatric remains one of our fastest-growing elements of our patient population. And so we're intent, we're actually committed to ensuring that we will be able to serve all kids. In fact, our discussions with the FDA, they want us to come out with an indication down to two. So, and we have users down to two, so we certainly want to be able to do that as well. I don't know how to -- there can't be direct comparison today between Horizon and 670 or the algorithm. Although at ADA last year, on Frank Doyle did present data that demonstrated that MPC was performed better than a PID algorithm. So, that could be part of why we feel comfortable. But I'm going to say that the data looked great. We are very excited and totally committed to being to launch with a pediatric indication.

Fair enough. And Patrick were Shacey again, one last question from my side. I know the number of new patients for FY 2016, if I use 15,000 number, we've all been focused on that. But roughly speaking I guess, let me ask the question from a different flavor. Let's say if I assume 9% to 10% attrition rates, net new patients give or take is around 13,500 in the US, what do you think of the total net new patients in the U.S. across the Board? What does that represent? I guess I'm just trying to understand where do you all stack up in that market share, if I look at the 13,500 is that 10% share, is that 15%, how does that stack up? Thank you for taking my questions.

In terms of market share which as I think Suraj what you were asking is that best data that we can refer to is at close concerned market research and that would demonstrate that we have somewhere in the neighborhood of 15% to 17% share of the pump market and a higher percent of new patient selecting a pump. But again we don't -- we really -- I know it might be hard to believe, but we don't pay a lot of attention to that data because our focus is on MDI patients and growing the market as opposed to taking share from tubed pump.

Thank you. And our final question comes from the line of Ben Andrew of William Blair. Your line is now open.

Hey Ben.

Good afternoon. Couple of question for you. Just maybe talk about the timing to having an opportunity with Amgen for Onrpo outside the U.S. How do you think about potentially using other glucose sensitive Libre rather than G56 with the Horizon as you've mentioned that in the past? And then just a quick follow-up on reimbursement.

Well, first of all, with Amgen growing international opportunity, we know they are exploring in international opportunity. That again is within their control and we don't -- they need to do all of the regulatory work to make sure that they provide the products in international markets. But that is something that I know they are working and it wouldn’t necessarily involve us other than support for any regulatory clearance that they might need.

They -- and Amgen I know made it public that they are in I think Costa Rica and potentially one other international market. And we understand that there's about 400,000 doses internationally. So, it does definitely represent a strong growth opportunity for us. But again that's for Amgen to execute on and we're supporting them in their international expansion plan. And the other question was about Libre, I think we've got a great partnership with Abbott. We like the Libre product. We know there are lot of customers -- a lot of overlap in the customers in Europe. People who are using both OmniPod and Libre and really getting dramatically reduced burden and a great customer experience. And so I think that's a nice opportunity. We have ongoing discussions about our pipelines and opportunities for continued partnership and development. But I don't have anything specific to comment on in terms of integration of Libre.

Okay. Thanks. And then finally, just you mentioned the opportunity to keep expanding coverage, can you size for us as roughly the percentage of either private payers or Medicaid -- total patient population that you don't have access to today, so that's the opportunity? And then CMS still roughly to 20% in your mind or is it smaller than that? Thank you.

If we look at just market access opportunity, it's probably an additional 40% or so of patients that we don't have access to because of Medicaid, Medicare and small regional payers. And so that's where we're focused. And I think what we've said in the past, I don't know about Medicare specifically by itself, but Medicare and Medicaid together represent about 30% of that opportunities. So, another 10% tied to regional payers. And we're making good progress on Medicaid. And as Pat said we remain confident that Medicare will happen, is just a matter of when.

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

Thank you, operator. I'll finish where I started. I am absolutely thrilled with Insulet's performance in 2016. Our team has done a remarkable job in driving our performance and positioning us for a continued success. We have the right tools to win and achieve our goal of a $1 billion in revenue in 2021. We have strong momentum across all areas of our business and we fully expect this momentum to continue. Our line of sight is sustainable topline growth and above market profitability becomes clear every day. And we are even more confident than ever in our ability to drive and deliver long-term shareholder value. I'd like to close by thanking the Insulet employees for your hard work and dedication to ease the burden and improve the lives of people who are living with diabetes and other disease. I'd also like to thank everyone for joining us on the call today and we very much look forward to sharing our significant progress with you during 2017. Thank you.

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